One of the more interesting developments in the gold mining sector at the moment is the impending launch of an investor alliance called the Shareholders Gold Council (SGC) whose objectives focus on reversing the poor shareholder returns and underperformance that has been dogging the sector’s leading gold mining stocks for some time now.
This new ‘Council’, which will be activist in nature, has been spearheaded by well-known hedge fund Paulson & Co, and was first pitched to fellow institutional investors and hedge funds during a Paulson & Co presentation at the Denver Gold Forum in September 2017.
For those unfamiliar with Paulson & Co, this is a hedge fund firm established by John Paulson in 1994. Paulson’s hedge fund firm rose to prominence in the late 2000s when it shorted subprime mortgages, and correctly bet on the collapse of the US housing market. Paulson & Co pursues event-driven strategies including merger arbitrage and corporate restructurings and runs a number of funds across equities and credit. Paulson also launched a specific gold fund in 2010 called the PFR Gold Fund which according to HedgeTracker had a “long-term strategy focus investing in mining companies and bullion-based derivatives“. This fund does not invest in physical gold, as was highlighted in the BullionStar article “Are the World’s Billionaire Investors Actually Buying Gold?“.
For those unfamiliar with the Denver Gold Forum, this is an annual three-day gathering of gold and silver mining companies, major institutional and hedge fund investors which invest in the sector, and Wall Street analysts covering the sector. In fact, the Forum’s organizers claim that the event represents nearly 90% of the world’s publicly traded gold and silver companies.
Reuters has also reported that major league institutional players such as Vanguard, State Street, Blackrock and Van Eck have also expressed interest in the SGC alliance.
High Cost Base, Destruction of Value
While hedge funds regularly attempt to turn around individual companies, the mobilization of a broad-based shareholder grouping focused on revitalizing an entire sector is still quite unusual, even for Wall Street. It is therefore instructive to examine what motivated Paulson & Co to roll out this idea and pitch the alliance to an entire institutional investment community. Although media coverage has been quite sketchy and exact details of the coalition remain unclear, the Denver presentation given by Paulson & Co’s natural resource specialist, Marcelo Kim provides some clarity, and is therefore worth reviewing.
According to Kim’s presentation ‘Gold Equities: Myths, Dreams and Reality‘, given to the Denver Gold Forum on 26 September 2017, the bottom line is that major gold mining stocks have been severely under-performing both the gold price and the broader equity indices for some time now.
This stock underperformance, thinks Paulson & Co, is due to poor investment decisions by said gold mining companies, destruction of enterprise value / low return on capital, and massive writedowns on ill-judged acquisitions, all in an environment of gigantic pay and compensation packages to gold mining company CEOs, clubby and cronie appointments to the companies boards of directors, and low stock ownership (but high options ownership) by these same company executives and board members. According to Paulson’s Kim, “CEOs and Boards get rich while shareholders lose money“.
Even more worryingly, total shareholder returns from 13 large publicly listed gold companies over the January 2010 to September 2017 period was an average negative 65%. However between 2010 and 2016, CEO pay in these same 13 leading gold mining companies was a combined US$ 550 million.
These 13 companies were Eldorado, Newcrest, Newmont, Gold Fields, Barrick, GoldCorp, Yamana, Kinross, AlgloGold, Agnico, Polymetal, Randgold, and Iamgold. All of these companies are members of the World Gold Council except for South African miners Gold Fields and Randgold and the Russian miner Polymetal. Notably, Randgold and Polymetal bucked the trend with relatively healthy shareholder return since 2010 of 35% and 20%, respectively, as well as the highest return on capital (RoC).
Additionally, over the 2010 – 2017 period, the gold mining industry had, according to Paulson and Co “written off $85 billion due to overpaying for acquisitions and massive cost overruns on mine builds“. Gold mining shareholders, said Kim, have no one to blame but themselves, as they had little engagement with company boards, chose not to engage in shareholder activism, but all the while continued to rubber stamp CEO pay, board appointments and mergers and acquisitions. Gold mining shareholders were in short, “like sheep being led to slaughter”.
Paulson’s Call to Action
The solution, according to Paulson & Co, is shareholder representation on company boards, investor rights agreements with company boards, company accountability to shareholders, the sacking of poor performing CEOs and board members, and the alignment of CEO compensation with share price performance. As all of these tactics are typical activist hedge fund tactics, it’s not really surprising that Paulson, as an activist hedge fund firm, would make these suggestions.
However, it is in the modus operandus and implementation of the scheme that there is arguably a more radical departure, since this is where the Shareholders Gold Council (SGC) comes in, with Paulson calling for a Council comprising a broad base of major (institutional) gold mining equity holders to come together and make recommendations on board appointments, CEO pay, company takeovers, as well as to make recommendations on annual general meeting (AGM) and extraordinary general meeting (EGM) voting decisions.
But still, is this really a new departure? In one way it is not, because there are perfectly good proxy advisory firms, such as Institutional Shareholder Services(ISS) and Glass, Lewis and Co which between them provide the same type of corporate governance and proxy voting research that Paulson’s Shareholders Gold Council is envisioning, and that are specialists in doing so for every major listed company in the world including every major exchange listed gold mining company.
Paulson and Co’s presentation even mentioned ISS, saying that the new Council would be ‘similar to ISS‘. According to Reuters’ June article, the Paulson led Council “will begin by releasing research reports on the gold mining sector… betting that shining spotlight on the space will result in greater accountability“. But is this just more of the same?
From a coverage standpoint, there are already countless sell-side (Wall Street) research reports covering all of the world’s leading gold mining companies that are published by a host of investment banks, in addition to umpteen buy-side research reports on the gold mining sector published by countless investment institutions and hedge funds, as well as the aforementioned governance and proxy voting research reports published by ISS and Glass Lewis.
If this new Shareholders Gold Council succeeds in gaining board level representation and in influencing investment and acquisition policy, and CEO compensation and board appointments, then this may in some way make a difference to future shareholder returns in the sector. But at this stage its impossible to say what type of influence, if any, such a Shareholders Gold Council would generate.
The Elephant in the Room
There is one topic, however, that an investor led Shareholders Gold Council could research, analyse and investigate, but for some mysterious reason has chosen not to. This is an issue that goes to the heart of a gold mining company’s operations and the performance of its share price. We are talking here about the actual gold price, how that gold price is discovered and established in today’s gold markets, whether that gold price is manipulated by bullion bank traders, and whether that gold price is subject to central bank interventions that attempt to control and stabilize it.
Simply put, the price that gold mining companies receive for their gold mining output is the most important driver of gold mining share price performance, and not the company’s cost base. We are assuming here that gold mining companies do not hedge their sales. Just look at how gold mining company stocks perform in an environment of a strongly rising or strongly falling gold price. The stock prices move up or down strongly since they are highly leveraged to corresponding gold price changes.
Take for example a simple model of a gold mining company. Its total revenue will depend on how much gold it extracts, processes and sells, and at what price it sells this gold. That’s the top line. The bottom line will be the profits remaining after subtracting total costs incurred by the mining company, which to some extent are fixed. These costs include operating costs (mining costs, processing costs, and corporate, general and administrative costs) and capital expenditure etc. Beyond this, impairments and writedowns on investments will also create an extra hit, as well as merger and acquisition costs.
As the gold price is most often quoted and understood in a price per ounce, the gold mining sector and the investment analysts which cover this sector like to calculate corresponding cost per ounce metrics, including operating costs per ounce of gold produced, total cash costs per ounce, and more recently an All-In Sustaining Cost (AISC) per ounce.
Total cash cost is a historic metric that was devised by the now defunct Gold Institute. It can be viewed as a standard metric for production cost in the gold mining sector. Cash costs would include all costs associated with producing the gold, such as direct production costs, smelting, refining, transport, and administration costs of a mine.
All-In Sustaining Cost (AISC) is a metric introduced by the World Gold Council in June 2013 which aims to try to reflect costs beyond cash costs. AISC includes cash costs but then adds other costs such as general administrative expenses (head office costs) and costs associated with maintaining and replenishing a mining company’s operations, i.e. for sustaining production. It thus includes capital expenditure and exploration costs.
So what Paulson & Co’s Shareholders Gold Council is planning, in addition to publishing research reports, is to try to have an impact on cost reduction, such as reducing CEO and board compensation, as well as to prevent gold miners making costly mistakes on acquiring overvalued mines which they will then have to take writedowns on in the future. This may all be very logical and make a difference in some way, but what the Shareholders Gold Council is not planning to do is to analyse and research anything about the gold price, which is, as was just stated above, the most important determinant of shareholder return and price performance in the gold sector.
