On August 10, the Wall Street Journal (WSJ) published an article about the Federal Reserve Bank of New York (FRBNY) custody gold and the NY Fed’s gold vault. This vault is located under the New York Fed’s headquarters at 33 Liberty in Manhattan, New York City.
The article, titled “The Fed Has 6,200 Tons of Gold in a Manhattan Basement – Or Does It?”, can be read on the subscription only WSJ site here, but is also viewable in full on both the Fox News Business and MorningStar websites, here and here. It also appeared on the front page of the Wall Street Journal print edition on Friday, August 11.
The NY Fed offers a ‘custody gold’ storage service to its customers, customers which are exclusively foreign central banks and international financial institutions, except notably, the US Treasury is also a gold storage customer of the NY Fed. The Fed’s gold vault, which is on level E (the lowest level) of its basement area under its downtown Manhattan headquarters, open in 1924, and has been providing a gold storage service for foreign central banks since at least the mid-1920s. Custody gold means that the NY Fed stores the gold on behalf of its customers in the role of custodian, and the gold is supposed to be stored on an allocated and segregate basis, i.e. “Earmarked gold”.
NY Fed stored gold has risen in public consciousness over the last few years arguably because of recent Bundesbank gold repatriation operations from New York as well as also similar gold repatriation from the central bank of the Netherlands. The moves by the Chinese and Russian central banks to actively increasing their gold reserves have also put focus on whether the large traditional central bank / official sector gold holders (such as Germany, Italy and the International Monetary Fund) have all the gold that they claim to have, much of which is supposedly stored at the NY Fed vault.
The main theme of the August 10 WSJ piece, as per the title, is whether the NY Fed actually stores all the gold in the vault that its claims to store, a theme which it introduced as follows:
“Eighty feet below the streets of lower Manhattan, a Federal Reserve vault protected by armed guards contains about 6,200 tons of gold.
The WSJ article intersperses a number of facts about this custody gold alongside various quotes, and while I cannot speak for anyone else quoted in the article, the quotes could probably best be described as being on the sceptical side of the NY Fed’s official claims.
Since I am quoted in the article, it seems appropriate to cover it here on the BullionStar website. The relevant section is as follows:
‘But “no one at all can be sure the gold is really there except Fed employees with access,” said Ronan Manly, a precious-metals analyst at gold dealer BullionStar in Singapore. If it is all there, he said, the central bank has “never in its history provided any proof.”
Mr. Manly is among gold aficionados who wonder if the bank is hiding something about what it’s hiding.’
Let me begin by explaining the basis of my quote.
The only reporting which the New York Fed engages in for the custody gold recorded as being held on behalf of its customers (central banks and official sector organizations) is a single number communicated each month (with a 1 month lag) on Federal Reserve table 3.13 – “Selected Foreign Official Assets Held at Federal Reserve Banks” and listed as “Earmarked Gold”.
As of the end of July 2017, the Fed reported that it was holding $7.84 billion of “Earmarked Gold” in foreign and international accounts. This amount is a valuation at the official US Treasury / Fed price of gold of US $42.22 per fine troy ounce, and which works out at approximately 5775 tonnes of gold.
The reason that this figure differs from the ~6200 tonnes number quoted by the Wall Street Journal is that it doesn’t include 416 tonnes of US treasury gold also claimed to be stored in the NY fed vaults. When the US Treasury claimed quantity is added, the figure comes to 6191 tonnes, hence the WSJ citation of circa 6200 tonnes.
NY Fed Gold – Opacity and Secrecy
Other than that, the Federal Reserve does not publicly communicate any other relevant information or details about the quantity of custody gold bars said to be stored in its vault, and furthermore, the Fed has never in its history publicly communicated any such relevant details or information.
So it is a fact that the Federal Reserve has “never in its history provided any proof” that all the gold it claims is there is really there, hence the quote is factual, and hence the connected quote that “no one at all can be sure the gold is really there except Fed employees with access” is a valid conclusion also.
The NY Fed has never provided any of the following:
– details of the names of the central banks and international financial institutions that it claims to hold gold on behalf of
– details of how much gold is held by each customer
– details of whether any of the gold stored in the vault is under lien, claim encumbrance or other title
– details of whether any of the custody gold is lent or swapped
– details of location swaps and / or purity swaps of gold bars between the NY Fed vaults and other central bank or commercial bank vaults around the world
– details of the fact that nearly all of the gold bars supposedly held in the NY Fed vault are a combination of old US Assay office gold bars and low grade coin bars made from melted coins
The NY fed has never allowed the conduct of any independent physical gold bar audits or published any results of its own audits. It has never published any gold bar weights lists (note one weight list for some US Treasury gold bars stored at the NY Fed vault made it into the public domain in 2011 as part of documentation that was submitted to a ‘Investigate the US Gold’ hearing in front of the US House of Representatives Committee on Financial Services. That weight list starts on page 132 of the pdf which can be accessed here.
Mainstream Media Cheerleaders and Detractors
The lack of transparency of the New York Fed as regards the custody gold that it stores for its central bank customers is therefore a valid point. The Wall Street Journal article of August 10 is merely highlighting this valid point. However, predictably this did not stop some mainstream US media critics from denouncing the WSJ article such as can be seen in the following tweet from a POLITICO ‘chief economic correspondent‘.
In which the WSJ takes seriously the lunatics who think the NY Fed is lying about what's in its vaults. https://t.co/83LsDN4ApP
I would wager that this Ben White chap has never asked the New York Fed any serious questions about its custody gold, preferring instead to throw around tweets using accusatory language such as ‘lunatics’. But this sort of reaction is par for the course from elements of the cheerleading US mainstream media, who seem to feel an obligation to protect the Fed and the status quo of the incumbent central bank led financial system from any valid criticism.
However, I have asked the NY Fed serious questions about its custody gold.
– the number of central banks and official sector institutions that have gold in storage with the NY Fed in Manhattan.
– the identities of these central banks / official sector institutions that have gold in storage.
– could FRBNY CBIAS / Account Relations provide me with gold bar weight lists for the gold holdings that these central banks and official sector institutions hold with the NY Fed?
As the first query went unanswered, I then resubmitted the query a month later in mid-March. On neither occasion did the Fed respond or acknowledge the request. Realistically, I didn’t expect the NY Fed to answer, since they have track record of being aloof and unanswerable to anyone but their own stakeholders, however, the outcome of the emails has established that the NY Fed does not engage on this issue nor provide any transparency in this area to the public.
I had expected the WSJ article to be a lot longer and more in-depth than it actually was, and to obtain some publishable response from the NY Fed. The WSJ however says in the article that:
“The Fed declined to comment”
The lack of any quotation by the Fed within the WSJ article is a glaring omission, and actually proves the complete lack of cooperation by the Fed on the entire topic of gold bar storage. The WSJ article does say that it filed Freedom of Information (FOIA) Requests with the NY Fed, which again underscores that without FOIAs, the Fed wouldn’t voluntarily reveal anything.
What these Freedom of Information requests actually contained is not, however, even revealed by the WSJ, except hilariously in one passing reference to “a heavily redacted tour guide manual“. Hilarious in the sense that the NY Fed would even see fit to heavily redact a simple tour-guide manual. To quote the WSJ:
‘The Wall Street Journal filed Freedom-of-Information requests with the New York Fed. Among the Journal’s findings, from a heavily redacted tour-guide manual provided by the Fed: Tour guides are informed that “visitors are excitable” and should be asked to “please keep their voices down.”‘
Why doesn’t the Wall Street Journal do a full publication of all the NY Fed FOIA responses that it received and publish them on its website? This at least would be some sort of backup evidence to the published article.
There are a multitude of angles that the Wall Street Journal could cover if it wanted to do a proper investigation into the gold bars supposedly stored in the NY Fed vault below 33 Liberty on Manhattan Island.
Why did the German Bundesbank take multiple years to transfer back a small portion of the gold that it claimed to have held at the NY Fed vaults, with much of that gold having to be recast / remelted into new bars en route to Frankfurt in Germany. If the gold was allocated and segregated to the Bundesbank account at the NYFed, there would have been no reason for the multi-year transfer delays and no reason to need to melt down and recast any gold bars.
Why did low-grade coin bars start turning up in the NY Fed vaults from 1968 onwards? The only place they could have come from is Fort Knox in Kentucky. The fact that these low-grade coin bars had to be used suggests there was not enough high-grade gold bars (995 US assay office Good Delivery gold bars) to satisfy central bank customer requirements at the NY Fed vault at that times. Some of these coins bars were over time shifted out of the NY Fed vaults and refined into high-grade bars and sent to the Bank of England in London. How much coin bar gold is still in the NY Fed vault.
For the 3 largest claimed gold holders at the NY Fed, which are the Banca d’Italia, the Bundesbank and the International Monetary Fund, and which between supposedly hold at least 4000 tonnes of gold at the NY Fed, there is no way to validate the accuracy of any of these holdings, neither from IMF, Bundesbank or Banca d’Italia sources, nor from the NY Fed. These gold holdings have, on paper, not changed since the early 1970s, but thats over 40 years ago and there is no way to check the accuracy of these 3 holdings which make up the lions share of all the gold supposedly held at the NYFed.
Why is there a tunnel between the NY Fed level E basement gold vault to the Chase Manhattan Plaza level B5 basement gold vault across the street? i.e. Why is a central bank vault linked to a commercial vault run by a commercial bank (JP Morgan Chase)?
Does, or has the JP Morgan / Chase in the past, facilitated the activation of NY Fed stored central bank gold into the commercial gold market via movements of gold bars from 33 Liberty to Chase Manhattan Plaza vaults?
Why is there no mention in the Wall Street Journal article of the NY Fed’s Auxiliary vault which was built in 1963 and its location, and which supposedly stores gold bars in a “wall of gold”. Was this not newsworthy?
Why did the 2004 version of the NY Fed gold vault brochure ‘The Key to the Gold Vault’ state that gold bars “belonging to some 60 foreign central banks and international monetary organizations” were stored at the NY Fed vault, and then the 2008 version of the same brochure had changed this statement to gold “belonging to some 36 foreign governments, central banks and official international organizations”.
Why the drop from 60 customers to 36 customers. I have heard from a very reliable senior ex-NY Fed executive that some central banks were unhappy to keep their gold in Manhattan in the aftermath of 9/11 and wanted it stored elsewhere. You wouldn’t blame then given what happened to the Scotia gold vaults under the WTC 4 on 9/11.
Why does the NY Fed decline to comment for a Wall Street Journal article? Surely this should ring alarm bells at the Wall Street Journal?
Over the last number of years, one of the most interesting trends in the physical gold world is the ongoing conversion of large 400 ounce gold bars into smaller high purity 1 kilogram gold bars to meet the insatiable demand of Asian gold markets such as China and India.
This transformation of 400 ounce bars into 1 kilogram bars is an established fact and is irrefutable given the large amount of evidence which proves it is happening, as has been documented on the BullionStar website and elsewhere.
It is also something which causes plenty of excitement in the gold world as it underscores the huge movement of physical gold from West to East, and the continual depletion of gold inventories from locations such as the London Gold Market.
The general movement is one of 995 purity 400 ounce gold bars coming out of gold-backed ETFs, central bank gold holdings and other wholesale gold holdings, and these bars making their way to the Swiss refineries where they are transformed / smelted / recast into smaller 9999 high purity gold bars. The smaller gold bars are then exported from Switzerland to India, China, Hong Kong, and the Middle East.
At the same time as the wider gold market acknowledges and publicises this trend, the establishment gold world and bullion banks (as represented by the London Bullion Market Association) tend to downplay this conversion of 400 ounce gold bars into 1 kilogram bars, presumably because it directly highlights the continual drain of real physical gold out of the London vaults into China and India, gold which has little chance of ever coming back again.
For an example of significant downplaying of conversion of 400 ounce gold bars into kilogram gold bars, see BullionStar post from September 2015 titled “Moving the goalposts….The LBMA’s shifting stance on gold refinery production statistics” which documents how a mammoth 2000 tonnes of LBMA gold refinery output attributed to the year 2013, mysteriously disappeared from the LBMA’s publications in early August 2015, after the original figure of 6,601 tonnes had been highlighted on this website, with the original figure being replaced by a far lower 4600 tonnes.
While gold refineries in countries other than Switzerland may be involved in these 400 ounce to 1 kilogram gold bar transformations, the Swiss refineries are the big players in this area, as they say so themselves. The names in question are Valcambi, PAMP, Argor Heraeus and Metalor. For a full understanding of the extent to which these large Swiss gold refineries process 400 ounce gold bars into kilobars and the importance that they attribute to this specific category of refinery activity, please see BullionStar blog from November 2015 titled “From Good Delivery bars to Kilobars – The Swiss Refineries, the GFMS data, and the LBMA“.
But if you thought the massive conversion of large gold bars into kilogram bars that occurred in years such as 2013 and 2014 was an anomaly or a one-off, then think again. Because it also happened in 2015, and in a very big way.
LBMA Update – 2015 Gold Refinery Statistics
In early May 2017, the London Bullion Market Association published a revised version of its 4 page ‘LBMA Overview Brochure’, the most notable update of which was that it revealed refinery production statistics for 2015 for the gold and silver refineries around the globe that are on the LBMA’s Good Delivery List.
A table in the updated brochure states that in 2015, the “total refined gold production by the refiners on the List was estimated to be 5,034 tonnes”. The corresponding figure for gold in 2014 was 4921 tonnes.
At some point each year, the LBMA will invariable release such refinery statistics, however, the lag in publication is inexplicably long, for example, 2015 data only gets released in May 2017. Why 2016 data is not released in 2017 remains a mystery. This length of lag would not happen in any other industry. Leaving aside this mystery, the 2015 statistics are interesting and worth analysing for a whole lot of reasons, which are discussed below.
This year the LBMA update – of the 2015 data – was a very low-key affair indeed and did not even, in the LBMA’s eyes, merit a press release. This differs to May 2016, when the LBMA published 2014 gold and silver refinery statistics and at least accompanied the announcement with a press release which it titled “4,921 tonnes of gold production in 2014 – LBMA GD refiners”.
The LBMA’s May 2016 press release stated that 2014 refinery gold production by the refiners on the LBMA’s Gold Good Delivery List for gold totalled 4921 tonnes, and importantly, it attributed the excess over ‘world mine production of 4,394 tonnes‘ to be due to “recycling of material by LBMA GD refiners converting large 400 oz bars into kilobars“.
This reference to ‘world mine production of 4,394 tonnes‘, which was itself attributed to Thomson Reuters GFMS, is incorrect, and the LBMA should have said that “world mine production + scrap recycling + net hedging supply” was 4394 tonnes, as is clear in the Thomson Reuters GFMS table from which the figure of 4394 tonnes was taken. This table is as follows:
The ‘net hedging supply’ category can be ignored as it is not relevant for gold-laden material arriving into gold refineries for processing. What the LBMA should have said in its 2016 press release is that in 2014, the gold refineries on its list (which generate 85% – 95% of world gold refinery output) produced 4921 tonnes of gold, which was in excess of combined gold mining production and scrap recycling i.e. in excess of 3131 + 1158 = 4289 tonnes. This excess was due to “recycling of material by LBMA GD refiners converting large 400 oz bars into kilobars”.
Given that the LBMA gold refiners only represent 85% – 90% of world gold refinery output, and not 100%, the mine and scrap material that they process is only 85% – 90% of global mine production and scrap production. Therefore, the GFMS figures should be scaled back to represent this 85% to 90% range.
It is however not realistic to expect that bullion banks which supply large 400 ounce gold bars to gold refineries for conversion into smaller gold bars would use non-LBMA accredited gold refineries to do so, since a) bullion banks are all members of the LBMA, and b) the London bullion banks use Swiss gold refineries which are all on the LBMA good delivery list. They would therefore not use a more obscure non-LBMA gold refinery, such as one of the smaller Indian gold refineries, to convert large wholesale / central bank gold bars into smaller gold bars.
Therefore, what the LBMA press release in May 2016 should really have said is as follows:
“In 2014, the gold refineries on the LBMA Good Delivery List (which generate 85% – 95% of world gold refinery output) produced 4921 tonnes of gold. This was in excess of the 85% – 90% of combined gold mining production and scrap gold recycling that these refineries are known to process. The LBMA refineries’ 4921 tonnes of refinery output in 2014 in excess of their mine and scrap processing of 3646 – 3860 tonnes (85% and 90% of combined mine and scrap supply) was due to recycling of material by LBMA GD refiners converting large 400 oz bars into kilobars.”
Such a statement would then put conversion of large 400 ounce gold bars into kilogram gold bars by LBMA gold refineries in 2014 at between 1060 and 1275 tonnes of gold (4921 – 3860, and 4921 – 3646). It would also mean that large 400 ounce gold bars from existing above-ground stockpiles were topping up ‘normal’ physical gold supply (gold mining output and scrap recycling) by between 25% and 30% during 2014.
These 2014 refinery figures have previously been covered in a BullionStar posting in June 2016. See BullionStar blog “An update on LBMA Refinery Statistics and GFMS”. The important take-away point here is that in 2014 the gold refineries on the LBMA good delivery list generated refined gold output in a distinct category attributed to recycling of material by LBMA good delivery refiners converting large 400 oz bars into kilobars.
Fast forwarding now to the 2015 LBMA figures and the 2015 Thomson Reuters GFMS figures, and repeating the above calculations:
For 2015, the LBMA states that the gold refineries on its list had total refined gold output of 5034 tonnes. In 2015, according to Thomson Reuters GFMS, gold mining production was 3158 tonnes, while scrap gold supply was 1173 tonnes, i.e. a combined mine and scrap gold supply of 4331 tonnes.
Since the gold refineries on the LBMA Good Delivery List for gold represent 85% to 90% of ‘world production’, which by LBMA logic is GFMS gold mining production and GFMS scrap recycling, then, these refineries would have processed between 3681 tonnes and 3898 tonnes (85% – 95%) of mine production and scrap supply during 2015.
This then implies that during 2015, these LBMA gold refineries also processed between 1136 tonnes and 1353 tonnes of gold due to converting large 400 oz bars into kilobars.
