Eighteen months ago I wrote a short synopsis of a gold sales transaction by the central bank of El Salvador wherein it had sold 80% (about 5.5 tonnes) of its official gold reserves. The title of the post was “El Salvador’s gold reserves, the BIS, and the bullion banks“. If you thought, why the focus on the Banco Central de Reserva de El Salvador (BCR), it’s not a major player on the world gold market, you’d be correct, it’s not in its own right that important.
However, the point of the article was not to profile the gold transactions of a relatively obscure central bank in Central America, but to introduce the topic of central bank gold lending to LBMA bullion banks, and the use of short-term ‘gold deposits‘ offered by these bullion banks. The reason being is this is a very under-analysed topic and one which I will be devoting more time to in the future. Gold loans by central banks to bullion banks are one of the most opaque areas of the global gold market. The fact that I’m using the central bank of El Salvador as the example is immaterial, it’s just convenient since the BCR happens to report the details of its gold lending operations, unlike most central banks.
A Quick Recap
At the end of September 2014, the BCR claimed to hold 223,113 ozs of gold (6.94 tonnes), of which 189,646 ozs (5.9 tonnes) was held in the form of “deposits of physical gold” with the Bank for International Settlements (BIS), and 33,467 ozs (1.04 tonnes) which was held as “time deposits” of gold (up to 31 days) with 2 commercial bullion banks, namely Barclays Bank and the Bank of Nova Scotia.
The following table and all similar tables below are taken from the BCR’s ‘Statement of Assets backing the Liquidity Reserve’, or ‘Estado de Los Activos Que Respaldan la Reserva de Liquidez’, which it publishes every 3 months.
In November 2014, the BCR executed a small sale of 5007 ozs of its gold from its quantity held with the BIS, leaving a holding of 218,106 ozs (6.784 tonnes) as of 31 December 2014, comprising 184,639 ozs held in “deposits of physical gold” with the BIS, and 33,467 ozs of “time deposits” (of between 2 and 14 days duration) with 2 bullion banks, namely BNP Paribas and the Bank of Nova Scotia. Notice that as of the end of 2014, BNP Paribas was now holding one of the time deposits of gold, and that Barclays was not listed.
Notice also in the above table the tiny residual time deposit gold holding attributed to Standard Chartered Bank Plc. Rewind for a moment to 30 June 2014. At the end of June 2014, the BCR’s gold deposits were placed with 3 LBMA bullion banks, namely, Barclays, Bank of Nova Scotia, and Standard Chartered.
This is the way short-term gold deposit transactions work. A central bank places the short-term gold deposit with one of a small number of bullion banks, most likely at the Bank of England, and when the deposit expires after e.g. 1 month, the central bank places the deposit again, but not necessarily with the same bullion bank. The deposit rates on offer (by the bullion banks) and the placements by the central banks are communicated over a combination of Bloomberg terminals, or by phone and then the transactions are settled by Swift messages. More about the actual mechanics of this process in a future article.
BCR sold its gold at the BIS, put the rest on deposit
In March 2015, the BCR sold 174,000 ozs (5.412 tonnes ) of gold, which left El Salvador with 44,000 ozs. When I wrote about this transaction 18 months ago I had speculated that:
“Since the Salvadoreans had 189,646 ozs on deposit with the BIS and needed to sell 179,000 ozs, the gold sold was most definitely sold to the BIS or to another party with the BIS acting as agent.
It would not make sense to sell some or all of the time deposits that are out with the bullion banks such as Barclays and Scotia, since a large chunk of the BCR gold at the BIS would have to be sold also. It would be far easier to just deal with one set of transactions at the BIS.
The above would leave the time deposits of 33,467 ozs (and accrued interest) out with the bullion banks, rolling over each month as usual. The other roughly 11,000 ozs that the BCR held with the BIS could be left with the BIS, or else this too could be put out on deposit with the bullion banks.”
This speculation turns out to have been correct. By 31 March 2015, the BCR held 10,639 ozs of gold “deposits of physical gold” with the BIS, and the same 33,467 ozs of “time deposits“, but this time split evenly between BNP Paribas and Barclays. The entire 174,000 ozs of gold sold came from the “deposits of physical gold” that El Salvador held with the BIS.
By 30 June 2015, the central bank of El Salvador had moved its remaining 10,639 ozs of “deposits of physical gold” from the BIS, and placed it into “time deposits” with bullion banks, with the entire 44,106 ozs being evenly split across Bank of Nova Scotia, BNP Parias and Standard Chartered, each holding 14,702 ozs.
Over the 12 months from end of June 2014 to 30 June 2015, a combination of at least 4 LBMA bullion banks, namely, Barclays, Bank of Nova Scotia, Standard Chartered and BNP Paribas were holding short-term gold deposits on behalf of the central bank of El Salvador. I say at least 4 banks, because there could have been more. The snapshots every 3 months only reveal which banks held gold deposits on those dates, not the full list of deposits that could have been placed and matured over each 3 month period.
These time deposits are essentially obligations by the bullion bank in question to repay the central bank that amount of gold. The original gold which was first deposited into the LBMA system could have been sold, lent or otherwise encumbered. It has become a credit in the LBMA unallocated gold system. Ultimately it needs to be paid back to the central bank by whichever bullion bank holds the deposit when the central bank decides that it no longer wants to roll its short-term deposits. This is why the anology of pass the parcel is a suitable one.
Looking at the more recent 3 monthly snapshots from September 2015 to June 2016, the same 4 LBMA bullion bank names were still holding the BCR’s gold deposits, namely Bank of Nova Scotia, Barclays, Standard Chartered and BNP Paribas.
As of 30 September 2015 – Bank of Nova Scotia, Barclays and BNP Paribas, evenly split between the 3 of them.
On 31 December 2015 – Bank of Nova Scotia, BNP Paribas, and Standard Chartered, evenly split between the 3 of them.
On 30 March 2016 – Bank of Nova Scotia and BNP Paribas, evenly split between the 2 of them.
On 30 June 2016, the BCR gold deposits were held by Bank of Nova Scotia and BNP Paribas, evenly spilt between the 2. The 30 June 2016 file on the BCR website doesn’t open correctly so this data was taken from the Google cache of the file.
IMF Reporting standards
Finally, let’s take a quick look at what monetary gold and gold deposits actually are, as defined by the International Monetary Fund (IMF).
“Monetary gold is gold owned by the authorities and held as a reserve asset. Monetary Gold is a reserve asset for which there is no outstanding financial liability”, IMF Balance of Payments Manual (BPM)
In April 2006, Hidetoshi Takeda, of the IMF Statistics Department published a short opinion paper on the ‘Treatment of Gold Swaps and Gold Deposits (loans)‘ on behalf of the Reserve Assets Technical Expert Group (RESTEG) of the IMF Committee on Balance of Payments (BoP) Statistics. The paper was called “Issues Paper (RESTEG) #11“. In the Issues paper, Takeda states:
“monetary authority make gold deposits ‘to have their bullion physically deposited with a bullion bank, which may use the gold for trading purpose in world gold markets‘”
“‘The ownership of the gold effectively remains with the monetary authorities, which earn interest on the deposits, and the gold is returned to the monetary authorities on maturity of the deposits'”
” Balance of Payments Manual, fifth Edition (BPM5) is silent on the treatment of gold deposits/loans. However, the Guidelines states that, “To qualify as reserve assets, gold deposits must be available upon demand to the monetary authorities”
You can see from the above that once the gold balance that is represented by the gold deposit is under the control of a bullion bank as a unallocated balance, then it becomes an asset of the bullion bank and can be used in subsequent bullion bank transactions, such as being lent again, or used to support its trading book, etc.
The big question is whether the gold as represented by the gold deposit is available on demand by the central bank which lent it. For ‘available on demand’ think using an ATM or walking into your local bank and withdrawing some cash from your account. It’s as simple as that.
“Regarding the statistical treatment of gold deposits/loans, keeping the status quo is suggested. That is, if the deposited/loaned gold is available upon demand to the monetary authorities, it can be included in reserve assets as monetary gold. However, if the gold is not available upon demand, it should be removed from reserve assets“
Takeda’s paper also covers the topic of “Double counting of gold from outright sales of gold acquired through gold swaps or gold deposits/loans” where he says logically:
“double counting of gold can occur when a bullion bank sells outright gold acquired through gold deposits/loans from… monetary authorities”
If the gold sold is not removed from the central bank’s balance sheet, it could:
“pose a problem when international statistical standards allow swapped/deposited gold to remain in the reserve assets of the gold provider.”
Given that nothing has changed in the IMF’s reporting standards since 2006, i.e. the IMF did not take on board Takeda’s recommendations on gold loan accounting treatment, and given that all central banks still report gold as one line item of “gold and goldreceivables”, then you can see how these gold deposits that are being continually rolled over by central banks using a small number of LBMA bullion banks based in London a) are being double counted if the gold involved has been sold, b) only represent claims by a central bank on a bullion bank, and c) allow bullion banks to increase their unallocated balances which can then be used in myriad leveraged and hypothecated ‘gold’ trading transactions
If you think 4 LBMA bullion banks passing a parcel of central bank gold claims around between them is excessive, wait until you see 28 bullion banks doing the same thing! Coming soon in a future article.
