On 17 April, Turkish news publication Ahval published a report stating that during 2017, Turkey withdrew 26.8 tonnes of gold that it had stored in the vaults of the New York Federal Reserve, and moved this gold under the custodianship of the Bank of England and the Bank for International Settlements (BIS).
The source of the Ahval report was a Turkish language article from the popular Hürriyet newspaper in Turkey. According to the Hürriyet report, also dated 17 April, which reported on the latest annual report of the Turkish Central Bank (Türkiye Cumhuriyet Merkez Bankası), Turkey’s central bank increased its gold holdings by 83.3 tonnes during 2017, 37.7 tonnes of which it purchased in the gold trading market of Borsa Istanbul, Turkey’s securities and precious metals exchange.
But of most interest, according to Hürriyet, was that the Turkish central bank also withdrew 28.6 tonnes of gold from the New York Federal Reserve in what it called a ‘complete reset‘, implying that this 28.6 tonnes of gold was the total gold holding that the Turkish central bank stored with the New York Fed at that time. The gold withdrawn from the Fed was then placed with the Bank of England and the BIS. Hürriyet portrays this gold movement as a ‘diplomatic crisis‘ between Turkey and the US, connected to potential military operations by the US against Syria.
Whether the withdrawal of the Turkish gold was in the form of gold location swaps between the NY Fed and the BIS and Bank of England, or whether the gold was actually withdrawn and shipped to Europe was not mentioned. NY Fed gold holdings did not materially change at all during 2018, so it appears that the withdrawal was in the form of gold swaps between the NY Fed, Bank of England and BIS.
Additionally, most gold held at the NY Fed is in the form of US Assay Office gold bars that are no longer accepted as ‘Good Delivery’ gold bars on the international market, so if the withdrawal was a physical one, the gold bars would need to be sent to a gold refinery while in transit to be converted into modern ‘Good Delivery’ bars before being deposited with the Bank of England and BIS. An inconvenience most nation-state gold holders would want to avoid.
The BIS does not have its own golds storage facilities, but instead uses the storage facilities of the Bank of England in London, the Swiss National Bank in Berne, and indeed the New York Fed, maintaining gold accounts at each of these three locations which it describes as “loco London, Berne and New York“.
Turkish gold reserves as reported by its central bank are unusual in that the reported figure of 591 tonnes includes gold which Turkish commercial banks hold with the central bank as part of their gold required reserves. Stripping these commercial bank gold holdings out, the Turkish Central Bank held 202 tonnes of gold of its own at the end of 2017, up from 116 tons held in May of 2017, an increase of 86 tonnes during 2017.
With Turkey’s complete withdrawal of its gold from the gold vaults of the Federal Reserve Bank of New York (FRBNY) under the FRBNY’s headquarters at 33 Liberty in Manhattan, the question must be asked how many other central banks that perceive the United States as a threat have done likewise or are considering doing likewise. The 2008 version of the NY Fed’s brochure ‘Key to the Gold Vault‘ stated that the Fed’s vaults under its headquarters in Manhattan stored gold on behalf of 36 central banks.
Since this Fed brochure was published than 10 years ago, the figure of 36 foreign central banks is surely out of date and needs updating and indeed downsizing. Perhaps a question to the Fed from an enterprising reporter from the Wall Street Journal or another US newspaper would set the record straight on this issue, although the Fed is famously secretive on this issue, and US mainstream financial media are almost always satisfied with a ‘no comment’ answer from the Fed.
All of the Russian Federation’s Gold Stored In Russia
Following a year in which the central bank for the Russian Federation added 214 tonnes of gold to its strategic gold reserves from January to December 2017, the Russian Federation through the Bank of Russia now continues to aggressively accumulate its gold reserves in 2018, keeping it in fifth place in world sovereign gold reserve rankings, ahead of China.
During March the Bank of Russia added another 9.3 tonnes, and now reports holding 1891 tonnes of gold, 49 tonnes more than the reported holdings of the Chinese central bank.
While Russian gold reserve accumulation is ongoing and to be expected, this week the chairman of the Russian State Duma Committee on Financial Markets, Anatoly Aksakov saw fit to react to the news that Turkey had withdrawn its gold from the New York Fed vaults, and confirmed that all of Russia’s gold reserves are stored on domestic soil within Russia.
“We do not have a gold reserve in the US, we have only Forex (foreign exchange) reserves abroad. No one can lay hands on our gold.“
With US sanctions imposed on the Russian Federation, this domestic gold storage policy by the Bank of Russia is probably to be expected but still reiterates the importance that Russia attributes to ring-fencing its gold reserves away from possible political risks and possible confiscation. As senior Bank of Russia official Dmitry Tulin told Reuters in May 2016:
“Russia is increasing its gold holdings because gold is a reserve asset that is free from legal and political risks”.
According to the Bank of Russia, two-thirds of its gold reserves are held in Moscow in a Bank building on Ulitsa Pravdy (Pravda Street), with the remaining one-third of the gold reserves stored in a building in St Petersburg. Recently, Russian media were allowed access to the Moscow vault, and documented a huge quantity of large gold bars (Good Delivery bars) stored in rows of metal cages, as the photos at this link clearly display.
Back in Turkey, Erdogan also made some eye-opening remarks this April about the potential role of gold in international lending. According to Turkish daily Hürriyet, while making a speech in Istanbul on 16 April 2018, Erdogan revealed that he had made a suggestion on this subject at a recent Group of Twenty (G20) meeting, asking:
“Why do we make all loans in dollars? Let’s use another currency. I suggest that the loans should be made based on gold.”
Erdogan also added that:
“with the dollar the world is always under exchange rate pressure. We should save states and nations from this exchange rate pressure. Gold has never been a tool of oppression throughout history.”
These soundings by Erdogan about international loans denominated in gold, coupled with the context of a ‘diplomatic crisis‘ between Turkey and the USA which precipitated the gold repatriation by Turkey away from the NY Fed, both underscore the extreme importance with which nation states regard physical gold as a strategic metal, and the lengths to which nation states such as Russia and Turkey will go to protect their interests against what they perceive as political risks from storing the yellow metal in locations where it might be seized or commandeered.
It may also not have been a coincidence that it was in May 2017 that Erdogan and his entourage visited Washington DC, and it was at this point in May 2017 that the Central Bank of Turkey also began to ramp up its gold purchases after a period of no accumulation, adding on average 11 tonnes of gold to its reserves between May 2017 and December 2017.
While the NY Fed gold vault figures do not show any net gold withdrawals during 2018, it may have been in May 2017 that Erdogan made the call to move Turkey’s New York stored bullion back to less politically risky storage locations in Europe.
This article is now transcribed below, here on the BullionStar website.
Central bank gold price suppression is a well-documented fact. Central banks have a long and colorful history of manipulating the gold price. This manipulation has taken many shapes and forms over the years. It also shouldn’t be surprising that central banks intervene in the gold market given that they also intervene in all other financial markets. It would be naive to think that the gold market should be any different.
n fact, gold is a special case. Gold to central bankers is like the sun to vampires. They are terrified of it, yet in some ways they are in awe of it. Terrified since gold is an inflation barometer and an indicator of the relative strength of fiat currencies. The gold price influences interest rates and bond prices. But central bankers (who know their job) are also in awe of gold since they respect and understand gold’s value and power within the international monetary system and the importance of gold as a reserve asset.
So central banks are keenly aware of gold, they hold large quantities of it in their vaults as a store of value and as financial insurance, but they are also permanently on guard against allowing a fully free market for gold in which they would not have at least some form of influence over price direction and market sentiment.
The Central Bankers’ Central Bank
The Bank for International Settlements (BIS) crops up frequently in gold price manipulation as the central coordination venue and the guiding hand behind a lot of the gold price suppression plans. This is true in all decades from the 1960s right the way through to the 2000s. If you want to know about central bank gold price manipulation, the BIS is a good place to start. Unfortunately the BIS is a law onto itself and does not answer to anyone, except its central banks members.
In the 1960s, central bank manipulation of the gold price was conducted in the public domain, predominantly through the London Gold Pool. This was in the era of a fixed official gold price of $35 an ounce. Here the US Treasury and a consortium of central banks from Western Europe explicitly kept the gold price near $35 an ounce, coordinating their operation from the Bank for International Settlements (BIS) in Basel, Switzerland, while using the Bank of England in London as a transaction agent. This price manipulation broke down in March 1968 when the US Treasury ran out of good delivery gold, which triggered the move to a “free market” gold price.
Central banks continued to suppress gold prices in the 1970s both through efforts to demonetize gold and also dump physical gold into the market to dampen price action. These sales were unilateral e.g. US Treasury gold sales in 1975 and over 1978-1979, and also coordinated (and orchestrated by the US) e.g. IMF gold sales across 1976-1980.
Gold Pool 2.0 – Force it Down Quick and Hard
Collusion to manipulate the price also went underground, for example in late 1979 and early 1980 when the gold price was rocketing higher, the same central banks from the London Gold Pool again met at the opaque BIS in Switzerland at the behest of the US Treasury and Federal Reserve in an attempt to launch a new and secretive Gold Pool to reign in the gold price. This was essentially a revival of the old gold pool, or Gold Pool 2.0.
These meetings, which are not very well known about, were of the G10 central bank governors, i.e. at the highest levels of world finance. All of the discussions are documented in black and white in the Bank of England archives and can be read on the BullionStar website.