If the LBMA had have written a press release in May 2017 to coincide with updating its table of the output of LBMA Good Delivery refineries, it should have read something like the following:
“In 2015, the gold refineries on the LBMA Good Delivery List (which generate 85% – 95% of world gold refinery output) produced 5034 tonnes of gold. This was in excess of the 85% – 90% of combined gold mining production and scrap gold recycling that these refineries are known to process. The LBMA refineries’ 5034 tonnes of refinery output in 2015 in excess of their mine and scrap processing of 3681 – 3898 tonnes (85% and 90% of combined mine and scrap supply) was due to recycling of material by LBMA GD refiners converting large 400 oz bars into kilobars, which was in the range of 1136 to 1353 tonnes.”
Where would these huge quantities of 400 ounce gold bars have come from that were melted down during 2015, predominantly or even exclusively by the Swiss gold refineries? Because 1136 to 1353 tonnes of large wholesale market gold bars is a lot of gold. The most likely source of this gold is from the London Gold Market. Beyond that, gold which was already stored in Switzerland is also a possible pool from which to draw from.
2015 UK to Switzerland Gold Exports
During 2015, Switzerland imported 1853 tonnes of non-monetary gold, and exported 1861 tonnes of non-monetary gold. By far the largest source of Swiss gold imports during 2015 was ‘the UK’, which in this case really means the London Gold Market. Non-monetary gold is just gold which is not monetary (central bank) gold. Non-monetary gold shows up on trade statistics. Monetary gold does not show up on trade statistics since central banks get an exemption from revealing physical movements of monetary gold across national borders.
During 2015, Switzerland imported 644.5 tonnes of non-monetary gold from the UK (London). You can see from the below graph that no other source country came anywhere close to supplying non-monetary gold to Switzerland in 2015, with the next largest source countries each only sending less than 70 tonnes of gold to Switzerland. And London does not have any gold mines nor any major scrap gold collection facilities.
Some of the other exporters of gold to Switzerland during 2015 were France, Germany, Italy and UAE/Dubai (none of which are gold mining countries), and South Africa, Russia, Peru (which have gold mining). Some of the gold sent from France, Germany, Italy and UAE was obviously scrap. Some of the gold sent from South Africa, Russia and Peru was most likely gold mining ore or gold doré. But somewhere within these numbers, there was also most likely good delivery gold bars. For example, why would Russia or South Africa send gold mining ore or gold doré or scrap to Switzerland when they have their own perfectly good gold refineries with huge capacity.
Surprising perhaps, the largest gold-backed ETF, the SPDR Gold Trust (GLD) did not lose that much gold during 2015, with only a net 65 tonne gold loss. This is more so because the damage to GLD’s gold holdings had really been done in mostly in 2013 and to a lesser extent in 2014 when holdings had fallen from the 1350 tonne range down to the 700 tonne range. See chart.
Based on recently released data from the Bank of England, it can be seen that during 2015 the Bank of England gold vaults lost 13.5 million ounces of gold, with Bank of England total gold holdings dropping from 167.2 million ounces at the end of 2014 to 153.6 million ounces at the end of 2015. This is equivalent to a 421 tonne loss of gold from the Bank of England vaults during 2015. All gold held in the Bank of England is in the form of Good Delivery gold bars (i.e. the large 400 ounce gold bars.
Whether gold lost from the Bank of England vaults during 2015 was central bank gold or bullion bank (commercial bank) gold is unclear since the Bank of England does not provide a breakdown of figures. It’s possible that some of this gold that left the Bank of England during 2015 was converted from monetary gold to non-monetary gold, and then sent to Switzerland to be transformed into kilogram gold bars. This would then show up in the Swiss trade statistics. If extracted from the Bank of England vaults and left as monetary gold and then exported to Switzerland, it would not show up in Swiss trade statistics.
If 644 tonnes of non-monetary gold, as per the Swiss trade statistics, were sent from London to Switzerland during 2015, and another 421 tonnes of monetary gold from the Bank of England were also sent to Switzerland during 2015, this in total would be 1065 tonnes of gold. This quantum would begin to account for the range of 1136 to 1353 tonnes being converted from 400 oz gold bars into 1 kilogram gold bars that the 2015 LBMA gold refinery statistics imply. Add in another 100 – 200 tonnes of Good Delivery bars from sources such as Russia, South Africa and Dubai and this huge scale of 400 ounce bar conversion begins to look achievable. There could also be Good Delivery bars flowing out of Swiss central bank vaults directly, i.e. the Swiss National Bank (SNB) gold vaults in Berne, which would not show up on any inbound gold trade customs statistics.
Within a 3 year period, we can see roughly that the following quantities of large gold bars were melted down into kilogram bars and sent to Asia:
2013: about 2000 tonnes of gold
2014: between 1060 and 1275 tonnes of gold
2015: between 1136 to 1353 tonnes of gold
Overall, within the 2013 – 2015 period that is about 4200 – 4600 tonnes of gold being converted into kilogram and other smaller denomination high purity gold bars and sent to markets in China, India, Hong Kong and elsewhere in Asia. This is gold above and beyond mine supply and scrap supply. Where has all of this gold come from? Some of it is proven to be from gold-backed ETFs. Some is most probably also from central bank vaults, in which case the central banks do not have the gold that they claim to have. Which everybody know anyway, as much central bank gold has been lent out and is merely a fiction on the central bank balance sheets. But there may also be other stockpiles of Good Delivery gold bars which are also feeding this huge trend. Until the LBMA begins to publish its vault statistics, any grey area unreported gold vault inventories in London are still being kept in the dark.
If the trend of raiding ETFs and borrowing central bank gold to send to Switzerland to convert into kilogram bars for the Asian markets continues, then this is not and cannot be sustainable. The question is how long it can remain sustainable, in other words when will it become unsustainable?
Sometime in the coming days, the London Bullion Market Association (LBMA) plans to begin publishing gold and silver vault holding totals covering the network of commercial precious vault operators in London that fall under its remit. This follows an announcement made by the LBMA on 8 May.
There are seven commercial vault operators (custodians) in the LBMA custodian vault network namely, HSBC, JP Morgan, Brinks, Malca Amit, ICBC Standard Bank, Loomis (formerly Viamat), and G4S. Note that ICBC Standard Bank has a vault which is operated by Brinks on behalf of ICBC Standard. It is also quite possible that some of the HSBC vaults, such as the famous GLD gold vault, are located within Brinks facilities.
Adding in the Bank of England gold vaults under the Bank of England’s head office in the City of London, the LBMA vaulting network comprises eight sets of vaults. However, the Bank of England vaults do not store silver, or at least there is no evidence that the Bank of England stores silver. However, the other 7 vault operators can and do store silver, or at least most of them do. It’s unclear whether the G4S vault stores anything on behalf of anyone, but that’s a different story.
The forthcoming LBMA vault data will represent actual physical gold and silver holdings, i.e. real tangible precious metals, as opposed to the intangible and gargantuan paper gold and paper silver trading volumes generated each day in the London precious metals markets.
The LBMA will report physical holdings data on an aggregated basis for each of gold and silver, i.e. one quantity number will be reported each month for vaulted gold, and one quantity number will be reported each month for vaulted silver. The LBMA data will be on a 3-month lagged basis. For example, if the LBMA begins reporting this data in early July (which it probably will), then the first set of data will refer to the end of March period.
The uncertainty as to when the LBMA will begin to publish its vault holdings data is purely because the LBMA has not provided a specific publication commencement date. At first, the LBMA announced that the reporting would begin “in the summer”. Subsequently, it announced that it’s vault reporting would begin in July.
As to whether the LBMA vault holdings numbers published each month will include or exclude the Bank of England gold vaults holdings is also unclear. At the end of April, the Bank of England went ahead and separately began to publish vault holdings numbers for its own gold vaults, also on a 3-month lagged basis. More information on this Bank of England initiative can be read in BullionStar blog “Bank of England releases new data on its gold vault holdings”
Incidentally, the Bank of England has now updated its website (updated 30 June) with the gold holdings figure for its vaults as of the end of March, and is reporting total physical gold holdings of 163.36 million troy ounces, which equates to 5081 tonnes of gold.
When the LBMA begins to publish its numbers, it will be clear as to whether the LBMA gold number includes the Bank of England gold holdings or not, and this will probably even be specified in a footnote of the report. Excluding the Bank of England vaults (or at least the non-loaned gold in the Bank of England vaults which is not under the title of bullion banks), the remaining lion’s share of the LBMA’s gold holdings number comprises gold held by Exchange Traded Funds (ETFs) in London.
“The HSBC vault in London holds gold on behalf of the SPDR Gold Trust (currently 853 tonnes) and ETF Securities (about 215 tonnes). The JP Morgan gold vault in London holds gold on behalf of ETFs run by iShares (about 210 tonnes in London), Deutsche Bank (95 tonnes), and Source (100 tonnes). An ABSA ETF holds about 36 tonnes of gold with Brinks in London. In total, these ETFs represent about 1510 tonnes of gold.”
The approach used to calculate the gold stored by these ETFs in the London vaults can be seen in the article “Tracking the gold held in London: An update on ETF and BoE holdings”. To this 1510 tonnes gold figure we can add gold held on behalf of customers of BullionVault and GoldMoney – which is roughly 12 tonnes of gold between them (4.75 tonnes for GoldMoney, and 7.2 tonnes of gold for BullionVault).
When the LBMA publishes its first gold total for gold held in its vault network, it will also be clear as to whether the LBMA vaults hold any significant amount of physical gold above and beyond the gold allocated within the gold-backed ETFs. There may be some gold tonnage held on an allocated basis by the LBMA bullion banks as a ‘float’, and also some gold held in allocated form by various institutional investors such as hedge funds, but my hunch is that this residual gold will be at most a respectable fraction of the amount of gold stored on behalf of ETFs in London.
However, the silver holdings in the LBMA vault network are a different kettle of fish entirely, and in addition to ETF holdings (which are reported), there could be significant silver holdings in the London vaults which have gone unreported up until now (unreported silver in the form of what consultancy GFMS calls ‘Custodian Vault’ holdings).
Although gold usually generates the most headlines, it’s important not to forget about silver, and the fact that this new LBMA reporting will also provide a monthly aggregated total for the amount of physical silver held in the LBMA vaulting network in London. The silver stored in these LBMA vaults is in the form of variable weight London Good Delivery silver bars.
Since silver has a lower value to weight ratio than gold and is bulkier to store, silver a) takes up more room and b) can be stored in secure warehouses rather than ultra-high secure vaults that are used to store gold. This is particularly true in expensive cities such as London where it is more economical to store silver in locations with lower commercial rental values.
In the LBMA vaulting network, London Good Delivery silver bars are stored 30 bars per pallet, i.e. a formation of 10 bars stacked 3 bars high. Since each bar weighs approximately 1000 oz, each pallet will weigh about 30,000 ozs, i.e. each pallet would weigh about 1 tonne.
At this stage, can we arrive at an estimate of the minimum amount of silver currently held in the LBMA London vaulting network? The answer is yes, for the simple reason that, in a similar manner to gold-backed ETFs, a substantial number of silver-backed ETFs also hold their silver in the vaults of London-based precious metals vaulting custodians, and these ETFs publicly report their silver bar holdings.
In addition, BullionVault and GoldMoney (which are not ETFs), both hold silver with one of the custodians in the LBMA vaulting network – Loomis. But I have included the BullionVault and GoldMoney silver totals below purely because even though they are non-ETF custodian vault holdings, both companies’ silver holdings are publicly reported on their websites.
However, there is probably also a lot more additional silver held in the London vaults above and beyond the silver bars allocated to ETFs and the known silver stored by GoldMoney and BullionVault. Some of this additional silver falls under what Thomson Reuters GFMS classify as ‘Custodian Vault‘ silver, which is silver that is basically in an ‘Unreported’ category but which Thomson Reuters GFMS seems to think it knows about through its own ‘proprietary surveys’ and ‘field research’. This ‘Custodian Vault’ silver probably accounts for a substantial amount of silver in the London vaults. However, it is difficult to know because GFMS does not provide granularity on its numbers beyond an overall ‘Europe’ number. But I have made some assumptions about this ‘Custodian Vault’ silver in London, which is discussed in a final section below.
For the silver-backed ETFs, the first step is to identify which silver ETFs hold silver bars in the LBMA vaults in London. Using the list of silver ETF providers specified on Nick Laird’s GoldChartsRUs website (subscription only), the platform providers and their ETFs which hold silver in the LBMA vaults in London are as follows:
iShares: 1 ETF
ETF Securities: 6 ETFs
SOURCE : 1 ETF
Deutsche Bank: 3 ETFs
Between them, these four providers offer 11 ETFs that hold some or all of their silver in LBMA London vaults. This silver is held with custodians JP Morgan and HSBC, and with sub-custodians, Brinks and Malca Amit. Note, that GoldMoney and BullionVault store silver in London with Loomis as custodian.
As publicly traded vehicles, most of these ETFs publish daily silver bar weight lists or holdings files and they also undergo twice yearly physical audits by independent auditors. These weight lists and audits documents are helpful in pinpointing who the custodians and sub-custodians are, which locations these silver ETF’s store their silver in, and how much silver (in silver bar form) is stored in each location.
iShares Silver Trust (SLV)
The iShares Silver Trust, ticker code SLV, is the world’s largest silver-backed ETF. It’s probably best to think of SLV as the silver equivalent of the mammoth SPDR Gold Trust (GLD).
The custodian for SLV is JP Morgan Chase Bank (London Branch), and Brinks also acts as a sub-custodian for SLV. SLV holds silver in vaults across both London and New York. According to the SLV daily silver bar weight list, SLV’s silver bars are held in two Brinks vaults in London, one JP Morgan vault in London, and one JP Morgan vault in New York.
As of 29 June 2017, SLV reported that it was holding 348,841 Good Delivery silver bars containing a total of 339.89 million troy ounces of silver, or a colossal 10,572 tonnes of silver. The actual SLV bar list, which is uploaded to a JP Morgan website in pdf format using the same filename each day, can be seen here, but be warned that the file is about 5370 pages long, so there’s no real need to open it unless you are curious. A screenshot of the top of the first page is provided below
The SLV weight list specifies that the SLV silver is held in a ‘Brinks London‘ vault, a ‘Brinks London C‘ vault, a ‘JPM London V‘ vault, and a ‘JPM New York‘ vault. Between them, 2 Brinks vaults in London hold 55% of SLV’s silver bars representing 5753 tonnes, or 54% of the silver held in SLV. Adding in the ‘JPM London V‘ vault means that 289,053 silver bars, weighing 8720 tonnes (or 82% of SLV’s entire silver holdings) are held in LBMA London vaults.
The auditor for SLV is Inspectorate. Interestingly, the latest Inspectorate letter for SLV, for record date 10 February 2017, does not make a distinction between the 2 Brinks vaults in London and just reports that SLV’s silver is in:
“Three vaults located in and around London and New York:
- two vaults owned and operated by JP Morgan Chase Bank N.A. with 124,054 bars
- one vault owned and operated by Brinks, as a sub-custodian for JP Morgan Chase Bank N.A. with 220,066 bars
This would suggest that Inspectorate does not see the need to distinguish between the “Brinks London” vault and the “Brinks London C” vault, presumably because both Brinks vaults are in the same building in the Brinks facility (which is beside Heathrow Airport).
Even though the official custodian for SLV is JP Morgan Chase Bank N.A., London Branch (see original SLV Custodian Agreement filed April 2006 here), since it’s launch in 2006 SLV has at different times used quite a diverse group of sub-custodian vaults as well as at least 3 JP Morgan vaults. For example, over the 3 year period from early 2010 to early 2013, SLV stored silver in the following vaults:
Johnston Matthey, Royston
Brinks London A
Brinks London C
Viamat (now known as Loomis)
JP Morgan London A
JP Morgan London V
JP Morgan New York
Royston is about 50 miles north of central London. The above list is taken from the following chart which is from the ScrewTape Files website.
Given that there are Brinks vaults in London named ‘Brinks London‘, ‘Brinks London A‘, and ‘Brinks London C‘, this would most likely imply that there is or was also a ‘Brinks London B‘ vault, which, for whatever reason, doesn’t show up in any ETF custodian documentation.
The naming convention of the JP Morgan vaults in London as ‘JPM London A‘ and ‘JPM London V‘ is also interesting. SLV silver started being taken out of the ‘JPM London A’ vault in February 2012, and this vault was depleted of 100 million ounces of SLV silver (~ 3100 tonnes) by October 2012 (blue line in above chart). At the same time, the SLV silver inventory in the ‘Brinks London’ vault ramped up by 100 million ounces of SLV silver also between February 2012 and October 2012.
JPM London A could be JP Morgan’s original vault in the City of London. This would then make the JPM London V vault a separate location. My pet theory (pet rock theory) is that the V in the ‘JPM London V’ could refer to Viamat International, which is now known as Loomis. JP Morgan could have outsourced storage of silver to Viamat by ring-fencing some vault space. JP Morgan could then call this space a JP Morgan vault, even though it would be physically within a location managed by one of the security storage / transport providers.
I now think on balance that HSBC probably took the same approach with its gold vault and has it located in a Brinks facility, but that it calls it a HSBC vault. This could also mean that HSBC uses Brinks to store silver, while referring to it as HSBC storage. As to whether HSBC and JP Morgan store gold at the Bank of England while labelling it as a HSBC or JP Morgan storage area is another interesting question, but is beyond the scope of discussion here.
Note, there is also an iShares Silver Bullion Fund known as SVR which uses Scotia Mocatta as a custodian, which as of 29 June held 2,154 silver bars, however, SVR mostly holds its silver bars mostly in Toronto with Scotia, with a small number of silver bars stored with Scotia in New York. SVR therefore does not store any silver bars in London. See latest SVR weight list here.
ETF Securities – 6 ETFs
Keeping track of all the silver-backed ETFs offered by ETF Securities is challenging to say the least, but in the below discussion I’ve tried to devise a system which will make things at least a little clearer.
ETF Securities operates 6 ETFs which hold physical silver bars that are stored in the LBMA precious metals vaulting network in London. Of these 6 ETFS, 3 of them hold silver bars and nothing else. The other 3 ETFs are precious metals baskets which hold ‘physical’ gold, silver, platinum and palladium. Two of these ETFs are domiciled in the UK, 2 are domiciled in Australia, and the other 2 are domiciled in the US. In each of the UK, Australia and the US, ETF Securities offers 1 silver ETF and 1 precious metals basket ETF.
