Tag Archives: Bank Of England

Guest Post: Australia Audits Gold Reserves At BOE

Written by Bullion Baron:

Two years ago the news was publicly broken on the BullionBaron.com website that 99.9% of Australia’s Gold reserves are stored at the Bank of England in the United Kingdom. Attempts by another blogger, interested in the whereabouts of Australia’s Gold, had been rejected by the Reserve Bank of Australia (RBA) only several months earlier, “The Bank does not publish the location of its gold reserves.”

Bank of England Vault
Bank of England gold vault

Decisions like this don’t happen in a black hole. Something changed the RBA’s mind, between August 2012 and December 2012, on making the location of Australia’s Gold reserves public.

From my observation, the RBA tends to follow the lead of other Central Banks, so the decision to release information on the location of Australia’s Gold may have been a result of Germany’s Central Bank (Deutsche Bundesbank) deciding to do so in October 2012 (interview containing the information originally released is no longer published on the site, but available via Web Archive). Only a month later, in November 2012, the Austrian Central Bank released the location of their Gold reserves, revealing that 80% resided in the UK, 3% in Switzerland and 17% in Austria. Cue the RBA feeling comfortable to release the location details of Australia’s Gold around 1 month later.

A recent experience of mine with the RBA further highlighted their desire to follow in the footsteps of other Central Banks rather than to think for themselves. A Freedom Of Information (FOI) request I made for the Gold bar list was initially rejected, but after lodging an appeal with the Office of the Australian Information Commissioner (OIAC), highlighting that the United States published a list of their Gold bars details (sans the serial number), the RBA decided to follow suit (RBA Gold Bar Details).

Earlier this year I spotted a line in the RBA’s 2014 Annual Report indicating an audit had been performed (not something I have seen mentioned in previous years):

Gold holdings at the end of June 2014 were around 80 tonnes, unchanged from the previous year. Gold prices rose by 9 per cent in Australian dollar terms in 2013/14, increasing the value of the Reserve Bank’s holdings of gold by around $0.3 billion to $3.6 billion. Activity in the gold lending market remained subdued, with the Bank having only 1 tonne of gold on loan during the year. Income earned on that loan amounted to $0.2 million. During the year in review, the Bank audited its gold holdings, including that portion held in safe custody at the Bank of England.

A question posed by email to the RBA earlier in the year suggested that RBA officials had performed the audit themselves. I decided to lodge another FOI request.

“I request that a copy of the following documents be provided to me: All documents pertaining to the audit of the RBA’s gold holdings performed during the 2013/14 financial year, as was specified in the ‘Operations in Financial Markets’ section of the Reserve Bank of Australia Annual Report 2014 (“During the year in review, the Bank audited its gold holdings”).”

Two months later (decision on the documents was delayed due to consultation with the Bank of England) I received the following list of documents that would be provided (on payment of fees, which were reduced from an original quote due to the small number of documents that could be released):

RBA Gold Audit Documents

And today the documents arrived. Here’s what we know…

In February 2013, the Assistant Governor (Financial Markets) requested the Audit Department to include in its audit program a review of the Bank’s gold holdings at the Bank of England (BoE). The Chief Representative in EU approached the BoE to facilitate this review and in late May 2013 initial planning discussions were held with BoE staff with tentative agreement that the review would take place in September 2013.

The audit included:

  • An on-site physical verification on September 23, 2013, which will take 4-5 days to complete, assuming two RBA auditors are involved given the proposed scope.
  • Inspecting a sample of RBA Gold bars (list to be provided in advance), including checking the details of these bars against the Bank’s inventory list and weighing of the bars by BoE staff using their equipment.
  • Randomly selecting additional Gold bars from the inventory list and observing these bars being located and retrieved from their vault (plus verifying the details and weighing them).
  • Obtain a high level understanding of the BoE gold safe custody service.
  • Continuing discussions for a comprehensive safe custody agreement between the RBA and BoE.