The wording in these discussions is very revealing and show the contempt which central bankers feel about a freely functioning gold market.
Phrases used in these meetings include:
“there is a need to break the psychology of the market” and “no question of any permanent stabilisation of the gold price, merely at a critical time holding it within a target area” and “to stabilise the price within a moving band” and “it would be easy and nice for central banks to force the price down hard and quickly“.
And these meetings of top central bankers were in early 1980, 11 years after the London Gold Pool and 8 years after the US Treasury reneged on its commitment in August 1971 to convert foreign holdings of US dollars into gold.
Whether this new BIS gold pool was rolled out in the 1980s is open to debate, but it was discussed across the board for months by the Governors at the BIS, and may have been introduced in a form which would provide physical gold to the oil producers (gold for oil trades) without putting a rocket under the gold price. Their main worry was to allow the Middle Eastern oil producers to acquire some gold for oil without pushing the gold price up.
The Bank of England was also involved in the 1980s in influencing prices in the London Gold Fix auctions, in what an ex Bank of England staffer described euphemistically as ‘helping the fixes’. And the Bank of England has even at times used terminology in the 1980s such as “smoothing operations” and “stabilisation operations” when referring to coordinated central bank efforts to control the gold price.
Paper Gold Ponzi
Probably two of the most influential changes on the gold market in the modern era are structural changes to the gold market which channel gold demand away from physical gold and into paper gold. These two changes were the introduction of unallocated accounts and fractionally backed gold holdings in the London Gold market from the 1980s onwards, and the introduction of gold futures trading in the US in January 1975.
In unallocated gold trading in the London OTC market, gold trades are cash-settled and there is rarely any physical delivery of gold. The trading positions are merely claims against bullion banks who don’t hold anywhere near the amount of gold to back up the claims. Unallocated bullion is therefore just a synthetic paper gold position that provides exposure to the gold price but doesn’t drive demand for physical gold.
When gold futures were launched in the US in January 1975, the primary reason for their introduction, according to a US State Department cable at the time, was to create an alternative to the physical market that would syphon off demand for gold, creating trading that would dwarf the physical market, and which would also ramp up volatility which in turn would deter investors from investing in physical gold. Gold futures are also fractionally backed and overwhelmingly cash-settled, and their trading volumes are astronomical multiples of actual delivery volumes.
Central banks as regulators of financial markets are therefore ultimately responsible for allowing the emergence of fractional reserve gold trading in London and New York. This trading undermines the demand for physical gold and allows the world gold price to be formed in these synthetic gold trading venues. Price discovery is not happening in physical gold markets. Its is happening in the London OTC (unallocated) and COMEX derivative markets. So this is also a form of gold price manipulation since the central banks know how these markets function, but they do nothing to crack down on what are essentially gold ponzi schemes.
Imagine, for example, that central banks were as tough on paper gold as they seem to be now on crypto currency markets. Now imagine if central banks outlawed fractional gold trading or scare-mongered about it in the same way that they do about crypto currencies? What would happen is that the gold market participants would panic and unwind their paper positions, precipitating a disconnect between paper gold and physical gold markets. So by being lenient on the fractional structure of trading in the gold markets, central banks and their regulators are implicitly encouraging activities that have a dampening effect on the gold price.
Gold Lending – A Riddle wrapped in a Mystery inside an Enigma
The gold lending market, mostly centred in London, is another area in which central banks have the ability to cap the gold price. Here central banks transfer their physical gold holdings to bullion banks and this physical gold then enters the market. These transactions can either be in the form of gold loans or gold swaps. This extra supply of gold through the loans and swaps disturbs the existing supply demand balance, and so has a depressing effect on the gold price.
The gold lending market is totally opaque and secretive with no obligatory or voluntary reporting by either central bank lenders or bullion bank borrowers. The Bank of England has a major role in the gold lending market as the gold used in lending is almost all sourced from the central bank custody holding in the Bank of England’s vaults.
There is therefore zero informational efficiency in gold lending, and that’s the way the central banks like it. furthermore, freedom of information requests about gold lending are almost always shot down by central banks, even sometimes on ‘national security’ grounds.
Many central banks have lent out their gold long ago, and just hold a ‘gold receivable’ on their balance sheet, which is a claim against a bullion bank or bullion banks. These bullion banks roll over the liability to the central bank for years on end and the original gold is long gone. Since central bank gold is never independently audited, there is no independent confirmation of any of the gold that any central banks claim they have.
Gold receivables are another fiction that allows central banks to fly under the radar in the gold lending market, and central banks go to great lengths to make sure the market does not know the size and existence of outstanding gold lending and swapped gold positions.
In Febuary 1999, the BIS was again the nexus for secretive discussions about the gold market when a number of the large powerful central banks basically ordered the IMF to drop an accounting change that would have split out gold and gold receivables into two separate line items on central bank balance sheets and accounting statements. These discussions are documented in the IMF document which is available to see here.
This accounting change would have shone a light on to the scale of central bank gold lending around the world, information which would have moved gold prices far higher.
Gold Loans and Gold Swaps – Highly Market Sensitive
However, a group of the large central banks in Europe comprising the Bank of England, the Bundesbank, the Bank de France and the European Central Bank (ECB) applied pressure to torpedo this plan as they said that “information on gold loans and swaps was highly market sensitive” and that the IMF should “not require the separate disclosure of such information but should instead treat all monetary gold assets including gold on loan or subject to swap agreements, as a single data item.”
Central banks also at times sell large quantities of gold, such as the Swiss gold sales in the early the 2000s, and the Bank of England gold sales in the late 1990s.While the details of such gold sales are always shrouded in secrecy, and the motivations may be varied, such as bullion bank bailouts or redistribution of holdings to other central banks, the impact of these gold sales announcements usually has a negative impact on the gold price. So gold sales announcements are another tactic that central banks use to at times keep the pressure on the price.
There are many examples of central bankers discussing interventions in the gold market. In July 1998, former Federal Reserve chairman Alan Greenspan testified before the US Congress saying that “central banks stand ready to lease gold in increasing quantities should the price rise.”
In June 2005, William R. White of the BIS in Switzerland, said that one of the aims of central bank cooperation was to “joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful.”
In 2008, the BIS at its headquarters in Switzerland even stated in a presentation to central bankers that one of the services it offers is interventions in the gold market.
In 2011, one of the gold traders from the BIS even stated on his LinkedIn profile that one of his responsibilities was managing the liquidity for interventions. After this was published, he quickly changed his LinkedIn profile.
Collectively, the central bank sector claims to hold the world’s largest above ground gold bar stockpile, some 33,800 tonnes of gold bars. Individually within this group, some central banks claim to be the top holders of gold bullion in the world, with individual holdings in the thousands of tonnes range.
This worldwide central bank group, also known as the official sector, spans central banks (such as the Deutsche Bundesbank), international monetary institutions (such as the Bank for international Settlements) and national monetary authorities (such as the Saudi Arabian Monetary Authority – SAMA).
These institutions hold gold as one of their reserve assets. Any gold held by a central bank as a reserve asset is classified as monetary gold. In addition to monetary gold, central bank reserve assets include such things as foreign exchange assets (such as US Dollars) and IMF Special Drawing Rights (SDRs). In general, reserve assets held by central banks are managed according to the criteria of safety, liquidity and return.
Given that central banks don’t generally divulge the gold that they lend, swap or otherwise use as collateral, the question as to whether the official sector actually holds 33,800 of gold, or far less than that amount, is debatable. But for the purposes of this discussion, the amount of gold that the central banking sector holds is not important.
This discussion focuses on why central banks hold gold. This discussion also uniquely draws on actual responses from many of the world’s largest central banks as to why, in their own words, they hold gold. While the common reasons for central banks holding gold range from store of value, to financial insurance, to asset diversification, we thought its best to let the actual gold holding central banks state their case.
Taking the list of official sector gold holders compiled by the World Gold Council (which uses IMF data sourced from the individual banks), the Top 40 gold holders on this list were identified. While most of the Top 40 gold holders are national central banks or equivalent, there are also a small number of international monetary institutions in the Top 40, namely, the Bank for International Settlements (BIS), the European Central Bank (ECB), and the International Monetary Fund (IMF). A similar question was sent out to each bank and institution. The question was:
“in the context that central banks hold gold as a reserve asset on their balance sheets, can Central Bank X clarify the main reasons why it continues to hold gold as a reserve asset?”
The central banks which responded to this question with constructive or definitive answers were as follows:
Germany’s Deutsche Bundesbank, which is most famous recently for repatriating gold from New York and Paris, but which still stores gold in London and New York, placed a particular emphasis on gold’s high liquidity, as well as gold’s powerful role in financial crises and emergencies:
“The part of the Bundesbank’s gold reserves which is to remain abroad could, in particular, be activated in an emergency. Therefore one part will remain in New York following completion of the relocation – the United States has the most important reserve currency in the world – and one part in London, the world’s largest trading centre for gold.
In the event of a crisis, the gold could be pledged as collateral or sold at the storage site abroad, without having to be transported. In this way, the Bundesbank could raise liquidity in a foreign reserve currency. However, these are purely precautionary measures as we are not expecting this kind of contingency scenario at the current time.
Gold is a type of emergency reserve which can also be used in crisis situations when currencies come under pressure.”