It’s most convenient to refer to the codes of these ETFs when discussing them. The 2 UK domiciled ETFs, with codes PHAG (silver) and PHPM (precious metals basket), are positioned under a company called ETFS Metal Securities Limited (MSL). The 2 ETFs domiciled in Australia, with codes PMAG (silver) and PMPM (precious metals basket), fall under a company called ETFS Metal Securities Australia Limited (MSAL). The final 2, which are US domiciled, are known as SILV (silver) and GLTR (precious metals basket).
ETFS Metal Securities Limited (MSL) – PHAG and PHPM
ETFS Physical Silver (PHAG) has a primary listing on the London Stock Exchange (LSE) and trades in USD. It’s NAV is also in USD. The custodian for PHAG is HSBC Bank Plc, with a listed vault location of London. Note: There is also another variant of PHAG called PHSP. It’s the same security as PHAG (same ISIN) but its trades in GBP (and its NAV is calculated in GBP). Its best to ignore PHSP as it’s literally the same fund.
ETFS Physical PM Basket (PHPM) is a precious metals Basket ETF that also holds gold, platinum, and palladium, in addition to silver. The custodian is HSBC Bank Plc with a vault location in London. There is also a GBP variant of PHPM called PHPP. Again, just ignore PHPP in this analysis.
ETFS Metal Securities Limited (MSL) officially reports all of its precious metals holdings in the same report (which it reports on each trading day). Since PHAG and PHPM are part of MSL, PHAG and PHPM silver bar holdings are reported together. According to the MSL weight list, as of 30 June 2017, MSL held 62,427 London Good delivery silver bars containing 60,280,155 troy ounces of silver(1875 tonnes). The individual ETFs within MSL also report their own holdings. However, there is a slight mismatch between dates on the individual fund pages and the date in the MSL spreadsheet with PHAG and PHPM reporting 29 June, while MSL has reported 30 June.
It’s not a big deal though. As of 29 June, PHAG held 58,777,148 troy ozs of silver (1828.2 tonnes) and PHPM held 1,480,037 troy ozs of silver (46 tonnes), which together is 60,257,185 troy ounces of silver (1874.25 tonnes), which is very close to the MSL reported number. Overall, PHAG holds 97.5% of the silver that is held in MSL, and PHPM only holds about 2.5% of the silver held in MSL.
Now, here’s the crux. While MSL uses HSBC Bank Plc in London as custodian for its silver, HSBC also uses Malca Amit London as sub-custodian, and the Malca Amit vault holds more than twice the amount of MSL silver (i.e. predominantly PHAG silver) than the HSBC vault. MSL’s reported silver holding are distributed as per the following table:
MSL holds 62,427 London Good Delivery silver bars in LBMA vaults in London, containing 60.28 million ounces of silver (1875 tonnes of silver). The Malca Amit vault stores 42,917 of these bars (1283 tonnes), and a HSBC vault stores another 19,510 silver bars (592 tonnes).
Inspectorate is also the independent auditor for the silver held by MSL. According to the latest Inspectorate audit letter, dated 3 March 2017 but referring to an end audit date of 31 December 2016, the silver in MSL was held in the vaults of HSBC Bank plc, London and at the vaults of Malca-AmitLondon.
ETFS Metal Secs. Australia Ltd (MSAL) – PMAG & PMPM
ETFS Physical Silver (PMAG), domiciled in Australia, is an ETF which only holds silver, and holds this silver in London with custodian HSBC Bank plc at a vault location in London. Note: ETF Securities officially refers to PMAG as ETPMAG.
ETFS Physical PM basket (PMPM) is a precious metals Basket ETF that also holds gold, platinum, and palladium, in addition to silver. The custodian of PMPM is HSBC Bank plc with a vault location in London. Note: ETF Securities officially refers to PMPM as ETPMPM.
In a similar way to UK domiciled MSL, MSAL (the ETFS Australian company) reports on all of its precious metals holdings in one daily spreadsheet including the silver in PMAG and PMPM. As of 30 June 2017, MSAL held 2754 silver bars in a HSBC vault in London, containing 2,664,690 troy ounces of silver (82.88 tonnes of silver).
Of the 2,664,690 ounces of silver held by MSAL, over 98%, or 2617,229 ounces, is held by PMAG, with less than 2% held in PMPM (47,362 ounces). The actual figures are 98.22% vs 1.78%. This means that PMAG roughly holds 2705 silver bars, and PMPM holds 49 silver bars.
Inspectorate is, not surprisingly, also the independent auditor for MSAL’s metal holdings, and as per the latest audit letter for record date 31 December 2016, the silver bars audit location is stated as having been “HSBC Bank plc, London“.
The latest silver bar weight list spreadsheet for the ETFS Silver Trust (SIVR), dated 29 June, which is titled “HSBC US Silver Bar List”, states that the SIVR Trust holds 21,437 silver bars containing 20,363,315 troy ozs of silver (633.4 tonnes of silver). There is no mention of SIVR holding any of its silver with a sub-custodian. The latest independent audit report for SIRV, by Inspectorate, for an audit reference date of 31 December 2016, states that the audit took place “at the vault of HSBC Bank plc, London (the “Custodian”)“, where Inspectorate found “20,108 London Good Delivery Silver Bars with a weight of 19,171,492.300 troy ounces.”
The latest silver bar weight list for the ETFS Precious Metals Basket Trust (GLTR), also dated 29 June, and which is titled “JPM Precious Metals Basket Bar List“, states that the GLTR Trust holds 5,670 silver bars containing 5,496,035 ozs of silver (~ 171 tonnes of silver).
However, while 85% of these bars (144.5 tones of silver) are stored in the ‘JP Morgan V‘ vault, 15% of the silver bars (26.5 tonnes of silver) are stored in a ‘Brinks 2‘ vault. So according to GLTR naming convention, as there is a ‘Brinks 2′ vault, presumably when it was first named, there was also a ‘Brinks 1′. ‘Brinks 2′ could possibly be referring to the same location as the ‘Brinks London A’ vault.
Inspectorate is also the independent auditor for the precious metals held by GLTR. In the latest Inspectorate audit letter for GLTR, with an audit reference date of 31 December 2016, Inspectorate states that its audit was only conducted “at the vault of J.P. Morgan Chase N.A, London (the “Custodian”)” where it counted “4,873 London Good Delivery Silver Bars“. This probably means that GLTR’s holdings of silver bars in the ‘Brinks 2′ vault are quite recent, i.e. they have been acquired since 31 December 2016.
SOURCE – Physical Silver P-ETC
A silver-backed ETF offered by the ETF provider ‘SOURCE’, which is named the Physical Silver P-ETC, holds its silver bars in a London vault of custodian JP Morgan. The SOURCE ETF platform was originally established in 2008 as a joint venture between Goldman Sachs, Morgan Stanley, and Merrill Lynch.
The latest silver bar weight list for the Physical Silver P-ETC (dated 23 June) states that it holds 3,129,326 troy ounces of silver (97.34 tonnes of silver). The list does not state an exact bar count, but looking at the weight list, there are about 3,237 silver bars listed.
Inspectorate is also the independent auditor for the Physical silver P-ETC. The latest Inspectorate audit letter, conducted on 4 January 2017, states that at that time, this ETF held 2,048 silver bars containing 1,982,343 troy ounces of silver. This is interesting because about a week ago, this SOURCE Physical silver P-ETC held about 4 million ozs of silver. Now it holds 3.1 million ounces of silver, and at the start of the year it held under 2 million ounces of silver. So the quantity of silver held in this SOURCE silver ETF fluctuates quite dramatically.
Deutsche Bank ETFs
There are 3 ETCs listed on the Exchange Traded Commodity (ETC) section of the Deutsche Asset Management website which hold physical silver in London. These 3 ETCs are as follows:
db Physical Silver ETC
db Physical Silver ETC (EUR)
db Physical Silver Euro hedged ETC
The Factsheets for these 3 Deutsche ETCs all list the custodian as “Deutsche Bank”, but list the sub-custodian as “JP Morgan Chase Bank”. For example, the Factsheet for the db Physical Silver ETCstates
“Custodian/Sub-custodian: Deutsche Bank AG/JP Morgan Chase Bank N.A.”
Shockingly, there do not seem to be any recent independent audit documents for any of these Deutsche ETCs anywhere on the Deutsche Asset Management website. The latest ‘Inventory Audit’ document in the ‘Download Center’ of the website is dated November 2012. That audit document can be viewed here. The old audit document stated that on 25 September 2012, ‘DB ETC Plc’ held 13,314 silver bars containing 13,040,194.3 troy ounces of silver (405.6 tonnes of silver), and that the audit was conducted at ‘Custodian and Location‘ of ‘JP Morgan Chase Bank, N.A. London‘. I have scanned the entire website and there is no sign of any other audit documents or any silver bar weight list.
The initial metal entitlement for units issued in each of these 3 ETCs was 10 troy ounces per unit. The latest units issued figures from Deutsche (dated 22 June 2017) for these ETCs is as follows:
db Physical Silver ETC: 277, 500 units issued
db Physical Silver ETC (EUR): 533,000 units issued
db Physical Silver Euro hedged ETC: 878,000 units issued
Total units issued for silver-backed db ETCs = 1,688,500 units
This would mean that in total, these 3 ETCs would have had an initial metal entitlement of 16,885,000 troy ounces of silver. However, due to what looks like operational fees being offset against the metal in these ETCs (i.e. selling silver to pay fund expenses), the effective metal entitlement for each of the 3 ETCs is now stated on the Deutsche website as being less than 10 troy ounces.
For db Physical Silver ETC, the entitlement is 9.6841 ounces. For db Physical Silver ETC, the entitlement is 9.6930 ounces and for db Physical Silver Euro hedged ETC the metal entitlement is a very low 7.9893 ounces.
Therefore, the amount of silver backing these ETCs looks to be (277500 * 9.6841) + (533000 * 9.693) + (878000 * 7.9893) = 14,868,312 troy ounces = 462.5 tonnes. Since there is no bar count, an approximate bar count assuming each bar weighs 1000 oz would be 14,870 Good Delivery silver bars.
Since there are no audit reports and no silver bar weight list for these ETCs, it’s difficult to know if real allocated silver in the form of London Good Delivery silver bars is backing these Deutsche Bank db ETCs, let alone trying to figure how many silver bars are in a JP Morgan vault in London backing these Deutsche products. We can therefore use 462.5 tonne for Deutche but with a caveat that there is no current silver bar weight lists or independent audit documents.
Total ETF Silver held in London LBMA Vaults
Adding up the silver held in the 11 ETFs profiled above yields the following table. In total, the 11 ETFs hold approximately 12,041 tonnes of silver (387.2 million troy ounces) across 4 vault operators. Brinks vaults hold 48% of the total, and JP Morgan vaults hold another 30%. HSBC and Malca Amit hold about 11% each of the remainder.
ETF Silver Holdings – Tonnes, for Silver stored in London LBMA Vaults
In terms of London Good Delivery silver bars, these 11 ETFs hold approximately 400,000 of these silver bars. Since the 3 Deutsche ETFs (ETCs) don’t have an available bar list, I converted the assumed troy ounce holdings to bar totals by assuming each bar held weighs 1000 ozs. Brinks stores over 191,000 of these Good delivery silver bars. That equates to nearly 6,400 pallets with 30 silver bars per pallet. If the pallets were stacked 6 high, and arranged in a square, that would be an area 32 pallets long by about 33 pallets wide. In addition, Brinks may also store silver on behalf of HSBC, or even on behalf of JP Morgan. Who knows?
According to the latest numbers on the BullionVault website (Daily Audit), BullionVault has 349,939.57 kgs of silver stored in London. That equates to 11,250,557 troy ozs of silver, or 350 tonnes of silver. This silver is stored in the form of London Good Delivery Silver Bars. According to the BullionVault website, BullionVault use Loomis as a custodian for storing silver bars in London:
Those with a BullionVault login can go in and view BullionVault’s latest silver bar weight list which has been generated by Loomis, but BullionVault don’t allow this list to be published externally. Suffice to say, the latest list, dated 11 May, lists 11,544 silver bars which are stored across nearly 400 pallets.
The GoldMoney website has a real-time audit page which currently states that GoldMoney has 202,057.614 kgs of silver. That equates to 6,496,153 troy ozs of silver, or 202 tonnes of silver stored in London. This silver is also stored with Loomis. At least some of this silver and probably a lot of it is in the form of London Good Delivery silver bars. Without being able to log in to the site properly, it’s not possible to see a bar list.
So between them, BullionVault and GoldMoney have 550 tonnes of silver stored in Loomis vaults in London. My guess is that Loomis (formerly Viamat) store precious metals in a warehouse in Shepperton Business Park, Govett Avenue, Shepperton, a warehouse which is in the corner of the business park, beside the railway track.
Adding this 550 tonnes of silver to the 12040 tonnes of silver held by the 11 ETFs above gives a figure of 12,590 tonnes. Let’s call it 12,600 tonnes. This is then the lower bound on the amount of physical silver in the LBMA vaults in London.
Thomson Reuters GFMS – “Custodian Vault” silver
On its ‘Silver Supply’ web page, the Silver Institute website has an interesting data table titled “Identifiable Above-Ground Silver Bullion Stocks” which lists 5 categories of above-ground silver stocks, namely ‘Custodian vaults’, ‘ETPs’, ‘Exchanges’, ‘Government’, and ‘Industry’.
What’s notable and striking about this table is that the ‘Custodian Vaults‘ category for 2016 amounts to a very large 1571.2 million troy ounces of silver (50,440 tonnes), and also the fact that this ‘Custodian vaults’ category is distinct from silver held in ‘Exchanges’ (such as COMEX and TOCOM) and ETPs / ETFs (such as the ETF products discussed above). The ‘Custodian Vaults’ category also does not include ‘Government’ stockpiles or ‘Industry’ inventories. The actual table and the data in the table are sourced from the Thomson Reuters GFMS “World Silver Survey” 2017 edition. As you will see below, this ‘Custodian Category’ refers to holdings of silver which are not reported, but which are stored in custodian vaults, including in the London vaults. This category therefore needs to be examined in the context of the LBMA’s imminent reporting of silver holdings in the LBMA London vaulting system.
You can also see from the above table that this 2016 Custodian Vaults figure of 1571.2 million ozs (50,440 tonnes) grew from a 2008 total of 615.6 million ozs (19,148 tonnes), so in eight years has risen more than 250%.
On pages 37-38 of this GFMS World Silver Survey 2017 (pdf – large file), GFMS makes some very interesting assertions. GFMS starts by defining what it calls Identifiable silver bullion stocks. It states:
‘Identifiable bullion stocks can be split into two categories: unreported GFMS stock estimates that are based on confidential surveys and field research; [and secondly] stocks that are reported.
“Unreported stocks include the lion’s share of our government category and our custodian vault category.”
“Reported inventories are predominantly held in ETPs..but also include some of the government and industry stockpiles.”
However, in the accompanying commentary to the above table, GFMS classifies all ETP, Exchange and Industry holdings as “Reported“, and all Custodian Vaults and Government holdings as “Unreported“. Therefore, it is useful to regroup the 2016 figures from the above table into a Reported category and an Unreported category, as the GFMS commentary then makes more sense. A regrouped table of the 2016 data is as follows, and illustrates that ‘Custodian Vault’ holdings of silver (none of which are reported) account for a whopping 61% of all above ground silver:
A GFMS bar chart in the 2017 World Silver Survey also underscores the dominant position of these (unreported) ‘Custodian Vault’ holdings:
GFMS goes on to say that in 2016 “Reported stocks were 36% of identifiable stocks“. Conversely, we can see that ‘Unreported’ silver stocks (Custodian Vaults and Government) were 64% of identifiable stocks.
GFMS says that for 2016 “71% of reported stocks were ETPs“, the rest being Exchange and Industry classifications. Exchanges refers to silver held in warehouses of COMEX (NY), TOCOM (Japan) and the SGE and SHFE (China). COMEX is currently reporting 209 million ouzs of silver in its approved warehouses in New York, of which 172 million ozs in Eligible and 37 million ozs is in the Registered category.
Interesting, but on a side note, GFMS also states in its 2017 silver report that as regards COMEX silver inventories:
“Eligible stocks reported by COMEX contain a portion that is allocated to ETPs”.
“At the end of 2016, the portion of COMEX Eligible stocks that was allocated to ETPs was around 16% of total COMEX eligible stocks.”
This will probably be an eye opener for those interested in COMEX silver warehouse stocks.
Addressing ‘Custodian Vault‘ stocks of silver, GFMS says that Europe’s share of Custodian Vault stocks was 488.7 million ozs (15,201 tonnes) in 2016 and accounted for 31% of total Custodian Vault stocks. Asian ‘Custodian Vault’ stocks of silver were just over 50% of the total with the remainder in North America (Canada and US).
Silver holdings in Custodian Vaults by Region, 2007 -2016. Source – GFMS World Silver Survey 2017
But what do these ‘Custodian Vault’ stocks of silver refer to?
GFMS does not provide a detailed answer, but merely mentions a number of examples, which themselves vary by region. For Asia GFMS says “the bulk of these stocks are located in China, and reflects stocks held in vaults at banks“, and also ” other parts of Asia, such as Singapore, have been increasing in popularity for storage of bars and coins in recent years“, while in India “global bullion banks increasingly seeking this location as a strategic point for silver vaulting in case the need arises.” There are also silver “stocks in Japan”. From a BullionStar perspective, we certainly are aware that there is a lot of silver bullion in vault storage in Singapore, so the GFMS statement is accurate here.
In North America, GFMS attributes the “growth in silver custodian vaulted stocks not allocated to ETPs” to a “drop in coin sales in North America last year“. In the 2016 edition of the World Silver Survey, GFMS said that the growth in custodian vault holdings was partially due to “the reallocation by some North American investors from their ETP holdings” [into custodian holdings].
Turning to Europe, GFMS says that the growth in Custodian vault silver holdings “can be attributed to increased institutional investor interest“. Therefore, according to GFMS, institutional investors in Europe are buying silver and holding real physical silver in Custodian vaults.
With 488.7 million ozs (15,201 tonnes) of silver held in Europe in ‘Custodian vaults’ that is not reported anywhere, at least some of this silver must be held in London, which is one of the world’s largest financial centers and the world’s highest trading volume silver market.