As the above document list shows, those relating to final audit results were not provided. I would assume the audit was successful, but no doubt that would be a highly contested opinion in the Gold blogosphere. The following reason was provided for denying access to the report:

Documents 10, 11 and 12 are drafts of the report prepared by the RBA’s Audit Department detailing the findings of the audit and document 13 is the final of that report.

Denial of access to these four documents in terms of s33(a)(iii) is appropriate because release of the information (which relates to procedures for the conduct of the audit with the BoE and the subsequent results) ‘would, or could reasonably be expected to, cause damage to’ the relationship between the RBA and the BoE. This belief is soundly held by us on the basis that we are aware that the BoE provides safe custody services not only to the RBA, but also to other central banks around the world.  Disclosure of the information in these documents could damage the relationship between the BoE and its other central bank clients, and by extension (as the source of the information), the relationship between the BoE and RBA. As foreshadowed to you in earlier correspondence, we consulted with the BoE in relation to these documents and they affirmed the views we held regarding the damage that would be done to the relationship between the BoE and RBA if the redacted information were disclosed.

Denial of access to these four documents is also appropriate in terms of s47E(a) (‘disclosure would, or could be reasonably expected to, prejudice the effectiveness of procedures or methods for the conduct of tests, examinations or audits’ by the Bank) and (b) (‘disclosure would, or could be reasonably expected to, prejudice the attainment of the objects of particular tests, examinations or audits conducted, or to be conducted’, by the Bank). The documents in question concern the ‘procedures and methods’ within both the RBA and the BoE regarding the conduct of the physical check of a sample of gold bars (for the purpose of conducting the audit). Disclosure of this information would, of course, reveal those procedures and methods, and by logical extension render them less effective. Also, the ability of the Bank to attain the objects of the audit (which is to reveal whether the Bank’s arrangements are robust and secure) would be prejudiced. These considerations apply to both the audit currently the subject of your FOI request and also any other audits undertaken by the RBA. A key requirement for undertaking a successful audit (of any aspect of the RBA’s work) is that there is as little opportunity as possible for individuals to take steps to predict what an auditor may choose to focus on, and/or how they will conduct the audit. It is self-evident that if such procedures and methods are revealed, then the opportunity to circumvent them is greatly increased.  As s47E is a public interest conditional exemption, I must take into account whether the giving of access is in the general public interest (in terms of s11A(5)). When deciding whether access is in the public interest, I must take into account the following from s11B(3) and have noted my views in each case:

Section 11B(3) factors favouring access to the document in the public interest include whether access to the document would do any of the following:

(a) promote the objects of this Act (including all the matters set out in sections 3 and 3A); release would be contrary to some sections, particularly sections 2(a) and 3(3)

(b) inform debate on a matter of public importance; the Bank’s gold holdings, while important and of interest to some, are not a matter of public importance generating any level of debate.

(c) promote effective oversight of public expenditure; release of the information would not do this.

(d) allow a person to access his or her own personal information; the request is not seeking personal information.

Taking into account these factors, and the implications release of the information would have on the Bank’s audit processes, I have decided that it is clearly not in the public interest to disclose the information in these four documents (10, 11, 12 and 13).  Disclosure of these documents would manifestly harm the public interest by way of reducing the ability of the RBA to successfully conduct audits and tests of its operations going forward.

The released documents (mostly a chain of various emails) also suggested the RBA has been invited back for another review in 12 months.

One interesting point from the documents; the Bank of England was emailing clients in June 2013 (those for whom they’re providing custodial services) inviting them to audit samples of their Gold:

Bank of EnglandGold Inspection Letter

Given that the RBA has followed the lead of other countries to release reserve location details, perform audits and release (some) bar list details, it will be interesting to see whether they go further and follow the lead of the many countries now deciding to repatriate some or all of their Gold reserves…However discussions on the RBA audit were already well advanced at that time.

I’m sharing links and opinions daily on Twitter (@BullionBaron).