In neighbouring Austria, the Oesterreichische Nationalbank (OeNB), Austria’s central bank, also mentioned the liquidity characteristics of gold, its benefits in a crisis, and also gold’s diversification benefits. The OeNB also recently made headlines when it too repatriated some of its gold back from storage in London. The OeNB told BullionStar that:
“Gold is an essential part within our strategy for crisis prevention and crisis handling and is held as liquidity reserve but is also a means to diversity our investments.”
Staying in the region, Switzerland’s central bank, the Swiss National Bank (SNB) highlighted the diversification and risk optimisation benefits of gold, responding that the National Bank holds gold because:
“As part of a good diversification of currency reserves, a certain proportion of gold can help reduce the balance sheet risk. The Swiss Federal Constitution, art. 99 stipulates that the SNB has to hold a part of its currency reserves in gold.
See also the speech given by Fritz Zurbrügg, Vice Chairman of the Governing Board of the SNB; it contains comments on the role of gold in the SNB’s currency reserves: .”
Article 99 of the Swiss Constitution in part says that “the Swiss National Bank shall create sufficient monetary reserves from its profits; a part of these reserves shall be held in gold“.
Fritz Zurbrügg’s speech cited by the SNB, which was mostly a politically loaded SNB attack against the 2014 Swiss gold referendum more than anything else, says in part that gold reserves can be used in crisis management and that the SNB’s gold is “stored in multiple locations for reasons of risk diversification“.
The Polish central bank, Narodowy Bank Polski (NBP), provided a very detailed answer to BullionStar covering gold’s lack of credit risk and counterparty risk and its finite supply, as well as gold’s safe haven and diversification benefits: The NBP said that:
“Gold, due to its attributes is a quite specific asset, and traditionally has been an important component of central bank’s foreign reserves.
The main features which support the unprecedented role of gold at the same time constitute the rationale for holding gold within central bank’s reserves. These are: lack of credit risk, independence from any country’s economic policy, limited size of the resource, physical features such as durability and almost imperishability.
Additionally, gold has been constantly perceived as a safe haven asset, and is particularly desirable in crisis times, when gold prices increase while other core assets’ prices have a downward tendency.”
Moving north to Sweden, the Swedish Riksbank, the world’s oldest central bank, responded to BullionStar with an explanation that its holds gold for liquidity, foreign exchange intervention, and diversification reasons:
“In brief, gold is a financial asset that, like the currency reserve, aims to ensure that the Riksbank can carry out its tasks. The gold can, for example, be used to fund liquidity support or foreign exchange interventions.
The main reason why Sweden still has a gold reserve is because the value of gold does not normally follow the same pattern as the value of the currency reserve. Consequently, the combined value of the gold and currency reserve is more stable than the value of the gold reserve and the currency reserve separately.”
Elsewhere in Europe, the Bank of Greece, Greece’s central bank, told BullionStar that it holds gold because of its safe haven and high liquidity characteristics during crises, crises which notably the Bank of Greece has faced plenty of in the recent past:
“The two main reasons central banks, including the Bank of Greece (typically prudent-oriented organisations), choose to include gold as a reserve asset on their balance sheets, are: 1) its recognition as a safe haven asset during periods of markets’ unrest and 2) the ability of instant liquidation in case of emergency.”
The Bank of Portugal, the Portuguese central bank, kept its answer generic, and seemed to speak on behalf of central banks in general, covering the main arguments why central banks as a group hold gold:
“Gold reserves are kept by Central Banks mostly for safety, liquidity, return and as a diversification strategy. Gold compares extremely favorably to other traditional reserve assets with high-quality and liquidity helping Central Banks to preserve capital, diversify portfolios, mitigate risks and on the medium/long-term Gold has consistently outperformed the average returns of other alternative financial assets.”
The United Kingdom’s official gold holdings are held in the name of HM Treasury, and not, as sometimes thought, in the name of the Bank of England. The Bank of England is custodian of the HM Treasury gold as well as custodian for the gold of many nations, including many of the central banks mentioned in this article. HM Treasury told BullionStar:
“The Government’s official holdings of international reserves comprise gold and foreign currency assets, and (IMF) Special Drawing Rights (SDRs).
HM Treasury appoints the Bank of England as its agent to carry out the day-to-day management of the international reserves. The Bank of England’s ‘Handbook on Foreign Exchange Reserves Management’ sets out the traditional reasons for countries holding gold in their foreign exchange reserves.”
Looking at this Bank of England Handbook, a section titled “The Role of Gold” sums up the UK’s traditional reasons for holding gold:
the “war chest” argument – gold is seen as the ultimate asset to hold in an emergency and in the past has often appreciated in value in times of financial instability or uncertainty;
the ultimate store of value, inflation hedge and medium of exchanges – gold has traditionally kept its value against inflation and has always been accepted as a medium of exchange between countries;
no default risk – gold is “nobody’s liability” and so cannot be frozen, repudiated or defaulted on;
gold’s historical role in the international monetary system as the ultimate backing for domestic paper money.
While the BoE author (John Nugée) questions if gold is suitable for the reserve management strategies of all central banks, he concludes that:
“The traditional view of gold as the ultimate asset still carries weight, and gold also provides an excellent diversification for currency assets; over the very long run there is a significant negative correlation between gold and other assets and a portfolio containing gold will show lower volatility over several business cycles.
Moreover central banks can increasingly manage their gold holdings to enhance returns through gold lending, gold swaps, collateralised borrowing, and so on. “
Notably, apart from South Africa’s answer below, the Bank of England paper is the only reference to gold lending and gold swaps in all the correspondence and references generated by these central bank responses. But it is not surprising that the Bank of England mentions gold lending and gold swaps, since the Bank of England is the world’s centre for these particular central bank activities.
Responding from Sydney, the Reserve Bank of Australia (RBA) told BullionStar that it views gold as financial insurance and to some extent as a form of asset diversification:
“The principal reason the Bank continues to hold some gold is as a contingency against unforeseen events. You may be aware that in 1997 the Bank sold 167 tonnes of gold, reducing its holdings from 247 tonnes to 80 tonnes after it was concluded that the gold holdings provided fewer diversification benefits than some other reserve assets.”
From this annual report, there are a number of reasons stated as to what the National Bank of Romania holds gold as a reserve asset:
“The gold reserve is meant, inter alia, to enhance confidence in the stability of the Romanian financial system and of the leu, being particularly useful in times of heightened economic turmoil (domestically or abroad) or geopolitical tensions.
Unlike other asset types, gold has no solvency risk attached, because it is not “issued” by an authority (such as a government or a central bank).“
Bangko Sentral ng Pilipinas, the Central Bank of the Philippines, also highlighted the themes of gold as a safe haven asset and as a portfolio diversifier, as well as an inflation hedge:
“The BSP, like other central banks, holds gold as reserve asset for the following reasons:
Diversification. By diversifying its reserve assets to include gold, the BSP is in a better position to manage risks and promote stability since gold is not directly influenced by economic shocks and policies. Moreover, its supply and demand are independent from the factors affecting the value of other reserve assets components.
Security. Gold is a real asset and bears no counterparty or credit risk. In times of uncertainty, gold is considered a safe-haven asset.
Inflation hedge. When inflation and inflation expectations are high, gold is considered a hedge against accelerating asset prices. Central banks buy gold to protect their currencies’ purchasing power in the event of an inflation.
Moreover, since the Philippines is a gold-producing nation, the BSP can purchase gold from small-scale miners, refine and cast these into gold bars (good delivery bars) that would qualify as reserve asset. Therefore, it can build up its gold reserves without relying too much on external purchases that would have to be paid for in foreign exchange.”
The Reserve Bank of South Africa (SARB) provided what is probably the most comprehensive answer of all the central banks polled, possibly a model text book answer. SARB said that:
the SARB as a central bank can be viewed as a “traditional gold holder” which has inherited gold reserves as part of a legacy and has over time kept its level of gold reserves unchanged to support a broad country strategy. South Africa being one of the main gold producers in the world, it is appropriate for the SARB to hold part of its official reserves in gold to confirm the country’s confidence in the metal.
More in general and similar to many other central banks, the rationale for SARB [holding gold] remains:
Gold acts as a store of value in times of crisis and is therefore seen as a safe-haven for capital preservation
Gold acts as a hedge against inflation. In other words, the price of gold tends to increase as inflation rises
Gold provides some diversification to official reserves – it’s rather low correlation with government bonds and money-market instruments
Gold has an intrinsic value and as a result it is nobody’s liability. As a unique asset class, it is not influenced by a country’s economic policy and outlook
Although short-term gold lending rates are currently very low, this has not always been the case and these rates may increase again, suggesting that it may not forever remain a non-income earning asset. In addition, when investing for longer time periods, gold loans earn positive, albeit low, returns when compared to other asset classes
Gold reserves can be regarded as insurance against unlikely, but extremely damaging events, such as the collapse of financial systems or debt default by major sovereign nations
Banco Central do Brasil, the Brazilian central bank, referenced reserve diversification and store of value in its response to BullionStar:
“The asset allocation of the Brazilian foreign reserves, including Gold, is a strategic decision of the Board of Governors. But, according to some Central Banks best practices, Gold as a commodity may be used as storage of value and to diversify their foreign reserves portfolio.”
While there is some skepticism as to how much gold the central bank of Libya actually has in the aftermath of its recent invasion, the Banque du Liban provided an interesting response on why it still holds gold, i.e. that its prevented by law from selling its gold holdings:
“When the LBP [Libyan Pound up to 1971] was very strong versus the USD in the early seventies ,Banque du Liban bought a large portion of its gold reserves what was very wise as the ounce price was around 42 USD.