“Custodian vault stock data excludes ETP Holdings, but it is important to note that most custodians of ETP silver stocks also store silver in vaults that are not allocated to ETPs. the same is true of futures exchange warehouses.”
So how much of this 15,201 tonnes of ‘Custodian Vaults’ silver that is said to be in Europe is actually in London vaults? Apart from London, there would presumably also be significant physical silver holdings vaulted in Switzerland and to a lessor extent in countries such as Germany, the Netherlands and maybe Austria etc. So whats’s a suitable percentage for London? Given London’s extensive vaulting network and prominence as a hedge fund and institutional investment centre, a 40-50% share of the European ‘custodian vault’ silver holdings would not be unrealistic, with the other big percentage probably vaulted in Switzerland. This would therefore put previously ‘Unreported’ silver holdings in the London vaults at between 6080 tonnes and 7600 tonnes (or an additional 182,000 to 230,000 Good Delivery Silver bars).
Adding this range of 6080 – 7600 tonnes to the 12,040 tonne figure that the 11 ETFs above hold, gives a total figure of 18,120 – 19,640 tonnes of silver stored in the LBMA vaults in London (545,000 – 585,000 Good Delivery silver bars).
Note, BullionVault and GoldMoney silver is technically part of the ‘Custodian Vault’ figure, so can’t be counted twice.
ps: In its 2017 World Silver Survey, GFMS also stated that in 2016, ETPs (ETFs) held 664.8 million ounces of silver “with 75% of the total custodian vaulted stocks [that were] allocated to ETPs held in Europe and 24% in North America. Asia makes up the balance of less than 1%.“. This would mean that as of the date of the GFMS calculation for 2016, 498.6 million ounces of ETF silver was vaulted in Europe.
Above, I have accounted for 387.1 million ounces of silver that is currently stored in London on behalf of 11 ETFs. There are also 3 Swiss Silver ETFs which store their silver in Switzerland. These are ZKB (currently with 74.9 million ozs), Julius Baer (currently with 13.7 million ozs) and UBS (currently with 5.89 million ozs), giving a total of 94.49 million ozs of silver for these 3 Swiss based platforms. Therefore, between London vaults and vaults in Switzerland, there are currently 14 ETFs that together hold 481.6 million ounces of vaulted silver (14,980 tonnes of vaulted silver).
When the LBMA finally manages to publish its first report on the silver and gold stored in the LBMA vaults in London in the coming days, we will have a clearer picture of how much physical silver is actually in these mysterious and opaque vaults.
A lower bound based on ETF holdings and BullionVault and GoldMoney holdings would be about 12600 tonnes of silver. A higher bound that also reflects ‘Custodian Vault’ holdings could be in the region of 18120 – 19640 tonnes of silver. There would probably also be some LBMA bullion bank float, which may or may not be included in ‘Custodian Vault’ figures, that could push the silver total to over 20,000 tonnes or more.
The LBMA perennially claims that it wants to bring transparency to the London precious metals market. This has been a very hollow mantra for a long time now. However, while some of the LBMA members may want this transparency, others, possibly some of the powerful bullion banks or their clients, certainly don’t want transparency. Take a case in point. At the Asia Pacific Precious Metals Conference (APPMC) in Singapore in early June, the LBMA CEO in a speech to the conference talked about the difficulty of even getting a press release out about the upcoming publication of gold and silver vault holdings data. She said (fast forward to 8:37 in the below video):
“It was actually a huge achievement just to get the press release out.”
For what is supposed to be a mature and efficient financial marketplace, this is a truly bizarre occurrence, and it must be pretty obvious that some of the vested interests in the London gold and silver markets needed to be dragged kicking and screaming over the finish line as regards being in any way open about how much gold and silver is actually in these LBMA London vaults.
But now, according to the LBMA CEO in the same part of her speech, even so-called “credible investors” (as opposed to uncredible investors?) also “find it a little odd that as a marketplace, there’s no data“, which may explain the vampires within the LBMA being dragged into the daylight.
Hopefully with the above analysis and the upcoming aggregated LBMA silver vaulting numbers, these “credible investors” (and the hundreds of millions of other silver investors around the world) will now be less in the dark about the amount of silver in the London LBMA vaulting network, and will now have better information with which to make investment decisions when buying silver and selling silver.
Infographic website Visual Capitalist recently published an eye-catching infographic on behalf of Sprott Physical Bullion Trusts which featured 4 well-known billionaire investors and their supposed investments in gold. The infographic is titled “Why the World’s Billionaire Investors Buy Precious Metals” and can be seen here.
The 4 investors profiled in the infographic are:
Jacob Rothschild (Lord), chairman of London-based investment trust RIT Capital Partners Plc
David Einhorn, president of Manhattan-based hedge fund firm Greenlight Capital
Ray Dalio, chairman and CIO of hedge fund firm Bridgewater Associates, Westport (Connecticut)
Stanley Druckenmiller, chairman and CEO of Manthattan-based Duquesne Family Office (and formerly of Duquesne Capital Management)
Overall, four very famous investors, and four names that should at least be vaguely familiar to almost anyone who has a passing interest in financial markets and investing.
For each of the 4 billionaires, the Sprott infographic provides a few quotes about their views on gold and then moves on to record their recent ‘Moves’ into ‘gold’, or in some cases their recent readjustments of existing ‘gold’ exposures.
However, the trouble with this infographic is that although it’s visually appealing, nowhere does it mention how these famous investors achieve their exposures to ‘gold’, i.e. what form their gold investments take.
This is something which is also regularly bypassed in financial media articles, especially those published by Bloomberg, articles which refer to hedge fund managers such as Druckenmiller, or John Paulson, or Ray Dalio buying ‘gold’, but which all too often are too lazy to do basic research into the actual trades that these hedge fund managers execute to acquire their positions in ‘gold’ and whether these positions are actually in real physical gold or in some form of synthetic or derivative or paper gold.
In fact, the first comment posted on the Visual Capitalist website under said Sprott infographic when it was published asks exactly this question:
“I’d like to know if they are holding physical bullion, presumably in guarded safe vaults, or just paper.”
Given that the infographic is ‘Presented by’ Sprott Physical Bullion Trusts, one might assume that Rothschild, Einhorn, Dalio and Drukenmiller are all investing in physical bullion.
But are they? This is the question I set out to answer and which is documented below. Some of my findings may surprise you.
The Rothschilds: Jacob & RIT Capital Partners
First port of call, the Rothschilds of St James’s Place in London. Given that the Rothschilds are probably the richest family in the world and have been involved in the gold market for hundreds of years, you might assume that the family of the Five Arrows knows a thing or two about the difference between real gold bars and paper gold. And presumably they do. However, no one seems to have told this to the day-to-day managers of RIT Capital Partners Plc, the Rothschild controlled investment vehicle quoted in Sprott’s infographic.
Investment trusts are actually public limited companies (Plcs) which are structured as closed-ended investment vehicles. These vehicles issue a certain number of shares that can then be publicly traded. RIT Capital Partners plc, formally called the Rothschild Investment Trust (hence the name RIT), trades on the London Stock Exchange. Jacob Rothschild (The Lord Rothschild) is chairman of RIT Capital Partners Plc.
As a publicly traded vehicle, RIT Capital Partners Plc publishes annual and half-yearly reports, and is therefore more transparent than its hedge fund brethren. RIT’s latest report, an annual report for year-end 2016, was published on 28 February 2017.
Strangely, although the Sprott infographic was only published on 7 June 2017, it quotes not from the annual report for year-end 2016 but from RIT’s half-yearly report to 30 June 2016, which was published on 15 August 2016.
The Sprott infographic states:
“In a 2016 shareholder update [Jacob] Rothschild outlined bold changes to the RIT Capital Partners’ portfolio, including…increased exposure to gold and precious metals to 8%”
Similarly, in the RIT Chairman’s Statement (page 2) of the 30 June 2016 report, Jacob Rothschild said “We increased gold and precious metals to 8% by the end of June.”
Glancing at either the Chairman’s statement or the Sprott infographic, you might think ‘ok, so RIT holds (or held) 8% of its portfolio in gold and precious metals’. However, this is not the case, a fact which becomes clear when we look at the Investment Portfolio (holdings) of RIT that are detailed in the same report.
RIT is a global investment fund whose holdings span equities, hedge fund investments, private investments, real assets, credit, and bonds. It’s ‘gold’ and ‘precious metals’ holdings are listed under ‘Real Assets’. The entire RIT portfolio is worth £2.73 billion.
The Real Assets section of the RIT report to 30 June 2016 (on page 6 of the report, page 8 of the pdf) lists relevant gold-related line items as:
“BlackRock Gold & General Fund”, described as “Gold and precious metal equities”, valued at £22.9 million, and representing 0.9% of the NAV, with a fund weight of 0.83%
“Gold Futures” with a description “Long, 6.0% notional“, valued at £7.6 million, represents 0.3% of the NAV
“Silver Futures with a description “Long, 1.2% notional” valued at £7.6 million, representing 0.0% (rounded) of the NAV
These are the only gold-related investments in the entire RIT portfolio. Therefore, could this 8% that Jacob Rothschild refers to as “we increased gold and precious metals to 8% by the end of June” be a combination of a 6% notional long on gold futures, a 1.2% notional on long silver futures, and a 0.8% fund weight in gold mining equities through the BlackRock Gold & General Fund holding?
In short, the answer is Yes.
Firstly, looking at the BlackRock Gold & General Fund, this is a UCITS equity fund which exclusively invests in the shares of gold and silver mining companies such as Newcrest, Newmont, and GoldCorp and which is benchmarked against the FTSE Gold Mining Index (an equity index). However, the BlackRock website reminds us that “The Fund does not hold physical gold or metal.” Like all equity investments, this fund exposes its holders to equity risk, currency risk, sectoral risks (in this case the mining sector), possible gold hedging risks, and the general corporate risks that come with stock specific investing in any publicly quoted company, some of which cannot be diversified through portfolio investing.
Next up are the precious metals futures line items. In investment portfolios, notional is literally the gross exposure of a position. In this case, the RIT portfolio being long 6.0% notional in gold futures just means that the portfolio’s notional exposure to gold (via the gold futures position) represented (on 30 June 2016) an amount which was 6.0% of the total (gross) exposure of the portfolio. This is also a leveraged position since it was acquired via the purchase of exchange traded futures and the maintenance of these futures via margin. The amount reflected in the NAV for this position just refers to the margin.
I also checked with RIT investors relations as to whether Jacob Rothschild, when he stated that RIT holds gold, was actually referring to these gold futures positions. RIT investor relations responded:
“Yes, we do refer to long gold futures exposure as “holding gold”. We take this view since we are confident that gold futures are acting as a suitable proxy for gold both from a regulatory perspective and in terms of where we are in the cycle.
However, it should be clear to all that holding gold futures is not the same thing as holding vaulted physical gold. Gold futures may provide exposure to the US Dollar price of gold, but that’s about it, and even if they can be theoretically exercised into physical gold on the COMEX or ICE platforms, no one uses them for this purpose. For example, only 0.04% of COMEX gold futures contracts result in physical delivery each year.
Gold futures also entail exchange risk, risk of not being able to exercise for delivery, margin risk, forced cash settlement risk, etc etc. Gold futures are also derivatives that can come into existence in massive quantities as long as there are counterparties to take the other side of the futures trades.
Allocated physical gold on the other hand is an asset which exists in limited quantities, has no counterparty risk, has intrinsic value and has been used as money and as a store of value for thousands of years.
The “regulatory perspective” that RIT refers to just seems to mean that the fund’s exposure ticks various compliance boxes and is an acceptable security from a compliance and regulatory perspective.
The “where we are in the cycle” phrase probably refers to the interest rate cycle in terms of interest rate movements, inflation, real interest rates etc, but surely this is irrelevant because if you really believe that gold futures prices are a perfect proxy for gold prices, then the existence of a “cycle” and the phases of such a cycle become irrelevant to the investment decision?
In summary, it should be clear that RIT Capital Partners Plc does not hold any gold or other precious metals, because it merely holds gold futures and units in a BlackRock fund which itself only holds gold and silver equities (common shares) and which does not hold physical gold.
Just for completeness, let’s turn to the latest annual report from RIT for year-end 2016 that Sprott did not refer to. Has anything changed compared to 30 June 2016? At year-end 2016, according to Jacob Rothschild:
“We continue to hold gold and gold mining shares amounting to 6% of the portfolio.“
Therefore, by the end of 2016, by RIT’s logic, it now had a 6% exposure to gold (and the exposure to silver futures had disappeared). However, as per the 6 month earlier period, this was really a) exposure to the US dollar price of gold via gold futures and b) an exposure to the common equity of publicly-traded gold mining companies through the BlackRock fund investment.
In the Real Assets section of the RIT annual report (page 13 of the report, page 15 of the pdf), it lists:
“BlackRock Gold & General Fund”, with a description “Gold and precious metal equities” valued at £20.3 million, representing 0.9% of the NAV, and with a fund weight of 0.7%
“Gold Futures” with a Description “Long, 5.7% notional” representing (0.2%) of the NAV
Again, the 6% Rothschild reference includes the 5.7% long notional on gold via the gold futures, the BlackRock fund with a weight of 0.7%, and possibly the (0.2%) NAV (margin), which altogether net to approximately 6% when rounded down. Since 8% sounds better than 6%, Sprott may have chosen to reference the 30 June 2016 RIT report and not the more recent 30 December 2016 RIT report as this would make Rothschild appear more bullish on gold.
David Einhorn and Greenlight Capital
Hedge funds by their nature are very secretive, and because they are private pools of capital, they have no obligation to report detailed holdings even to their clients, let alone to the general public. Some of the justifications for hedge fund secrecy include preventing other trading parties adversely trading against them and preventing competitors replicating their positions. Note, hedge funds still have to report equity holdings to the US SEC and they do this via their quarterly 13F form submissions, which can be viewed on the SEC EDGAR website about 6 weeks after quarter end.
Sometimes hedge fund stars will drop hints about some of their positions or engage with the financial media, but this is mainly to talk their positions and trading books up. Often however, the “partner letters” (similar to shareholder letters) that hedge fund partnerships send to their clients / investors will give some indication as to their positions and asset allocations, and for whatever reason, some of these letters seem to make it into the public domain pretty quickly. Note that most hedge funds are established as Limited Liability Companies (LLCs), a structure which supports the partnership model.
Following Jacob Rothschild, next up on the Sprott infographic is hedge fund manager David Einhorn and his Greenlight Capital hedge fund firm. Greenlight, as a hedge fund firm, runs a series of funds that invest in equity, debt etc but also include global macro and that are known as the “Greenlight Capital funds” a.k.a. “The Partnerships”. There are at least 6 funds in this group, maybe more.
The Sprott infographic refers to a recent gold-related ‘Move’ that Einhorn that made as follows:
“In early 2017, Einhorn mentioned on an earnings call that he was:…Keeping gold as a top position”
“Gold remains a long-term position with a thesis that global fiscal and monetary policies remain very risky”
So we can assume that Einhorn maintains a gold exposure of some sort. Since there was no information in the above partner letter as to what exactly Greenlight refers to as a gold position, and nothing that I could find on the web, I did what any junior Bloomberg reporter should but doesn’t do, and shot off an email to Greenlight asking how Greenlight Capital attains its long gold exposure? Surprisingly, or maybe not, within about 20 minutes Greenlight answered with a short and sweet one-liner:
“We hold physical allocated gold in all our funds.”
This response came from the top of the Greenlight tree, close to Einhorn. Hint David Einhorn only follows three accounts on Twitter, one of which is Donald Trump another of which is the Einhorn Trust. So now we know that at least one major hedge fund firm holds physical allocated gold.
On a side note, Greenlight also offers two funds called Greenlight Capital (Gold), LP and Greenlight Capital Offshore (Gold), Ltd. These two funds actually offers investors a gold class which denominates investments in that class in gold rather than USD. This is similar to a USD denominated fund offering shareholders a EUR or CHF class, the only difference being that this class is in gold.
Ray Dalio and Bridgewater
Bridgewater Associates, based in Westport in Connecticut, runs some of the largest and most well-known individual hedge funds such as the global macro Pure Alpha as well as other well-known funds called ‘The All Weather’ and ‘Pure Alpha Major Markets’. Ray Dalio is founder, chairman and chief investment officer (CIO) of Bridgewater.
In the Sprott infographic, the gold ‘Move’ which they chose to highlight Dalio for was that:
“In 2016, Dalio said it is prudent to have a ‘well-diversified portfolio’ that is 5-10% gold”
However, unlike the other investors profiled, i.e. Rothschild, Einhorn, and Druckenmiller, who had investment decisions attributed to them that involved taking or extending long positions, there is nothing, at least in the infographic, that refers to Dalio taking on or amending a gold position.
“And so gold is one of the currencies. So we have dollars, we have euros, we have yen and we have gold.”
“Now, it [gold] doesn’t have a capacity — the capacity of moving money into gold in a large number is extremely limited.”
“I think … there’s no sensible reason not to have some — if you’re going to own a currency, … it’s not sensible not to own gold”
“I don’t want to draw an inordinate amount of attention to gold”
“a certain limited amount, at least passably, should be in gold, just like you would hold a certain amount in cash”
“Now, it depends on the amount of gold, but if you don’t own, I don’t know, 10 percent in — if you don’t have that and then it depends on the world, then you — then there’s no sensible reason other than you don’t know history and you don’t know the economics of it.”
Dalio frequently, in various forums, demonstrates his understanding of the historical importance of gold in the monetary system. Based on the language that Dalio uses about capacity of the gold market and his appreciation of the history of gold, my hunch is that Bridgewater does hold physical gold in a similar manner to how Greenlight Capital holds gold.
Although it is quite tricky to contact Bridgewater, I did manage to find Dalio’s email (somehow or other) and like an aspiring Bloomberg reporter (or not), I shot off an email to Dalio asking:
“DoesBridgewater hold physical gold in its funds (e.g. Pure Alpha, All Weather, and Pure Alpha Major Markets) or some other type of long gold exposure?”
The same day, I received back an automated response:
Message from "Ray Dalio"
I recognize from your email address that this is the first message I have received from you since Bridgewater Associates began using Sender Address Verification (SAV).