Welcome to the twilight zone of IMF gold sales, where transparency really means secrecy, where on-market is off-market, and where IMF gold sales documents remain indefinitely “classified” and out of public view due to the “sensitivity of the subject matter”.
Off and On Market
Between October 2009 and December 2010, the International Monetary Fund (IMF) claims to have sold a total of 403.3 tonnes of gold at market prices using a combination of ‘off-market’ sales and ‘on-market’ sales. ‘Off-market’ gold sales are gold sales to either central banks or other official sector gold holders that are executed directly between the parties, facilitated by an intermediary. For now, we will park the definition of ‘on-market’ gold sales, since as you will see below, IMF ‘on-market’ gold sales in reality are nothing like the wording used to describe them. In total, this 403.3 tonnes of gold was purportedly sold so as to boost IMF financing arrangements as well as to facilitate IMF concessional lending to the world’s poorest countries. As per its Articles of Agreement, IMF gold sales have to be executed at market prices.
Critically, the IMF claimed on numerous occasions before, during and after this 15-month sales period that its gold sales process would be ‘Transparent’. In fact, the concept of transparency was wheeled out by the IMF so often in reference to these gold sales, that it became something of a mantra. As we will see below, there was and is nothing transparent about the IMF’s gold sales process, but most importantly, the IMF blocked and continues to block access to crucial IMF board documents and papers that would provide some level of transparency about these gold sales.
Strauss-Kahn – Yes, that guy
On 18 September 2009, the IMF announced that its Executive Board had approved the sale of 403.3 metric tonnes of gold. Prior to these sales, the IMF officially claimed to hold 3217.3 tonnes of gold. Commenting on the gold sales announcement, notable party attendee and then IMF Managing Director Dominique Strauss-Kahn stated:
“These sales will be conducted in a responsible and transparent manner that avoids disruption of the gold market.”
The same IMF announcement on 18 September 2009 also stated that:
“As one of the elements of transparency, the Fund will inform markets before any on-market sales commence. In addition, the Fund will report regularly to the public on the progress with the gold sales.”
On 2 November 2009, the IMF announced the first transaction in its gold sales process, claiming that it had sold 200 tonnes of gold to the Reserve Bank of India (RBI) in what it called an ‘off-market’ transaction. This transaction was said to have been executed over 10 trading days between Monday 19 November to Friday 30 November with sales transactions priced each day at market prices prevailing on that day. On average, the 200 tonne sales transaction would amount to 20 tonnes per day over a 10 day trading period.
Note that the Reserve Bank of India revealed in 2013 that this 200 tonne gold purchase had merely been a book entry transfer, and that the purchased gold was accessible for use in a US Dollar – Gold swap, thereby suggesting that the IMF-RBI transaction was executed for gold held at the Bank of England in London, which is the only major trading center for gold-USD swaps. As a Hindu Business Line article stated in August 2013:
“According to RBI sources, the gold that India bought never came into the country as the transaction was only a book entry. The gold was purchased for $6.7 billion, in cash.”
“The Reserve Bank of India bought 200 tonnes of gold for $1,045 an ounce from the IMF four years ago. The Government can swap it for US dollars,” said [LBMA Chairman David] Gornall.”
Two weeks after the Indian purchase announcement in November 2009, another but far smaller off-market sale was announced by the IMF on 16 November 2009, this time a sale of 2 tonnes of gold to the Bank of Mauritius (the Mauritian central bank), said to have been executed on 11 November 2009. Another two weeks after this, on 25 November 2009, the IMF announced a third official sector sales transaction, this time a sale of 10 tonnes of gold to the Central Bank of Sri Lanka.
Overall, these 3 sales transactions, to the Reserve Bank of India, Bank of Mauritius and the Central Bank of Sri Lanka, totalled 212 tonnes of gold, and brought the IMF’s remaining official gold holdings down to 3005.3 tonnes at the end of 2009, leaving 191.3 tonnes of the 403.3 tonnes remaining to sell. All 3 of the above announcements by the IMF were accompanied by the following statement:
“The Fund will inform markets before any on-market sales commence, and will report regularly to the public on progress with the gold sales.”
For nearly 3 months from late November 2009, there were no other developments with the IMF’s gold sales until 17 February 2010, at which point the IMF announced that it was to begin the ‘on-market’ portion of its gold sales program. At this stage you might be wondering what the IMF’s on-market gold sales consisted of, which ‘market’ it referred to, how were the sales marketed, who the buyers were, and who executed the sales transactions. You would not be alone in wondering about these and many other related questions.
The IMF’s press releases of 17 February 2010, titled ‘IMF to Begin On-Market Sales of Gold’ was bereft of information and merely stated that the IMF would “shortly initiate the on-market phase of its gold sales program” following “the approach adopted successfully by the central banks participating in the Central Bank Gold Agreement“, and that the sales would be “conducted in a phased manner over time”. The third Central Bank Gold Agreement (CBGA) ran from September 2009 to September 2014. These CBGA’s, which have been running since September 1999, ostensibly claim to support and not disrupt the gold market but in reality have, in their entirety, been highly secretive operations where vast amounts of central bank and official sector gold is channeled via the BIS to unspecified buyers in the bullion banks or central bank space, with the operations having all the hallmarks of gold price stabilization operations, and/or official sector gold redistribution between the world’s developed and emerging market central banks.
The February 2010 announcement also made the misleading claim that “the IMF will continue to provide regular updates on progress with the gold sales through its normal reporting channels”. These regular updates have never happened.
The IMF publicly announced each official sale shortly after the transaction was concluded. A high degree of transparency will continue during the sales of gold on the market, in order to assure markets that the sales are being conducted in a responsible manner.”
However, following this February 2010 lip service to transparency, there were no direct updates from the IMF exclusively about the on-market gold sales, even after the entire gold sales program had completed in December 2010.
One further IMF ‘off-market’ gold sale transaction was announced on 9 September 2010. This was a sale of 10 tonnes of gold to Bangladesh Bank (the Bangladeshi central bank) with the transaction said to have been executed on 7 September 2010. Adding this 10 tonnes to the previous 212 tonnes of off-market sales meant that 222 tonnes of the 403.3 tonne total was sold to central banks, with the remaining 181.3 tonnes sold via ‘on-market’ transactions. The Bangladesh announcement was notable in that it also revealed that “as of end July 2010, a further 88.3 metric tons had been sold under the on-market sales announced in February 2010″. The addition of Bangladesh to the off-market buyer list that already consisted of India, Sri Lanka and Mauritius also resulted in the quite bizarre situation where the only off-market buyers of IMF comprised 4 countries that have extremely close historical, political, cultural and economic connections with each other. Three of these countries, India, Bangladesh and Sri Lanka, are represented at the IMF by the same Executive Director, who from November 2009 was Arvind Virmani, so their buying decisions were most likely coordinated through Virmani and probably through the Reserve Bank of India as well.
“The International Monetary Fund (IMF) announced today the conclusion of the limited sales program covering 403.3 metric tons of gold that was approved by the Executive Board in September 2009.”
“The gold sales were conducted under modalities to safeguard against disruption of the gold market. All gold sales were at market prices, including direct sales to official holders.”
‘Modalities’ in this context just means the attributes of the sales including the approach to the gold sales, i.e. the sales strategy. This brief announcement on 21 December 2010 was again bereft of any factual information such as which market was used for the ‘on-market’ gold sales, the identity of executing brokers, the identity of counterparties, transaction dates, settlement dates / deferred settlement dates, method of sale, information on whether bullion was actually transferred between parties, publication of weight lists, and other standard sales transaction details. Contrast this secrecy to the 1976 -1980 IMF gold sales which were conducted by a very public series auction, and which were covered in minute details by the financial publications of the time.
As usual with its treatment of official sector gold transactions, the World Gold Council’s Gold Demand Trends report, in this case its Q4 2010 report, was absolutely useless as a source of information about the IMF gold sales beyond regurgitating the press release details, and there was no discussion on how the gold was sold, who the agent was, who the buyers were etc etc.
Lip Service to Transparency
When the IMF’s ‘on-market’ sales of 191.3 tonnes of gold commenced in February – March 2010, there were attempts from various quarters to try to ascertain actual details of the sales process. Canadian investment head Eric Sprott even expressed interest in purchasing the entire 191.3 tonnes on behalf of the then newly IPO’d Sprott Physical Gold ETF. However, Sprott’s attempts to purchase the gold were refused by the IMF, and related media queries attempting to clarify the actual sales process following the IMF’s blockade of Sprott were rebuffed by the IMF.
A Business Insider article from 6 April 2010, written by Vince Veneziani and titled “Sorry Eric Sprott, There’s No Way You’re Buying Gold From The IMF”, lays out the background to this bizarre stone-walling and lack of cooperation by the IMF. Business Insider spoke to Alistair Thomson, the then external relations officer at the IMF (now Deputy Chief of Internal Communications, IMF), and asked Thomson why Sprott could not purchase the gold that was supposedly available in the ‘on-market’ sales. Thomson’s reply is summarised below:
“The IMF is only selling gold though a qualified agent. There is only one of these agents at the moment and due to the nature of the gold market, they won’t reveal who or what that agent is.”