Then after the turmoil that plunged the country into war and chaos and in order to preserve the reserves, the parliament issued a law preventing Banque du Liban from trading on gold and consequently from selling the existing reserves. The law is still in force and Banque du Liban is holding now the 15th largest gold reserves worldwide.”
European Central Bank (ECB)
The ECB responded to BullionStar’s question without actually addressing the question and by citing references which not not address the question either. This deflection strategy is not unknown in ECB press conferences. The ECB said that:
The only reference the 4th central bank gold agreement (which was between the ECB and European central banks) makes to gold reserves is that “Gold remains an important element of global monetary reserves“, but does not say why. Interestingly, the ECB’s ‘Foreign Reserves and own Funds” page states that “The ECB’s foreign reserves [which include gold] ensure that the ECB has sufficient liquidity to conduct foreign exchange operations if needed.”
These “foreign exchange operations” are, according to the ECB, mainly foreign exchange interventions, which can be unilateral or concerted (ECB member banks together), and can be centralised (directed by the ECB) or decentralised (carried out by the member banks on behalf of the ECB). So is ECB gold being used as liquidity in foreign exchange operations? The Swedish Riksbank mentioned this use of gold, so it might be an operational tactic of the ECB also.
A number of banks, although they responded, said that they could not comment on the reasons they hold gold. This secretive approach isn’t very logical and is even more surprising given that some of the banks which took this approach are all from otherwise progressive and advanced OECD economies.
The Banco de España, which is a member of the ECB’s Eurosystem alongside such central banks as the Portuguese, German and Austrian central banks, seemed to be particularly secretive as to why it holds gold, and told BullionStar:
“We do not make public comments on the reserve assets policy of the Banco de Espana so unfortunately we cannot help you in your query.”
“Regarding your inquiry on our gold asset, we cannot disclose any information other than the information published on our website due to our confidentiality policy.”
However, looking at the Bank of Japan website, there is nothing material on the site addressing why the BoJ continues to hold a very large amount of gold.
Bank for International Settlements (BIS)
The BIS, headquartered in Basel, Switzerland, is commonly known as the central bankser’s central bank. The BIS is also infamously known for organising and plotting gold price suppression and gold market interventions through its various Gold Pool cartels. As well as holding gold in its own name, the BIS holds gold on behalf of other central banks. Perennially secretive, it was not surprising that the BIS refused to answer BullionStar’s question directly, but at least they replied. The BIS said:
While there is some discussion of gold in BIS Papers 40 and 58, there is no discussion for the reasons why central banks hold gold as a reserve asset.
The cutoff point for this survey was the Top 42 gold holding central banks in the world, as this allowed the inclusion of Australia and Brazil, both of which are large gold holders and both of which are also large domestic gold producers. Between them, these 42 central banks and monetary institutions claim to hold 32,075 tonnes of gold, which is 95% of the 33,790 tonnes of gold claimed to be held by the 100 central banks on the World Gold Council list.
Of the central banks and institutions contacted, 21 replied with definitive responses. Arguably, this is quite a high response rate given that it was surveying a diverse cross-section of central banks from around the world on a subject which central banks are traditionally quite secretive about. Of the central banks in the Top 42 list, emails were sent to all of those that were contactable by email. In a few cases a web contact form was used.
Five central banks were not contactable as they did not have any obvious email address or web contact form. These banks were from Lebanon, Venezuela, Mexico, Taiwan and China. The Chinese People’s Bank of China is notoriously difficult to contact, even for BullionStar which has been writing about the PBoC and the Chinese Gold Market for years.
Four central banks had a bounce back on the email addresses stated on their websites. These were the central banks of Algeria, Egypt, and Indonesia. None of the three banks contacted by web form responded. These were the central banks of India, Turkey, and Saudi Arabia.
Not surprisingly, banks from more developed and democratic countries have a more transparent means of being contacted and they maintain media and communications staff. Therefore it is logical that these banks are more likely to have responded.
Of the 9 central banks and institutions which did not respond within a reasonable time-frame, they were then re-contacted, asking them had they had time to look at the query. Nearly all of these banks still did not reply. These institutions were the US Treasury, and central banks from the Russia Federation, South Korea, Kuwait, Kazakhstan, Belgium, Netherlands, Thailand, and Italy.
Its notable that the US Treasury, which claims to have the largest official gold reserves in the world, 8133 tonnes of gold, did not respond as to why it supposedly holds the largest gold reserves in the world. These supposed US gold reserves are as large as the gold reserves of the next three countries combined (Germany, Italy and France).
The IMF, headquartered in Washington DC, sent a generic reply to say that they had received the query, but they never responded. The Central Bank of Iraq received the query, forwarded it to their operations department, but there was no subsequent response.
Some of these non-responding banks have ‘reasons we hold gold’ sections on their websites or in their annual reports, so for anyone interested, those information sources could be consulted.
In their own words, the reasons central banks hold gold in large quantities are many fold, however there are consistent themes in the central banks’ explanations. Many of the respondents cited gold’s ability to be mobilized in a crisis, that ‘gold holdings can be activated in an emergency’, that gold is an ‘emergency reserve in a crisis’, ‘a contingency against unforeseen events’, a form of ‘insurance’, or as the Bank of England says ‘a war chest’ and the ‘ultimate asset to hold in an emergency’. As such, nearly all central banks referred to gold as a safe haven asset.
Many central banks mentioned gold’s high liquidity, and some referred to the ability to use their gold to raise liquidity in a foreign currency, even for foreign exchange intervention.
Gold’s role as a hedge against inflation was cited in a number of the central bank answers, which explains why central banks look to the gold price as a barometer of inflation expectations.
Many of the banks also pointed out that because of the unique attributes of physical gold, such as limited supply and mined into existence, gold does not have any counterparty risk or credit risk, and because it is not issued by governments, it has no default risk.
The return generating potential of gold was also cited by a few central banks via the use of gold lending, gold swaps and the use of gold as collateral. Interestingly, very few of the banks that responded directly mentioned gold lending, although many of these central banks do engage in gold lending. This in itself highlights the absolute secrecy surrounding all data relating to the gold lending market which is centred in London at the Bank of England and also through the Swiss National Bank in Berne and the Banque de France in Paris.
Many of the respondents also highlighted gold’s portfolio diversification benefits. Because its price is not affected by economic events in the same way as the prices of financial securities, the gold price is not highly correlated with the prices of other assets. Gold therefore brings stability to a reserve asset portfolio.
With such widespread support among the world’s central banks for holding physical gold, as a safe haven, as an inflation hedge, and as a form of investment diversification, their enthusiasm for gold in 2018 looks as strong as it has ever been in any decade of the modern era.
This is Part 2 of a two-part series. The series focuses on collusive discussions and meetings that took place between the world’s most powerful central bankers in late 1979 and 1980 in an attempt to launch a central bank Gold Pool cartel to manipulate and control the free market price of gold. The meetings centered around the Bank for International Settlements (BIS) in Basle, Switzerland.
Part 2 takes up where Part 1 left off, and begins by looking at developments in the BIS Gold Pool discussions during January 1980, a month in which the US dollar gold price rocketed more than 60% during a three-week period to reach a then record of $850 per ounce. Part 2 then looks at how the discussions involving these central banks evolved over the remainder of 1980 and 1981 as key high level central bankers continued to call for intervention into the gold market.
Part 2 also looks at evidence that central bankers party to the discussions began advocating gold for oil exchanges between the West and the Saudis, exchanges which would provide real wealth (gold) to the Arabs in exchange for oil flowing to the West, while simultaneously keeping a lid on the gold price.
A series of meetings of the world’s most powerful central bank governors were held in late 1979 at the Bank for International Settlements (BIS) office of BIS Chairman and President Jelle Zijlstra in Basle, Switzerland. The objective of the meetings was discussion of a central bank consortium that would operate a collusive Gold Pool to manipulate the price of gold. Note that this was more than 11 years after the London Gold Pool had collapsed in March 1968.
At the IMF annual conference in Belgrade in early October 1979, the US monetary authority delegation in the form of Paul Volcker, William Miller, Tony Solomon, and Henry Wallich approached Fritz Leutwiler, Chairman of the Swiss National Bank, and discussed a proposal to launch a joint central bank gold selling operation.
During the discussions at the BIS and between the central bankers at various locations, Zijlstra, who was BIS President until the end of 1981, and Leutwiler, who became BIS President in January 1982, were both strongly in favour of launching a new joint central bank gold pool to manipulate the gold price.
The oil-producing cartel OPEC was at that time, “increasingly concerned that gold was outpacing oil”, but Al Quraishi, Governor of the Saudi Arabian Monetary Authority (SAMA) had made an assurance that the Saudi’s “would not rock the boat” and buy gold on the market if a new gold pool was activated. However, Al Quraishi and SAMA were still eager to “diversify” the reinvestment of the Saudi oil revenues into gold.
The Bank of England recorded market intelligence in October 1979 that the “USA was planning to sell 10 million ounces of gold in four separate unannounced operations” before the end of 1979 so as to “placate the Saudi Arabians.“
The Bank of England’s foreign exchange and gold specialist at that time, John Sangster, thought that there was“a need to break the psychologyof ‘the market can only go one way and that is up’.”