Your message is very important to me. Like you, we are very concerned with stopping the proliferation of spam. We have implemented Sender Address Verification (SAV) to ensure that we do not receive unwanted email and to give you the assurance that your messages to me have no chance of being filtered into a bulk mail folder.
By pressing REPLY and SEND to this message your original message will be delivered to the top of my inbox. You need only do this once and all future emails will be recognized and delivered directly to me.
However, after replying as per the instructions above using the verification address, there was no further response from Bridgewater. Maybe he is on vacation!
So the jury is still out on how Bridgewater acquires its exposure to gold, assuming that its funds actually have exposure to gold. But my guess is that at least some of Bridgewater’s funds do hold gold, and probably hold real physical allocated gold.
Stanley Druckenmiller and Duquesne
Finally, the Sprott infographic features Stanley Druckenmiller, founder and former chairman and president of Pittsburgh-based Duquesne Capital Management, and also former portfolio manager of Soros’ Quantum Fund. In 2010, ‘Stan’ Druckenmiller wound down Duquesne Capital since he claimed it was becoming harder to deliver consistently high returns, but he continued to manage his own wealth through Duquesne Family Office LLC, which is based out of Manhattan.
According to the infographic, in early 2017 Druckenmiller said:
“Gold was down a lot, so I bought it.”
Stan Druckenmiller, Duquesne
This quote was reported in a 8 February 2017 Bloomberg article which itself was based on a CNBC interview from 7 February:
“I wanted to own some currency and no country wants its currency to strengthen,” Druckenmiller said Tuesday in an interview. “Gold was down a lot, so I bought it.”
As per usual, Bloomberg doesn’t bother to find out or mention what form of gold exposure Druckenmiller was referring to in that interview.
Strangely, Bloomberg says that Druckenmiller bought gold in late December and January having previously sold his ‘gold’ on election night in November when Trump was elected. I say strangely because Druckenmiller is known for getting his US dollar ‘gold exposure’ via the gold-backed ETF the SPDR Gold Trust (GLD) however, the Duquesne Family Office 13F filings with the SEC don’t show GLD activity in Q4 2016 or Q1 2016.
Looking at recent Duquesne Family Office 13F filings which show reportable equity holdings (including GLD since GLD is a listed security and is basically like a share), the last time Duquesne Family Office had a long exposure to the SPDR Gold Trust was in Q1 2016 when it held 2,016,000 call options on the SPDR Gold Trust (Cusip 78463V907) which at the time had a notional exposure of $237.16 million. Druckenmiller had purchased 2,880,000 call options on GLD during Q2 2015 but reduced this to 2,016,000 calls during Q1 2016. Duquesne has not held any SPDR Gold Trust shares or options since Q1 2016.
However, looking at the Duquesne 13F filings for Q3 2016, Q4 2016 and Q1 2017, there are some interesting changes in reported holdings of some gold mining equities over this period.
The timing of Druckenmiller saying that he sold his ‘gold’ on election night in November 2016 and the bought gold in late December 2016 and January 2017 fits very well with the Duquesne trades of selling Barrick Gold and Agnico Eagle so that they appeared in the Q3 13F, but not in the Q4 13F and then reappeared in the Q1 2017 13F. If this is the case, then Druckenmiller’s Duquesne does not hold gold but holds gold mining equities, and Druckenmiller’s recent references to buying gold are really references to holding common shares in publicly-traded gold mining companies.
Duquesne, however, could hold other ‘gold exposures’ such as gold futures or even real physical allocated gold. But due to the non-obligation of these investment pools to report holdings, this is unclear.
I also sent an email to Stan Druckenmiller at his Duquesne address, asking him:
“Does Duquesne Family Office hold physical gold as part of its exposure to gold within its investments, or is the exposure some other type of long gold exposure such as the gold-backed ETF GLD?”
However, as of the time of writing, Druckenmiller has not responded.
Druckenmiller’s gold exposure via GLD calls between Q2 2015 and Q1 2016 also deserves some commentary. Readers of this website will know that holding a gold-backed ETF such as GLD is not the same as owning real physical gold. Although the Trust behind GLD holds gold bars, GLD units just provide exposure to the US dollar price of gold and there is no conversion option into real gold. With GLD, the holder is a shareholder and not a gold holder. There are many other concerns with GLD, all of which are documented on a BullionStar infographic.
However, Duquesne’s ‘exposure’ is even one more step removed from gold since it was in the more of a derivative (call option) on an underlying (GLD) which itself does not provide ownership of any gold to the holder. So in some ways this could be called a second order derivative.
Paulson & Co
Although Sprott’s infographic doesn’t feature John Paulson of hedge fund firm Paulson & Co, maybe it should have. However, on second thoughts maybe not, because Paulson & Co is currently the 6th largest institutional holder of SPDR Gold Trust (GLD) shares, which as explained above, is not the same as owning real physical gold. According to its latest 13F filing, Paulson & Co holds 4,359,722 GLD shares worth a sizeable $500 million.
Paulson also launched a specific gold fund in 2010 which is now called the PFR Gold Fund, named after Paulson, and the two managers who used to run the fund, namely, Victor Flores and John Reade, hence the PFR. Reade has now left Paulson & Co, and moved to the World Gold Council (WGC), which derives the majority of its revenue from…wait for it….the SPDR Gold Trust, since WGC’s 100% owned subsidiary World Gold Trust Services is the sponsor of the GLD.
RIT Capital Partners Plc claims to hold gold but really holds a) gold futures which provide notional long gold exposure and b) a BlackRock fund which invests in gold mining shares.
Greenlight Capital holds allocated gold in all of its hedge funds (and they are good about replying to emails).
Bridgewater Associates probably holds gold exposure across at least some of its funds. Given Ray Dalio’s grasp of the importance of real physical gold, I would be surprised if Dalio’s funds do not hold real physical gold. But Dalio is a hard man to track down, so the jury is still out on this one.
Stan Druckenmiller’s Duquesne Family Office had a large exposure to the SPDR Gold Trust via call options in 2015 and early 2016 but then closed this exposure. Duquesne also invests in gold mining equities Barrick Gold and Agnico Eagle Mines, and this could be what Druckenmiller is referring to when he said he sold and then bought back gold.
Paulson is a big fan of the SPDR Gold Trust, a vehicle which is in no way the same as owning physical gold, because it merely provides exposure to the US dollar price of gold.
In 2016, withdrawals of gold from the Shanghai Gold Exchange totalled 1970 tonnes, the 4th highest annual total on record. This was 24% less than SGE gold withdrawals recorded in 2015, which reached a cumulative 2596 tonnes (See Koos Jansen’s 6 January 2017 blog at BullionStar “How The West Has Been Selling Gold Into A Black Hole” for more details of the 2016 withdrawals).
SGE gold withdrawals are an important metric in the physical gold market because SGE gold withdrawals are a suitable proxy for approximating Chinese wholesale gold demand. This proxy functions well because China’s domestic gold mining production, Chinese gold imports, and most Chinese gold scrap are all sold on the Shanghai Gold Exchange. As a reminder, gold withdrawals from the SGE means actual physical gold bars withdrawn from the SGE’s network of 62 approved precious metals vaults in 35 cities across China. (See “The Mechanics Of The Chinese Domestic Gold Market” for a discussion of why this proxy works).
2017 SGE Gold Withdrawals
Year-to-date, which now includes the first four months of 2017, SGE gold withdrawals have reached 727 tonnes, which annualized equals 2181 tonnes, and would make 2017 the 3rd highest SGE vault withdrawal year on record, and only slightly behind the 2197 tonnes of registered withdrawals from the Exchange’s vaults in 2013. And since SGE gold withdrawals are a suitable proxy for wholesale Chinese gold demand, it would point to 2017 shaping up to be one of the strongest years ever for physical gold demand in the Chinese gold market.
SGE Gold Withdrawals 2008 – 2017. The 2017 figure reflects January – April inclusive. Source:www.GoldChartsRUS.com
With two-thirds of the year still to play out, annualised estimates of year-to-date gold withdrawal figures will always be approximations and will change when each successive month’s figure is added.
For example, January 2017 gold withdrawals of 184.4 tonnes suggested an annualised withdrawal figure of 2213 tonnes. February’s withdrawals as per published SGE data came in at 179.2 tonnes, implying an annualised figure of 2182 tonnes. As monthly withdrawals increased in March to 192.2 tonnes, this edged the annual estimate up to 2224 tonnes. But coincidentally, April’s SGE gold withdrawal figure brought the annual estimate back to ~2182 tonnes. This was so because combined gold withdrawals for January and February exactly equaled combined withdrawals for March and April, in both cases 363 tonnes over the two consecutive two month periods.
January + February = 184+179 = 363 tonnes
March + April = 192+171 = 363 tonnes
There is also a data discrepancy worth pointing out with the Shanghai Gold Exchange’s gold withdrawal figures for 2017. This discrepancy relates to the fact that the monthly withdrawal numbers for the 4 month period from January to April do not add up to the cumulative gold withdrawal figure for 2017 as published elsewhere on the Exchange’s website.
SGE gold withdrawals for January to April inclusive summate to exactly 727.073 tonnes.
However, in the latest (April) edition of the SGE’s monthly “Data Highlights” report, which is published in English, it states that cumulative withdrawal volume inclusive of April totalled 771.973 tonnes, which is 44.9 tonnes higher than the figure implied by the summation of the 4 individual months’ figures.
This data discrepancy has been present in the ‘Data Highlights’ report each month since February. For example, at the end of February 2017, the combined monthly withdrawals of January (184.412 tonnes) and February (179.237 tonnes) were 363.649 tonnes, but the ‘Data Highlights’ report for February stated that the cumulative withdrawal total for those two months was 378.649 tonnes. This is exactly 15 tonnesmore than the two months combined would suggest. So, it seems that there is a data issue somewhere in SGE record keeping, especially given the rounded figure nature of the discrepancy number.
The SGE March report also had an error when the monthly totals for January – March pointed to gold withdrawals of 555.899 tonnes , while the March ‘Data Highlights’ listed cumulative gold withdrawals of 524.899 tonnes, in this case exactly 31 tonnesless than the summation of the 3 monthly figures would suggest. Again, the rounded figure nature of the discrepancy number suggests a data issue somewhere in the SGE reporting system.
Until the SGE clarifies the discrepancy, its best to go with the summation of the individual month’s withdrawal figures while awaiting feedback from the Exchange.
The above chart plots cumulative gold withdrawals for the 4 months to end of April compared to similar periods in previous years, and again shows that 2017 looks set to be one of the strongest years for Chinese gold demand on record. The cumulative gold withdrawals of 727 tonnes for the January to April timeframe are the 2nd highest ‘Month 1-4′ cumulative figure on record, with only 2015 higher, when the similar figure came in at 821 tonnes.
Beginning last November and persisting into December 2016, the SGE gold price and the International gold price (as expressed in Yuan) began to diverge with the SGE gold price trading significantly higher. This created a noticeable and rapidly rising premium in the SGE gold price, and at one point in mid December this premium was $40 per ounce higher than, or over 3% above the international gold price.
This phenomenon was at the time attributed to the introduction by the Chinese authorities of more stringent restrictions on gold imports in an effort to reduce currency outflows. For example, Reuters, citing trader sources, wrote on 9 December 2016 that China was “curbing gold imports in [a] bid to limit yuan outflow”.
There were also rumours in the gold market at that time that a number of banks that had been authorised to import gold into China had lost their import licences (or that their licenses had not been renewed), and that the People’s Bank of China was also becoming stricter on the quotas of gold that it would allow banks to import in a given consignment. However, when BullionStar asked the SGE about this in December, the SGE did not reply.
Only 13 banks are authorised to import gold into China, 10 of which are local Chinese banks, and the other 3 of which are the foreign banks HSBC, ANZ and Standard Chartered.
In theory, an expansion in the SGE price premium could have been caused by a combination of limited supply or higher demand, or both. The below chart for 2016 (lower panel) illustrates the emergence of this premium in early November, with the premium rising rapidly from less than 0.5% at that time to nearly 3.5% at one point in December, but still ending the year in the 2% range. The upper panel of the chart show that same phenomenon only in terms of the relative prices of the SGE and International gold prices.
In contrast, for the 10 months of 2016 that preceded November, the premium of the SGE price to the International price was persistently very low and static from January to October 2016.
Fast forwarding to 2017, the most interestingly observation of the SGE premium since the November-December timeframe is that although the premium dropped sharply in January from the 2% range down to the 0.4% range by January month-end, it resumed a uptrend in February before spiking up noticeably again during March to levels approaching those seen in November and December.
In the case of March, it appears that premiums rose again for the very same reason that was attributed to the sharp rise in late 2016, i.e. the re-emergence of supply constraints brought on by more stringent gold import restrictions. According to Reuters in an article on the subject dated 17 March in which it quoted a Hong Kong based trader saying that:
“imports are happening, but with some restrictions. The government has been doing this since November to control the capital outflows. Now, it is becoming a bit aggressive with stringent reviews”
“The quotas are reviewed regularly and extended on a case by case basis.”
Although premiums shrank after mid-March and returned to the 1% level, they oscillated in the 1% to 0.5% range until mid-April and since then have resumed a steady rise to the 1% level, which is a very different chart to the one that persisted for most of 2016.
It therefore seems that the impact of tighter import restrictions that appeared in November and December of last year and which the rising premiums reflected was not a transitory phenomenon but instead has become a persistent feature of the Chinese gold market.
And what does this say about the Chinese authorities’ plans to liberalise the Chinese gold market since more restrictive import quotas and rules appear to be doing the opposite by undermining some of the liberalisation steps that had already been underway?
An article in February on BullionStar’s website titled “A Chink of Light into London’s Gold Vaults?” discussed an upcoming development in the London Gold Market, namely that both the Bank of England (BoE) and the commercial gold vault providers in London planned to begin publishing regular data on the quantity of physical gold actually stored in their gold vaults.
Critically, this physical gold stored at both the Bank of England vaults and the commercial London vaults underpins the gargantuan trading volumes of the London Gold Market and the same market’s ‘liquidity’. Therefore, a new vault holdings dataset would be a very useful reference point for relating to London’s ‘gold’ trading volumes as well as relating to data such as the level and direction of the gold price, the volume of gold held in gold-backed Exchange Traded Funds (ETFs), UK gold import and export statistics, and Swiss and Hong Kong gold imports and exports.
The impending publication of this new gold vault data was initially signalled by two sources. Firstly, in early February, the Financial Times (FT) wrote a story claiming that the London Bullion Market Association (LBMA) planned to begin publishing 3 month lagged physical gold storage data for the entire London gold vaulting network, that would, according to the FT:
“show gold bars held by the BoE, the gold clearing banks, and those [vaults] operated by the security companies such as Brink’s, which are also members of the LBMA.”
The “gold clearing banks” are the bullion bank members of London Precious Metals Clearing Limited (LPMCL), namely, HSBC, JP Morgan, ICBC Standard Bank, Bank of Nova Scotia – Scotia Mocatta, and UBS. HSBC and JP Morgan operate precious metals vaults in London. See profile of JP Morgan’s London vault and a discussion of the HSBC vault . ICBC Standard Bank also maintains a vault in London which is operated on its behalf by Brinks.
The second publication to address the new gold vault data was the World Gold Council. On 16 February, addressing just the Bank of England vaults, the World Gold Council wrote in its Gold Investor publication that:
“The Bank of England is, for the first time, publishing monthly data revealing the amount of gold it holds on behalf of other central banks.”
“The data reveals the total weight of gold held within the Bank of England’s vaults and includes five years of historical data.”
While I had been told by a media source that the London vault data would be released in the first quarter of 2017, at the time of writing, there is still no sign of any LBMA vault holdings data covering the commercial vault operators in London. However, the Bank of England has now gone ahead and independently released its own numbers covering gold held in the Bank of England gold vaults. These gold vaults, of which there are between 8 – 10 (the number fluctuates), are located on the 2 basement levels of the Bank of England headquarters in the City of London.
In an updated web page on the Bank of England’s website simply titled ‘Gold’, the Bank of England has now added a section titled ‘Bank of England Gold Holdings’ and has uploaded an Excel spreadsheet which contains end-of-month gold holdings data covering every month for a 6-year period up to the end of December 2016, i.e. every month from January 2011 to December 2016 i.e. 72 months.
According to the Bank of England, the data in the spreadsheet shows:
“the weight of gold held in custody on the last business day of each month. We publish the data with a minimum three-month lag.
Values are given in thousands of fine troy ounces. Fine troy ounces denote only the pure gold content of a bar.
We only accept bars which comply with London Bullion Market Association (LBMA) London Good Delivery (LGD) standards. LGD bars must meet a certain minimum fineness and weight. A typical gold bar weighs around 400 oz.
Historic data on our gold custody holdings can be found in our Annual Report.”
Prior to this spreadsheet becoming available, the Bank of England only ever divulged gold vault quantity data once a year within its Annual Report, for year-end reporting date end of February.
You will appreciate that the new spreadsheet, having data for every month of the year, and for 72 months of data retrospectively, conveys a lot more information than having just one snapshot number per year in an annual report. Therefore, the Bank of England has gone some way towards improving transparency in this area.
Before looking at the new data and what it reveals, it’s important to know what this data relates to. The Bank of England provides gold custody (storage) services to both central banks and a number of large commercial banks. Large commercial banks which trade gold are commonly known as bullion banks, and are mostly the high-profile and well-known investment banks.
On its gold web page, the Bank highlights this fact – that it provides gold custody service to both central banks and commercial banks:
“We provide safe custody for the United Kingdom’s gold reserves, and for other central banks. This supports financial stability by providing central banks with access to the liquidity of the London gold market.
We also provide gold accounts to certain commercial firms that facilitate access for central banks to the London gold market.”
In the London Gold Market, the word “liquidity” is a euphemism for gold loans, gold swaps, and gold trading including gold sales. This reference to central banks accessing the London Gold Market as being in some way supportive of ‘financial stability’ is also an eye-opener, since reading between the lines, the Bank of England is conceding that by accessing the London Gold Market’s “liquidity” via bullion banks, these central bank clients are either contributing to direct stabilisation of the gold price in some shape or form, or else are using their gold operations to raise foreign currencies for exchange rate intervention and/or system liquidity. But both routes are aiming at the same outcome. i.e. stability of the financial system.