Resources & Firepower, but Don’t mention the Gold Price
The Shareholders Gold Council, which on paper will have immense research resources and firepower and influence, will not it seems devote any time or resources to questioning anything to do with the gold price and will just take it a a given. This to me is a completely lost opportunity given that there is ample material for analysis in this area, some of which would surprise institutional and hedge fund investors in the gold space if they bothered to look. Much of this material has been documented on this website and elsewhere, such as by GATA.
The entire structure of the world’s largest and most influential contemporary gold markets has little to do with physical gold. The gold price is predominantly established and discovered in two markets, the London Gold Market and the COMEX gold futures market which between them trade very little physical gold but do trade vast quantities of synthetic gold and gold derivatives. See ‘What sets the Gold Price – Is it the Paper Market or Physical Market?‘.
The vast majority of ‘gold’ trading in the London Gold Market is of unallocated gold which is merely a claim against a bullion bank, and is a form of synthetic or paper gold in as much of a way as the gold futures derivatives that trade on COMEX are. See ‘Bullion Banking Mechanics‘ and an accompanying infographic for details. All gold demand that flows into unallocated paper gold by definition does not flow into physical gold demand, a gold miner’s bread and butter. So unallocated gold syphons off real physical gold demand into a paper substitute and suppresses real demand for physical gold.
There is no trade reporting in the London Gold Market, and the London Bullion Market Association (LBMA) whose remit it is to release it has continually stalled on publishing any trade reporting. This reinforces the opacity of the one of the main gold markets which is responsible for gold price discovery. Nor is there any transparency about where major gold-backed ETFs such as GLD, that store their gold in the London gold vaults, actually source this gold from, some of which is borrowed from central banks.
Nor it there any reporting of any activity in the London gold lending market or of outstanding central bank gold loans or gold deposits. Central bank gold loans are therefore another suppressing influence on the gold price.
This is also ample evidence that the Bank for International Settlements has continually taken a keen interest in the ‘free market’ price of gold and has at times discussed at the highest levels (i.e. the governors of major central bank) how to control the gold price. See ‘New Gold Pool at the BIS Basle, Switzerland’ Part 1 and Part 2.
The COMEX gold futures market is in effect a casino which has a huge influence on gold price discovery but where little physical gold ever changes hands. Some major bullion banks have also been fined recently for manipulating the gold price. These are the same bullion banks which ran the London Gold Fixings and which now run the LBMA Gold Price auctions, auctions whose prices the gold mining companies take to sell their gold output at.
Generally speaking, gold mining executives don’t want to touch any subject related to the gold price, nor does its representative body the World Gold Council. Now it seems, the institutionally backed Shareholders Gold Council likewise does not want to broach the ‘gold price’ subject.
Which is a shame, for by not examining the issue, and by not using some of their research resources to analyse and investigate and to ‘write reports‘ on the ample evidence of structural inefficiencies and interventionalist forces that hold back the gold price, Paulson’s Shareholders Gold Council, in the same way as the gold mining shareholders which they criticize, will remain “like sheep being led to slaughter”.
On 29 January 2018, the Commodity Futures Trading Commission (CFTC) Division of Enforcement together with the Criminal Division of the US Department of Justice and the FBI announced criminal and civil enforcement actions against 3 global investment banks and 5 traders for involvement in trade spoofing in precious metals futures contracts on the US-based Commodity Exchange (COMEX). COMEX is by far the largest and most active futures exchange in the world for trading precious metals futures including gold futures contracts and silver futures contracts.
The CFTC is bringing the charges under what it calls “commodities fraud and spoofing schemes“. Spoofing of orders is illegal under the US Commodity Exchange Act. The 3 banks in question are Deutsche Bank, UBS, and HSBC. As part of the CFTC’s prosecution, Deutsche Bank is being fined US$ 30 million, UBS US$ 15 million, and HSBC US$ 1.6 million.
The CFTC’s Order against the banks maintains that from at least February 2008 to at least September 2014, Deutsche Bank traders were involved in a scheme to manipulate precious metals futures prices by spoofing orders for those futures contracts, and also by extension that this spoofing triggered customer stop-loss orders.
Similarly, the CFTC Order says that UBS traders on the UBS precious metals spot trading desk were involved in spoofing orders in gold futures and silver futures contracts from January 2008 to at least December 2013, and likewise triggering customer stop-loss orders.
In the case of HSBC, the CFTC says that HSBC, through its New York office, spoofed orders in gold futures and other precious metals. However, the CFTC Order does not specify the period under which HSBC is accused of engaging in such spoofing. This may be because, according to the CFTC, HSBC cooperated during the CFTC’s investigation and offered to settle. But overall, the spoofing by one or more of the named banks was said to have run from January 2008 to at least September 2014.
As part of the process, the CFTC also announced civil enforcement actions against precious metals traders Andre Flotron formerly of UBS, and James Vorley and Cedric Chanu formerly of Deutsche Bank for what the CFTC describes as “spoofing and engaging in a manipulative and deceptive scheme in the precious metals futures market“.
According to the Department of Justice (DoJ) press release on the matter, Vorley (a UK citizen) and Chanu (a French citizen) are being charged in a criminal complaint in the Northern District of Illinois court with “conspiracy, wire fraud, commodities fraud, and spoofing offenses in connection with executing a scheme to defraud involving both solo and coordinated spoofing on the COMEX“. During that time, Vorley was based in London with Deutsche bank and Chanu was based in London and Singapore with Deutsche Bank.
Flotron is charged in an indictment in the District of Connecticut for “conspiracy to commit spoofing, wire fraud, and commodities fraud” during the time when he worked at UBS as a precious metals trader on the UBS trading desks in Zürich, Switzerland, and Stamford, Connecticut USA.
The DoJ statement also names Edward Bases and John Pacilio, and says that Bases and Pacilio are charged in a criminal complaint with “commodities fraud in connection with an alleged scheme to engage in both solo and coordinated spoofing on the COMEX“. Bases was at Deutsche Bank until June 2010 at which point he moved to a unit of Merrill Lynch. Pacilio worked for a unit of Merrill Lynch during 2010 and 2011 when some of his trade spoofing is alleged to have taken place.
Note that according to the DoJ “a complaint, information, or indictment is merely an allegation, and all defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law“.
For an excellent explanation of some of the spoofing activities that these traders are accused of have engaged in, please see the recent article ‘US Gold & Silver Futures Markets: “Easy” Targets‘ by specialist researcher Allan Flynn posted on the BullionStar website and on his own ‘COMEX We have a Problem’ website here.
Spot, Fixes and Futures in the Gold and Silver Markets
While gold and silver futures trading is one side of the wholesale precious metals markets, it is not the full picture, because as well as COMEX, the over-the-counter (OTC) London Gold and Silver Markets are key gold and silver trading venues for these same investment banks, as well as key components of gold and silver price determination. And central to the London Gold Market and London Silver Market are the daily fixing auctions for gold and silver.
The investment bank precious metals traders who trade gold and silver in the wholesale market do so not just through exchange traded futures contracts or OTC contracts, but both. And they constantly trade across the London and COMEX ‘venues’ at the same time. In both gold and silver, predominant price discovery for the international gold price and for the international silver price occurs in the London OTC Market and on COMEX.
Price movements in one location, for example on COMEX futures, get instantly reflected in the London OTC spot quotes, and vice versa. Therefore price quotes in the London market, including opening prices and round prices for the London daily Fixings can be influenced by moving the futures prices. For example, if there is collusion among traders to push the futures prices lower so as to benefit other traders who have positions based on Fixing levels, this can be done by the trader from one bank pushing the futures price lower, while a trader at a second bank benefits from this movement in terms of his exposure to the Fixing price which has also moved lower. Such price movements are documented in the ‘Final Notice’ that the UK Financial Conduct Authority (FCA) levied against Barclays Bank and one of its precious metals traders in May 2014 (See below for details).
As highlighted below, the majority of the banks mentioned in the CFTC fines were also central to these gold and silver fixings, and astoundingly one of the traders mentioned above and subject to the CFTC and DoJ actions, James Vorley, was even a director of both of the private companies that oversaw the London Gold and Silver Fixings.