Sangster’s view was also that there was “no question of anypermanent stabilisation of the gold price, merelyat a critical time holding it within a target area”, an operation he called a “smoothing operation”.
A meeting to discuss a new collusive gold pool took place in the BIS office of Zijlstra on Monday 12 November 1979, whose invitees (in addition to Jelle Zijlstra) were Gordon Richardson, Governor of the Bank of England, Cecil de Strycker, Governor of the National Bank of Belgium, Fritz Leutwiler, Chairman of the Swiss National Bank, Bernard Clappier, Governor of the Banque de France, and Otmar Emminger, President of the Bundesbank.
A follow-on meeting about the collusive new gold pool took place in the BIS office of Zijlstra on Monday 10 December 1979, attended by Zjilstra, Kit McMahon of the Bank of England, Otmar Emminger, outgoing President of the Bundesbank, Karl Otto Pohl, incoming Bundesbank President, de la Geniere, the incoming Governor of the Banque de France, de Strycker, Governor of the Belgian central bank, Leutwiler, Chairman of the Swiss National Bank, and Rene Larre, BIS General Manager.
The December meeting, which was facilitated by BIS general manager Rene Larre, also revealed that “European central banks would intend to buy back in due course any gold they sold”, that the Gold Pool could be funded by buying gold first so as to create an inventory of physical gold to use for selling operations, and that in McMahon’s words “if the scheme were to be simply a BIS one, publicity would not necessarily, orperhaps desirably, arise”
Based on the detailed briefing of the content of that meeting at the BIS on 10 December, which was written by the Bank of England’s Kit McMahon for the benefit of the Bank of England Governor Gordon Richardson, the proposed new gold pool, among other things, would sell gold “only when gold was relatively strong and the dollar relatively weak and [buy] only in the reverse circumstances.”
In the 10 December 1979 meeting at the BIS, the Bundesbank was against the Gold Pool plan due to what Bundesbank President Otmar Emminger attributed to opposition from the BundesbankCentral Bank Council. However, the Bundesbank was thought, by the Bank of England’s Sangster, to be against the Gold Pool primarily as a tactical way to force the US Fed to address the underlying problems of a weak US dollar and high inflation.
The Banque de France, which had been in favour of the Gold Pool scheme prior to October 1979, also came out in the 10 December meeting as being against the scheme due to what Banque de France governor De la Geniere described as “great political dangers…of selling any French gold” indirectly through a Gold Pool. However, Sangster also thought the Banque de France was more likely to be tactically backing the Germans so as to put pressure on the Fed to first address inflationary problems.
As per Part 1, a number of internal documents from the Bank of England are cited below. These documents provide a unique road map on the evolution of the collusive discussions at the BIS and the thinking of the Bank of England executives involved in and supporting the discussions. Documents are rendered in blue text and italics, with bold, underlining, and a few cases of red text added where appropriate.
January 1980 BIS Gold Pool Meeting
Following the Gold Pool meeting at Zjilstra’s office in the BIS headquarters on 10 December 1979, the central bank governors next met at the BIS in Basle on 7 January 1980 during their monthly scheduled ‘Basle Weekend’. The afternoon London Gold Fix was set at $431 on 10 December 1979, but by 4 January 1980 it was already 36% higher at $588.
In preparation for the January meeting about the proposed Gold Pool, which took place on Monday 7 January 1980, John Sangster, the Bank of England’s foreign exchange and gold specialist, wrote the following briefing document titled “SECRET” to the attention of the Governor’s Private Secretary (G.P.S.) as well as to the attention of Bank of England Executive Director Kit McMahon. The Governor of the Bank of England at that time was Gordon Richardson.
To recap from Part 1, Christopher McMahon, known as ‘Kit’ McMahon, became Deputy Governor of the Bank of England on 1 March 1980, taking over that position from Jasper Hollom. Prior to becoming Deputy Governor, McMahon was an executive director at the Bank of England from 1970 to 1980. McMahon signed his internal Bank of England memos and correspondence with the initials ‘CWM’, short for Christopher William McMahon. McMahon left the Bank of England in 1986 to take up the role of Chief Executive and Deputy Chairman of Midland Bank. Midland Bank was taken over by HSBC in 1992. See profiles of McMahon here and here.
Gordon Richardson was Governor of the Bank of England for 10 years from 1973 to 1983. Before that, he was a non-executive director of the Bank of England between 1967 and 1973. Richard was chairman of J. Henry Schroder Wagg from 1962 to 1972, and chairman of Schroders from 1966 to 1973. After leaving the Bank of England, Richardson went on to be a director of Saudi International Bank in London. He also headed the influential Group of Thirty (G30) central bank lobbyist group, and was chairman of Morgan Stanley International.
John Sangster’s full name was John Laing Sangster, hence he signed his internal Bank of England memos and analysis with the initials ‘JLS’.
G10 plus Switzerland
Sangster’s secret memo to McMahon and Richardson was written on Friday 4 January 1980, a day on which the afternoon Gold Fix came in at $588 per ounce. The memo addressed developments in the gold price and discussed potential joint central bank intervention into the gold market. Hand written at the top are the words “The Governor has seen : copy in Basle Dossier JB 7/1“. JB is the Bank of England’s John Balfour who was also copied on the document, and who was a Bank of England alternate director at the BIS at that time.
The memo has 6 numbered paragraphs, paragraphs 5 and 6 of which are most interesting:
Copies to : Mr McMahon, Mr Balfour, Mr Byatt
5. Since the market has further extended itself, any central bank operation would now have greater chance of success. But it would have to be a co-operative effort preferable on a G.10 plus Switzerland basis. Obviously the contributors, with the possible exception of the USA, would go into the operation in the hope and intention of subsequently recapturing their gold. But I think the new “pool” must face the possibility that they might not recapture some or all of their gold – in which case they would have to envisage the operation as a general contribution to the struggle against inflation.
6. If a G.10 plus Switzerland operation were mounted on a pro rata basis, our share would be just under 3%. If the Italians (who sometimes talk as if the loss of one ounce of their gold would mean the end of the world) and the Swedes (very low gold holders) dropped out, our share would be about 3 1/4 %. If the Japanese declined on the excuse of a very low gold proportion, then I think we could do so too.
4th January 1980
The G10 that Sangster mentions refers to the Group of 10 highly industrialised nations which consisted of the USA, UK, France, West Germany, Netherlands, Belgium, Italy, Canada, Sweden, and Japan. The G10 as a grouping was formed in 1962 when these 10 countries participated in the IMF’s General Arrangements to Borrow (GAB) plan. Switzerland became associated with the GAB in 1964 but the name remained the G10. The G10 also participated in the Smithsonian Agreement in December 1971, with all other members agreeing to peg their currencies against the US dollar.
As readers will recall from Part 1, this list of 11 countries, as represented by their central banks, comprised the group of central banks that either advocated the gold market intervention meetings in late 1979 (the US), were present in the BIS Gold Pool meetings in November and December 1979 (Switzerland, West Germany, France, Netherlands, Belgium), or that were to be consulted after the December meeting. As per the December 1979 meeting:
“The meeting ended with Leutwiler saying he would approach the Canadians and Japanese to see how they felt about the idea while Zijlstra would talk to the Italians. All would then think further about it and revert in January.“
No mention of the Swedes, but, based on Sangster’s comment above, the Swedes were considered to be “very low gold holders“.
As per the 12 November 1979 Gold Pool meeting, there are no meeting minutes in the public domain for the 7 January 1980 Gold Pool meeting, with the BIS Archives office claiming it did not have such minutes. When asked about minutes from a 7 January 1980 meeting, the BIS Archives deflected the question and misdirected the answer, saying only that:
“The Gold Pool came to an end in 1968, so I take it that you are referring to meetings of the Gold and Foreign Exchange Committee. We do have some minutes for this meeting, but unfortunately not for the period which interests you.”
However, London Times correspondent Peter Norman, in Basle that day to cover the “Basle Weekend”, did write a report on the outcome of the BIS governors’ January meeting on gold. In his article titled “Bankers Rule Out Sale of Reserves to Hold Back Rush into Gold”, dated Monday 7 January 1980 (a day on which the gold price closed at $634), Norman wrote:
“Western central bank governors today ruled out any concerted sales of gold from reserves to quell the speculative rush of funds into the metal on the world’s bullion markets.
The idea, which has been suggested at various times in the past few months by Herr Fritz Leutwiler, the Swiss National Bank president, foundered when it became apparent that it would receive no support from the West German Federal Bank and the Bank of France.As these central banks have the second and third largest gold reserves in the Western world, their agreement was crucial to the launching of a concerted sale.”
“It appears that the gyrations of the gold markets were discussed at some length yesterday at the regular monthly meetings of central bankers here.”
“Behind the decision not to introduce a concerted programme of gold sales lies a hope that the speculative fever of the past few days will burn itself out and that the price will fall sharply of its own accord to administer a salutary shock to speculators.
There is also the sober consideration that nobody knows how much gold would need to be dumped on the market to achieve the desired result.“
Norman only refers to ‘sales of gold’ and not a Gold ‘Pool’ since knowledge of the Gold Pool discussions was not in the public domain at that time. The reference in the London Times’ January 1980 report to the West German and French central bankers still being against the launch of a gold intervention operation gels with the view attributed to the Bundesbank and Banque de France during the December 1979 BIS meeting.