“Sprott can’t buy the gold directly because they do not deal with institutional clients like hedge funds, pension funds, etc. The only buyers can be central bankers and sovereign nations, that sort of thing.”
The IMF board agreed months ago how they wanted to approach the sale of the gold. Sprott is welcome to buy from central banks who have bought from the IMF, but not from the IMF directly.”
While this initial response from the IMF’s Alistair Thomson contradicted the entire expectation of the global gold market which had been earlier led to believe that the ‘on-market’ gold sales were just that, sales of gold to the market, on the market, Thomson’s reply did reveal that the IMF’s ‘on-market’ gold sales appeared to be merely an exercise in using an agent, most likely the Bank for International Settlements (BIS) gold trading desk, to transfer IMF gold to a central bank or central banks that wished to remain anonymous, and not go through the publicity of the ‘off-market’ transfer process.
Although, as per usual, the servile and useless mainstream media failed to pick up on this story, the IMF’s unsatisfactory and contradictory response was deftly dissected by Chris Powell of GATA in a dispatch, also dated 6 April 2010. After discussing the IMF’s initial reply with Eric Sprott and GATA, Business Insider’s Vince Veneziani then went back to IMF spokesman Alistair Thomson with a series of reasonable and totally legitimate questions about the ‘on-market’ gold sales process.
What are the incentives for the IMF not to sell gold on the open market or to investors, be it institutional or retail?
Did gold physically change hands with the banks you have sold to so far or was the transaction basically bookkeeping stuff (the IMF still holds the physical gold in this case)?
Are there available records on the actual serial numbers of bullion? How is the gold at the IMF tracked and accounted for?
Does IMF support a need for total transparency in the sale of gold despite the effects it could have on various markets?
Shockingly, Alistair Thomson, supposedly the IMF press officer responsible for answering the public’s queries about IMF finances (including gold sales), arrogantly and ignorantly refused to answer any of the questions, replying:
“I looked through your message; we don’t have anything more for you on this.”
Another example of the world of IMF transparency, where black is white and white is black, and where press officers who have formerly worked in presstitute financial media organisations such as Thomson Reuters fit in nicely to the IMF’s culture of aloofness, status quo protection, and lack of accountability to the public.
Monthly Report on Sales of Gold on the Market
Fast forward to July 2015. While searching for documents in the IMF online archives related to these gold sales, I found 3 documents dated 2010, titled “Monthly Report on Sales of Gold on the Market“. Specifically, the 3 documents are as follows (click on links to open):
Each of these 3 documents is defined by the IMF as a Staff Memorandum (SM), which are classified as ‘Executive Board Documents’ under its disclosure policy. The IMF Executive Board consists of 24 directors in addition to the IMF Managing Director, who was in 2009 the aforementioned Dominique Strauss-Kahn. According to the IMF’s Executive Board synopsis web page, the board “carries out its work largely on the basis of papers prepared by IMF management and staff.”
The most interesting observation about these 3 documents, apart from their contents which we’ll see below, is the fact that only 3 of these documents are accessible in the IMF archives, i.e. the documents only run up to May 2010, and do not include similar documents covering the remainder of the ‘on-market’ sales period (i.e. May – December 2010). Therefore there are 7 additional monthly reports missing from the archives. That there are additional documents that have not been published was confirmed to me by IMF Archives staff – see below.
Each of the 3 reports is only 3 pages long, and each report follows a similar format. The first report spans February – March 2010, specifically from 18 February 2010 to 17 March 2010, and covers the following:
“summarizes developments in the first month of the on-market sales, covering market developments, quantities sold and average prices realized, and a comparison with widely used benchmarks, i.e., the average of London gold market fixings“
‘Market developments’ refers to a brief summary in graphical chart of the London fixing prices in US Dollars over the period in question. Quantities sold and the currency composition of sales are notable:
Sales Volume and Proceeds: A total of 515,976.638 troy ounces (16.05 metric tons) of gold was sold during the period February 18 to March 17. These sales generated proceeds of SDR 376.13 million (US$576.04 million), based on the Fund’s representative exchange rates prevailing on the day of each sale transaction.
Currency Composition of Proceeds: Sales were conducted in the four currencies included in the SDR valuation basket …., with the intention of broadly reflecting the relative quota shares of these currencies over the course of the sales program.
The 4 currencies in which the sales were conducted during the first month were USD, EUR, GBP and JPY. See table 1 in the document for more information. Perhaps the most revealing point in each document is the confirmation of the use of an agent and specifically an arrangement that the sales prices included a premium paid by the agent:
Sales Prices compared with Benchmarks: The sales were implemented as specified in the agreement with the agent. Sales were conducted at prices incorporating a premium paid by the agent over the London gold fixing, and for sales settled in currencies other than the U.S. dollar, the sales price also reflects market exchange rates at the time of the London gold fixings (10:30 am and 3:00 pm GMT), net of a cost margin.
The use of a premium over the London fixing price is very revealing because this selling strategy, where the agent paid a premium over the average London gold fixing price, is identical to the sales arrangement which the Swiss National Bank (SNB) agreed with the Bank for International Settlements (BIS) when the BIS acted as sales agent for SNB gold sales over the period May 2000 to March 2001.
As Philipp Hildebrand, ex-governor of the SNB, revealed in 2005 when discussing the SNB gold sales strategy that had been used in 2000-2001:
“At the outset, the SNB decided to use the BIS as its selling agent. Between May 2000 and March 2001, the BIS sold 220 tonnes on behalf of the SNB. For the first 120 tonnes, the SNB paid the BIS a fixed commission while the performance risk resided with the SNB. For the next 100 tonnes, the BIS agreed to pay the average price of the AM and PM London gold fixing plus a small fixed premium.“
My conclusion is therefore that the IMF also used the Bank for International Settlements in Basel, Switzerland as selling agent for its ‘on-market’ gold sales over the period February to December 2010, with the sales benchmarked to average London fixing prices in the London Gold Market.
The pertinent details for the IMF’s March – April sales document are as follows:
“A total of 516,010.977 troy ounces (16.05 metric tons) of gold was sold during the period March 18 to April 16.”
“Sales were conducted in three of the four currencies included in the SDR valuation basket” i.e. USD, EUR and JPY”
The relevant details from the April – May sales document are as follows:
“A total of 490,194.747 troy ounces (15.25 metric tons) of gold was sold during the period April 19 to May 18, 2010; no sales were conducted during the last two business days in April, owing to end of financial year audit considerations.”
“Sales were conducted in three of the four currencies included in the SDR valuation basket” i.e. USD, GBP and JPY
Purely a Pricing Exercise?
The entire ‘on-market’ gold sales program of 181.3 tonnes may well have been just a pricing exercise by the Bank for International Settlements gold trading desk to determine the market prices at which to execute the transfers, with the gold transferring ownership after the event as book entry transfers at the Bank of England in the same manner as was applied to the Indian ‘off-market’ purchase of 200 tonnes.
Taking the sales quantities in the 3 published monthly reports, and incorporating quarterly IMF gold holdings time series data from the World Gold Council, it’s possible to calculate how much gold was ‘sold’ each single day over the entire ‘on-market’ gold sales program. As it turns out, for much of the program’s duration, identical quantities of gold were sold each and every day. The ‘on-market’ program commenced on 18 February 2010. Between 18 February and 17 March, which was a period of 20 trading days in the London gold market, the agent sold 515,976.638 troy ounces (16.05 metric tons) of gold. Between 18 March and 16 April, which was also a trading period of 20 trading days (even after factoring in 2 Easter bank holidays), the agent sold a practically identical quantity of 516,010.977 troy ounces (also 16.05 metric tons). This is a daily sales rate of 25,800 ozs or 0.8025 tonnes per trading day over these 40 trading days.
During the period from 19 April to 18 May 2010, which was 19 trading days excluding the 3rd May UK bank holiday and excluding the last 2 trading days of April on which the IMF program didn’t trade, the agent sold 490,194.747 troy ounces (15.25 metric tons) of gold, which again is…wait for it… 0.8025 tonnes and 25,800 ozs per day (0.8025 * 19 = 15.2475 tonnes & 25,800 * 19 = 490,200 ozs).
Following the combined Indian, Mauritian, and Sri Lankan ‘off-market’ purchases of 212 tonnes during Q4 2009, the IMF’s gold holdings stood at 3,005.32 tonnes at the end of 2009. Based on World Gold Council (WGC) quarterly data of world official gold reserves, the IMF’s gold holdings then decreased as follows during 2010:
…resulting in total remaining gold holdings of 2,814.04 tonnes at the end of 2010, an IMF gold holdings figure which remains unchanged to this day.
These WGC figures tally with the IMF monthly report figures. For example, the IMF says that 16.05 tonnes was sold up to and including 17 March, and with another 10 trading days in March 2010, a further 8.205 tonnes (0.8025 daily sales * 10) was sold by the end of March, giving total Q1 sales of 16.05 + 8.025 = 24.075 tonnes, which is identical to the WGC quarterly change figure. The IMF was active on 59 trading days in Q2 during which it sold 47.34 tonnes, which…wait for it…was an average of 0.8024 tonnes per day (47.34 / 59 = 0.8024).