With the CFTC / DoJ fines, complaints and indictments against the banks and their traders for manipulating gold and silver futures prices now in the public arena, the question of manipulation of the London Gold and Silver fixing auctions now comes back in focus, and the question now needs to be asked – where are the regulators in investigating (and perhaps prosecuting) banks and traders for gold and silver fixings manipulation?
Because even a superficial look at the banks and traders, the trading desks and their operations, the trader chat room transcripts, and the connections between the futures and fixings at the time of the fixings should give even the most dullard regulators and prosecutors pause for thought.
Deutsche Bank and HSBC – New York Futures and London Fixings
As a reminder, the London Silver Fixings were a daily auction of (paper) silver at midday in London that operated up until August 2014 when they were replaced by the LBMA Silver Price auction. The London Gold Fixings were a twice daily auction of (paper) gold at 10:30 am and 3:00 pm in London that operated up until March 2015 when they were replaced by the LBMA Gold Price auction.
The London Silver Fixings were administered by a private company called London Silver Market Fixing Ltd (LSMFL) whose three members were Deutsche Bank, HSBC and the Bank of Nova Scotia. Deutsche Bank, HSBC and Bank of Nova Scotia were also the only 3 entities allowed to take directly participate in the silver fixings, and each had become a member of the silver fixings by acquiring one of the 3 traditional companies that had run the fixings – ScotiaBank acquired Mocatta in 1997, Deutsche acquired the old Sharps Pixley in 1993, and HSBC had acquired Samuel Montagu and rebranded as HSBC during its 1990s reorganisation.
The London Gold Fixings were administered by a private company called London Gold Market Fixing Ltd (LSMFL) which had 5 members, namely Deutsche Bank, HSBC, Bank of Nova Scotia, Barclays, and Societe Generale (SocGen). Only these 5 banks were allowed to directly participate in the gold fixings. These 5 banks were also the only banks in the gold fixings from 2004 all the way to 2014.
So from “January 2008 to at least September 2014“, the period stipulated by the CFTC that covers manipulation of gold and silver futures, the same banks, i.e. Deutsche Bank and HSBC, were at all times active members of the daily gold and silver fixings in London.
Even more amazingly, James Vorley, the Deutsche Bank trader who is the subject of the CFTC / DoJ accusation of “conspiracy, wire fraud, commodities fraud, and spoofing offenses” on COMEX was a Director of both London Silver Market Fixing Ltd and London Gold Market Fixing Ltd from September 2009 until May 2014, which is all the way through the period of ‘at least February 2008 to at least September 2014’, when Deutsche Bank precious metals traders were involved in a scheme to manipulate precious metals futures prices by spoofing orders for those futures contracts. You couldn’t make this up!
Vorley, along with Deutsche’s Kevin Rodgers resigned from the London Gold and Silver Market fixing companies in May 2014, when Deutsche Bank dropped out of the daily gold and silver fixing auctions. Matthew Keen of Deutsche Bank had previously resigned as a director of the gold and silver fixing companies in January 2014 when he left the bank and was replaced by Rodgers who was Global Head of Foreign Exchange at Deutsche Bank at that time. But curiously, Rodgers also left Deutsche at the end of April 2014.
There is plenty written elsewhere on how the LBMA maintained its stranglehold over the London gold and Silver reference price benchmarks when the old tarnished fixings were no longer viable and the bullion banks running those fixings had to quickly pretend to distance themselves from the fixing while at the same time maintaining total control over the new versions of the auctions. But in summary, in August 2014, when the new LBMA Silver Price auction was launched by the LBMA with just 3 bank members, HSBC and Bank of Nova Scotia continued as 2 of these members. When the LBMA Gold Price auction was launched in March 2015, the existing incumbents of the old Gold Fixings namely Barclays, HSBC, Bank of Nova Scotia and SocGen, rejoined the new auction along with its new members, UBS and Goldman Sachs.
Barclays Mini-Puke: Gaming the Gold Fixing
In May 2014, the UK Financial Conduct Authority (FCA) fined Barclays Bank £26 million for systems and controls failings and conflicts of interests in relation to the London Gold Fixing auctions of which it was one of the 5 bullion bank participants. According to the FCA, these failings persisted from 2004 (when Barclays joined the fixings) until 2013. The year 2004 was also when the gold and silver fixings stopped being conducted in a room in Rothschilds offices and began to be conducted remotely.
As part of the May 2014 fines of Barclays, the FCA also fined Daniel Plunkett, one of the Barclays London-based precious metals traders, £95,000. While the fine for Plunkett was specifically to penalise his placement and cancellation of orders which were intended to manipulate prices within the rounds of the fixing, the commentary supplied by the FCA on the case is interesting in that it shows how gold futures price movements external to the fixings also very much influenced the fixing round prices during the auction that the FCA penalised Plunkett for.
At the start of the 28 June 2012 Gold Fixing at 3:00 p.m., the Chairman proposed an opening price of USD1,562.00. However, the proposed price quickly dropped to USD1,556.00, following a drop in the price of August COMEX Gold Futures (which was caused by significant selling in the August COMEX Gold Futures market, independent of Barclays and Mr Plunkett).
You can see here the interactions and influences that the COMEX gold futures prices movements had on the opening price that the Gold Fixing Chairman proposed to the begin the auction with. And now that we know there was collusion between the various precious metals traders across the bullion banks, it is not difficult to accept that the traders from one bank could be moving the futures lower to not only help themselves but as a favour to precious metals traders at other cartel banks that were also involved in the collusion schemes.
Banging the Fixes – Chat Room Transcripts from Class Action Suits
But there is also direct evidence of trader collusion to manipulate prices in the London gold and silver fixings in the form of trader chat room transcripts. This is not speculation, it is fact. Facts that have been documented in class action proceedings in the New York courts brought by plaintiffs against the bank member of the London Gold and Silver Market Fixing companies.
Again we turn to Allan Flynn, who was probably first to call attention to the manipulation of the silver market by these same banks with his extensive and succinct coverage of the evidence from the New York class action suits in his 8 December 2016 article ‘How to Trigger a Silver Avalanche by a Pebble: “Smash(ed) it Good”‘ posted on the BullionStar website and on Allan’s website here, and in his follow-up article from 14 December 2016 titled “When Gold Pops 1430 We Whack It“, posted on his website and on the ZeroHedge website here.
In the silver class action suit against Deutsche Bank, HSBC, the Bank of Nova Scotia, and UBS, Deutsche agreed in April 2016 to settle with the plaintiffs and to produce“instant messages, and other electronic communications” as part of the settlement. See BullionStar article ‘Deutsche Bank agrees to settle with Plaintiffs in London Silver Fixing litigation‘for full details of the April 2016 announcement.
Attorneys for the plaintiffs subsequently, as Allan Flynn documented “submitted samples of dozens of chat room messages between UBS and Deutsche Bank“, indicating “many efforts to artificially suppress gold prices, and to manipulate gold prices at the time of the Fixing.”
“One chat see’s a Deutsche Bank trader confirming with a UBS trader his trading had indeed influenced the Gold Fix: ‘u just said u sold on fix.‘ The UBS traded replied ‘yeah,’ ‘we smashed it good.‘
Another transcript example contained the following exchange:
“During a trading day which had been less successful the Deutsche Bank trader assured his opposite trader from Bank of Nova Scotia that ‘at least the fix will be fun . . . make it all back there!!!!!!‘”
So here we have precious metals traders actually colluding to artificially move the price levels on the fixings.
Technology Facilitated the Manipulation of the Fixes since 2004
In June 2015, I wrote an article on the BullionStar website titled “The pre-2015 London Gold Fixings – More technologically advanced than reported” in which I set out substantial evidence that the former Gold Fixings up until March 2015 were not some archaic dial-in telephone based auction using paper and pencils to set the price as the mainstream financial media choose to believe, but that the auctions since 2004 in both gold and silver employed sophisticated web-based technology apps, trading software, messaging apps and chat apps, all of which could also facilitate collusion and price manipulation across multiple trading desks in ‘rival’ banks.
When Rothschild pulled out of the Gold Fixings in 2004, Barclays took Rothschild’s place and the fixings moved to a remote model where traders from each of the 5 members banks of the Gold Fixing coordinated remotely instead of meeting twice a day face to face. At the same time, the fixing members introduced this new communication technology to assist their twice daily fixes.