The G5 Gold Meeting – Washington
However, this did not stop further discussions on gold market intervention, since exactly one week later on Monday 14 January in Washington DC, the deputy finance ministers of the G5 convened a secret meeting to also discuss a plan for joint central bank gold sales. In the 1970s, the G5 (Group of 5) referred to the world’s then five largest economies i.e. US, UK, Japan, West Germany and France.
This meeting was covered by a New York Times report, titled “Concerted Gold Sales Discussed” and filed in Washington DC on Wednesday 16 January 1980, a day on which the PM Gold Price closed at $760:
“The possibility of concerted sales of gold by central banks from the leading industrial nations was discussed at a secret meeting in Washingtonlast Mondayby deputy finance ministers from the United States, West Germany, France, Britain and Japan.
The United States Treasury, confirming reports of the meeting that have just leaked out, said discussions were not confined to gold, and that discussions covers a ‘ wide range’ of international monetary issues.
European sources reported that there was as yet no consensus on the gold sales, with France and Germany opposed and the United States, Britain and Japan in favour, but with varying degrees of enthusiasm.”
As per the London Times report on 7 January, the New York Times report of 16 January referred to sales of gold but not to the secretive Gold Pool discussions. The New York Times also recorded the West Germans and French as being non-cooperative about joint gold market intervention.
On Thursday 17 January 1980, the London Times, in an article titled “Gold at $755 after biggest jump ever” also commented on the secret Washington DC meeting, which it said was “chaired by Anthony Solomon, Under-Secretary of the United States Treasury for Monetary Affairs“, and that “apparently there was general agreement at the meeting that political factors were totally dominating the gold markets and that there was little point in any central bank selling gold.”
Sangster’s G5 Gold Briefs
The day after this Times report, on Friday 18 January, when the gold price closed in London at $835 per ounce, John Sangster at the Bank of England sent a confidential memorandum to Kit McMahon and to the attention of the Governor Gordon Richardson, commenting on the “G5 gold briefs“, i.e. the G5 gold discussions in Washington DC between the US, UK, France, West Germany and Japan. Sangster’s memo was as follows:
Copies to Mr. Kirbyshire, Mr. Byatt, Governors’ Private Secretary
Just a few glosses on the G5 gold briefs.
1. Whereas the earlier rise in the gold price had definitely been a factor in the dollar’s weakness, since early in the New Year the dollar has detached itself from gold.
2. But gold has been a factor in the rise in the price of other commodities. part of that rise is obviously due to the increase in international tension, but the meteoric rise in gold has almost certainly exacerbated it.
3. Now that international tension is the main factor in the gold market, any central bank action would probably be ineffective.
4. If tension eased substantially, however, central bank action need not then be unnecessary. With greater chance of success, it could be helpful in further cooling the inflationary environment.
5. I am suspicious of the thesis that any future gold pool must start with purchases. When the price starts to rise there will be too strong an inducement, and probably many would present arguments not to sell.
6. All of which seems to suggest that the only gold policy central banks could be said to have is – afraid to sell but hoping to buy in the next bear phase. Realistic perhaps, but not very satisfying.
18th January 1980 (Dictated by JLS and circulated in his absence)
The ‘international tension’ referred to in Sangster’s note above most likely refers to the Soviet invasion of Afghanistan in December 1979 and the Iranian hostage crisis that began in November 1979.
While John Sangster’s ‘glosses on the G5 gold briefs‘ memo from 18 January 1980 may have given the impression that gold market intervention was off the cards for the time being, no one told this to Fritz Leutwiler, chairman of the Swiss National Bank, because less than 2 weeks later, Leutwiler was again stirring for“central bank intervention in the gold market”.
According to Peter Norman in an article for the Times titled “Swiss call for banks to dampen gold price”, dated 31 January 1980 , a day on which the US dollar gold price closed at $653:
“Dr Fritz Leutwiler, president of the Swiss National Bank, has once again advocated central bank intervention in the gold market to curb wild price movements.
In today’s issue of Handelsblatt, the West German business daily, Dr Leutwiler was quoted as saying that central banks should exercise control over the gold price to dampen down inflationary expectations and prevent speculation on the gold market from spreading on to foreign exchange markets.”
“What has provoked Dr Leutwiler to raise the issue of central bank intervention in gold at this time remains a mystery. Neither he nor his spokesman were available for comment in Zurich today.“
“He has suggested central bank intervention in the gold market before, at the meeting of the International Monetary Fund in Belgrade last autumn and again to foreign journalists in Geneva last December. However, at the meeting of central bank governors in Basle last month [December 1979], the issue was quickly disposed of once it became apparent that neither the French nor West German central banks would support the idea.”
Note that after working for the London Times, Peter Norman subsequently moved to the Financial Times in 1988 and was the FT’s economic editor from 1992 to 1995, as well as later becoming the FT’s chief EU correspondent. Norman’s profile can be read here.
After gold in US dollars hit a peak of $850 in January 1980, the price came off but still ended January 1980 at over $700 per ounce. By the end of February 1980, the US dollar gold price was trading in the $640 range, and by March and April 1980 it was trading in the $500 range, as the Paul Volcker led US Fed’s interest rate hikes began to take effect. But by the end of June 1980, the gold price was again above $600 per ounce, and in late September 1980 gold was trading above $700 per ounce.
Exchange of Gold for Oil while the World Adjusts
In September 1980, the Bank of England Governors (the Governor and Deputy Governor) and senior executives again went on record addressing the gold price and possible coordinated central bank interventions into the gold market. The following detailed commentary document was written by the Bank of England’s John Sangster (JLS) on Wednesday 17th September 1980, a day on which the US dollar gold price closed at $673.
Although JLS addressed the September 1980 memorandum to “The Deputy Governor” and to “Anthony Loehnis”, it was also sent to the Governor, Gordon Richardson, because Richardson, along with McMahon and Loehnis, all replied to the memorandum by writing signed notes in pen on the actual circulated document, as was the convention at the time.
In the document, “Mr Loehnis” refers to Anthony Loehnis. At that time in 1980, Loehnis was an Associate Director of the Bank of England. In 1981, he became an executive director of the Bank responsible for overseas affairs. Loehnis had previous worked for the Bank of England Governor Richardson from 1977 to 1979, and Richardson had actually brought Loehnis into the Bank of England from J henry Schroder Wagg & Co, where Richardson had been chairman. Loehnis moved to SG Warburg in 1989. Loehnis’ full name was Anthony David Loehnis and hence he signed his internal Bank of England memos and correspondence with the initials ‘ADL’. See profile of Loehnis here.
17. 9. 80
MR LOEHNIS, THE DEPUTY GOVERNOR
Central Banks and Gold
1. Last year when there was some discussion of a possible revival of the central bank gold pool, sceptics outnumbered advocates. Subsequent events justified the sceptics, although international political events played more of a part than any can have foreseen. Nevertheless a general but unspecified wariness of political disasters may be a part of the general background to scepticism in this area. The sceptic may also now point to the gold price occasionally threatening $700 again even though international tension is significantly reduced.
2. Nevertheless the price of gold is telling us something, and I do not think that we can dismiss it as merely a symptom to be ignored while continuing to concentrate on fundamentals.
3. The world is in competition for a relatively few “inflation-proof” assets, of which gold is reckoned to be chief. Its supply has been sharply reduced over the past year and the bulk of its stock is largely and firmly held by the G10 (and Switzerland).
4. In these circumstances the competition for the reduced supply – much sharpened by OPEC appetite which was not markedly present in 1973/74 – is having a disproportionate effect on the price. I well realise that if this continues for long, gold may not be such a good hedge in the short-run thereafter.
5. But the damage to inflationary psychology will by then have been done; not only in the developed countries but with OPEC, where the escalating price of this, one of the few inflation-proof assetscould become an element in their price determination. Moreover, gold seems to exercise some influence on many “hard” commodities irrespective of fundamentals. The “symptoms” may therefore be having an independent effect on price levels.
6. It is not of course for us with our relatively low gold holding, compared with many of the G10 countries, to preach a new gold pool. We can question however whether it is helpful in the longer run for the G10 countries to continue to sit pat on all their gold (in just another manifestation of the perversity of the adjustment process) and complacently accept the effects of the rising price of gold.
7. If any operations were ever contemplated, it would have to be geared at some concept of the developing real price of gold and not attempt to hold any particular nominal level.It would almost certainly not be a “pool” with any significant potential for recovery of gold sold. Rather it would enable OPEC to acquire some modicum of the chief inflation-proof asset without an excessive rise in the price.The aim would be to prevent gold making its own particular contribution to inflation while the developed world was attempting to bring inflation down and so reduce gold’s own peculiar attraction.
8. This is not to advocate gold for oil directly; the price haggling would be too acrimonious. Market intermediation should allow the G10 to move with the price while attempting to control its pace as well as break off the experiment when possible or necessary. A positive policy for gold could be a sign of confidence on the broader issue of inflation. But I fear the general opinion will be that the risk of comparative failure is too high to warrant such action on gold.