At the end of the day, the gold price has always been a barometer that central banks strive to keep a lid on and which they aim to stabilise or smoothen the gyrations of, given that the alternative – a freely formed and unmanipulated gold price – would thwart their coordination of fiat currency exchange rates, interest rates and inflation targets.
Interestingly, in addition to the new spreadsheet of gold holdings data, the Bank of England gold web page now includes a link to a new 1 page ‘Gold Policy’ pdf document, which, looking at the pdf document’s properties, was only created on 30 January 2017. This document therefore also looks like it was written in conjunction with the new gold vault data rollout.
The notion of central banks accessing the liquidity of the London Gold Market via bullion banks is further developed in this Gold Policy document also. The document is quite short and merely states the following:
“GOLD ACCOUNTS AT THE BANK OF ENGLAND
1. The Bank primarily offers gold accounts to central bank customers. This is to support financial stability by providing central banks with secure custody for their gold reserves and access to the liquidity of the London gold market (particularly given the Bank’s location).
2. To facilitate, either directly or indirectly, access for central banks to the liquidity of the London gold market, the Bank will also consider providing gold accounts to certain commercial firms. In deciding whether to provide an account, the Bank will be guided by the following criteria.
a. The firm’s day to day activities must support the liquidity of the London gold market. b. Specifically, the Bank may have regard to a number of factors including but not limited to: evidence of active or prospective trading with a central bank customer; or whether the firm has committed to honour buy and sell prices.
3. Access to a gold account remains at the sole discretion of the Bank.
4. The Bank will review this policy periodically.”
The Vault Data
Nick Laird has now produced a series of impressive charts of this new Bank of England data on his website GoldChartsRUS. Plotting the series of 72 months of gold holdings data over January 2011 to December 2016 yields the below chart.
On average, the Bank’s vaults held 5457 tonnes of gold over this 6 year period. The minimum amount of gold held was 4693 tonnes at the end of March 2016, while the maximum quantity of gold held was 6250 tonnes at the end of February 2013.
The overall trend in the chart is downward with a huge outflow of gold bars from the bank’s vaults from the end of February 2013 to the end of March 2016.
As of January 2011, the BoE held just over 5500 tonnes of gold bars in its vaults. Gold holdings rose until the end of August 2011 and peaked at nearly 5900 tonnes before falling to 5600 tonnes at year-end 2011. Overall in 2011, the holdings fluctuated in a 400 tonne range, trending up during the first 8 months, and down during the latter 4 months.
This downtrend only lasted until January 2012, at which point BoE gold holdings totalled about 5450 tonnes. For the remainder of 2012, BoE gold under custody rose sharply, reaching 6200 tonnes by the end of 2012, a level near the ultimate peak in this 6 year chart. The year 2012 was therefore a year of accumulation of gold bars at the Bank during which 750 tonnes were added.
The overall maximum peak was actually 6250 tonnes at the end of February 2013, after which a sustained downtrend evolved through the remainder of 2013. By December 2013, gold under custody at the Bank of England had fallen to 5670 tonnes, creating an overall outflow of 580 tonnes of gold bars during 2013.
The outflow of gold continued during 2014 with another 470 tonnes flowing out of the Bank, leading to end of year 2014 gold holdings of just 5200 tonnes. The outflow also continued all through 2015 with only 4780 tonnes of gold in custody at the end of December 2015. The Bank therefore lost another 440 tonnes of gold bars in 2015.
Overall, that makes an outflow of 1490 tonnes of gold from the Bank’s vaults over the 3 years from 2013 to 2015 inclusive. This downtrend lingered for 3 more months, with another 80 tonnes lost, which brought the end of March 2016 and end of April 2016 figures to a level of about 4700 tonnes, which is the overall trough on the chart. It also means that there was a net outflow of 1570 tonnes of gold bars from the Bank’s vaults from the end of February 2013 to the end of March / April 2016.
A new uptrend / inflow trend began at the end of April 2016 and continued to the end of November 2016, where gold custody holdings peaked again at about 5123 tonnes before levelling off at the end of December 2016 at 5102 tonnes. Therefore, from the end of April 2016 to the end of December 2016, the Bank of England vaults added 400 tonnes of gold bars.
The gold holdings of the vast majority of central banks have remained stagnant over the 2011 – 2016 period, the exceptions being the central banks of China and Russia. But Russia buys domestically mined gold and stores it in vaults in Moscow and St Petersburg, so this would not affect gold holdings at the Bank of England. China’s central bank, the People’s Bank of China (PBoC), is known to buy its gold on the international market, including the London Gold Market. It then monetizes this gold (classifies it as monetary gold), and airlifts it back to China. But these Chinese purchases don’t show up in UK gold exports because monetary gold is exempt from trade statistics reporting. However, if China was surreptitiously buying gold from other central banks with gold accounts at the Bank of England or buying gold from bullion banks with gold accounts at the BoE, then some of the gold outflows from the BoE could be PBoC gold purchases. But without central bank specific data, its difficult to know.
But what is probably true is that the fluctuations in the quantity of gold stored in the Bank of England vaults are more do to with the gold holdings of bullion banks and less to do with the gold holdings of central banks, for the simple reason that central bank gold holdings are relatively static, or the least the central banks claim that their gold holdings are static. This does not take into account the gold lending market which the central banks and bullion banks go to great lengths to keep secret.
There is also a noticeable positive correlation between the movement of the US Dollar gold price and the inflows/outflows of gold to and from the Bank of England vaults, as the above chart demonstrates.
Bullion Bank gold accounts at the BoE
One basic piece of information that the Bank of England’s new vault storage data lacks is an indication of how many central banks and how many commercial banks are represented in the data.
In its first quarterly report from Q1 2014,the Bank of England states that 72 central banks operate gold accounts at the bank of England, a figure which includes a few official sector organisations such as the International Monetary Fund (IMF), European Central Bank (ECB), and Bank for International Settlements (BIS). This number would not have changed much in the meantime, so we can assume that the gold holdings of about 72 central banks are represented in the new data. But the number of commercial banks holding gold accounts at the Bank of England is less clear-cut.
The 5 gold clearing banks of the LPMCL all hold gold accounts at the Bank of England. Why? Because it says so on the LPMCL website:
“Each member of LPMCL has vaulting facilities under its control for the storage of gold and/or silver, plus in the case of gold bullion, account facilities at the Bank of England, which have contributed to the development of bullion clearing in London.”
The LPMCL also states that its clearing statistics include:
“Transfers over LPMCL Clearing Members’ accounts at the Bank of England.”
Additionally, the LPMCL website states that their
“clearing and vaulting services help facilitate physical precious metal movement logistics, location swaps, quality swaps and liquidity management.”
The Bank of England’s reference in its new ‘Gold Policy’ document to commercial banks needing to be “committed to honour buy and sell prices” is a reference to market makersand would cover all 13 LBMA market makers in gold, which are the 5 LPMCL members and also BNP Paribas, Citibank, Goldman Sachs, Merrill Lynch, Morgan Stanley, Société Générale, Standard Chartered Bank, Toronto-Dominion Bank. But there are also gold trading banks that make a market in gold which are not officially LBMA market makers, such as Commerzbank in Luxembourg which claims to be one of the biggest bullion banks in the world.
So I would say that lots of other bullion banks (of which there about 40 in total) have gold accounts at the Bank of England in addition to the 13 official LBMA market makers.
More fundamentally, any bullion bank that is engaged in gold lending with central banks (the central banks being the lenders and the bullion banks being the borrowers) would need a gold account at the Bank of England. I counted 28 bullion banks that have been involved with borrowing the gold of just one central bank, the central bank of Bolivia (Banco Central de Bolivia – BCB) between 1998 and 2016. Some of these banks have since merged or exited precious metals trading, but still, it gives an estimate of the number of bullion banks that have been involved in the gold lending market. The Banco Central de Bolivia’s gold lending activities will be covered in some forthcoming blog posts.
Bullion banks that are Authorised Participants (APs) for gold-backed ETFs such as the SPDR Gold Trust (GLD) or iShares Gold Trust (IAU) may also have gold accounts at the Bank of England. I say may have, because in practice the APs leave it up to the custodians such as HSBC and JP Morgan to allocate or deallocate the actual physical gold flowing in and out of the ETFs, but HSBC on occasion uses the Bank of England as a sub-custodian for GLD gold (see “SPDR Gold Trust gold bars at the Bank of England vaults” for details), so if some of the APs want to keep their own stash of allocated physical gold in relation to ETF trading, it would make sense for them to have a gold account at the Bank of England.
As to how much gold the GLD stores at the Bank of England and how regularly this occurs is still opaque because the SEC does not require the GLD filings to be very granular, however there is a very close correlation between inflows and outflows from GLD and the inflows and outflows from the Bank of England vaults, as the following chart clearly illustrates.
As gold was extracted from the GLD beginning in late 2012, a few months later the Bank of England gold holdings began to shrink also. This trend continues all the way through 2013, 2014 and 2015. Then as the amount of gold began to increase in the GLD at the end of 2015, the gold holdings at the Bank of England began to increase also. Could this be bullion banks extracting gold from the GLD, then holding this gold at the Bank of England and then subsequently exporting it out of the UK?
Some of it could, but UK gold net exports figures suggest that gold was withdrawn from both the Bank of England vaults and from the ETF gold stored at commercial gold vaults (run by HSBC and JP Morgan), after which it was exported.
Looking at the above chart which plots Bank of England gold holdings and UK gold imports and exports (and net exports) is revealing. As Nick Laird points out in this chart, over the 2013 to 2015 period during which the Bank of England gold holdings fell by 1500 tonnes, there were UK net gold export flows of 2500 tonnes, i.e. 2500 tonnes of gold flowed out of London gold vaults, so an additional 1000 tonnes had to come from somewhere apart from the Bank of England vaults.
The new monthly vault holdings data from the Bank of England can now also be compared to the amount of gold reported by the Bank of England in its annual reports. The figures the Bank reports in the annual report are as of the end of February. These figures are only reported in Pounds Sterling, not quantities, so they need to be either converted to USD and divided by the USD LBMA Gold Price on the last day of February, or else just divided by the GBP LBMA Gold Price on that day.
For end of February 2015, the calculated total for gold held at the Bank of England (based on the annual report) came out at 5,134 tonnes. Now the Bank of England data says 5126 tonnes which is very close to the calculation. For February 2016, the calculation came out at 4725 tonnes. The new Bank of England data now says 4730 tonnes, so that’s pretty close also.
This new Bank of England data is welcome and the Bank of England has taken a step towards greater transparency. However, it would be more useful if the Bank published a breakdown of how much of this gold is held by central banks and how much is held by bullion banks, along with the number of central banks and number of bullion banks that the data represents. Two distinct sets of data would be ideal, one for central bank custody holdings and the other for bullion bank custody holdings. The Bank most likely would never publish two sets of data as it would show bullion bank gold storage activity for the whole world to see.
While the Bank of England has now followed through with its promise to publish its gold vault holdings, the LBMA has still not published gold vault data for the commercial gold vault providers, i.e. its members HSBC, JP Morgan, ICBC Standard Bank, Brinks, Malca Amit, Loomis and G4S. Where is this data, why is there a delay, and why has it not yet been published?
As a reminder, the Financial Times article in early February said that the LBMA would publish gold vault holdings data that would:
“show gold bars held by the BoE, the gold clearing banks, and those [vaults] operated by the security companies such as Brink’s”
The Financial Times article also said that:
“HSBC and JPMorgan, London’s biggest bullion banks, are backing the initiatives by the LBMA to improve transparency.”
With the gold holdings data on the other London vaults still not published, it begs the question, has there been a change of mind by HSBC and JP Morgan, two of the LBMA’s largest and most powerful members?
“Reputedly [the Bank of England vaults are] the second largest vault in the world with approximately 500,000 gold bars held in safe custody on behalf of its customers, including LBMA members, central banks, international financial institutions and Her Majesty’s Treasury.”
A holding of 500,000 Good Delivery gold bars is equal to 6250 tonnes. However, according to the Bank of England’s own figure for month end December 2016, the Bank of England only holds 5100 tonnes of gold in custody (408,000 Good delivery gold bars). Therefore, the LBMA is overstating the Bank of England’s holdings by 1150 tonnes, unless, and it’s unlikely, that the BoE vaults have seen huge gold bar inflows in the last 4 months.
In early February 2017 while preparing for a presentation in Gothenburg about central bank gold, I emailed Sweden’s central bank, the Riksbank, enquiring whether the bank physically audits Sweden’s gold and whether it would provide me with a gold bar weight list of Sweden’s gold reserves (gold bar holdings). The Swedish official gold reserves are significant and amount to 125.7 tonnes, making the Swedish nation the world’s 28th largest official gold holder.
Before looking at the questions put to the Riksbank and the Riksbank’s responses, some background information is useful. Sweden’s central bank, Sveriges Riksbank aka Riksbanken or Riksbank, has the distinction of being the world’s oldest central bank (founded in 1668). The bank is responsible for the administration of Swedish monetary policy and the issuance of the Swedish currency, the Krona.
Since Sweden is a member of the EU, the Riksbank is a member of the European System of Central Banks (ESCB), but since Sweden does not use the Euro, the Riksbank is not a central bank member of the European Central Bank (ECB). Therefore the Riksbank has a degree of independence that ECB member central banks lack, but still finds itself under the umbrella of the ESCB. Since it issues its own currency, the Riksbank is responsible for the management of the Swedish Krona exchange rate against other currencies, a task which should be borne in mind while reading the below.
On 28 October 2013, the Riksbank for the first time revealed the storage locations of its gold reserves via publication of the following list of five storage locations (four of these locations are outside Sweden) and the percentage and gold tonnage stored at each location:
Bank of England 61.4 tonnes (48.8%)
Bank of Canada 33.2 tonnes (26.4%)
Federal Reserve Bank 13.2 tonnes (10.5%)
Swiss National Bank 2.8 tonnes (2.2%)
Sveriges Riksbank 15.1 tonnes (12.0%)
The storage locations of Sweden’s official Gold Reserves: Total 125.7 tonnes
Nearly half of Sweden’s gold is stored at the Bank of England in London. Another quarter of the Swedish gold is supposedly stored with the Bank of Canada. The Bank of Canada’s gold vault was located under it’s headquarters building on Wellington Street in Ottawa. However, this Bank of Canada building has undergone a complete renovation and has been completely empty for a number of years, so wherever Sweden’s gold is in Ottawa, it has not been in the Bank of Canada’s gold vault for the last number of years.
The Swedish gold in Canada (along with gold holdings of the central banks of Switzerland, the Netherlands and Belgium) could, however, have been moved to the Royal Canadian Mint’s vault which is also in Ottawa. Bank of Canada staff are now moving back into the Wellington Street building this year. But is the Swedish gold moving back also or does it even exist? The location of the Swedish gold in Ottawa is a critical question which the Swedish population should be asking their elected representatives at this time, and also asking the Riksbank the same question.
Just over 10% of the Swedish gold is supposedly in the famous (infamous) Manhattan gold vault of the Federal Reserve under the 33 Liberty building. Given the complete lack of cooperation of the Federal Reserve Bank of New York (FRBNY) in answering any questions about foreign gold holdings in this vault, then good luck to Swedish citizens in trying to ascertain that gold’s whereabouts or convincing the Riksbank to possibly repatriate that gold.
A very tiny 2% of Swedish gold is also listed as being held with the Swiss National Bank (SNB). The SNB gold vault is in Berne under its headquarters building on Bundesplatz.
The Riksbank also claims to hold 15.1 tonnes of its gold (12%) in its own storage, i.e. stored domestically in Sweden. Interestingly, on 30 October 2013, just two days after the Riksbank released details of its gold storage locations, Finland’s central bank in neighbouring Helsinki, the Bank of Finland, also released the storage locations of its 49 tonnes gold reserves. The Bank of Finland claims its 49 tonnes of gold is spread out as follows: 51% at the Bank of England, 20% at the Riksbank in Sweden, 18% at the Federal Reserve Bank of New York, 7% in Switzerland at the Swiss National Bank and 4% held in Finland by the Bank of Finland. This means that not only is the Riksbank storing 15.1 tonnes of Swedish gold, it also apparently is also storing 9.8 tonnes of Finland’s gold, making a grand total of 24.9 tonnes of gold stored with the Riksbank. The storage location of this 24.9 tonnes gold is unknown, but one possibility suggested by the Swedish blogger Cornucopia (Lars Wilderäng) is that this gold is being stored in the recently built Riksbank cash management building beside Stockholm’s Arlanda International Airport, a building which was completed in 2012.
On its website, the Riksbank states that its 125.7 tonnes of gold “is equivalent to around 10,000 gold bars”. A rough rule of thumb is that 1 tonne of gold consists of 80 Good Delivery Bars. These Good Delivery Gold gold bars are wholesale market gold bars which, although they are variable weight bars, usually each weigh in the region of 400 troy ounces or 12.5 kilograms. Hence 125.7 tonnes is roughly equal to 125.7 * 80 bars = 10,056 bars, which explains where the Riksbank gets its 10,000 gold bar total figure from.
Using Gold for Foreign Exchange Interventions
On another page on its web site titled ‘Gold and Foreign Currency Reserve’, the Riksbank is surprisingly open about the uses to which it puts its gold holdings, uses such as foreign exchange interventions and emergency liquidity:
“The gold and foreign currency reserve can primarily be used to provide emergency liquidity assistance to banks, to fulfil Sweden’s share of the international lending of the International Monetary Fund (IMF) and to intervene on the foreign exchange market, if need be.”
This is not a misprint and is not a statement that somehow only applies to the ‘foreign currency reserve’ component of the reserves, since the same web page goes on to specifically say that:
“The gold can be used to fund emergency liquidity assistance or foreign exchange interventions, among other things.”
Therefore, the Riksbank is conceding that at least some of its gold is actively used in central bank operations and that this gold does not merely sit in quiet unencumbered storage. On the contrary, this gold at times has additional claims and titles attached to it due to being loaned or swapped.
When the Riksbank revealed its gold storage locations back in October 2013, this news was covered by a number of Swedish media outlets, one of which was the Stockholm-based financial newspaper Dagens Industri, commonly known as DI. DI’s article on the topic, published in Swedish with a title translated as “Here is the Swedish Gold“, also featured a series of questions and answers from personnel from the Riksbank asset management department. Some of these answers are worth highlighting here as they touch on the active management of the Swedish gold and also the shockingly poor auditing of the Swedish gold.