The Bank Of England Lost 755 Tonnes Of Gold In 2013

The Bank Of England (BoE) just came out with their annual report 2014. In the report it’s stated the BoE is the custodian of 5485 metric tonnes of gold (£140 billion pounds measured February 28, 2014). From the BoE annual report 2014:

The Bank provides custodial services for a range of customers. As at 28 February 2014, total assets held by the Bank as custodian were £594bn, of which £140bn were holdings of gold.

In the BoE’s annual report 2013 it was stated they held 6240 tonnes of gold (£210 billion pounds measured February 28, 2013). From the BoE annual report 2013:

As part of this strategy the Bank also provides custodial services for a range of customers. As of 28 February 2013, total assets held by the Bank as custodian were £699 billion, of which £210 billion were holdings of gold.

(To calculate the tonnage I used a gold price of £1046.719 for February 2013 and £793.931 for February 2014)

According to the BoE they had 755 tonnes less gold in their vaults in February 2014 relative to February 2103 (in contrast to reports the BoE lost 1300 tonnes in 2013). The BoE is a custodian for central banks and the LBMA, the removed gold from the vaults was most likely from LBMA customers. GLD’s gold inventory is vaulted in London, but I’m not positive how much, if any, of their gold is stored at the BoE. GLD’s stock lost 451 tonnes over this period. If everything GLD lost came from their own HSBC vault, and nothing from their sub-custodian the BoE, the gold removed from both GLD and the BoE in total is 1206 tonnes.

However, when we look at UK’s net gold trade over this period (March 2013 – February 2014), we can see 1593 tonnes were exported.

UK Gold Trade 2009 - march 2014

This leaves a gap of 392 tonnes (1593 minus 1201), which had to be supplied by additional LBMA or private vaults in London.

Gold Trade Numbers 2013 Broke All Records

In 2013 we’ve experienced what kind of extreme buying power China is able to unleash on the physical gold market; Chinese wholesale demand in 2013 was 2197 tons, this excluded PBOC purchases. While the mainstream media is still absolutely clueless on what actually happened and how much gold was distributed across the globe, the facts aren’t that hard to summarize. Let’s have a look at the facts, supplemented with commentary by yours truly.

As most countries disclose their gold trade numbers, by analyzing these numbers we could see a clear gold vein running from the London Bullion Market to the vaults of the Shanghai Gold Exchange (SGE) in China mainland, from where the gold enters the Chinese market place. This main vein ran through Switzerland and Hong Kong.

The London Vaults

Most gold in the UK is located at the vaults of the BoE, where gold from the LBMA, the official reserves from the BoE and official reserves from many other central banks are stored. Additionally there are many gold vaults owned by Bullion Banks (GLD) and private parties in London. In response to the drop in the price of gold in April 2013 we have seen significant outflows from the UK; net export broke all records.

UK Gold Trade 2009-2013

UK Gold Trade 2013

The UK net exported 1425 tons of gold in 2013, of which 152 tons net to the United Arab Emirates, 145 tons net to Hong Kong and 1329 tons net to Switzerland. In December total net export was 62 tons, up 68 % from November, while net export to Switzerland dropped to 52 tons. Net export (directly) to Hong Kong was 29 tons.

In 2013 GLD’s inventory dropped by 552 tons.

GLD gold inventory change 2013

Through The Swiss Refineries

From refineries in Switzerland we know that all the gold that came from the UK in 400 ounce London Good Delivery (LGD) bars was being refined into 1 Kg bars 99.99 % purity, and sent to the East. Switzerland has never traded and refined as much gold as in 2013; gross import was 3082 tons and gross export 2786 tons.

Switzerland has a long history in gold refining and vaulting, both businesses had to adapt in 2013. Refining exploded as some plants almost doubled their capacity, working in three shifts 24 hours a day to supply the East. From Looking at the chart below we can see Swiss net import decreased to 295 tons in 2013 from an average of 572 tons in 2002 – 2012, which suggests their vaulting business grew less than in recent years.

Switzerland Gold Trade 2002 - 2013
NOTE, this shows gross weight. Fine weight of import is substantially lower.

