Tag Archives: gold reserves

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).

Eurosystem Increasing Allocated Official Gold Reserves

The Eurosystem is expressing an increasing interest in gold.

One of the commenters on this blog, Arend Lammertink, notified me of official gold reserves data disclosed on the websites of the Dutch central bank (DNB) and the German central bank (Bundesbank). At DNB we can find a sheet that shows the Dutch central bank started separating its gold holdings from one category (gold, and gold receivables), to more detailed categories in May 2014.

Screen Shot 2014-12-02 at 2.29.55 PM
Source: DNB

The row goudbaren means ‘gold bullion’ and niet ge-alloceerde goudrekeningen means ‘unallocated gold accounts’. The white rows represent the value, the weight is disclosed in millions of fine troy ounces; The Netherlands holds 612.5 tonnes in total, fully allocated and nothing is leased since 2008 (same as Germany).

Over at the site of the Bundesbank the same information is published from 18 of the 28 member states of the European Union that use the euro currency (The Eurosystem). The Bundesbank (BuBa) publishes the fine troy ounces of the official gold reserves of the Eurosystem in ‘Gold bullion’ and ‘Unallocated gold accounts’. If we add up both categories the outcome for all countries equals the Official Gold Reserves disclosed by the World Gold Council. Concluding ‘Gold bullion’ is allocated (and obviously unallocated is unallocated).

From BuBa:

The application of the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6) is binding for EU member states by virtue of a regulation adopted by the European Commission. Moreover, the reporting requirements of Eurosystem NCBs vis-à-vis the European Central Bank are stipulated in a guideline.

From the guideline Changes in the methodology and classifications of the balance of payments and the international investment position:  

With regard to reserve assets, gold transactions and positions will in the future be subdivided into gold bullion, which includes gold bars and allocated gold accounts, and gold receivables, to which no specific gold holdings are assigned.

The unallocated gold accounts of the Eurosystem relate to gold to which no specific gold holdings are assigned.

Eurosystem Official Gold Reserves Allocation, October 2014
The ECB holds 22 % (109 tonnes) of its gold reserves in unallocated accounts.

The data demonstrates most of the Eurosystem official gold reserves are allocated and since January 2014 (which is as far as the more detailed data goes back) the unallocated gold reserves are declining as we can see in the next chart.

Eurosystem Total Official Gold Reserves (10,787 tonnes)

Unfortunately we do not know what happened prior to 2014.

Note, allocated does not mean the gold is located on own soil, but is does mean the gold is assigned to specific gold holdings, including bar numbers, wether stored on own soil or stored abroad. Unallocated gold relates to gold held without a claim on specified bar numbers, often these unallocated accounts are used for easy trading.

Two good descriptions of unallocated gold accounts from the LBMA:

To take the analogy of simple currency bank accounts, precious metal bars, of any form, may be drawn down, or allocated, from an unallocated account in just the same way that bank notes with specific unique numbers may be drawn out of a bank checking account.

As you might know bank accounts are fractionally backed.

UNALLOCATED ACCOUNT: An account where specific bars are not set aside and the customer has a general entitlement to the metal. This is the most convenient, cheapest and most commonly used method of holding metal. The holder is an unsecured creditor.

The fact the Eurosystem discloses the ratio between its allocated and unallocated gold and, more important, the fact that the portion of allocated gold is far greater and increasing, tells me the Eurosystem is allocating as much gold as they can. Add to that the Germans are currently repatriating over 600 tonnes of their allocated gold from the US and France, and The Netherlands has just repatriated 123 tonnes of its allocated gold from the US. Will the rest of the Eurosystem follow to repatriate their gold from abroad?

The Eurosystem is surely up to something with its gold. This can only be seen in advance of a reform of the international monetary system. As Jean-Claude Trichet, former president of the European Central Bank, stated on a financial forum in Beijing at the end of October 2014:

The global economy and global finance is at the turning point in a way… New rules have been discussed not only inside the advanced economies, but with all emerging economies, including the most important emerging economies, namely, China.

On behalf of China the General Manager of the Precious Metals Department at ICBC (the largest bank in China and the world), Zhou Ming, stated on the LBMA Forum in Singapore in June 2014:

  1. International gold prices will return to rational levels after shooting high.
  2. With the status of the US dollar as the international reserve currency is shaky, a new global currency setup is being conceived.
  3. Uncertain changes will happen to gold’s traditional dollar-pricing so the US dollar’s influence on gold pricing needs to be re-evaluated.
  4. With the rise of Asian economies, China and India will continue to be the world’s pillars of physical gold demand.
  5. Gold has not only moved from West to East but will continue to move to the East.

So, China and Europe are embracing gold prior to the replacement of the US dollar as the world reserve currency. I truly wonder what will replace the US dollar.