The actual memorandum from John Sangster (JLS) to McMahon and Loehnis (and Richardson) can be seen here: Page 1 and Page 2. The links may take a little while to load first time. Since this is an extremely important document, it can also be viewed below:
There are a number of intriguing aspects to Sangster’s Bank of England document, namely that:
Gold was reckoned to be the chief “inflation-proof” asset
The bulk of the available gold stock was firmly held by the G10 (and Switzerland)
Gold demand by OPEC countries was impacting the gold price due to limited supply
The escalating price of gold was feared by Sangster to have the potential to affect OPEC’s price determination of oil
Sangster’s posed the question whether “in the longer run” the G10 countries should “sit pat on all their gold”
Sangster’s vision was for central bank operations to target the movements of the real price of gold in a moving fashion
Sangster’s did not necessarily envision a central bank Gold Pool in the traditional sense but a Pool that would “enable OPEC to acquire some modicum” of Gold “without an excessive rise in the price”. Modicum is a word which means a small quantity of something.
Sangster also wanted to “prevent gold making its own particular contribution to inflation” (i.e. to sabotage what gold does best – signal inflation) and hilariously, in typical central banker fashion, he referred to the interest in real money (gold) as a “peculiar attraction” that should be targeted.
There are 3 hand-written notes on the document. The first note at the top of page 1 in blue pen was written by Anthony Loehnis. The second note which starts at the top left of page 1 and continues at the bottom of page 1 in black pen was written by the Deputy Governor Kit McMahon. The 3rd note at the bottom of page 2 in black pen was written by the Governor Gordon Richardson.
Note from Anthony Loehnis:
“An interesting but difficult proposal. The case for rising gold prices as a locomotor rather than a manifestation of inflation would need to be made very persuasively. And I have difficulty with “the developing real price of gold”. It may nonetheless be an idea worth touring around in Basle and elsewhere, although I share the doubt in JLS’s final statement. AOL 19.9”
Note from Kit Mc Mahon:
“I have always been one of the sceptics in this area, & I am afraid I remain one.If the US would declare official convertibility buying and selling to CMIs without limit – at say $700, I believeit would be an enormously beneficial development for the international monetary system and especially for the US. But I see not the faintest chance that this will ever happen. In the absence of such a move I think it would be weak and dangerous for a group of central banks to try ad hoc to influence the price. CWM 24/9.”
Note from Gordon Richardson:
“It is surely impossible for any country to fix a gold price in present circumstance. What I am looking towards is some exchange of gold for oil while the world adjusts – although not very hopefully! G”
Again, there were some intriguing comments in the these hand-written notes.
Loehnis recommended sharing around Sangster’s proposals in Basel (BIS) and elsewhere.
McMahon advocated that the US Government declare official convertibility between the US dollar and gold at $700 per ounce. This was based on a calculation of US overseas dollar liabilities tallied in a separate document. A similar calculation today would put the US dollar gold price in the many thousands.
Richardson was ‘looking towards an exchange of gold for oil’ between the gold holders (Western central banks) and the gold producers (OPEC, the most important member of which was the Saudis).
In the Bank of England Archives, there do not seem to be any relevant files relating to Gold Pool discussions or gold market intervention after the year 1980. Likewise, BIS Archives claim not to have any material whatsoever about the 1979-1980 BIS Gold Pool discussions, despite the fact that there are numerous files in the Bank of England archives proving that these discussions took place. We therefore need to look at relevant material from other sources covering the period after 1980.
Zjilstra’s Per Jacobsson lecture – September 1981
Just over 1 year after John Sangster had written his document dated 17 September 1980 to Kit McMahon, Anthony Loehnis, and Gordon Richardson, in which he envisioned a scheme that would “enable OPEC to acquire some modicum” of gold “without an excessive rise in the price”, the BIS President Jelle Zijlstra was again proposing joint action to control the gold price.
On Sunday, 27 September 1981 in Washington DC, Zjilstra gave the main speech at the IMF’s annual “Per Jacobsson Lecture”. Zijlstra was chosen to give this speech to mark the fact that he was scheduled to retire at the end of 1981 from his role as President and Chairman of the BIS and as President of the Dutch central bank, De Nederlandsche Bank (DNB). Note that Fritz Leutwiler of the Swiss National Bank (SNB) became BIS President and Chairman from January 1982 onwards, while Wim Duisenberg became President of the Dutch central bank in January 1982.
In his “Per Jacobsson Lecture” which was titled “Central Banking with the Benefit of Hindsight”, and which was given while the gold price had last traded that week at $450 per ounce, Zijlstra candidly told his Washington DC audience of fellow central bankers that:
“I feel that it is necessary for us, within the Group of Ten and Switzerland, to consider ways to regulate the price of gold, admittedly within fairly broad limits,so as to create conditions permitting gold sales and purchases between central banksas an instrument for a more rational management and deployment of their reserves.
On the occasion of the annual meeting of the IMF in 1979 this was brought up, but regrettably, insufficient agreement could be reached to make even a modest start with regulating the gold price in the free market.
It is my firm conviction that relatively small-scale interventions, though not forestalling the subsequent explosion of the gold price, would at least have reduced it to more manageable proportions.
Now that the turbulent emotions seem to have quietened down, we would be wise to reflect anew and without prejudice on these subjects.”
These quite extraordinary statements from Zjilstra while still BIS President illustrate that the desire of the BIS head to intervene in the gold market had not dwindled between early 1980 and the end of 1981. In fact, Zjilstra seemed to be indicating that the lower volatility in the gold price towards the end of 1981 provided a perfect opportunity to revisit the discussions with more chance of success in controlling the gold price.
Zjilstra “regretted” that “insufficient agreement could be reached” by the G10 and Switzerland on considering “ways to regulate the price of gold” in late 1979
Zjilstra was also convinced that “relatively small-scale interventions” would have reduced the gold price moves in January 1980 “to more manageable proportions“
Zjilstra advocated revisiting the topic of gold market intervention (“reflecting anew and without prejudice on these subjects“) sensing that “the turbulent emotions seem to have quietened down”.
This view of Zjilstra’s resonates with John Sangster’s comment in his 18 January 1980 report about the G5 Gold Briefs in which Sangster said:
“If tension eased substantially, however, central bank action need not then be unnecessary. With greater chance of success, it could be helpful in further cooling the inflationary environment.”
Given that Fritz Leutwiler of the Swiss national Bank took over the reins as BIS President in January 1982, and given that Leutwiler was arguably the most prominent of all the BIS governors as an advocate of a new BIS Gold Pool (see above and Part 1), then it would not be surprising if, under Leutwiler’s stewardship, the BIS inner club of Governor’s recommenced discussions of a BIS Gold Pool during the 1982 – 1983 timeframe.
First, there is the Meeting on the Gold Pool – 1983
During that time, Gordon Richardson was still Bank of England Governor, Karl Otto Pohl was still Bundesbank President, Fritz Leutwiler was still Swiss National Bank Chairman, and Paul Volcker was still Chairman of the US Federal Reserve. So, is there any evidence of a Gold Pool mentioned during this timeframe?
Fascinatingly, there is:
“Over A bratwurst-and-beer lunch on the top floor of the Bundesbank, Karl Otto Pohl, its president and a ranking governor of the BIS, complained to me in 1983 about the repetitiousness of the meetings during the “Basel weekend.”“First, there is the meeting on the Gold Pool, then, after lunch, the same faces show up at the G-10, and the next day there is the board which excludes the U.S., Japan, and Canada, and the European Community meeting which excludes Sweden and Switzerland.”
Edward Jay Epstein, “The Money Club” – An Essay, HARPER’S November 1983
In 1983, investigative journalist Edward Jay Epstein was given privileged access to the Bank for International Settlements and some of its inner sanctum central bank governors while he was writing an article on the BIS (“The Money Club”) for US magazine Harper’s.
In his Money Club article, Epstein writes:
“Artfully concealed within the shell of an international bank, like a series of Chinese boxes one inside another, are the real groups and services the central bankers need-and pay to support.
The first box inside the bank is the board of directors, drawn from the eight European central banks (England, Switzerland, Germany, Italy, France, Belgium, Sweden, and the Netherlands), which meets on the Tuesday morning of each “Basel weekend.“
To deal with the world at large, there is another Chinese box called the Group of Ten, or simply the “G-10.” It actually has eleven full-time members, representing the eight European central banks, the U.S. Fed, the Bank of Canada, and the Bank of Japan. It also has one unofficial member: the governor of the Saudi Arabian Monetary Authority.
“This powerful group, which controls most of the transferable money in the world, meets for long sessions on the Monday afternoon of the “Basel weekend.”
[Karl Otto Pohl] concluded: “They are long and strenuous-and they are not where the real business gets done.” This occurs, as Pohl explained over our leisurely lunch, at still another level of the BIS: “a sort of inner club.“
Bundesbank President Karl Otto Pohl is clearly on record in 1983 as stating that “First, there is the meeting on the Gold Pool“ during the “Basle weekend“. But the only publically known gold pool was the London Gold Pool which operated from November 1961 to March 1968.
Epstein interviewed the Bundesbank’s President Karl Otto Pohl in 1983, more than 15 years after the London Gold Pool had collapsed. Pohl only joined the Bundesbank in 1977, and he would not, in 1983, have used the term ‘Gold Pool’ for a meeting that had not discussed a gold pool since 1968, i.e. 15 years earlier. So what does this term ‘Gold Pool’ refer to?
“What is the ‘gold pool’ cited by BIS board member and Bundesbank President Karl Otto Pohl in his interview with the financial journalist Edward Jay Epstein published in the November 1983 edition of Harper’s magazine?”