Therefore, over Q1 and Q2 2010 (i.e. between February and the end of June 2010), the ‘on-market’ sales program sold 71.42 tonnes at a consistent ~ 0.8025 tonnes daily rate. This would suggest an algorithmic program trade which offered identical quantities each and every day, or more likely just priced these quantities so as to arrive at a sales consideration amount so that the IMF would receive ‘market prices’ for its gold. Recall that IMF gold has to be sold at market prices according to the Fund’s Articles of Agreement.
Given that 88.3 tonnes had been sold ‘on-market’ by the end of July 2010 as the IMF revealed in its Bangladesh announcement, we can infer that 16.88 tonnes was sold ‘on-market’ during July 2010. This 16.88 tonne sale in July was actually at a slightly lower pace than previous months since there were 22 trading days in July 2010, however the figure was chosen due to the following: With 191.3 tonnes on sale at the outset of the ‘on-market’ program, and 71.42 tonnes sold by the end of June, this left 119.88 tonnes to sell at the end of June. Whoever was choosing the monthly sales quantities wanted to finish July with a round figure of 103 tonnes, and so chose 16.88 tonnes to sell in July (i.e. 119.88 – 16.88 = 103 tonnes). Subtracting the 10 tonnes that Bangladesh bought in September 2010 (which would have been also factored in at that time) left a round 93 tonnes (2.999 million ozs) to sell as of the beginning of August.
The Q3 2010 sales of 67.66tonnes comprised the 10 tonne ‘off-market’ sale to Bangladesh on 7 September and 57.66 tonnes of on-market sales. Given 16.88 tonnes sold in on-market sales in July, there was therefore 40.78 tonnes sold over August – September, or an average of 20.39 tonnes in each of August and September (which represented a combined 43 trading days). Overall, there were 65 trading days in Q3 and 58 trading days in Q4 (assuming that the sales wrapped up on 21 December as per the IMF announcement). From the beginning of August to the 21 December, a period of 101 trading days, the IMF sold the remaining 93 tonnes, which would be a daily sales pace of 0.93 tonnes per day.
So overall, the IMF’s 403.3 tonnes of gold sales between November 2009 and December 2010 consisted of 222 tonnes sold ‘off-market’ to India, Bangladesh, Sri lanka, and Mauritius, 88.3 tonnes sold ‘on-market’ between February and July 2010, and 93 tonnes sold ‘on-market’ between August and December 2010′.
Given that the IMF’s 4 gold depositories are the Federal Reserve Bank of New York, the Bank of England in London, the Banque de France in Paris and the Reserve Bank of India in Nagpur India, and given that the IMF gold in New York is mostly in the form of US Assay Office melts, and the gold in Nagpur is a hodgepodge of mostly low quality old gold (read non-good delivery gold), then it would be logical for the IMF to sell some of its good delivery gold which is stored in London (which, until at least the late 1970s, was predominantly held in the form of Rand Refinery 400 oz gold bars), or even in Paris, since the Banque de France has been engaged in an ongoing program of upgrading the old US Assay office gold bars in its custody to good delivery bars.
“Our bars are not all LGD [London Good Delivery quality], but we have an ongoing improvement programme.”
This Banque de France gold bar upgrading program was also confirmed in February 2011 in a National Geographic Magazine article which stated:
“Buyers don’t want the beat-up American gold. In a nearby room pallets of it are being packed up and shipped to an undisclosed location, where the bars will be melted down and recast in prettier forms.”
Top Secret Foot Notes
There are 2 interesting footnotes on page 1 or each of the 3 above documents. The first footnote states that ‘The Executive Board was briefed on the plans for on-market sales prior to the announcement’, the announcement in question being the IMF’s 17 February 2010 announcement IMF to Begin On-Market Sales of Gold.
The second footnote, which is a footnote to a sales process and sales performance summary, refers to 2 further IMF papers as follows: “Modalities for Limited Sales of Gold by the Fund (SM/09/243, 9/4/09) and DEC/14425-(09/97), 9/18/09“.
As mentioned above, SM are Staff Memorandums which are classed under Executive Board Documents. DEC series document are ‘Text of Board Decisions’ (hence the DEC) and these documents are also deemed to be Executive Board Documents. After searching for both of these documents (SM/09/243 and DEC/14425-(09/97)) in the IMF archives, it became apparent that they were not there, i.e. they were not returned and not retrievable under IMF archive search results.
This was surprisingly since the IMF claims to have what it calls its “IMF Open Archives Policy”, part of which is Article IX, Section 5, which is the “Review of the Fund’s Transparency Policy—Archives Policy“. This policy, prepared by the IMF Legal Department includes the following:
Access will be given as follows:
2. (i) Executive Board documents that are over 3 years old
(ii) Minutes of Executive Board meetings that are over 5 years old;
(iv) Other documentary materials maintained in Fund archives over 20 years old.
3. Access to Fund documents specified in paragraph 2 above that are classified as “Secret” or “Strictly Confidential” as of the date of this Decision will be granted only upon the Managing Director’s consent to their declassification. It is understood that this consent will be granted in all instances but those for which, despite the passage of time, it is determined that the material remains highly confidential or sensitive.
Given that the 2 above gold sales documents, as well as 7 other monthly reports about ‘on-market’ gold sales were missing from the archives, but all the while the IMF claimed its on-market gold sales to be “Transparent”, the next logical step was to contact the IMF Archives people and seek explanations. What follows below is the correspondence I had with the IMF Archives staff. The IMF Archives staff were very helpful and their responses were merely communicating what they had found in their systems or had been told ‘from above’. My questions and emails are in blue text. The IMF replies are in red text. My first set of queries were about the SM/09/243 and DEC/14425 documents:
02 August 2015: My first question
I’m looking for IMF document SM/09/243 “Modalities for Limited Sales of Gold by the Fund” (Sept 4th 2009) in the IMF Archives catalog (http://archivescatalog.imf.org/search.aspx). However, SM/09/243 does not appear to be in the online Archives.
But, for example SM/09/242 and SM/09/244 are both retrievable in the searchable archives, but not SM/09/243.
Can you clarify where SM/09/243 is?
02 August 2015: My second question
Could you clarify how to search for and retrieve a document in the IMF online Archives that has reference “DEC/14425-(09/97)”
This document is dated 9/18/09. I cannot find it using any of the search parameters.
3 August: IMF Archives reply
Thank you for contacting the IMF Archives. Both documents you are referring to in your recent communication, SM/09/243 and DEC/14425, are not available to the public. Please visit our website to consult on IMF Policy on Access to the Archives.
3 August: me
Can you clarify why these documents are not available to the public? i.e. have they received a certain classification?
4 August: IMF Archives
You are absolutely right, despite the time rule, these two documents are still closed because of the information security classification. We hope it answers your question.
4 August: me
Thanks for answer. Would you happen to know when (and if) these files will be available…..assuming it’s not a 20 year rule or anything like that.
5 August: IMF Archives
Could you please provide some background information about your affiliation and the need to obtain these documents. Classified documents undergo declassification process when such a request is submitted. It can be a lengthy process up to one year.
5 August: me
I was interested in these specific documents because I am researching IMF gold sales for various articles and reports that I’m planning to write.
6 Aug: IMF
Thank you for providing additional information regarding your inquiry. Please send us a formal request for the declassification of these two documents specifying your need to have access to them. We will follow through on your behalf and get back to you with a response.
Before I had replied with a formal request, the IMF archives people contacted me again on 12 August 2015 as follows:
12 Aug: IMF
While waiting for your official request we made preliminary inquiries regarding the requested documents. The decision communicated back to us is not to declassify these documents because of the sensitivity of the subject matter.
Thank you for the clarification. That’s surprising about the classification given that the IMF on-market gold sales were supposed to be transparent.
Was there any information fed back to Archives on why the ‘subject matter’ is deemed sensitive?
14 Aug: IMF Archives
“Thank you for your follow-up email. Unfortunately, these particular documents are still deemed classified and no further explanation has been communicated to the Archives.”
My next set of questions to IMF Archives in August 2015 addressed the 7 missing monthly gold sales reports that should have covered May – December 2010. Since there is a 3 year rule or maybe at max a 5 year rule under the IMF’s Transparency Policy (Archive Policy), I thought that maybe the May/June, June/July, and July/August 2010 files might be due for automatic release under the 5 year rule by the end of August 2015.
22 August 2015: Me:
“I have a question about documents which appear in the online Archive after the 5 year schedule.
Is there a scheduled update or similar which puts newly available documents in the Archive when the 5 years has elapsed?
For example, I see some documents in the Archive from June 2010, but not July/August 2010. Is there an automated process that runs, but that hasn’t yet run for July/August 2010, that puts the latest documents into the publicly available Archive?”
24 August: IMF
“Thank you for your inquiry. The review and declassification of eligible documents that meet the time rule is done by batches. Therefore, publication does not happen in real time. It is a process that takes time and might cause a delay. We will let you know when July and August documents are posted.”
2 October 2015: me
“Do you know when documents from June 2010 onwards will be added to the IMF online archive? I still don’t see any yet.
Is there a batch of declassifications for June 2010 / July 2010 / August 2010 happening soon?”