In the DI article, Göran Robertsson, Deputy Head of Riksbank’s asset management department, noted that historically the Swedish gold was stored at geographically diversified locations for security reasons, but that this same geographic distribution is now primarily aimed at facilitating the rapid exchange of Swedish gold for major foreign currencies, hence the reason that nearly half of the Swedish gold is held in the Bank of England gold vaults – since the Bank of England London vaults are where gold swaps and gold loans take place.
Robertsson noted that over the 2008-2009 period,50 tonnes of gold Swedish gold located at the Bank of England was exchanged for US dollars:
“London is the dominant international marketplace for gold.We used the gold 2008-2009 during the financial crisis when we switched it to the dollar we then lent to Swedish banks”
One of these Riskbank gold-US Dollar swap transaction was also referenced in a 2011 World Gold Council report on gold market liquidity. This report stated that in 2008 following the Lehman collapse:
“In order to be able to provide liquidity to the Scandinavian banking system, the Swedish Riksbank utilised its gold reserves by swapping some of its gold to obtain dollar liquidity before it was able to gain access to the US dollar swap facilities with the Federal Reserve.”
In the October 2013 DI interview, Göran Robertsson also noted that at some point following this gold – dollar exchange, “the size of the reserve was restored“, which presumably means that the Riksbank received back 50 tonnes of gold. As to whether the restoration of the gold holdings was the exact same 50 tonnes of gold as had been previously held (the same gold bars) is not clear.
Sophie Degenne, Head of the Riksbank’s asset management department, also noted that:
“The main purpose of the gold and foreign exchange reserves is to use it when needed, as in the financial crisis”
Auditing of the Swedish Gold
On the subject of so-called transparency and auditing of the gold, Sophie Degenne said the following in the same DI interview:
“Why do you reveal at which central banks the gold is located? It is a part of the Riksbank endeavours to be as transparent as we can. We have engaged in dialogue with the relevant central banks”
How do you verify that the gold is really where it should be? “We have our own listings of where it is.We reconcile these against extracts that we receive once a year.From now on, we will also start with our own inspections.”
Therefore, the Riksbank gold auditing procedure at that time was one of merely comparing one piece of paper to another piece of paper and in no way involved physically auditing the gold bars in any of the foreign locations. These weak audit methods of the Swedish gold were first highlighted by Liberty Silver CEO, Mikael From in Stockholm-based news daily Aftonbladet’s coverage of the Swedish gold storage locations in an article in early November 2013 titled “Questions about Sweden’s gold reserves persist“.
In Aftonbladet’s article, Mikael From stated that while it was welcome that the Riksbank was at that point signalling an ambition to inspect the Swedish gold reserves, it was not clear that the Riksbank would be conducting a proper audit of the gold reserves at the time of inspection, although such a proper audit would be highly desirable. Mikael stated that without such a proper audit, and without witnessing the gold with their own eyes, the Riksbank and the Swedish State could not be certain that the Swedish gold actually existed.
Turning now to the questions which I posed to the Swedish Riksbank in early February 2017 about its gold reserves. I asked the Riskbank two basic and simple questions as follows:
“I am undertaking research into central bank gold reserves, including the gold reserves held by the Riksbank at its 5 storage facilities.
1. Are the gold bars held by the Riksbank in its foreign storage facilities physically audited by the Riksbank (i.e. stored at Bank of England, Bank of Canada, Federal Reserve New York and Swiss National Bank)? In other words, does the Riksbank have a physical audit program for this gold?
2. Secondly, would the Riksbank be able to send me a gold bar weight list which shows the gold bar holdings details for the 125.7 tonnes of gold held by the Riksbank. A weight list being the industry standard list showing bar brand (refiner), serial number, gross weight, fineness, fine weight etc.
A few days after I submitted my questions, the Presschef/Chief Press Officer of the Riksbank responded as follows. On the subject of auditing:
“Answer 1: Yes, the Riksbank performs regularly physical audits of its gold.“
In response to the question about a gold bar weight list, the Chief Press Officer said:
Answer 2: The Riksbank publishes information about where the gold is stored and how much in tonnes is at each place. See table (same distribution table as above). However, the Riksbank does not publish weight lists or other details of the gold holdings.“
So here we have the Riksbank claiming that it personally now performs physical audits of its gold on a regular basis. This is the first time in the public domain, as far as I know, that the Riksbank is claiming to have undertaken physical gold audits of its gold holdings, and it goes beyond the 2013 statement from the Riksbank’s Sophie Degenne when she said “we will also start with our own inspections“.
But critically ,there was zero proof offered by the Riksbank to me, or on its website, that it has undertaken any physical gold audits. There is no documentation or evidence whatsoever that any physical audits have ever been conducted on any of the 10,000 gold bars in any of the 5 supposed storage locations that the Riksbank claims to store gold bars at. Contrast this to the bi-annual physical audits which are carried out on the gold bars in the SPDR Gold Trust (GLD) which are published on the GLD website.
In any other industry, there would be an outcry and court cases and litigation if an entity claimed it had conducted audits while offering no proof of said audits. However, in the world of central banking, perversely, this secrecy is allowed to persist. This is outrageous to say the least and Swedish citizens should be very concerned about this lack of transparency of the Swedish gold reserves.
Official Secrecy about Swedish Gold Reserves
Given the brief and not very useful Riksbank responses to my 2 questions above, I sent a follow on email to the Riksbank asking why the Swedish central bank did not publish a gold bar weight list. My question was as follows:
“Is there any specific reason why the Riksbank does not publish a gold bar weight list in the way, for example, that a gold-backed ETF does publish such a weight list every trading day?
i.e. Why is the Riksbank not transparent about its gold bar holdings?”
This second email was answered by the Riksbank Head of Communications, as follows:
“This kind of information is covered by secrecy relating to foreign affairs, as well as security secrecy and surveillance secrecy in accordance with the relevant provisions in the Swedish Public Access to Information and Secrecy Act.
As far as we are aware of, the Riksbank is among the most transparent central banks, being public with information about the storage locations and volumes, but do let us know if any other central banks are offering the level of transparency you are asking for (except for Germany of course, which we are aware about).”
So here you can see here that gold, which in the words of the Wall Street Journal is just a ‘Pet Rock’, is covered by some very strong secrecy laws in Sweden. Why would a pet rock need ultra strong secrecy laws?
An explanatory document on Sweden’s “Public Access to Information and Secrecy Act” can be accessed here. In Sweden, the rules governing public access to official documents are covered by the Freedom of the Press Act. While its beyond topic to go into the details of Swedish secrecy laws right now, there is a short section in the document titled “What official documents may be kept secret?” (Section 2.2) which includes the following:
“The Freedom of the Press Act lists the interests that may be protected by keeping official documents secret:
National security or Sweden’s relations with a foreign state or an international organisation;
The central financial policy, the monetary policy, or the national foreign exchange policy;
Inspection, control or other supervisory activities of a public authority;
The interest of preventing or prosecuting crime;
The public economic interest;
The protection of the personal or economic circumstances of private subjects; or
The preservation of animal or plant species.
Given that the Riksbank stated that the information in its gold bar weight lists was “covered by secrecy relating to foreign affairs, as well as security secrecy and surveillance secrecy”, I would hazard a guess that the Riksbank would try to reject Freedom of Information requests in this area by pointing to central bank gold storage and gold operations as falling under points 1 or 2, i.e. falling under national security or relations with a foreign state or international organisation, or else monetary policy / foreign exchange policy (especially given that the Riksbank uses gold reserves in its foreign currency interventions). Perhaps the Riksbank would also try to twist point 5 as an excuse, i.e. that it wouldn’t be in the public economic interest to release the Swedish gold bar details.
As to why the Riksbank and nearly all other central banks are ultra secretive about gold bar weight lists and even physical auditing of gold bar holdings usually boils down to the fact that, like the Riksbank, these gold bar holdings are actively managed and are often used in gold loans, gold swaps and even gold location swaps. If identifiable details of the gold bars of such central banks were in the public domain, given that these bars are involved in loans, currency swaps and location swaps, these gold bar details could begin to show up in the gold bar lists of other central banks or of the gold bar lists of publicly listed gold-backed Exchange Traded Funds. This would then blow the cover of the central banks which continue to maintain the fiction that their loaned and swapped gold is still held in unencumbered custody on their balance sheets, and would blow a hole in their contrived and corrupt accounting policies.
A Proposal to the Oldest Central Bank in the World
Since the Riksbank happened to ask me were there any central banks “offering the level of transparency [I was] asking for” i.e. providing gold bar weight lists, I decided to send a final response back to the Riksbank in early March highlighting the central banks that I am aware of that have published such gold bar weight lists, and I also took the opportunity of proposing that the Riksbank should follow suit in publishing its gold bar weight list. My letter to the Riksbank was as follows:
“You had asked which central banks offered a level of transparency on their gold holdings that include publication of a gold bar weight list. Apart from the Deutsche Bundesbank, which you know about, I can think of 3 central banks which have released weight lists of their gold bar holdings.
The 3 examples below (together with the Bundesbank) show that some of the most important central banks and monetary authorities in the world have now deemed it acceptable to include the release of gold bar weight lists as part of their gold communication transparency strategies.
The 4 sets of weight lists below include gold bar holdings at the Bank of England (stored by Mexico, Australia, Germany), and at the Federal Reserve Bank of New York (stored by the US Treasury and Bundesbank). Together these two storage locations account for 60% of the Riksbank’s gold holdings (74.6 tonnes).
The Riksbank is the world’s oldest central bank and has a long track record of being progressive and transparent. By releasing the Riksbank’s gold bar weight lists for the gold bars stored over the 5 storage locations (London, New York, Ottawa, Berne and in Sweden), the Swedish central bank would be joining an elite group of central banks and monetary institutions that could be considered the early stage adopters of much needed transparency in this area.”
The RBA list includes refiner brand, gross weight, assay (fineness), and fine weight, as well as bank of England account number.
3. US Treasury
In 2011, the US Treasury’s full detailed schedules of gold bars was published by the US House Committee on Financial Services as part of submissions for its hearing titled “Investigating the Gold: H.R. 1495, the Gold Reserve Transparency Act of 2011 and the Oversight of United States Gold Holdings”.
These US Treasury weight lists are as follows, and are downloadable from the financial services section of the “house.gov” web site.
Weight list of all Treasury gold held at Fort Knox, Denver and West Point – 699,515 bars – pdf format
The Bundesbank list show all the German gold bars held at the Bank of England, NY fed and Banque de France as well as in Frankfurt.”
As of now, the Swedish Riksbank has a) not published a gold bar weight list of any of its gold bar holdings and b) not acknowledged my follow up email where I listed the central banks that have produced such lists and suggested that the Riksbank do likewise.
The Swedish Riksbank claims to hold 10,000 large Good Delivery gold bars in 5 locations across the world and now claims to have conducted physical gold audits of this gold. Yet it has never published any physical gold audit results of any of these gold bars nor published any of the serial numbers of any of the 10,000 gold bars it claims to have in storage. For a so-called progressive democracy this is shocking, although not surprising given the arrogant and unaccountable company that central bankers keep with each other.
If someone with time on their hands, ideally a Swedish citizen, has an interest in this area, it would be worthwhile for them to research the rules of the Swedish Freedom of Information Act, and then craft a few carefully worded Freedom of Information requests to the Riksbank requesting physical audit documents and gold bar weight lists of Sweden’s 125.7 tonnes of gold that is supposedly held in London, New York, Ottawa, Berne and in Sweden, possibly in or around Stockholm or beside Arlanda airport.
While these Freedom of Information requests would probably get rejected due to some spurious secrecy excuse and thrown back at the applicant in short order, at least its worth trying, and might make a good story for one of the Swedish financial newspapers to cover.
I was recently interviewed by financial journalist Lars Schall on behalf of Swiss based Matterhorn Asset Management. Our interview covered the German and Russian gold markets, Venezuela’s official gold reserves, the secrecy of the London gold market, and the outlook for the gold price, among a number of other topics. Matterhorn kindly granted me permission to post the audio interview and transcript below. The original interview titled “Economics will dictate that the price of gold is going to rise” can be found on the GoldSwitzerland website.
Lars Schall: Howdy ladies and gentlemen, I am connected right now with Ronan Manly at the London Business School. BullionStar and Ronan have just recently published a major work of research related to the gold markets all around the world. Before we’ll talk about this let me ask you, Ronan, to give us some background on you. When, how, and why did you become interested in the precious metal markets to start with?
Ronan Manly: Hello. Yes, I think I became first interested in precious metals around 2003-04, when there was a bull gold market in precious metals mining stocks. About that time I was interested in investing in equities. And it was from the perspective of the bull market in gold and silver stocks catching my eye that I started reading about gold. And that really led me into thinking about gold as an investment asset class. In 2005 and 2006, when I was in the London Business School as a student, I did a research paper on adding commodity assets to existing portfolios of bonds and equities as a diversification technique. So it was during that time again I did a little bit more research about precious metals, and gold, and silver as an asset class.
And then I was working in the City of London in the equity investment management space for a few years. And I actually forgot about precious metals, because it wasn’t really on my radar at that time. When I left that role in 2011 I had some free time, and I started going to the Bank of England archives to start to research in gold again. I’d gone to a GATA conference in the summer of 2011 in London, and that sparked my interest in gold. And I thought well, because I’m living in London, with the Bank of England just down the road, I might as well go and have a look at their archives. So that started really me on the road of doing research about monetary gold. And I went on a number of occasions to the Bank of England. And I even went across to Paris to the Bank of France archives. And that again was very eye-opening. Because of the nature of archives, there’s a 30 year, or 35 year [access] rule. So you can’t really look at anything beyond say the 1980s, early 80s. But even then I could start piecing together the importance of gold, and the monetary system, and it just fed my interest, and the fact that gold was at the front and center stage of the financial system. But this role has unfortunately been lost.
Myself and a lot of other people who grew up being educated in the 1980s and 1990s thought gold had somehow fallen off the financial curriculum. And it was really, because I started realizing that gold was a fascinating area that was interconnected with so many other areas like economic history, the IMF, the financial system, and various industries, like banking and mining, that it attracted my attention. And also the fact that it was quite opaque. In a very strange way it was a challenge, because it’s difficult to find out information about the gold market without really putting in a lot of effort. But it’s very rewarding when you do find information that other people don’t have. And I think that’s what I’m trying to get across in my blog, sharing information that maybe is there, it’s available in public, but it’s very difficult to get. So once I find some good information I like to share it.
LS: Yeah. And as already mentioned you did something like that, because at BullionStar you’ve published recently some sort of an encyclopedia of gold markets around the world. Now, why did you consider it necessary to do this at BullionStar, and what is the purpose?
RM: That’s a good question, because we’ve actually just launched this a week, or two ago – BullionStar Gold University. It took a few months to get all the research together. The concept was one that BullionStar devised as a way of sharing information with the general public. You can look at it more as a portal of precious metals information, more time independent information, and factual information. You can even look at it as like a Wikipedia of up-to-date information on precious metals.
It’s actually a group effort. I was doing a lot of the writing. But various other people in BullionStar have been part of the project from day one including I.T. developers and graphic designers, and the BullionStar CEO who devised the whole concept.
So the first phase of this is a profile of gold markets around the world. It includes about 21 different profiles covering 25 markets, really captures the essence and characteristics of each of those markets from some of the very large ones the people know about to less well-known ones. So it includes markets like London, New York, Shanghai, India, Hong Kong, Japan, down to probably less well-known markets, like Malaysia, Thailand, Indonesia. And there’s a slight regional focus on Asia, because BullionStar is based in Asia. But it includes markets like South Africa, Germany, Italy, France, Saudi Arabia, Dubai, Turkey. So there’s really something there for everybody.
And the main reason was to create up-to-date information that people can go to as a source of reference if they’re writing articles. Journalists, for example, can use it as a source of reference. Because there was nothing really up-to-date in one place that captured that information. So really what we’re trying to do is make it easy for people to – if they have a question about one gold market in a different place they can go and consult the Gold University. This is only the first phase. We’re going to be having a lot of other topics and concepts rolled out as part of this umbrella information portal in the near future starting with precious metal vaults, central band gold policies, refineries and mints, then down the road adding other areas such as if you want to find out about the tax on precious metals in a certain area or jurisdiction, or the legal / legislative [position] of various governments, what their view is on allowing their citizens to purchase precious metals. So it’s really a wide coverage.
LS: Now, talking about those profiles, according to your analysis, which is the most credible gold market that you’ve seen as part of your research?
RM: Well, after 25 different markets I actually think that the German gold market is a very deep and thorough markets with a lot of liquidity. It’s very accessible to the public. Now, I have to say that I didn’t really know much about the German market before I began researching it. I was pleasantly surprised to learn there were so many different participants in the German market from commercial banks down to wholesalers, down to large retailers. And the German public really seems to get gold as an investment asset class.
But I started looking at Germany, literally I knew that maybe a few large banks were involved. But as I did more research I realized that there’s a lot of different levels of participants in the German market, starting with the Landesbanks, the Bayern Landesbank, LBBW, and Helaba, and some of the other regional banks. And there’s Reiffeisenbank, and Commerzbank, even though it’s based in Luxembourg, you could classify that as a German bank. And as you know, Lars, the customers of the Sparkasse savings banks can go in and buy gold quite easily. And Germany has like over 100 tons of consumer gold demand each year. So I really think that the market hangs together very well. It’s very deep and liquid. It’s interconnected with Austria, and Switzerland, and you’ve also got at least five or six very well-known and well-regarded gold refineries like Heraeus, and now Degussa has bought a new refinery in there. Is it Pforzheim?
RM: So I think the German psyche for a number of reasons has a very good understanding, grasp, and respect for gold. And I think this is exemplified by the very deep and widespread network within the German gold market. It’s one that I would never have thought about six months ago if you would’ve ask me. But now it’s definitely one of the more intriguing markets out there.
LS: Yeah. And your positive impression of the German gold market was also supported by a recent trip that you took to Berlin.