The Chinese are not only buying unprecedented amounts of physical gold, additionally they strive to have more power in the pricing of the yellow metal. I have published numerous translations – a memo on gold policy from the Chinese government to various ministries, gold institutions, exchanges and the central bank, an interview with the head of the precious metals department of China’s biggest bank on it’s gold aspirations and an article on Chinese gold policy written by one of the most influential leaders of the Chinese gold market – in which this is all clearly exposed. In my opinion the Chinese will eventually take over the entire (paper) gold market.

Swiss refineries are also refining LGD bars for Gulf nations in the new standard 1 K four-nines bars (LGD bars are shipped from the Gulf to Switzerland, 1 K four-nines bars are shipped back). The president of the Peoples Republic of China Xi Jinping has called for better ties for China and Gulf Nations and for an acceleration in talks towards a free trade agreement.

China’s Foreign Minister Wang Yi met with Israeli Prime Minister Benjamin Netanyahu, the Saudi Arabian crown prince, the Iranian Foreign Minister, as well as a multitude of players from the Gulf and North Africa in the last couple of months to develop trade with West Asia. Yi’s goal was to reinforce the oil supply chain from the Middle East, and improve ways to export Chinese goods. Additionally China is investing in large infrastructure projects (railways, harbors, etc) in West Asia to breathe new life into the Silk Road.

Silk route west asia china

At the same time four Gulf nations (Bahrain, Kuwait, Qatar and Saudi Arabia) are planning to setup a new common currency. All developments just mentioned are related as Asian nations seek allies to make a stand in a post US dollar system.

The Special Administrative Region Hong Kong

Hong Kong gold trade also broke all records. Net gold import jumped 1500 % from 37 tons in 2012 to 597 tons in 2013. Gross import in 2013 accounted for 2239 tons up 133 %, gross export 1642 tons up 78 %.

Hong Kong gold trade 2009 - 2013

The biggest supplier by far was Switzerland, as Hong Kong net imported 913 tons from the Swiss in 2013, up 613 % from 128 tons in 2012 (look at the chart below and spot the record). The Swiss gross exported 1236 tons more in 2013 than in 2012, apparently the bulk of this extra refining output went to Hong Kong.

HK Swiss gold trade 2003 - 2013

Hong Kong’s main gold export destination was China mainland. Net export was 1158 tons, up 108 % from 525 tons in 2012. Gross export was 211 tons, gross re-export (gold that passes through Hong Kong without being processed, i.e. 1 K bars) was 1284 tons.

Hong Kong - China gold trade 2009 - 2013

Hong Kong - China gold trade monthly 2009 - 2013

Gross import from the mainland was 337 – this reflects a lot of jewelry fabricated in Shenzhen that is being exported to Hong Kong. Shenzhen is located just across the border from Hong Kong, accommodates the biggest SGE vault and is known for it’s jewelry production industry. The jewelry that is being shipped to Hong Kong is ‘smuggled’ back into the mainland to some extent.

Shenzhen Hong Kong

In the mainland there is a 22 % tax on jewelry (17 % VAT, 5 % consumption tax), In Hong Kong there is 0 % tax on jewelry. It’s quite common for Chinese in the mainland to make trips to Hong Kong, buy cheap jewelry and other physical gold products and take this home without being bothered at the border. Customs are very stringent on gold exports from China mainland, on the import side Chinese can easily walk through wearing their new necklaces.

The Chinese jewelry company Chow Sang Sang estimates more than half their products sold in Hong Kong are purchased by mainland tourist. Additionally there are mainland tourists that purchase physical gold in Hong Kong and store it locally in safety deposit boxes at banks as well as vaults outside the banking system. This hidden mainland demand partially explains the unprecedented net gold imports by Hong Kong in 2013 (597 tons by 7 million inhabitants). The other explanation being Hong Kong vaults gold for investors from all over the world.

Chow Sang Sang jewelry sales broken down per region

Chinese demand per capita

Please be aware that China mainland can import gold through many other ports than Hong Kong (as I have written bout here). According to my analysis the mainland has roughly imported  2000 tons of gold in 2013 including PBOC purchases.

In Gold We Trust