2 October: IMF
“Thank you for contacting the IMF Archives. Unfortunately, we are unable to speculate about the documents website availability and provide a more specific timeframe than the one already communicated in the attached correspondence. As already promised, we will let you know when July and August documents are posted.”
Then about 30 minutes later (on 2 October 2015) the IMF sent me another email:
2 October: IMF
“Dear Mr. Manly,
I ran a sample search of Executive Board minutes available via IMF Archives catalog and was able to find minutes issued in June and July 2010. Is there a specific document you are looking for which you are unable to find?
2 October: Me
“I was searching for the next months’ reports in the below series, report name “Monthly Report on Sales of Gold on the Market” – see screenshot attached.
The current search retrieval brings back 3 reports spanning February- May 2010, but nothing after May 2010. Report names in the retrieved search results are:
SM/10/69 SM/10/102 SM/10/139”
I was wondering if a couple of months in this series after May 2010 are available now?”
5 October: IMF
“The reports after May 2010 haven’t been declassified for public access because of the sensitivity of the subject matter, and therefore they are not available for retrieval.
We apologize for any inconvenience this may cause.”
5 October: Me
“Thanks for the reply. Out of interest, why were the reports from February to May 2010 declassified, since surely the June-December 2010 monthly reports are identical to the first three months in that they are also just providing monthly updates on the same batch of gold ~180 tonnes of gold which was being sold over the 10 month period?”
7 October: IMF
“Dear Mr. Manly,
This series of reports is under review at the moment, and according to security classification they are currently closed.
And there you have it folks. This is IMF transparency. As per the IMF Archive disclosure policy, only Christine Lagarde, current IMF Managing Director, has the authority to consent to the declassification of classified Executive Board documents.
Sensitivity of Subject Matter – China and Bullion Banks
The above IMF responses speak for themselves, but in summary, here we have an organization which claims to be transparent and which claims to have run a transparent ‘on-market’ gold sales program in 2010, but still after more than 6 years it is keeping a large number of documents about the very same gold sales classified and inaccessible to the public due to the ‘sensitivity of the subject matter’. What could be so sensitive in the contents of these documents that the IMF has to keep them classified? Matters of national security? Matters of international security? And why such extremely high level security for an asset that was recently described by the august Wall Street Journal as a ‘Pet Rock’?
The secrecy of keeping these documents classified could hardly be because of sensitivity over the way in which the sales were executed by the agent, since this was already revealed in the February – May reports that are published, and which looks like a normal enough gold sales program by the Bank for International Settlements on behalf of the IMF? Could it be to do with the identities of the counterparties, i.e. the buyer(s) of the gold? I think that is the most likely reason.
Two counterparties that spring to mind that might request anonymity in the ridiculously named ‘on-market’ sales process would be a) the Chinese State / Peoples Bank of China, and b) a group of bullion banks that were involved in gold swaps with the BIS in 2009/2010.
Chinese discretion – Market Speculation and Volatility
Bearing in mind another one of the IMF’s mantras during the 2009-2010 gold sales processes that it wanted to “avoid disruption of the gold market”, and the Chinese State’s natural surreptitiousness, the following information reported by China Daily on 24 February 2010 (which was the first week of ‘on-market’ sales) is worth considering. The article, titled ‘China unlikely to buy gold from the IMF‘, stated the following:
“Contrary to much speculation China may not buy the International Monetary Fund’s (IMF) remaining 191.3 tons of gold which is up for sale as it does not want to upset the market, a top industry official told China Daily yesterday.
“It is not feasible for China to buy the IMF bullion, as any purchase or even intent to do so would trigger market speculation and volatility,” said the official from the China Gold Association, on condition of anonymity.”
To me, these comments from the ‘anonymous’ China Gold Association official are a clear indication that if China was the buyer of the remaining 181.3 tonnes (ie. 191.3 tonnes – 10 tonnes for Bangladesh), then China certainly would have conducted the purchase in secrecy, as ‘it does not want to upset the market’, and “any purchase or even intent to do so would trigger market speculation and volatility”
In the same China Daily article, there was also a comment reported from Asian Development Bank economist Zhuang Jian, who was in favor of China buying the IMF gold, as he thought that “buying IMF gold would not only help China diversify its foreign exchange reserves but also strengthen the yuan as an international currency”, and that China would “have a bigger say in the IMF through the gold purchasing deal”.
Zhuang Jian also stated that “China can start with small purchases on the international market like the 191.3 tons of IMF gold. In the short-term, the market will see volatility, but in the long-term the prices will return to normal”.
BIS Swaps and Bullion Bank Bailouts
In late June 2010, the Bank for International Settlements (BIS) published its annual report to year-end March 2009. This report revealed that the BIS had, during its financial year, taken on gold swaps for 349 tonnes. The Wall Street Journal (WSJ) initially reported in early July 2010 that these swaps were with central banks, however the BIS clarified to the WSJ that the gold swaps were in fact with commercial banks. The Financial Times then reported in late July 2010 that “Three big banks – HSBC, Société Générale and BNP Paribas – were among more than 10 based in Europe that swapped gold with the Bank for International Settlements.” Notice that two of the named banks are French banks.
Since the BIS refuses to explain anything material about these swaps, which was most likely a gold market fire-fighting exercise, the details remain murky. But the theory that best explains what actually happened was advanced by the late Adrian Douglas of GATA in early July 2010. Douglas proposed that bullion bank gold bailout tripartite transactions actually created the BIS gold swaps. Since IMF gold is stored at both the Bank of England vaults in London and at the Banque de France vaults in Paris, IMF ‘on-market’ gold held in Paris or London would be very easy to transfer to a group of bullion banks who all hold gold accounts at the Bank of England and, it now appears, also hold gold accounts at the Banque de France.
In May 2012, George Milling-Stanley, formerly of the World Gold Council, provided some insight to the publication Central Banking about the role of the Banque de France in being able to mobilize gold. Milling-Stanley said:
“Gold stored at the Bank of England vaults … can easily be mobilised into the market via trading strategies, or posted as collateral for a currency loan”
‘Of the Banque de France, Milling-Stanley says it has ‘recently become more active in this space [mobilising gold into the market], acting primarily as an interface between the Bank for International Settlements in Basel [BIS] and commercial banks requiring dollar liquidity. These commercial banks are primarily located in Europe, especially in France’.”
It’s interesting that two of the three banks named by the Financial Times as being involved in the BIS gold swaps are French, and that Milling-Stanley mentioned that most of the commercial banks that interfaced with the BIS are French banks. Given that the then Managing Director of the IMF, Dominique Strauss-Kahn, is French, as is his successor Christine Lagarde, could some of the ‘on market’ IMF gold sales been a case of the French controlled IMF bailing out French bullion banks such as SocGen and BNP Paribas?
Applied to the IMF gold sales, and under a tripartite transaction, as I interpret it, the following transactions would occur:
IMF gold is transferred by book entry to a set of bullion banks who then transfer the title of this gold to the BIS. The BIS transfers US dollars to the bullion banks who then either transfer this currency to the IMF, or owe a cash obligation to the IMF. The sold gold is recorded in the name of the BIS but actually remains where it is custodied at the London or Paris IMF Gold Depositories, i.e. at the Bank of England or Banque de France vaults.
In this scenario, the IMF gold could have been transferred to bullion banks and further transferred to the BIS during 2009, with the ‘on-market’ pricing exercise carried out during 2010. With the BIS as gold sales agent, the entire set of transactions would be even more convenient since the BIS gold trading desk would be able to oversee the gold swaps and the gold sales.
So, in my opinion, the IMF ‘on-market’ gold on offer was either a) bought by the Chinese State, or b) was used in a gold market fire-fighting exercise to bail out a group of bullion banks, or c) a combination of the two.
Modalities of Gold Sales
As to why the IMF paper “Modalities for Limited Sales of Gold by the Fund” (Sept 4th 2009) SM/09/243″ is under lock and key and can only be declassified by the IMF Managing Director Christine Lagarde, the conclusion is that it too must contain references to something that the IMF are extremely worried about allowing into the public domain. For the simple reason is that a similarly named IMF paper from 25 June 1999, titled “Modalities for Gold Sales by the Fund” (EBS/99/110)” is accessible in the IMF Archives, and while revealing in a number of respects, it hardly contains ‘sensitive material’. This paper was prepared when the IMF had been thinking about conducting gold sales back in 1999 which never materialized, except in the form of an accounting trick to sell to and simultaneously buy back a quantity of gold to and from Mexico and Brazil. This 1999 paper “Modalities for Gold Sales by the Fund” is very interesting though for a lot of reasons as it sketches out the limitations on IMF gold sales, the approaches to the sales that were considered by the IMF at that time, and it’s also is full of pious claims that the gold sales process should be ‘transparent’, such as the following:
“it will be critical to ensure transparency and accountability of the Fund’s gold operations through clear procedures for selecting potential buyers and determining prices, and through public disclosure of the results of the sales after they have taken place. The need for transparency and evenhandedness, which is essential for an international financial institution, argues for providing as much information as possible to the public.”