In November 2014, the Swiss financial regulator FINMA announced that an investigation of UBS had found manipulation and attempted manipulation of by UBS Zurich employees of forex and precious metals benchmarks. At the time, Mark Branson, FINMA’s CEO said that “we have [also] seen clear attempts to manipulate fixes in the precious metals markets.”
According to FINMA, it found that chat groups between traders at multiple banks were central to how the manipulation was coordinated:
“In the improper business conduct in foreign exchange and precious metals trading, electronic communication platforms played a key role. The abusive practices were evidenced in the information exchanged between traders in chat groups. FINMA examined thousands of suspicious chat group conversations between traders at multiple banks.“
The introduction of new technology and chat apps from 2004 is also highly correlated with academic research findings showing “a decade of manipulation” of the gold fixing from 2004 until 2013. As highlighted in the Bloomberg article “Gold Fix Study Shows Signs of Decade of Bank Manipulation“
“Abrantes-Metz and Metz screened intraday trading in the spot gold market from 2001 to 2013 for sudden, unexplained moves that may indicate illegal behavior. From 2004, they observed frequent spikes in spot gold prices during the afternoon call. The moves weren’t replicated during the morning call and hadn’t happened before 2004, they found.
Large price moves during the afternoon call were also overwhelmingly in the same direction: down.
On days when the authors identified large price moves during the fix, they were downwards at least two-thirds of the time in six different years between 2004and 2013. In 2010, large moves during the fix were negative 92 percent of the time, the authors found.
There’s no obvious explanation as to why the patterns began in 2004, why they were more prevalent in the afternoon fixing, and why price moves tended to be downwards, Abrantes-Metz said in a telephone interview this week.”
Well, there is an obvious explanation. The downward price movements identified by Abrantes-Metz and Metz started in 2004 because that’s when the London gold fixings went to a remote model and technology including chat apps was introduced. The suspicious price movements were more prevalent in the London afternoon because that was also the New York morning where COMEX gold futures were more active and where New York based traders could force the futures down causing a corresponding drop in the opening prices and round prices in the fixing auctions.
Prosecuting banks and traders for price manipulation on COMEX futures while ignoring the far larger London market and its gold and silver fixings looks like a job half done. Trading desks and their traders are agnostic to trading venues and with interlinked markets, the COMEX and the London Fixings are two sides of the same coin.
With blatant evidence that the same banks and traders were involved in both markets, and with actual chat room transcripts now confirming that precious metals traders across multiple banks were colluding in fixing price manipulation, then why are their no active regulatory investigations of trader manipulation of the London Gold and Silver Fixings?
Is it because of lack of jurisdictional authority or are the regulators and criminal enforcement agencies such as the FCA, DoJ, FINMA and the German BAFIN too terrified of opening a can of worms into the huge liabilities that would arise from proving a decade long criminal manipulation of the London Gold and Silver price benchmarks and that were used throughout the world the value of everything from ISDA contracts to institutional precious metals products, to ETFs.
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?
The London Bullion Market Association (LBMA) has just released a first update on the quantity of physical gold and silver holdings stored in the ‘LBMA’ London vaulting network. The LBMA press release explaining the move, dated 31 July, can be read here.
This vaulting network, administered by the LBMA, comprises a set of precious metals vaults situated in London that are operated by the Bank of England and 7 commercial vault operators. For simplicity, this set of vaults can be called the LBMA London vaults. The 7 commercial vault operators are HSBC, Brinks, ICBC Standard Bank, Malca Amit, JP Morgan, Loomis and G4S. ICBC Standard outsources its vault management to Brinks. It’s possible that to some extent HSBC also outsources some of its vault management to Brinks.
Strangely, the LBMA’s initial reporting strangely only runs up to 31 March 2017, which is 4-months prior to the first publication date of 31 July. This is despite the fact that new LBMA vault holdings data is supposed to be published on a 3-month lagged basis, which would imply a latest report coverage date of 30 April.
At the end of April 2017, the Bank of England separately began publication of gold vault holdings for the gold bars that the Bank stores in custody within its own vaults. The Bank of England reporting is also on a 3-month lagged basis (and the Bank actually adheres to this reporting lag). See BullionStar article “Bank of England releases new data on its gold vault holdings”, dated 28 April 2017, for details of the Bank of England vault reporting initiative.
Currently, the Bank of England is therefore 1 month ahead of the LBMA vault data, i.e. on 31 July 2017, the Bank of England’s gold page was updated with Bank of England gold custody vault holdings as of 30 April 2017.
Ignoring the LBMA 3-month lagged vs 4-month lagged anomaly, the LBMA’s first vault reporting update, for vault data as of 31 March 2017, states that the 8 sets of vaults in question (which includes the Bank of England gold vaults) held a combined 7449 tonnes of gold and a combined 32078 tonnes of silver.
Also included in the first batch of LBMA data are comparable London vault holdings figures for gold and silver for each month-end date from July 2016 to February 2016 inclusive. Therefore, as of the 31 July 2017, there is now an LBMA dataset of 9 months of data, which will be augmented by one month each month going forward. Whether the LBMA will play catch-up and publish April 2017 month-end and May 2017 month-end figures simultaneously at the next reporting date of 31 August 2017 remains to be seen.
The New Vault Data – Gold and Silver
For 31 March 2017, the LBMA is reporting 7449 tonnes of gold stored across the 8 sets of vault locations. For the same date, the Bank of England reported 5081 tonnes of gold held in the Bank of England vaults. Therefore, as of 31 March 2017, there were 2368 tonnes of gold ‘not in the Bank of England vaults’ (or at least 2368 tonnes of gold not counted by the Bank of England data).
Of the gold not in the Bank of England vaults, about 1510 tonnes of this gold in London was held by gold-backed Exchange Traded Funds (ETFs), mainly with the custodians HSBC and JP Morgan. These ETFs include the SPDR Gold Trust and various ETFs from ETF Securities, Source, iShares, and Deutsche Bank etc. This 1510 tonnes figure is taken from an estimate calculated at the end of April 2017 using data from the GoldChartsRUs website. See BullionStar article “Summer of 17: LBMA Confirms Upcoming Publication of London Gold Vault Holdings” dated 9 May 2017 for details of this ETF calculation.
Subtracting this 1510 tonnes of ETF gold from the 2368 tonnes of gold stored outside the Bank of England vaults means that as of 31 March 2017, there were only about 858 tonnes of gold stored in the LBMA vaults outside of the Bank of England vaults that was not held by gold-backed ETF holdings. See Table 1 below.
The lowest gold holdings number reported by the LBMA within its 9 months of vault data is actually the first month, i.e. July 2016. At month-end July 2016, the LBMA report shows total vaulted gold of 7283 tonnes. There was therefore a net addition of 166 tonnes of gold to the LBMA vaults between August 2016 and the end of March 2017, with net additions over the August to October 2016 period, followed by net declines over the November 2016 to February 2017 period.
Turning to silver, as of 31 March 2017, the LBMA is reporting total vaulted silver of 32,078 tonnes held in London vaults. The vaulted silver data also shows a notable increase over the period from the end of July 2016 to the end of March 2017, with a net 2485 tonnes of silver added to the vaults.
Since the Bank of England vaults only store gold in custody on behalf of customers and do not store silver, there are no silver holdings at the Bank of England and therefore there is no specific Bank of England silver reporting. The LBMA silver data therefore refers purely to silver vaulted with operators such as Brinks, JP Morgan, Malca Amit, HSBC, and Loomis.
There are currently at least 12,000 tonnes of silver stored in London on behalf of silver-backed ETFs such as the iShares Silver Trust (SLV), various ETF Securities products, a SOURCE ETF and some Deutsche Bank ETFs. Subtracting these ETF holdings from the full 32,078 tonne figure being reported by the LBMA would suggest that there are an additional ~ 20,000 tonnes of non-ETF silver held in the London vaults.
Previous Vault Estimates for Gold and Silver
Prior to the new LBMA and Bank of England vault holdings data reports, the only way to work out how much gold and silver were in the London vaulting network was through estimation. Between 2015 and 2017, a number of these estimates were calculated for gold and published on the BullionStar website and the GoldChartsRUs website.