RM: That’s right, yeah. At the beginning of February I was invited by BullionStar to what’s called the World Money Fair in Berlin. This is an annual fair that takes place in February at which all the big refineries and mints from around the world go to exhibit. There’s a lot of numismatic dealers as well. But more interestingly it seems to be the event of which a lot of precious metal participants go to meet each other for commercial meetings, and to just meet, and greet, and update each other.
So for example, the reason I went there was to meet up with my colleagues from Singapore. But we were introduced to a lot of heads of refineries, heads of mints, some of the large wholesalers from the US. And it as a great to see the precious metals markets in action. The fact that it was in Berlin again, I think highlights the fact that Germany is a very important gold market, and people don’t really seem to realize that. If you asked a lot of people on the street outside of Germany they probably wouldn’t realize that Germany is such a buoyant gold market.
LS: And which of the markets that you examined will be the most interesting to watch going forward?
RM: I think there are quite a few interesting markets. But the one that fascinated me the most, and that I think will be very important going forward: Russia. And it’s more because the Russian gold market for the last number of years has been dominated by central buying purchases from the Russian Central Bank. And it’s sister organization called the Gokhran, which is the state fund for precious metals. And again, I wouldn’t have really thought about this until I started researching it. But at the moment the majority of the gold production that comes out of Russia every year is purchased by the central bank. But they do via a very clever process, where the commercial banks intermediate. So the commercial banks finance gold producers who mine the metal, which is then sent to the refineries, but it’s purchased by commercial banks like Sperbank, NOMOS, VTB, Gazprombank. And then they sell it on to either the Gokhran, or to the central bank.
So what you see is that, for example, seven or eight years ago in 2007, the Russian Central Bank only had 400 tons of gold in its official reserves, and now 10 years later it has just over 1,400 tons. And I think another part of the equation that people don’t seem to grasp, and it’s quite opaque, is the fact that the Gokhran is also purchasing gold. So I think what is happening is that sometimes if the central bank reserves are being updated it transfers from the Gokhran, like the way that we suspected maybe the PBoC in China is transferring metal from other Chinese state entities.
So from a supply perspective it’s also interesting because if the Russian state system is gobbling up a lot of Russian gold output, that means there’s less gold at the margin for world supply. So I think it’s going to be really important to look at this continued trend where a lot of Russian gold production is being taken by the state. And that will definitely have an impact on world gold supply if demand continues to outstrip supply.
LS: Yeah. Now, when it comes to the market that you look at in the most critical way I think the candidate could be London, correct?
RM: Yes. I think that’s because London is the largest market. So in one way you think that there is a lot of information out there about the London market. And in some ways there is, but in other ways there’s not, because it’s quite opaque, and the people who run the London gold market choose not to divulge very much information about it – be it the Bank of England, or the Bullion banks that are represented by the LBMA. So again, it’s because London is one of the two centers for gold price discovery that in some ways it’s so important and critical to world gold market that it makes sense to critically analyze it. And over the last number of years there’s been numerous times where I’ve become frustrated where I’m trying to do some research on the London market, and I just can’t get anywhere, because there’s a lack of data there. And that’s the biggest question, why is that? And I think it’s because the LBMA, and the banks that they represent do not really want anyone poking around and finding out what’s really going on in the London gold market.
And you and I, Lars, know both that because it’s such an important market for price discovery that if there’s any, for example, large transactions that are going on that aren’t in the public domain that’s quite important, because it is affecting the price globally, and it’s affecting every participant in the larger global market. So it’s something I think is worth putting a lot of effort into it to try to find out as much as possible about.
LS: Yeah, worth noting is also what you wrote recently about the gold of Venezuela. Can you tell us about this please, and why is this of significance?
RM: Like a lot of research that I do, it started off as a small focus. I found some information that had come out about the repatriation of Venezuela’s gold back in 2011-12. And for people who maybe don’t recall exact details Hugo Chavez wanted to repatriate all of his gold that was held internationally, which is about 210 tons. Eventually he repatriated 160 tons, and left 50 in London. And they added the repatriated gold to what was already held in Caracas, Venezuela, which was about 150 tons. So it made a very good case study, because very few central around the world will ever divulge information about gold. But Venezuela at that time chose to do so.
The Bank of Central Venezuela was quite forthcoming in telling people about how much gold they have, where it was located, how much they wanted back. And that in itself was a good case study. But what has happened more recently with all the economic problems in Venezuela is that a lot of that gold has started to go to where it probably was held originally. Some of it’s being flown into Switzerland; various banks like Citibank, Deutsche are supposedly doing swaps with some of that gold giving U.S. dollar financing to the Venezuela government.
And I think that particular set of episodes is very good as a case study, because what it applies to is that there could be a lot of similar for example swaps going on with Central American banks and international Bullion banks. And I know that there are a few. But that doesn’t get written about. Because again the information is withheld. So I think the repatriation and the subsequent re-export of Venezuelan gold back to Europe serves as a reminder that gold is a liquid asset, and that it is a very important asset in the financial system. But for whatever reason central banks and governments always try to downplay it.
LS: Yeah. But given that we have a debt crisis you think that gold will be a winner of this crisis?
RM: Yeah, I do think that it will start to become – to play a more central role in a future monetary system. As regards what exact role that will play it’s difficult to know, but I definitely think that I see gold really emerging to the front stage of a revised, or a reset monetary system. Because gold doesn’t have any counterparty risk. It doesn’t have any default risk. We’ve seen before though a stable international monetary system that had gold playing an important role.
LS: Yeah. But do you think that we will then see more efforts to repatriate gold from New York and London to the original countries?
RM: I don’t really think so, unless it’s done in a very gradual way. I think the Chavez episode was more of a nationalistic triumphalist symbolic exercise. And it backfired. Not because of the actual repatriation, but because of unfortunately for Venezuela, its economic standing has gone down. But I tend to think that all the different central banks around the world cooperate so closely that they wouldn’t really put pressure on each other in that regard by pulling out gold that might make it look like they’re unhappy with either the Bank of England, or the Federal Reserve. I think if it’s being done, it’s being done in a very surreptitious way.
LS: Yeah, just as the Germans do?
RM: Well, that’s a very strange one. I still haven’t understood fully what they are doing. Is it more of a gesture to the population, or – they could’ve easily done this without telling anybody, like they did in the early 2000s when Bundesbank repatriated, what was it, 900 tons from the Bank of England? Nobody knew about that.
LS: Yeah. Yeah. Okay, let’s come to our final point, and that would be the question what are your overall expectations for gold in 2016?
RM: Well, you know, that’s a good question. Seeing that we’re nearly at the end of the first quarter, and that’s been one of the best quarters in a long time. I still think that the gold price in USD terms will end the year higher than it is now. And I say that, because I think that there’s such a huge excess demand for physical gold for various places like China. If you look at the supply side there isn’t a huge supply increase. There’s a lot of gold gone through gold refineries in places like Switzerland, and unless there is some hidden source of supply that we don’t know about, simply economics will dictate that the supply outweighing demand would mean that the price is going to rise.
I was talking to Koos Jansen from BullionStar yesterday, and he’s actually working now doing estimates of Chinese gold importation from 2015 where he takes various trade statistics from Switzerland, U.K., Australia, and Hong Kong, and he’s coming up with a figure of 1500 tons are being imported last year into China. And if you add to that the Chinese domestic production of around 450 tons, and then some scrap recycling, that’s over 2,000 tons of gold. And the World Gold Council are only saying there’s a 1,000 tons of domestic demand. But if you also take the annual gold-mining output say for example 3,000 tons, if you take away China’s 415, you take 200 and something tons from Russia, then the rest of world is having to compete for dwindling physical annual gold-mining output. And really just from a simple economics point of view I think that the gold price should end up higher at the end of this year. Whether it will is a different question.
LS: Of course.
RM: I’m not really qualified to answer that. I think it’s very dangerous speculating on gold prices in general, because there seems to be a lot in the price action of the gold market that doesn’t follow common sense.
LS: Yeah. But you would say in the long run gold is a good investment?
RM: I think it is a good investment to have some of a total investment. And what I mean is that it’s a good investment to have, and to diverse my portfolio. And I think it’s also from a collector’s point of view, it’s nice to have some of your assets in a physical tangible substance that is nice to own. And you still have it at the end of the day even if it’s changed in fiat currency terms.
LS: Yeah. But we would like to underline this again: Gold has no counterparty risk.
RM: That’s right, yeah. And so for example, any gold products that may involve a few different layers of counterparties like an ETF, for example, physical gold doesn’t have that. As long as you have it in your possession, or store it in a reliable storage space.
When Singapore Exchange (SGX) launched a physically-delivered gold kilobar contract in October 2014, there was much fanfare from the contract’s promoters (SGX, World Gold Council, IE Singapore and the Singapore Bullion Market Association) that the SGX Gold Kilobar would kick-start exchange-based gold kilobar trading in the Singapore gold market, while providing liquidity, price discovery and a gold price benchmark for the Singapore region.
The Demise of SGX’s Kilobar Gold Contract
However, these much-hyped benefits never materialised, since despite a relatively active start, trading in the kilobar contract never gained traction and is now essentially flat-lining at zero trading volume, even after some supposedly volume boosting changes introduced by the SGX in December 2015. In SGX Kilobar Gold Contract trading, 6 consecutive business day contracts trade at any one time, and when one contract expires, another is added. Settlement can occur on a daily basis, which, for each lot, consists of delivery and receipt of a batch of 25 kilobars of gold.
At launch in mid-October 2014 through to end of December 2014, the SGX kilobar gold contract saw 152 lots traded. Following this, the entire 2015 volume only reached 158 contracts, with only 4 contracts traded in the fourth quarter of 2015 (2 lots in December 2015, zero lots in November 2015, and 2 lots in October 2015). This means that throughout Q4 2015, only 100 gold kilobars were delivered/received.
In December 2015, in response to these embarrassingly low trading volumes, SGX introduced three changes. These changes:
a) extended trading hours from the a 3-hour window spanning 8:30am – 11:30am Singapore time to a 6.5 hour period spanning 9:00am – 3:30pm
b) introduced a ‘short position’ transfer process under which sellers who don’t have the gold to deliver can transfer their positions to local bullion banks, so as to address seller default sceanarios
c) erased the previous procedure whereby a seller had to direct a participating bullion bank (a Gold Delivery Agent) to ‘attest’ that the gold being sold conformed to the contract’s specifications (specifications such as fineness and approved refinery)
SGX also waived clearing fees on the contract until 31 March so as to “promote market activity”.
Judging by the contract’s trading volumes, these December 2015 tweaks to the contract have had absolutely no effect on trading volume. In fact, trading volumes have actually fallen to practically zero since the beginning of 2016. In its ‘Market Statistics Report’ for March 2016, SGX reveals that the SGX Kilobar Gold contract recorded zero trading volume in March 2016, zero trading volume in February 2016, and volume of only 1 contract in January 2016. Therefore, for the first 3 months of 2016, only a single gold kilobar contract lot has traded, and the first quarter 2016 volume did not even match the tumbleweed fourth quarter of 2015.
Why has the SGX Gold Kilobar contract failed?
Perceived Liquidity issues
Lack of trading volume will always deter potential participants on any exchange, since if there’s is a perception of low liquidity, participants will stay away. In the case of the SGX Gold Kilobar, market participants appear to find it more efficient to continue to trade in the OTC market, a market which offers greater flexibility, and where premiums on kilobars are derived from actual supply and demand and from arbitraging locational differences between Singapore, London and elsewhere.
The SGX Gold Kilobar contract is inflexible in that delivery is in the form of a sealed box of 25 x 1 kilo bars of gold. All bars in the box have to be from the same producer, and the buyer has no control over brand of bar purchased, having to accept one of seventeen approved brands. The high quantity threshold also excludes a gold buyer, who, for example, may want to purchase 10-15 kilobars, but not 25 kilobars.
Delivery to the SGX Approved Vault
Gold kilo bars can only be sold through the contract if they reside in the Approved Vault (Brinks vault in Singapore Freeport). This requires the bars to have either a) remained in the Approved Vault with the box unopened, or b) been received in directly from an approved refinery, or c) been sent in from the vault of one of the ‘Recognised Forwarders’ in Singapore (Certis CISCO, G4S, Loomis, Malca-Amit, or Brinks second Singapore vault). The approved vault operator (Brinks) ensures that bars received into its vault fulfill these criteria.
Delivery from the SGX Approved Vault
Gold traded under the SGX Gold Kilobar contract is delivered at the Approved Vault in Singapore. So a buyer of gold through the contract has to then decide how to collect this gold from the Approved Vault. SGX has recently added two other delivery locations, Bangkok and Hong Kong, using three banks, Bank of Nova Scotia, JP Morgan and ICBC Standard, but delivery in these cities involves extra delivery fees, and is “subject to each bank’s availability of physical gold.”
Convoluted account setups
The account setup requirements for trading and taking/making delivery of gold in the SGX Kilobar Gold contract are quite involved. Trading the contract requires opening a futures trading and clearing account with an SGX Clearing member, which itself involves associated account opening procedures, trading access set-up steps and declarations. There are also trading fees and clearing fees, and reporting requirements. The account then needs to be funded and have a margin facility set up.
Delivery of gold under the contract makes use of a complex account convention called a Kilobar Gold Accounts (KGA). KGAs represent allocated gold holdings held under the contract with Brinks Singapore, the approved vault operator, at the approved vault, Brinks vault at the Singapore Freeport. Anyone trading the SGX contract who wishes to take or make delivery of gold must open a KGA, in one of 3 ways.
A KGA can be opened with a Gold Delivery Agent (GDA) (one of the contract’s market makers) who can either create a customer specific KDA or specify the KGA within an omnibus account structure. Another option is to set up a KGA through an SGX clearing member who in turn will account for the gold via an omnibus KGA account with one of the GDAs, or with Brinks Singapore. A third option is to open a KGA directly with Brinks Singapore Pte Ltd in the form of a Brinks customer KGA. This option involves entering a standard account opening process with Brinks and also signing a ‘Rider’ with Brinks that addresses the SGX custody contract under which Brinks provides services to Singapore Exchange Derivatives Clearing (SGX-DC). Since the gold is ultimately held at Brinks vault, there are storage charges, gold bar transaction charges, as well as transport charges for moving gold from the Freeport vault to somewhere else in Singapore, such as Brinks main Singapore vault.
Only banks can directly trade the contract
Natural participants in the gold market such as refineries and jewellery companies cannot trade the SGX gold kilobar contract directly. They have to trade via banks. When the contract was launched in October 2014, only 4 market makers were appointed, and these market makers were required to be category 1 members of the Singapore Bullion Market Association. The four original 4 market makers for the contract were JP Morgan, Bank of Nova Scotia, Standard Bank and Standard Chartered Bank. These category 1 SMBA members also played a role in the contract as Gold Delivery Agents (GDAs) until December 2015.
SGX Counterparty and Default Risk
It’s still possible for an SGX Gold Kilobar contract to end with cash-settlement, in which case SGX imposes a 10% penalty on one of the parties. There is still also potential default risk, which can arise after the transfer of a short position in the scenario in which the new short also fails to deliver the contracted gold.
Compare, for example, the above complexity and rigidity of the SGX Kilobar Gold contract to the ease and simplicity of buying or selling physical gold kilobars through BullionStar in Singapore, with which I’m familiar.
When buying gold from BullionStar, the customer can place an order to buy or sell gold bars in any quantity with complete flexibility on brand choice. A customer can choose to purchase 25 x 1 kilo gold bars if they so wish, or can choose any quantity of kilobars, in a mixture of available gold bar brands from some of the world’s most prestigious precious metals refineries and mints. Indeed, with BullionStar, a customer can choose to purchase or sell any available gold bar size, such as 100 gram gold bars, or any available gold coin products, or any other precious metals.
Unlike the SGX Kilobar Gold contract which trades in US Dollars per gram, with BullionStar prices are quoted in Singapore Dollars, US Dollars, Euros and Bitcoin, and purchases can be paid for using any of these currencies. Payment mechanisms are also flexible, including bank transfer, cash, NETS (in Singapore Dollars), and cheque, and again using Bitcoin.
Pricing and Transparency
BullionStar’s gold and other precious metal range is sourced from some of the most highly regarded precious metals refineries and mints in the world such as Germany’s Heraeus, Switzerland’s PAMP, the Royal Canadian Mint, and the Perth Mint of Australia. BullionStar’s website clearly displays the price premium of every product carried compared to the world gold price, as well as the product’s spread between buy and sell price. This ensures the entire transaction process is fully transparent.
With BullionStar, customers can buy gold and other precious metals online, and request home delivery, or else buy and arrange to pick up their metal at the store, or else purchase metal online and put it into ‘My Vault’ storage in BullionStar’s secure vault storage facility. Alternatively, customers can walk in and buy gold and other precious metals over the counter at BullionStar shop and showroom premises in Singapore. This physical accessibility also applies to customers being able to walk in to the BullionStar store to deposit gold for storage, walk in to audit their stored gold without appointment, and also walk in to withdraw bullion holdings held in the vault.
Besides allocated bullion products, with BullionStar clients also have access to the Bullion Savings Program (BSP). This is an ultra-flexible and very low entry cost option to buy gold in units of 1 gram and upwards. BSP customers can buy and sell any time, 24 hours a day, 7 days a week. Once 100 grams, or multiples of 100 grams, have been accumulated in the program, a BSP customer can convert these 100 gram holdings into physical bullion in the form of 100g PAMP cast bars. The BSP is fully-backed by precious metals holdings, in fact it has a backing greater than 100%.
Some radical changes appear to be needed to the SGX Gold Kilobar contract if it’s to attract critical mass and appeal to a wider variety of trading participants. This may include the need for greater flexibility in lot size. However, competing Singapore-based exchange, ‘ICE Futures Singapore’, launched a physically-deliverable 1 kilo lot gold futures contract in November 2015, but this too has seen tiny trading volumes, negligible open interest, and zero deliveries (zero issues and stops) since launch date.
Singapore supports a large and vibrant gold market. For example, in 2015, 113 tonnes of gold were exported just from Switzerland to Singapore. But merely looking at exchange volume of the SGX Kilobar Gold contract and the ICE Singapore kilobar gold contract will fail to capture the big picture. It appears that in Singapore and surrounding regions, buyers and sellers of gold kilobars continue to prefer the flexibility of OTC trading, the very flexibility that BullionStar provides on a number of fronts as highlighted above.
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