On the actual approaches to gold sales, the 1999 Modalities paper introduces the topic as follows:
“This paper considers four main modalities for the sale of gold by the Fund: (i) direct sales to another official holder of gold; (ii) placements into the market through a private intermediary or a group of intermediaries, such as bullion banks; (iii) placements into the market through the intermediation of a central bank with experience in gold sales or the BIS; and (iv) direct sales to the market through public auctions, as was the case with the gold sales by the Fund between 1976 and 1980″
On the topic of publication of sales results, the 1999 paper states:
“Publication of results: In all cases, the Fund would make public at regular, say monthly, intervals the quantity sold and the prices obtained, as well as, depending on the modality decided by the Board, the names of the buyers. In the case of a forward sales strategy involving an intermediary, the Fund would make public the quantities and delivery dates of the forward sales. It would be for consideration whether the Fund would announce the names of the intermediaries selected by the Fund to sell the gold, if that modality would be chosen”
On the topic of limitations to IMF gold sales, the 1999 paper says:
“Under the Articles, the Fund is only authorized to sell gold; that is, to transfer ownership over gold on the basis of prices in the market, taking into account reasonable transactions costs. The Articles prescribe the objective of avoiding the management of the price, or the establishment of a fixed price, in the gold market (Article V, Section 12 (a)). This implies that the Fund “must seek to follow and not set a direction for prices in the gold market.“
Under the Articles, the Fund cannot engage in gold leasing or gold lending operations, enter into gold swaps, or participate in the market for gold options or other transactions that do not involve the transfer of ownership over gold.”
“Directors generally expressed the view that private placements of gold, either through a group of private institutions or through the intermediation of central banks or the BIS, had many advantages in terms of flexibility, both in terms of timing as well as in the discretion that the Fund’s agents could employ in the techniques that they could use tochannel gold into the market.“
And from the discussion, using the services of the BIS (or another central bank) appeared to be most favorable option:
“Directors further noted that there would be considerable practical difficulties in the choice of the institution or group of institutions through which the sales of gold could be conducted, even though these would be limited-but not entirely eliminated-by choosing a central bankor the BIS.“
“Greater openness and clarity by the IMF about its own policies and the advice it provides to its member countries contributes to a better understanding of the IMF’s own role and operations, building traction for the Fund’s policy advice and making it easier to hold the institution accountable. Outside scrutiny should also support the quality of surveillance and IMF-supported programs.”
“The IMF’s efforts to improve the understanding of its operations and engage more broadly with the public has been pursued along four broad lines: (i) transparency of surveillance and IMF-supported programs, (ii) transparency of its financial operations; (iii) external and internal review and evaluation; and (iv) external communications.”
“The IMF’s approach to transparency is based on the overarching principle that it will strive to disclose documents and information on a timely basis unless strong and specific reasons argue against such disclosure.”
Again, what could these “strong and specific reasons” arguing “against such disclosure” be for the 2010 IMF gold sales?
By now you will begin to see that the IMF’s interpretation of transparency on gold sales diverges massively from any generally accepted interpretation of transparency. The IMF appears to think that merely confirming that a gold sale took place or will take place is the epitome of transparency, when it would more accurately be described as obfuscation and a disdain for actual communication with the public. IMF transparency is anything but transparent.
Perhaps the usually useless mainstream financial media may finally sit up and next time they bump into the IMF’s Ms Lagarde at a press conference, ask her why the IMF continues to block access to its 2010 gold sales documents, which remain classified due to, in the IMF’s own words, “the sensitivity of the subject matter”. Here’s hoping.
It has now come to light that on Tuesday 8 March, the Banco Central de Venezuela (BCV) sent another 12.5 tonnes of gold by air freight to Switzerland (via Paris), and fascinatingly in this instance, the exact details of the transfer are already available, including the cargo manifest, courtesy of Venezuelan newspaper El Cooperante which broke the news on 11 March.
As per the January gold exports to Switzerland, which most likely were part of a gold swap to generate much-needed financing for the crisis-ridden Venezuelan economy, this latest shipment appears likewise.
Air France flight AF 385 and Brinks Switzerland
The BCV’s 12.5 tonne gold shipment was flown out of Caracas International Airport (Maiquetia Simon Bolivar) on Air France flight AF 385 to Paris, leaving at 5:49pm local time on Tuesday 8 March, and arriving into Paris Charles de Gaulle Airport at 7:54am on Wednesday 9 March.
The sender of the shipment was Banco Central de Venezuela, and the consignee (initial receiver) was Brinks Switzerland. Given that Brinks Switzerland was listed as the consignee for a flight arriving into Paris Charles de Gaulle at 8am, then there would have been a second flight from Paris to presumably Zurich in Switzerland which is the main destination airport for gold arriving into Switzerland. As giant Swiss refiner Valcambi says under Transportation Services, it provides “Import services and transportation from Zürich airport to Valcambi“.
The 3 immediate direct flights from Paris Charles de Gaulle to Zurich after 8:00am are Swiss Air flight LX 655 at 09:55, Air France flight AF 1614 at 12:55, and Swiss Air flight LX 639 at 15:05. Brinks has its operations centre headquarters in Zurich at Zurich Airport (and also a Geneva office at Geneva Airport).
The Cargo Manifest
The Cargo Manifest from Maiquetia Airport (Caracas International Airport) shows that the BCV’s gold shipment was described as ‘GOLDS BARS’, with tracking number 057-91145645, and comprised 12,561 kilos, packed in 318 packets, which are listed somewhat surprisingly as being ‘caja de carton’ (which translates as cardboard box). Super-strong cardboard presumably.
If each bar weighed approximately 400 ozs, there would have been about 1,009 or 1,010 bars in the shipment. With 318 packets, and with 12,561 kgs = 403,845.53 troy ounces = 12.56 tonnes, then on average there were 39.5 kgs per packet (12561 / 318 = 39.5), which is a little but more than 3 bars per packet. But since gold bars can’t obviously be divided, then these gold bars may have been slightly larger US Assay Office bars weighing more than 400 ozs. Remember that the London Bullion Market Association (LBMA) Good Delivery specification for gold bars ranges from 350 oz up to 430 oz. Alternatively, most of the packets could have contained 3 bars each and the remaining packets 4 bars each.
Air France has a web-based cargo tracking number website but unfortunately, it does not return any information on tracking number 057-91145645. See screenshot:
However, the Air France website doesn’t return any data on other known gold shipments of Venezuelan gold, for example Air France tracking number 057-53208470 from late 2011, which was actually displayed on Venezuelan TV (see below bar code). Therefore, tracking information on gold shipments may not be publicly available for security reasons.
It’s important to consider the extent to which this latest BCV gold shipment may be scraping the barrel in terms of the BCV’s remaining unencumbered gold reserves. My theory at this stage is that the gold bars being sent to Switzerland are being sent to Swiss refineries to be refined into modern Good Delivery bars, and not to be refined into 1 kilo gold bars for the Asian market. This would be the case if all of the 160 tonnes of gold (in modern good delivery form) that had been repatriated during late 2011 / early 2012, was already in play (i.e. encumbered, under lien or claim or pledge).
This is assuming that the gold in transit are the gold legs of USD – gold swaps, whereby the gold is then held (and used) by a commercial bank counterpart or via some gold swap arrangement between the BCV and a commercial bank facilitated by the Bank for Settlements (BIS) in Basel. Furthermore, the legal wording of gold swaps would normally stipulate that gold held as part of a gold swap would need to be deposited into the gold vault of an institution such as the Bank of England, FRBNY, or the BIS’ storage facility at the Swiss National Bank etc.
Consider some facts about the BCV’s gold reserves and the gold swap activity and rumoured gold swap activity by the BCV in the recent past, using a reverse timeline:
The BCV exported 12.56 tonnes of gold to Switzerland on 8 March 2016
Venezuela (assumed to be the BCV) exported 35.8 tonnes (specifically 35.835 tonnes) of gold to Switzerland in January 2016 (from Swiss Customs Data)
Venezuela exported 24 tonnes of gold to Switzerland in 2015, nearly 35 tonnes in 2014, and approximately 8 tonnes in 2013, after exporting far smaller amounts in any of the 7 prior years (about 0-4 tonnes per annum over 2006 -2012). See chart from Nick Laird’s www.sharelynx.com below.
The BCV had carried out gold swaps with the Bank for International Settlements‘in recent years’, with up to 7 swap transactions (Reuters February 2016). These swaps would have to have used gold held outside of Venezuela, i.e. either at the Bank of England or using gold that was exported from Venezuela to Switzerland in 2013-2015
The BCV shipped an unspecified quantity of gold out of Caracas airport to an international destination on 2nd, 3rd and 7th July 2015 (re-exported for pledging)
BCV’s gold reserves fell by 60 tonnes over the period March – April 2015
The BCV entered into a 4 year gold swap with Citibank (announced in April 2015). This Citibank swap most likely used the 50 tonnes of Venezuelan gold that had been left at the Bank of England in 2011.