The “Tracking the gold held in London” article, published on 5 October 2016, took a LBMA statement of 6500 tonnes of gold being in London, the earliest reference to which was from 8 February 2016 Internet Archive page cache, and also took a Bank of England statement that the Bank held 4725 tonnes as of the end of February 2016 period, and then it factored in that the UK net imported more than 800 tonnes of non-monetary gold up to August 2016, and also that ETFs had added about 399 tonnes over the same period. It also calculated, using GoldChartsRUS ETF data, that the London-based gold-backed ETFs held about 1679 tonnes of gold as of the end of September 2016.
Therefore, as of the end of September 2016, there could have been at least 7300 tonnes of gold held across the LBMA and Bank of England vaults, i.e. 6500 tonnes + 800 tonnes = 7300 tonnes. As it turns out, this estimate was quite close to the actual quantity of gold held in the LBMA and Bank of England vaults at the end of September 2016, which the LBMA’s new reporting now confirms to have been 7590 tonnes. The estimate is a lower number because it was unclear as to which initial date the LBMA’s 6500 tonnes reference referred to (in early 2016 or before).
Previous Vault Estimates Silver
At the beginning of July 2017, an article on the BullionStar website titled “How many Silver Bars are in the LBMA Vaults in London?” estimated that there were about 12,000 tonnes of Good Delivery silver bars held across 4 LBMA vault operators in London on behalf of 11 silver-backed Exchange Traded Funds. These ETFs and the distribution of their silver bars across the 4 vault operators of Brinks, Malca Amit, JP Morgan and HSBC can be seen in the following table.
Table 3: ETF Silver held across LBMA commercial vaults in London, early July 2017
The above article about the number of silver bars in the London vaults also drew on some data from precious metals consultancy Thomson Reuters GFMS, which each year publishes a table of identifiable above ground global silver supply in its World Silver Survey. One category of silver within the GFMS identifiable above ground silver inventories is called ‘Custodian Vaults’. This is distinct from silver holdings in ETFs and silver holdings in exchange inventories such as in COMEX approved vaults in New York. A simple way to view ‘Custodian Vaults’ silver holdings is as an opaque ‘unreported holdings’ category as opposed to the more the transparent ETF holdings and COMEX holdings categories.
For 2016, according to GFMS, this ‘Custodian Vaults’ silver amounted to 1571.2 million ounces (48,871 tonnes), of which 488.7 million ounces (15,200 tonnes), or 31% was represented by what GFMS calls the ‘Europe’ region. Unfortunately, GFMS do not break out the ‘Custodian Vaults’ numbers by individual country because they say that they receive the data on a confidential basis and cannot divulge the granularity. The early July article on BullionStar had speculated that:
“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.”
“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).
But here’s the catch. With the LBMA now saying that as of the end of March 2017 there were 1.031 billion ounces of silver, or 32078 tonnes, stored in the LBMA vaulting network in London (and 31238 tonnes of silver in London as of end of December 2016), of which at least 12,000 tonnes is in silver-backed ETFs, then that still leaves about 20,000 tonnes of silver in the London vaults, which is higher than the silver total attributed to the entire ‘custodian vault’ category’ in Europe (as per the GFMS 2016 report).
Even the lowest quantity in the 9 months that the LBMA reports on, which is month-end July 2016, states that the LBMA vaults held 951,433,000 ounces (29,593 tonnes), which after excluding silver ETFs in London, is still higher than the total ‘Custodian Vault’ category that GFMS attributes to the European region in 2016.
These new LBMA vault figures are basically implying that all of the GFMS custodian vault figure for Europe (and some more) is all held in London and not anywhere else in Europe. But that could not be the case as there is also a lot of silver vaulted in Switzerland and other European countries such as Germany, to think of but a few.
This begs the question, does the GFMS Custodian vault number for Europe need to be updated to reflect the gap between the non-ETF holdings that LBMA claims are in the London vaults and what GFMS is reporting in a European ‘Custodian vaults’ category? If the LBMA reporting actually broke down the silver vaulting quantity number into Good Delivery silver bars and other categories, it might help solve this puzzle as it would give an indication of how much of this 32,000 tonnes of silver is in the form of bars that are accepted for settlement in the London Silver Market i.e. Good Delivery silver bars.
Could some of this 32,000 tonnes of silver be in the form of silver jewellery, and private holdings of silver antiques and even silver artifacts? On the surface the LBMA reporting appears to say not since it states that:
“jewellery and other private holdings held by retailers, individuals and smaller vaults not included in the London Clearing system are not included in the numbers”
But because this statement reads rather ambiguously, by implication another interpretation of the LBMA statement could be that:
“jewellery and other private holdings held by retailers and individuals in vaults that are part of the London Clearing system are included in the numbers”
The London Clearing system here refers to the vaults of the 7 commercial vault operators.
Until GFMS comes back with a possible clarification of its ‘Custodian Vault’ figure for Europe, then this contradiction between the LBMA data for silver and GFMS data for silver will persist.
Large Bars but also Small Bars and Gold Coins
According to the LBMA’s press release, while “the LBMA vault holding data …represent the volume of Loco London gold and silver held in the London vaults offering custodian services“, surprisingly the new LBMA data includes “all physical forms of metal inclusive of large wholesale bars, coin, kilo bars and small bars.”
The inclusion of gold coins, smaller gold bars and gold kilobars in the LBMA vault data is bizarre because only large wholesale bars are accepted as Good Delivery in the London gold and silver markets, not gold coin, not smaller bars, and not gold kilobars. Even the LBMA website states that “the term Loco London refers to gold and silver bullion that is physically held in London. Only LBMA Good Delivery bars are acceptable for trading in the London market.”
Furthermore, the entire physical London Gold Market and physical London Silver Market revolve around the LBMA Good Delivery lists. Spot, forward and options trades on the London OTC gold and silver market are only referenced to a unit of delivery of a Good Delivery bar, both for gold and for silver.
This is the London Good Delivery gold bar. It must have a minimum fineness of 995.0 and a gold content of between 350 and 430 fine ounces….. Bars are generally close to 400 ounces or 12.5 kilograms”
For silver, the same guide states that:
“Unit for Delivery of Loco London Silver
This is the London Good Delivery silver bar. It must have a minimum fineness of 999 and a weight range between 750 and 1,100 ounces, although it is recommended that ideally bars should be produced within the range of 900 to 1,050 ounces. Bars generally weigh around 1,000 ounces.”
Additionally, all the new London-based gold futures contracts launched by the LME, ICE and CME also reference, if only virtually, the unit for Delivery of loco London gold, i.e. the London Good Delivery gold bar. They do not reference smaller gold bars or gold coins.
In contrast to the LBMA , the COMEX exchange where the famous COMEX 100 ounce gold futures contract is traded only reports vault inventories of gold and silver where the bars satisfy that contract for delivery, i.e. the contract for delivery is one hundred (100) troy ounces of minimum fineness 995 gold of an approved brand in the form of either “one 100 troy ounce bar, or three 1 kilo bars”. COMEX do not report 400 oz gold bars or gold coins specifically because the contract has nothing to do with these products. Then why is the LBMA reporting on forms of gold that have nothing to do with the settlement norms of its OTC products in London?
Additionally, the LBMA website also states that “only bars produced by refiners on the [Good Delivery] Lists can be traded in the London market.“ All of this begs the question, why does the LBMA bother including smaller bars, kilogram bars and gold coins? These bars cannot be used in settlement or delivery for any standard London Gold Market transactions.
Perhaps these smaller gold bars and gold coins have been included in the statistics so as to boost the total reported figures or to make reverse engineering of the numbers more difficult? While the combined volumes of smaller bars and kilobars probably don’t add up to much in terms of tonnage, the combined gold coin holdings of central banks stored at the Bank of England could be material.
For example, the United Kingdom, through HM Treasury’s Exchange Equalisation Account (EEA), claims to hold 310.3 tonnes of gold in its reserves, all of which is held in custody at the Bank of England. The latest EEA accounts for 2016/2017, published 18 July 2017 state that “The gold bars and gold coin in the reserves were stored physically at the Bank’s premises.” See Page 43, Exchange Equalisation Accounts for details. Many more central banks, for historical reasons, also hold gold coins in their reserves. See Bullionstar article “Central Banks and Governments and their gold coin holdings” for some examples.
As another example, the Banque de France in Paris holds 2435 tonnes of gold of which 100 tonnes is in the form of gold coins, and 2,335 tonnes of gold bars. Even though these gold coins are held in Paris, this shows that central bank gold coin holdings could materially affect LBMA gold reporting that includes ‘gold coins‘ within the rolled up number. But such gold coins cannot be traded within the LBMA / LPMCL gold trading / gold clearing system and if present would overstate the number of Good delivery gold bars within the system.