The BIS initially responded to Schall with a classic ‘deflection and avoid answering the question’ response. The BIS wrote:
“Many thanks for your phone call and e-mail enquiry…
A detailed history of the Gold Pool, which operated between 1961 and 1968, can be found in Toniolo, Gianni (2005), ‚Central Bank Cooperation at the Bank for International Settlements,‘ Cambridge: Cambridge University Press, pp. 375-81 and 410-23. This book should be available from most academic libraries covering finance and economics.”
“Thank you for your response. However, it seems that you have not answered my question as to the ‘gold pool‘ that Mr. Pohl cited in his interview with Edward Jay Epstein. That interview took place many years after the London Gold Pool disbanded and it must have been the BIS‘ own gold pool.
Therefore, once again: what is the ‘gold pool‘ that Mr. Pohl was talking about in 1983?”
The BIS then replied again as follows:
“After further in-house research the following can be said about references to the’‚Gold Pool’:
The ‘Gold Pool‘ Mr Pohl referred to in the 1983 interview is clearly a bit of a misnomer. The (London) ‘Gold Pool‘ as such – i.e. as a mechanism to intervene actively in the gold market by buying and selling gold on behalf of the central banks – operated only between 1961 and 1968.
Out of the regular meetings of central bank gold and foreign exchange experts organized at the BIS between 1961 and 1968 to discuss the operations of the London Gold Pool grew the so-called G10 Group of Gold and Foreign Exchange Experts, which continued their regular meetings at the BIS after the London Gold Pool had been abandoned. But for quite some time after 1968 this group was still being referred to by some as the ‘Gold Pool’, although it didn’t have the operational role the London Gold Pool had. This forum still exists today — it was re-named the Markets Committee in 1999.
Thus, it should be clear that after 1968 the mandate of this Gold and Foreign Exchange Committee was no longer to discuss and agree on direct interventions on the gold market,but simply to monitor and discuss developments on the financial markets generally. This is the ‘Gold Pool‘ Mr Pohl refers to in his 1983 interview.
Frankly, this BIS response is risible and fabricated since Karl Otto Pohl only joined the Bundesbank in 1977 and had no dealings whatsoever with the 1960s gold pool so would never have referred to a meeting which had nothing to do with a gold pool as “the meeting on the Gold Pool“.
As former Luxembourg prime minister Jean-Claude Juncker famously said: “When it becomes serious, you have to lie“. The BIS response to Schall is also as hollow and misleading as a similar response the BIS sent to me when I asked for BIS documents on the Gold Pool discussions which took place in Jelle Zjilstra’s office in November and December 1979, meetings which are proven to have taken place. As a reminder, the BIS told me:
“The Gold Pool came to an end in 1968, so I take it that you are referring to meetings of the Gold and Foreign Exchange Committee. We do have some minutes for this meeting, but unfortunately not for the period which interests you.”
Many Modicums of Gold for the Saudis
Therefore, what sort of Gold Pool would the early 1980s gold Pool have been? Bank of England Governor, Gordon Richardson, a member of the BIS inner club of governors, was calling for “some exchange of gold for oil while the world adjusts”.
Bank of England gold and foreign exchange specialist John Sangster recommended a pool that would not have significant potential for recovery of gold sold, but that “would enable OPEC to acquire some modicum” of gold “without an excessive rise in the price.” It would involve “market intermediation” which would “allow the G10 to move with the price while attempting to control its pace.”
OPEC was “increasingly concerned that gold is outpacing oil”, and while Al Quraishi, Governor of the Saudi Arabian Monetary Authority (SAMA) said that the Saudi’s “would not rock the boat” and buy gold on the open market if a new gold pool was selling, the Saudi’s still wanted to“diversify” into gold.
Incoming BIS President, Fritz Leutwiler “advocated central bank intervention in the gold market“. Outgoing BIS President Jelle Zjilstra wanted the G10 and Switzerland to “consider ways to regulate the price of gold, so as to create conditions permitting gold sales and purchases between central banks.“
Soviet – Kuwait Gold for Oil Deals
Gold for Oil sales were not just in the realm of theory even in 1979. They were fact. On 4 October 1979, the Governor’s office at the Bank of England wrote the following Secret briefing to the Bank of England Deputy Governor about Russian gold being exchange for Kuwaiti oil:
THE DEPUTY GOVERNOR
Sir George Bolton phoned and asked me to mention to you that he had heard the following story from Washington.
It was attributed to the State Department and has two strands.
The Russians have sold one hundred tons of gold to Kuwait against payment in oil.
The Russians have suggested to the Government (?Central Bank) of Kuwait that they should act as agents for the Russians in buying oil against gold.
4th October 1979
Handwritten 1 DAHB / JGH only. 2 back to JLS please. Handwritten “Mr McMahon, Mr Sangster, Mr Walker” “for what it may be worth”.
The day before this Secret memo was written, the New York Times reported from the IMF conference in Belgrade on 3 October 1979 in an article titled “Saudis Hint Oil Output May Drop – Dollar’s Eroding Value Cited at IMF Meeting” that:
“Saudi Arabia’s finance minister told a forum of international monetary officials and private bankers today that his country was considering new cutbacks in oil production because of the eroding value of the dollar.”
“It would be naive to pretend that a continuous erosion of our financial resources, through inflation and exchange depreciation, could not evoke reactions,” Sheik Abalkhail said.
“We have done this to maintain more orderly conditions in the oil market and to promote a higher level of sustained growth of the world economy. We are finding it increasingly difficult to continue our policies under prevailing instabilities in exchange markets, coupled with high levels of inflation in industrial countries.”
On 4 October1979, the New York Times again reported from the IMF conference in Belgrade in an article titled “Historical Linkage Cited For Gold and Oil Values” that:
“South Africa’s finance minister suggested today that there was a rough historical relationship between oil and gold prices.”
“Of the relationship between gold and oil, [Oren] Horwood declined to provide any explanation, saying ‘I simply note the fact’. The reaction of bankers here was that the relationship showed a constancy of real values against the background of gyrations in currencies.”
“Mr Horwood said that, as tracked over the last half-century, the price of gold per ounce was generally 15 times greater than the price of oil per barrel.”
Prior to the 1970s, the gold oil ratio was more static than the gold oil ratio since the 1970s for the simply fact that the gold price was fixed for a large period of time prior to the 1970s. However, the Gold to Oil ratio since 1970 has moved in a range of about 10 to 35, with a lengthy period during the 2000s when the ratio dipped below 10.
Conclusion – The BIS, Where Noone Can See
To me, the evidence suggests that a Gold Pool did evolve at the BIS in the early 1980s but that it has been extremely well hidden. If it did evolve, was its intent to control the gold price so that Saudi & Co could acquire gold on the open market without driving up the gold price, or was it a dual purpose operation of Western central banks to quell inflationary signals, while in the background transferring a portion of their substantial gold holdings to Saudi & Co in secretive BIS administered transactions? And did it fix the gold / oil ratio or attempt to target a range, while allowing the dollar price of gold and oil to seemingly fluctuate randomly? And where was the gold that was being provided to Saudi & Co coming from, central bank sales from the large western central bank gold holders?
The Bank of England’s Sangster said he did not want to“advocate gold for oil directly” but was advocating that OPEC “acquire some modicum” of gold “without an excessive rise in the price.” And Bank of England Governor Gordon Richardson was “looking towards some exchange of gold for oil while the world adjusts“. Remembering that given that the Governor of the Saudi Arabian Monetary Authority (SAMA) was an unofficial member of the G10 at the BIS, then it is not implausible that the Saudis got what they wanted i.e. a chance to acquire real money in the form of gold in return for continuing to supply oil to the advanced Western economies.
Anyone familiar with the writings of “Another” on the USAGold website which appeared starting in October 1997 will recognise that this is exactly what “Another” said happened at the BIS, i.e. that the BIS fixed the gold/oil ratio so as to allow the Saudis to acquire gold even as they were receiving US dollars in payment for their oil exports.
In other words, that one leg of the BIS transactions took the form of behind the scenes gold transfers that flowed to Saudi & Co as subsidised payments for oil, thereby allowing the Saudis to receive payment in the ultimate money of gold in addition to fiat US dollars, while the other leg of the transactions allowed oil to continue to flow to the West. And lastly, that these arrangements, by also targeting the gold price, kept gold at an artificially low level which prevented gold fulfilling its traditional role of inflationary baramoter.
Anyone who reads ‘Another’ will see intriguing sentences such as follows, which just so happen to resonate with what BIS discussions and Bank of England documents were alluding to:
It was once said that “gold and oil can never flow in the same direction”
The BIS, instead of taking [gold] outright, places it where it’s needed!
In effect the governments are selling gold in any form to “KEEP IT” being used as ‘REAL MONEY” in oil deals!
Make no mistake, the BIS knows gold in the many thousands.
Not all oil producers can take advantage of this deal as it is done “where noone can see”.
Westerners should not be too upset with the CBs actions, they are buying you time!
Oil went from $30++ to $19 + X amount of gold! Today it costs $19 + XXX amount of gold (which according to some ‘Another’ experts, is a reference to the gold for oil agreement of the 1980s being renewed in the earlier 1990s at more favourable terms to the Saudis after the invasion of Kuwait)
All of this is presented in highly stylised but cryptic and ‘vague’ detail by Another & Friend of Another (FOA) on the USAGold website for those interested in reading it. I would tend to agree with what “Another” says, especially after having seen all of the discussions that took place at the BIS from the late 1970s onwards. The only question I would have is if the gold for oil deals are true, then “why the secrecy?” Why not make it public, and let the world adjust?
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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