Venezuelan opposition leader, Maria Corina Machado, had information in March 2015 that suggested the BCV was engaging in an even larger gold swap that the Citi bank swap: “¿Es cierto que estarían negociando una segunda operacion de empeño similar a la anterior por un monto aun mayor?“
12,819 good delivery bars (160 tonnes) were repatriated to Venezuela in late 2011 / early 2012
About 4,089 bars (about 51 tonnes) of Venezuela’s gold was left in London after the 2011/ 2012 repatriation
There were 12,357 bars (about 154.5 tonnes of gold) held in the BCV vaults in Caracas before the gold repatriation started in late 2011. These bars that were originally in Caracas are mainly if not exclusively US Assay office bars since they were repatriated from the FRB in New York in the late 1980s
There were 25,176 bars (about 315 tonnes) in the BCV vaults when the repatriation to Caracas completed (in early 2012)
Approximately 50 tonnes of BCV gold has been exported from Venezuela to Switzerland within the first 10 weeks of 2016. How much longer can this outflow continue? This gold is being exported by the BCV in order to participate in swaps (or maybe even outright sales) in order to provide external financing to the Venezuelan Government. The fact that the gold is being picked up by Brinks Switzerland suggests it is being brought to a Swiss gold refinery. The main reason gold is sent to Switzerland is so that it can be refined or recast.
At least 3 entities have been associated with this external financing so far, namely Citibank, Deutsche Bank and the Bank for International Settlements. Bullion banks and the BIS hold gold in long-term holdings in the form of Good Delivery Bars, and enter into gold transactions using Good Delivery bars, not kilobars. With 50 tonnes of Venezuela’s gold left behind at the Bank of England in 2011, there were only another 160 tonnes of gold bars at the BCV vaults that were not old US Assay Office bars. The gold now going from the BCV to Switzerland is, in my view, old US Assay Office bars. This would suggest that more than 200 tonnes of Venezuela’s gold is already in play, as well as the 50 tonnes from Q1 2016.
With the BCV being totally opaque about the real state of its gold holdings, and with the IMF / World Gold Council still reporting the fantasy that the BCV / Venezuela holds 361 tonnes of gold in its official reserves, some speculation is in my view acceptable, and the above information should go someway towards illuminating a truer state of Venezuela’s gold holdings, but what that true state of play is, only the BCV, Venezuelan Government and associated insider bullion banks and central banks know.
Note, that it’s also possible that Venezuela exported gold to Switzerland (or elsewhere) in February 2016. Swiss customs data, which shows (non-monetary) gold imports and exports, including de-monetised gold, is available each month but with a lag of 3 weeks. Therefore the February 2016 data is available on Tuesday 22 March, on the Swiss Customs website.
Whereas some central banks have become more forthcoming on where they claim their official gold reserves are stored (see my recent blog post ‘Central bank gold at the Bank of England‘), many of the world’s central banks remain secretive in this regard, with some central bank staff saying that they are not allowed to provide this information, and some central banks just ignoring the question when asked.
In the ‘Central bank gold at the Bank of England’ article, I said that “A number of central banks refuse to confirm the location of their gold reserves. I will document this in a future posting.” As promised, this blog post explains what I meant by the above statement.
Some of those central banks may have made it into the Bank of England storage list if they had been more transparent in providing gold storage information. However, since they weren’t transparent, these banks make it into the alternative ‘non-cooperative’ list. One subset of this list is central banks, which to be fair to them, did actually respond and said that they cannot divulge gold storage information. The other subset is central banks which didn’t reply at all when I asked them about their official gold storage location details.
The below list, although not complete, highlights 7 central banks and 1 official sector financial institution (the BIS), which, when asked where do they store their gold reserves, responded with various similar phrases saying that they could not provide this information. Between them, these 7 central banks claim to hold 1,500 tonnes of gold. Adding in the BIS which represents another 900 tonnes, in total that’s 2,400 tonnes of gold where the central banks in charge of that gold will not provide any information as to its whereabouts. Much of this 2,400 tonnes is no doubt stored (at least in name) at the FRBNY and the Bank of England, with some stored in the home countries of some of the central banks.
I have included the 8 responses below, but have deleted any references to individuals’ names or email addresses:
Bank of Japan: 765.2 tonnes of gold
Bank for International Settlements (BIS): > 900 tonnes of gold
BIS manages 443 tonnes of gold under custody for central banks
BIS owns 108 tonnes of gold itself
BIS manages 356 tonnes of gold deposits from central banks
BIS has 47 tonnes of gold swaps outstanding
Spain: 281.6 tonnes of gold
South Africa: 125.2 tonnes of gold
Thailand: 152.4 tonnes of gold
Singapore: 127.4 tonnes of gold
Malaysia: 37.9 tonnes of gold
Paraguay: 8.2 tonnes of gold
…which translates into English as …..”That information is classified and cannot be disclosed. I hope you understand“.
‘No Answer’ central banks
I also emailed some central banks which didn’t respond to the question, ‘where are your gold reserves stored?’. They may not have responded for various reasons, including the emails may not have reached the relevant people who would normally be responsible for such matters. These banks account for another 500+ tonnes of gold reserves. Again, some of this gold is probably at the Bank of England, such as, some of Jordan’s and Kuwait’s gold, due to historical ties with the Bank of England.
Banque du Liban (Lebanon): 286.8 tonnes (said to be in Lebanon and FRB New York)
The BIS’ response above on the gold storage question, i.e. “the information that you have requested is not made publicly available” makes a mockery of its own claims in the below slide that central banks are required to be transparent and accountable.
The only ‘gold’ that the BIS is willing to discuss is its pie-in-the-sky corporate-speak ‘Golden Triangle’ of central bank Autonomy complimented by Transparency and Accountability when it states:
– TRANSPARENCY – important for holding central bank to account
- ACCOUNTABILITY – crucial counterpart of autonomy in an open society, makes transparency more credible
(I added the 2 red arrows to the slide to highlight these points)
Conclusion: Finland’s change of heart
The fact that staff of some central banks won’t discuss that bank’s gold storage arrangements is no doubt an internal rule, or a storage depository rule, or some such nonsense. The nonsensical nature of their non-cooperation and evasion is highlighted by the below about-turn from the Bank of Finland, when in January 2013 it childishly told me that “We are not allowed to tell the exact depository, town or country“, and then 9 months later in October 2013, the powers-that-be at the gold depositories gave the go-ahead, for the Bank of Finland then spilled the beans, squealing that its gold was stored at a cornucopia of the usual suspects, namely, the Bank of England, the Federal Reserve Bank of New York, the Swiss National Bank, and smaller amounts at the Swedish Riksbank and the Bank of Finland.
Given that the Bank of England, the Federal Reserve Bank of New York, and the Swiss National Bank all agreed to the Bank of Finland’s request in 2013 to publish the individual storage locations of its gold, and given that the vaults of these 3 banks store the vast majority of internationally stored central bank gold, therefore it also makes a mockery of central banks which persists in claiming that they cannot divulge information on the storage of their own gold, which in most cases is supposedly spread between the very same 3 sets of vaults.
And after the Bank of Finland press release, which most Finns and most of the world probably didn’t even see, Helsinki and the world continued about its business as before. The point being that the storage locations of central banks’ gold reserves is not that big of a deal. Its only the central banks that make it into a big deal with their secrecy….unless of course, they are hiding something bigger, and the gold is not even where its supposed to be.
According to a Reuters report from 24 April, the central bank of El Salvador, Banco Central de Reserva de El Salvador (BCR), sold approximately 80% of its gold reserves during March 2015. This sale comprised 5.412 tons of gold and raised $206 million for the Bank.
Reuters initiated its story based on updates to the International Monetary Fund’s gold reserve data, which this month was updated on 24 April. Each month, the IMF updates its International Financial Statistics dataset with economic data (on a one to two month lag) including country gold reserve data reported to it by member countries.
However, the Reuters story was very brief and failed to explain any of the details about El Salvador’s gold or the March gold sales. Therefore, to correct this situation, the full story is explained below.
IMF gold reserve data by country
The IMF elibrary web site is the entry point for retrieving monthly country gold reserve data (by volume in fine troy ounces) for any IMF member country. Note that on the IMF’s site, gold reserve data is part of the International Financial Statistics (IFS) dataset and not part of the International Reserves dataset. The IFS dataset was subscription-based until January 2015, after which the IMF made a number of datasets, including IFS, free to access.
IFS gold reserve data for El Salvador shows that starting with a total of 223,000 ounces of gold in November 2014, the central bank’s gold reserves fell by 5,000 ozs to 218,000 ozs in December 2014, before dropping by another 174,000 ozs to 44,000 ozs in March 2015, making an overall fall of 179,000 ozs between November and March. See table below:
Looking at El Salvador’s quarterly gold reserve data since Q2 2014, as well as its annual gold reserve data since 2011, shows that the only movements in the country’s gold holdings over the last 4 years were the December 2014 and March 2015 gold sales. See table below:
However, the best source of information on the Banco Central de Reserva de El Salvador’s (BCR) gold holdings, is of course, the bank’s own publications. The BCR, like a number of other central banks in the region, divulges relatively more information about its gold holdings than most other central banks in other parts of the world.
The Bank for International Settlements, Barclays and Scotia
Section 7 of this statement addresses the BCR’s gold deposits (Depósitos en Oro) and is quite detailed in the information that it provides. See screenshot below:
As of 30th September 2014, the BCR claimed a gold holding of 223,113.213 troy ounces. Exactly 85% of this gold holding (189,646 ozs) was said to be held as deposits of physical gold (Depósitos de oro físico) with the Bank for International Settlements (BIS). The BIS offers gold “safekeeping and settlements facilities” that are “available loco London, Berne or New York“, i.e. the BIS maintains gold accounts in three locations, so El Salvador’s gold could have been held with the BIS in any of these three locations.