The Bank of England gold page on its website also only refers to Good Delivery ‘gold bars’ and says nothing about gold coins, which underlines the special status to which the Bank of England assigns Good Delivery gold bars in the London Gold Market. Specifically, the BoE gold page states that:
“..we provide gold storage on an allocated basis, meaning that the customer retains the title to specific gold bars in our vaults”
“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“
The Bank of England has now confirmed to me, however, that the gold holdings number that it reports on its website “is the total of all gold held at the Bank” and that this “includes coins that belong to the Exchange Equalisation Account (EEA) which are held by the Bank on behalf of Her Majesty’s Treasury (HMT)”
This means that the total gold number being reported by both the Bank of England and the LBMA needs to be adjusted downward by some percentage so as to reflect the amount of real Good Delivery gold bars in the London vaults. What this downward adjustment should be is unclear, as neither the Bank of England nor the LBMA break out their figures by category of gold bars versus gold coins.
LBMA numbers – Obscured Rolled-up numbers
Another shortcoming in the LBMA’s vault reporting is that it does not break down the gold and silver holdings per individual vault. The LBMA will be only releasing 2 highly rolled-up numbers per month, one for gold and one for silver, for example, 7449 tones for gold and 32078 tonnes for silver in the latest month.
Contrast this to New York based COMEX and ICE gold futures daily reporting, which both do break down the gold holdings per New York vault. Realistically, the LBMA was never going to report gold or silver holdings per vault, as this would be a bridge too far towards real transparency, and would show how much or how little gold and silver is stored by each London vault operator / at each London vault location.
This does not, however, stop the LBMA from claiming transparency and in its 31 July press release it states that:
“According to the Fair and Effective Markets Review (see here for further details) ‘…in markets where OTC trading remains the preferred model, authorities and market participants should continue to explore the scope for improving transparency, in ways that also enhance effectiveness.’“
Real transparency, as opposed to lip-service transparency, would be supported by providing an individual breakdown of the number of Good Delivery gold and silver bars stored in each of the 8 sets of vaults at each month end. If they want to include gold coins, smaller gold bars, and gold kilo bars as extra categories, then this could also be itemised on a proper report. It would also only take any decent software developer about 1 day to write and create such a report.
There is also the issue of independently auditing these LBMA numbers. The issue is essentially that there is no independent auditing of these LBMA numbers nor will there be. So there is no second opinion as to whether the data is accurate or not.
The Bank of England gold vault reporting is also short of transparency as it does not provide a breakdown of how much of the reported gold is held by central banks, how much gold is held by bullion banks, how much of the central bank gold is out on loan with the bullion banks, and how much gold, if any, is held on behalf of ETFs at the Bank of England as sub-custodian. Real transparency in this area would provide all of this information including how much gold the LPMCL bullion clearing banks HSBC, JP Morgan, UBS, Scotia Mocatta and ICBC Standard hold at the Bank of England vaults.
On the issue of ETF gold held at the Bank of England, it has been proven that at times the Bank of England has acted as a gold custodian for an ETF, for example, during the first quarter 2016, the SPDR Gold Trust held up to 29 tonnes of gold at the Bank of England, with the Bank of England acting in the capacity of sub-custodian to the SPDR Gold Trust. See BullionStar article “SPDR Gold Trust gold bars at the Bank of England vaults” for details.
The London Float
The most important question with this new LBMA vault reporting is how much of the 7449 tonnes of gold stored in London as of the end of March 2017 is owned or controlled by bullion banks.
Or more specifically, what is the total level of LBMA bullion bank unallocated gold liabilities in the London market compared to the amount of real physical gold bars that they own or control.
This ‘gold owned or controlled by the bullion banks’ metric can be referred to as the ‘London Float’. LBMA bullion banks can maintain their own holdings of gold bars which they buy in the market or import directly, and they can also borrow other people’s gold thereby controlling this gold also. Some of this gold can be in the LBMA commercial vaults. Some can also be in the Bank of England vaults.
In its press release, the LBMA states that:
“The physical holdings of precious metals held in the London vaults underpin the gross daily trading and net clearing in London.”
This is not exactly true. Only gold which is owned or controlled by the bullion banks can underpin gold trading in London. Allocated gold sitting in a vault that is owned by central banks, ETFs or investors and which does not have any other claim attached to it, does not underpin anything. It just sits there in a vault.
As regards gold bars stored in the LBMA vaults in London, these bars can either be owned by central banks at the Bank of England, owned by central banks at commercial vaults in London, owned by ETFs at the commercial vaults in London, owned or controlled by bullion banks, and owned by investors (either institutional investors, hedge funds, private individuals etc). On occasion, some ETF gold has at various times been at the Bank of England.
If central bank gold is held in allocated form and not lent out, then it is ‘off the market’ and can’t be ‘used’ by any other party such as a LBMA bullion bank. If central bank gold is lent out or swapped out to bullion banks, then it can be used or even sold by those bullion banks. The LBMA uses the euphemism ‘liquidity’ to refer to this gold lending. For example, from the LBMA’s recent press release on the new vault reporting it says:
“In addition, the Bank of England also offers gold custodial services to central banks and certain commercial firms, that facilitate central bank access to the liquidity of the London gold market.”
ETF gold when it is held within an ETF cannot legally be used by other entities since it is owned by the ETF and allocated to the ETF. Institutionally owned gold or private owned gold when it is allocated is owned by the holder. It could in theory be lent to bullion banks also.
Some of the LBMA bullion banks have gold accounts at the Bank of England. How many of these banks maintain gold holdings within the Bank of England vaults nobody will say, not the Bank of England nor the LBMA nor the bullion banks, but it at least extends to the 5 members of London Precious Metals Clearing Limited (LPMCL) which are HSBC, JP Morgan, Scotia Mocatta, ICBC Standard and UBS. Gold accounts for bullion banks undoubtedly also extend to additional bullion banks beyond the LPMCL members because many bullion banks have been involved in gold lending at the Bank of England for a long time, for example Standard Chartered, Barclays, Natixis, BNP Paribas, Deutsche Bank, and Goldman Sachs, and these banks would at some point have to take delivery of borrowed gold at the Bank of England.
Note, the gold brokers of the London Gold Market have for a long time, as least since the 1970s, been able to store some of their gold bars at the Bank of England vaults. These brokers were historically Samuel Montagu, Mocatta, the old Sharps Pixley, NM Rothschild and Johnson Matthey.
Since LBMA bullion banks can maintain gold accounts at the LBMA commercial vaults in London, and because some of these banks have gold accounts at the Bank of England also, then this London “gold float” can comprise gold bars at the commercial vaults and gold bars at the Bank of England vaults. It is however, quite difficult to say exactly what size this London bullion bank gold float is at any given time.
Whatever the actual number, its not very big in size because if you subtract central bank gold and ETF gold from the overall LBMA gold figure (of 7449 tonnes as of the end of March 2017) then whatever is left is not a very big quantity of gold bars, and at least some of this residual gold stored in the LBMA commercial vaults is owned by institutions, hedge funds, private individuals and platforms such as BullionVault.
In September 2015, a study of central bank gold held at the Bank of England calculated that about 3779 tonnes of Bank of England custody gold can be accounted for by central bank and monetary authority gold holdings. See “Central bank gold at the Bank of England” for details and GoldChartsRUs page “LBMA/BOE VAULTED GOLD, 2016 Update – The London Float”. Compared to the 4725 tonnes of gold held at the Bank of England at the end of February 2016, this would then mean that there were about 946 tonnes of gold at the Bank of England that was “unaccounted for by central banks”. This was about 20% of the total amount of gold held at the Bank of England at that time.
However, some of this 946 tonnes was probably central bank gold where the central bank owner had not publicly divulged that it held gold at the Bank of England. Many central banks around the world that were contacted as part of the research into the “central bank gold at the Bank of England calculation” either didn’t reply or replied that they could not confirm where their gold was stored. See BullionStar article “Central Banks’ secrecy and silence on gold storage arrangements” for more details.
After factoring in these unknown central bank gold holders at the Bank of England, the remaining residual would be bullion bank gold. It could therefore be assumed that a percentage of gold stored at Bank of England, somewhere less than 20% and probably also less than 10%, is owned by bullion banks. Since central bank gold holdings, on paper at least are relatively static, the monthly changes in gold holdings at the Bank of England therefore probably mainly reflect bullion bank gold movements rather than central bank gold movements.
If we look back now at the LBMA vault data for gold as of 31 March 2017, how much of this gold could be bullion banks (London float) gold.
LBMA total gold vaulted: 7449 tonnes
Bank of England gold vaulted: 5081 tonnes
Gold in commercial LBMA vaults: 2368 tonnes
Gold in ETFs: 1510 tonnes
Gold in commercial vaults not in ETFs: 858 tonnes
Gold in commercial vaults not in ETFs that is allocated to institutions & hedge funds = x
i.e. 7449 – 5081 = 2368 – 1510 = 858
Assume 10% of the gold at the Bank of England is bullion bank gold. Also assume bullion banks gold hold some gold in LBMA commercial vaults.
Therefore total bullion bank gold could be (0.1 * 5081) + (858 – x) = 508 + 858 – x = 1366 – x.
Since x has to be > 0, then the bullion bank London float is definitely less than 1300 tonnes and probably less than 1000 tonnes. The bullion banks might argue that they can borrow more gold from central banks, take gold out of the ETFs, and even import gold from refineries. All of these options are possible, but still, the London bullion bank float is not that large. And it is this number in tonnes of gold which should be compared to the enormous volumes of ‘paper gold’ trading that occur in the London Gold Market each and every trading day.
For example in June 2017, the LBMA clearing statistics state that 21 million ounces of gold was cleared each trading day in the London Gold Market. That’s 653 tonnes of gold cleared each day in London. With a 10 to 1 ratio of gold trading to gold clearing, that’s the equivalent of 6530 tonnes of gold traded each day in the London gold market, or 143,660 tonnes over the 22 trading days of June. Annualised, this is 1.632 million tonnes of gold traded per year (using 250 trading days per year).
And sitting at the bottom of this trading pyramid is probably less than 1000 tonnes of bullion bank gold underpinning the gigantic trading volumes and huge unallocated gold liabilities of the bullion banks. So you can see that the London gold trading system is a fractional-reserve system with tiny physical gold underpinnings.
In May 2011, during a presentation at the LBMA Bullion Market Forum in Shanghai China, on the topic of London gold vaults, former LBMA CEO Stewart Murray included a slide which stated that:
Investment – more than ETFs
Gold Holdings have increased by ~1,800 tonnes in past 5 years, almost all held in London vaults
Many thousands of tonnes of ETF silver are held in London
Central banks hold large amounts of allocated gold at the Bank of England
Various investors hold very substantial amounts unallocated gold and silver in the London vaults
The last bullet point of the above slide is particularly interesting as it references “very substantial amounts’ of unallocated gold and silver. Discounting the fact for a moment that unallocated gold and silver is not necessarily held in vaults or held anywhere else, given that it’s just a claim against a bullion bank, the statement really means that investors have ‘very substantial amounts‘ of claims against the bullion banks offering the unallocated gold and silver accounts i.e. very substantial liabilities in the form of unallocated gold and silver obligations to the gold and silver unallocated account holders.
If a small percentage of these claim holders / investors decided to convert their claims into allocated gold and silver, especially allocated gold, then where are the bullion banks going to get the physical gold to give to these converting claim holders? Neither do the claim holders of unallocated positions have any way of knowing how accurate the LBMA vault reporting is, because there is no independent auditing of the positions or of the report.
UBS and LBMA
The last line of the LBMA press release about the new vault reporting states the following:
This line includes an embedded link to the Teves report within the press release. This opens a 7 page report written by Teves about the new vault reporting. By definition, given that this report is linked to in the press release, it means that Joni Teves of UBS had the LBMA vault reporting data before it was publicly released, otherwise how could UBS have written its summary.
In her report, Teves states that a UBS database estimates that there are “1,485 tonnes of gold worth about $60bn and about 13,759 tonnes of silver worth about $7.85bn are likely to be held in London to back ETF shares“.
These UBS numbers are fairly similar to the ETF estimates for gold (1510 tonnes) and silver (12040 tonnes) that we came up with here at BullionStar, and so to some extent corroborate our previous ETF estimates. Teves also implies that some of the gold in the Bank of England figure is not central bank gold but is commercial bank gold as she says:
“let’s say for illustration’s sake that about 80% to 90% of BoE gold holdings are accounted for by the official sector.“
The statement on face value implies that 10% – 20% of Bank of England gold is not central bank gold. But why the grey area phrase of “let’s say for illustration’s sake”. Shouldn’t the legendary Swiss Bank UBS be more scientific than this?
Teves also says assume “negligible amount (in commercial vaults) comprises official sector holdings“, and she concludes that “this suggests that over the past year, an average of about 2,945 to 3,450 tonnes ($119-$139 bn) of investment-related gold was held in London.”
What she is doing here is taking the average of 9 months of gold holdings held in the LBMA commercial vaults (which is 2439 tonnes) and then adding 10% and 20% respectively of the 9 month average of gold held at the Bank of England (which is 506 and 1011 tonnes) to get the resulting range of between 2945 and 3451 tonnes.
Then she takes the ETF tonnes estimate (1485) away from her range to get a range of between 1460 and 1965 tonnes, as she states:
… “Taking these ETF-related holdings into account would then leave roughly around 1,460 to 1,965 tonnes or about $59bn to $79bn worth of gold in unallocated and allocated accounts as available pool of liquidity for OTC trading activities“
But what this assumption fails to take into account is that some of this 1,460 to 1,965 tonnes that is in allocated accounts is not available as a pool of liquidity, because it is held in allocated form by investors precisely so that the bullion banks cannot get their hands on it and trade with it. In other words, it is ring fenced. Either way, a model will always output what has been input into it. Change the 10% and 20% range assumptions about the amount of commercial bank gold in the Bank of England vaults and this materially alters the numbers that can be attributed to be an ‘available pool of liquidity for OTC trading activities’.
Additionally, the portion of this residual gold that is in ‘unallocated accounts’ is not owned by any investors, it is owned by the banks. The ‘unallocated accounts’ holders merely have claims on the bullion banks for metal that is backed by a fractional-reserve trading system.
In her commentary about the silver held in the London vaults, Teves does not comment at all about the huge gap between her ETF silver in London (which UBS states as 13,759 tonnes), and the full 32000 tonnes reported by the LBMA,and does not mention how this huge gap is larger than all the ‘Custodian Vault’ silver which Thomson Reuters GFMS attributes to the entire ‘Europe’ region.
The amount of gold in the London LBMA gold vaults (incl. Bank of England) that is not central bank gold, that is not ETF gold, and that is not institutional allocated gold is quite a low number. What this actual number is difficult to say because a) the LBMA will not produce a proper vault report that shows ownership of gold by category of holder, and b) neither will the Bank of England in its gold vault reporting provide a breakdown between the gold owned by central banks and the gold owned by bullion banks. So there is still no real transparency in this area. Just a faint chink of light into a dark cavern.
On the topic of London vaulted silver, there appears to be a lot more silver in the LBMA vaults than even GFMS thought there was. It will be interesting to see how GFMS and the LBMA will resolve their apparent contradiction on the amount of silver stored in the London LBMA vaults.
Guillermo Barba, the Mexican financial and economic journalist, has recently published an article on his website confirming that through an information request that he had made to Mexico’s central bank, Banco de México (Banxico), the central bank has now released what amounts to a relatively comprehensive list of Mexico’s gold bars held in storage at the Bank of England gold vaults in London.
Mexico’s list is an inventory of wholesale market gold bars that Banixco owns and stores in custody at the Bank of England vaults in London. In the contemporary parlance of the gold market, most people would call this type of holding an allocated gold holding, but more historically in the Bank of England world, it has been known as an “earmarked gold” holding or a “set-aside gold” holding because the specific bars are set-aside for a specific central bank, in other words the central bank has its name attached to those particular bars (earmarked).
Wholesale gold bars are also known as London Good Delivery gold bars or variable weight gold bars, and each weighs in the region of 400 troy ounces ( ~ 12.5 kilos). On the Banixco list, there are 7,265 wholesale gold bars listed. This new list is one of the very few detailed central bank gold bars lists (weight lists) which exists in the public domain, and it could be useful for a number of purposes (see below).