The remainder of the gold holdings comprised 31 day time deposits in gold (Depósitos a plazo en oro) placed with two bullion banks, and derivative coverage (Derivado de Cobertura) with the BIS in the form of two put options entered into in March 2014.
The time deposits in gold were placed in equal sizes with Barclays Bank and the Bank of Nova Scotia. Each of these time deposits represented 7.5% of El Salvador’s gold holdings, specifically 16,733 ozs with Barclays and 16,734 ozs with Scotia, and 15% in total. The combined deposits also totalled 33,467 ozs, just over 1 ton. Interest on gold deposits is usually paid in gold that accrues and is added to the outstanding deposit total, so this amount in excess of 1 ton may represent interest payable to the BCR by the bullion banks.
Note that both Barclays and Scotia were two of the member banks of the recently defunct London Gold Market Fixing Company which managed the daily London gold fixings, and the two banks are also now two of the seven participants in the new LBMA Gold Price auction which recently replaced the gold fixings. Barclays and Scotia are also two of the six member bullion clearing banks which constitute London Precious Metals Clearing Ltd (LPMCL).
There was also a residual line item under the BCR’s time deposits in gold attributed to a third bullion bank, Standard Chartered. Finally, the BIS derivatives coverage line item accounted for 2,180 ozs.
At the stated valuation price of $1,216.50 per ounce, the above totals add up to 225,293 ozs of gold, but subtracting the derivatives line item of 2,180 ozs yields 223,113 ozs, which is the total gold holding that the BCR claims to hold. The gold representing the derivatives (put options explained below) line item seems to represent a loss on the puts expressed in gold that the BCR makes an adjustment for by subtracting it from its ‘total’ gold holding, hence it reported a gold holding of 223,113 ozs.
The last notes to the above section 7 state that:
“OnMarch 12, 2014, twoput options with a maturity of one year were entered into, with a notional value of11,200and211,913.213troyounces respectively, atan exercise priceof US $1,100.00per troyounce.
However, on 30 June the BCR had an active time deposit in gold placed with Standard Chartered as well as with Barclays and Scotia, and so was using three bullion banks for placing its gold deposits.
Using a valuation price of $1,315 per troy ounce, the June report shows that Barclays held a time deposit in gold for the BCR of 16,733 ozs, Scotia held a deposit of 8,467 ozs and Standard Chartered held a deposit of 8,267 ozs. These deposits also rolled over with a one month maturity.
The gold deposit with Barclays in June 2014 is identical to that of September 2014, so it was just being renewed by the BCR every month and rolling over with Barclays. Note that the Scotia and StanChar deposits of 8,267 ozs and 8,467 ozs respectively, add up to 16,734 ozs, so between June and September, these two deposits were combined at some point when they matured and were then placed together with Scotia.
In the June accounts, the amount of gold attributed to the ‘derivatives’ (put options) is only 711 ozs, or US$935,761 and so the total amount of gold listed below adds up to 223,825 ozs. Subtracting the 711 ozs (loss) again gives 223,113 ozs, the BCR’s published gold holding. Gold was trading at about $1,300 in June 2014 but there was still about 9 months left until the expiration date of the options.
Gold Deposits = Gold Lending
It’s important to grasp what these gold deposits with bullion banks are. This is merely gold lending by a central bank which has lent this gold out to LBMA bullion banks at very low deposit rates of maybe 0.5% – 1.00%. The LBMA bullion banks, at the time the lending first occurred, obtained the physical gold and immediately sold it.
These are short-term gold deposits, which keep maturing every month or so, therefore a central bank has to keep renewing them, either with the same LBMA bullion bank or another LBMA bullion bank which is in the market quoting to take these deposits. The central banks do this by sending MT60* series SWIFT messages to the bullion banks. These gold deposits that a central bank puts out can stay out for years and years after they were first entered into. For example, Bolivia has had gold deposits out with LBMA bullion banks since 1997, or over 17 years. I will write about Bolivia’s gold lending in detail at some point.
None of the LBMA bullion banks actually has this gold on deposit, since its been sold. The banks just take over the obligation to pay the gold back to the central bank. So the claims that the central bank has to the bullion banks just keep switching around. One month the claims could be on Barclays, Scotia and Standard Chartered. A few months later the claims could be to Natixis, BNP Paribas and HSBC etc etc.
Lots of central banks engage in this activity, they just don’t report it in as much detail as, for example, El Salvador or Bolivia. The Austrian federal auditors recently published a report which showed that Austria’s central bank, the OeNB, was actively engaging in gold lending with multiple bullion banks, with up to 10 counter-parties in 2009. See here.
Selling its Gold did not make sense for El Salvador
In its 24 April story, Reuters reported from San Salvador that a central bank of El Salvador official had said that the gold sales were to “diversify risk and take advantage of the metal’s appreciation”, as well as to protect the Bank’s reserve portfolio “against market volatility”. This explanation doesn’t make a lot of sense especially since the put options were out of the money in March 2015.
Firstly, the gold price has not appreciated very much recently, and in US dollar terms it has fallen notably since September 2011. El Salvador’s gold holdings did not change at all over 2011-2014 and their value went down, not up. So, at this time, the reference to the “metal’s appreciation” is bogus, since even if the cost price was substantially lower, a far better time to sell would have been in 2011-2012.
Secondly, gold as a reserve asset in a central bank reserve portfolio is held precisely because it provides diversification and can act as an inflation hedge, currency hedge and also represents a reserve asset or war chest of last resort. In the World Gold Council’s latest ‘World_Official_Gold_Holdings_as_of_April2015_IFS’ report from early April, when El Salvador was listed as holding 6.8 tons of gold, this represented 9.9% of the BCR’s total reserves.
Emerging market central banks have been actively increasing their gold reserves in recent years, so as to increase the gold percentage in their reserves to something approaching 10%. Since El Salvador had an enviable ratio of nearly 10% of gold to total reserves that many emerging central banks are striving to reach, it does not make any sense as to why the BCR suddenly turned around and ruined this ratio, by selling nearly four-fifths of its gold. The BCR’s gold to total reserves ratio is now a miniscule 2% of its total reserve portfolio. There may therefore have been other considerations at play between El Salvador and the BIS such as the BIS suggesting the sale.
So, which gold did El Salvador sell?
Recall that the BCR’s two put options with the BIS were entered into on 12 March 2014 and had a maturity of one year and a strike price of US$ 1,100 per troy ounce. One put was for a notional value of 11,200 troy ounces and the other was for a notional value of 211,913.213 troy ounces. But with the strike price at $1,100 there was no value in exercising them.
For the month of March, the US dollar gold price traded in a range from about $1,220 down to $1,150. From 2nd to 12th March, gold also traded roughly in a range from near $1,220 at the start of the month, down to near $1,150 on 12th March, but still above $1,100.
Recall that as of 30 September 2014, the central bank of El Salvador had 223,113 ozs of gold, of which 189,646 ozs was held in “deposits of physical gold” with the BIS, and 33,467 ozs was held as time deposits of gold with commercial bullion banks.
In November 2014, as stated, the Salvadoreans sold 5,000 oz, leaving 218,113 ozs, and then the major sale occurred in March 2015 of 174,000 oz (or 5.412 tons). In total that’s 179,000 ozs of sales, leaving El Salvador with 44,000 ozs.
Since the Salvadoreans had 189,646 ozs on deposit with the BIS and needed to sell 179,000 ozs, the gold sold was most definitely sold to the BIS or to another party with the BIS acting as agent. On its website, under ‘foreign exchange and gold services”, the BIS states that it offers “purchases and sales of gold: spot, outright, swap or options“.
It would not make sense to sell some or all of the time deposits that are out with the bullion banks such as Barclays and Scotia, since a large chunk of the BCR gold at the BIS would have to be sold also. It would be far easier to just deal with one set of transactions at the BIS. And additionally, the bullion banks do not have El Salvador’s gold, they would need to use their own stocks or go out into the market to buy gold in order to repay the BCR.
The above would leave the time deposits of 33,467 ozs (and accrued interest) out with the bullion banks, rolling over each month as usual. The other roughly 11,000 ozs that the BCR held with the BIS could be left with the BIS, or else this too could be put out on deposit with the bullion banks.
The case of the El Salvador gold sales demonstrates that central banks can and do use the gold depositing facilities of the Bank for International Settlements, and also the gold lending services of LBMA commercial bullion banks such as Barclays, the Bank of Scotia and Standard Chartered amongst many others. The case of El Salvador also shows that central banks actively use derivatives such as put options within the management of the gold component of their reserve portfolios.
It would be naive to think that the bullion banks and the BIS are just providing these services to small emerging market central banks in Central America. It would be more realistic to suggest that the bullion banks and the BIS are providing these gold reserve portfolio services (with scale) to many central banks.
It’s also a shame that neither Reuters nor any other financial news organisation sees fit to write anything of substance about El Salvador or other central banks and the real workings of the interbank and BIS gold market given that it’s not that difficult to produce an article such as the above within a few hours of research and writing.
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