Barba has done persistent and diligent work over the last 6 years, by patiently obtaining more and more information from the Mexican central bank about its gold reserves via various Freedom of Information Requests (FOIA), and shedding some light on this usually opaque area of gold and central banking.
2011: Gold Reserves Skyrocket, Central Bank Secrecy
Before we examine this newly published list from the Banco de México, a little background is useful. As of February 2017, Mexico held about 120.7 tonnes of gold in its official gold reserves, which puts the country at the tail-end of the world’s Top 30 official/country gold holders.
All through the 2000s, Banixco only held a few tonnes of gold in its official reserves, ranging from about 4 tonnes and 9 tonnes. This situation changed in early 2011 when the Mexican central bank purchased just over 93 tonnes of gold in March 2011 (first reported by the FT in early May 2011). This brought Mexico’s gold holdings up from 7.1 tonnes to about 100.2 tonnes by the end of Q1 2011. The country’s official gold holdings were boosted further to about 125.2 tonnes by Q2 2012 when Banixco bought more than 16 tonnes in March 2012. See World Gold Council quarterly changes of central bank gold holdings for the underlying data.
After Mexico made these sizeable gold purchases in early 2011, Guillermo Barba submitted various FOIAs to the Mexican central bank about the country’s newly acquired gold stash. Unfortunately, most of these information requests received weak responses from the Bank. For example, the question:
“How many bars of gold make up the recent acquisition of 93 tonnes of gold made by Banxico en the first quarter of 2011”
received a response from Banixco of:
“…we inform you that the information that you request is classified as reserved”
The Mexican central bank also added that:
“due to the variability of the content of gold in the bars, it is not possible to specify with certainty the exact number of bars purchased.”
We later learned that the Bank of England purchased this “gold” on behalf of Mexico. On the surface, Banixco saying that it could not “specify with certainty the exact number of bars purchased” seems to suggest that at least some of the Mexican gold at that time in 2011 was held on a unallocated basis and possibly out on loan to bullion banks in the London gold lending market.
If Mexico bought actual gold bars at the outset in Q1 2011, the gold bought for Mexico was probably already sitting in the Bank of England vaults. Some of it may then have been lent out to bullion banks immediately. Alternatively, at the outset in Q1 2011, the Bank of England could have ‘sold’ to Mexico a fine ounce claim on a number of gold ounces, that could then be allocated to actual gold bars on a future date. Without seeing the purchase invoices of the Mexican gold transactions, it’s hard to say what the initial purchase transactions referred to.
Another question Barba put to Banixco in 2011 was:
“In what country or countries is the gold that forms part of the International Reserves of Mexico physically located?”
“access to the requested information will not be granted, since it is classified as reserved”
Barba’s article addressing his questions in 2011 and Banixco’s responses, which was published in September 2011, can be read here.
“At month’s end, April 2012, Banco de Mexico maintained a position in fine gold of 4,034,802 ounces, of which only 194,539 ounces are located in the territory of the United Mexican States.
“countries where these reserves are located are ‘United States of America, England and Mexico.‘
‘the acquisitions of gold during March and April 2012 are under custody in England’.”
[the gold is stored in] “the city of London, England, where more than 99% of the gold which the Bank of Mexico maintains outside the country is presently under custody…”
With 4,034,802 ounces (125.5 tonnes) held in total, and 194,539 ounces (6.05 tonnes) held in Mexico, there were 3,840,263 ounces (119.44 tonnes) held outside Mexico, which was 95.2% of Mexico’s total gold holdings. With 99% of the foreign gold in London, this equated to about 3.8 million ounces (118 tonnes) held in London, and about 38,000 ounces (1.2 tonnes) held in the US with the Federal Reserve Bank (FRB).
Mexican Federal Auditors not happy with Banixco
In February 2013, Guillermo Barba also highlighted that the Mexican Federal Audit Office (Auditoría Superior de la Federación or ‘ASF’) Report for the Year 2011 was highly critical of Banixco’s relaxed approach to its gold purchases at the Bank of England.
The ASF reprimanded Banixco, saying that it:
“has not conducted physical inspections to gold to verify compliance with the terms of acquisition and the conditions regarding its storage, in order to be certain of the physical custody of this asset”
According to the ASF, Banixco only held documents about the “Terms and Conditions” of the gold holdings contract with the Bank of England, with records of “the dates of the transactions” and also some “payment vouchers”.
ASF also recommended that the Mexican central bank:
“make a physical inspection with the counterparty [Bank of England] that has the gold under its custody, in order to be able to verify and validate its physical wholeness.”
February 2017: Partial Glimpse of Bar List
Fast forward to 17 February 2017, and Barba published another article confirming that following some further information requests to the Mexican central bank, Banixco had clarified the following facts about its gold holdings:
“Of the 3.881 million ounces of gold that the Bank of Mexico has at the close of October 2016, 98.95% are held in the United Kingdom, 0.0004% in the Federal Reserve Bank of the United States and the remaining 1.05 % In Mexico.”
“The Bank of Mexico has the serial number of each ingot protected in accounts assigned abroad. From these accounts, the number of ingots rises to 7,265. It should be noted that for unallocated accounts there is no specific serial number and therefore the number of ingots cannot be determined.”
“Assigned accounts are those that are owned on specific ingots with serial numbers, and segregated from the rest.“
Therefore, for each gold ingot held in a foreign domiciled allocated gold account, Bank of Mexico is in possession of the bar serial numbers. This was the first information from Banixco that specifically addressed the number of gold bars held by the Mexican central bank at the Bank of England.
As of October 2016, with 3,881,000 ounces of gold held by Mexico in total, 98.95% of which was held at the Bank of England in London, that would infer that 3,840,250 ounces of gold (119.4 tonnes) were held in London, with only about 1,550 ounces (0.0004%) held at the FRB in New York.
Assuming each gold bar contains 400 oz troy ounces of gold, then 7,265 bars would contain 2.906 million troy ounces. It would also mean that about 934,000 troy ounces (29 tonnes) of Mexico’s gold are held unallocated accounts (where the gold is not unassigned as specific gold bars). The existence of unallocated gold accounts is revealing since it proves that the Bank of England doesn’t just offer its central bank customers the traditional custody facility of earmarked / set-aside / allocated gold bars. It also offers what either amounts to gold accounts that are denominated on a fine ounces basis but are fully backed by a pool of gold, or alternatively these unallocated accounts may not be fully backed (i.e. fractionally-backed).
To facilitate gold lending in the London Gold Market between central banks (the lenders) and commercial bullion banks (the borrowers), the Bank of England would have to operate account facilities for its customers that were in a sense dematerialised because when a central bank lends gold bars to a bullion bank, it does not necessarily (and probably doesn’t) receive back the same gold bars, because those bars have either been sold in the market or onward lent in the market. Therefore an account convention with specific bars earmarked to a customer would not facilitate this process. Only an account where the unit is a balance of fine troy ounces of gold would allow these transfers to occur. In this scenario, the central bank still insists it has a fine troy ounce gold holding, even though its gold has been lent out to a bullion bank.
The other alternative is that the Bank of England is selling its central bank customers a gold account service where, for example, Central Bank A pays dollar cash upfront for 100 tonnes of gold, and the Bank of England signs a piece of paper saying “We the Bank of England have a liability to Central Bank A for 100 tonnes of gold“, but that gold is not necessarily in the Bank of England vaults or anywhere else. The Bank of England just has to be able to allocated the claim to real physical gold bars if Central Bank A ever decides that its 100 tonne gold asset be converted to allocated gold bars.
Without seeing the “Terms and Conditions” of these “unassigned gold” contracts with the Bank of England, its hard to say how exactly the “unassigned gold” is backed up, and to what extent it’s backed up.
Historically, the Bank of England only ever offered earmarked gold accounts to its central bank customers, and on a few occasions in the 1950s and 1970s it actually pushed back on plans to offer customers fine gold ounce balance accounts (and got legal advice on this), because the Bank did not want to go down the road of ending up with one pool of gold backing multiple central bank customer accounts, as this went against the concept of custody of assets and title to specific gold, and furthermore the Bank was afraid of the legal implications of central banks depositing specific bars but getting back different bars which might not be of the same quality etc.
March 2017: Banixco Releases Detailed Bar List
Initially, as per his 17 February article, Banixco only provided Barba with a list of the 7,265 gold bars showing two columns of data, the first column listing internal Bar-IDs from the Bank of England’s gold bar database, and the second column listing the refiner brand names of the bars. This first list can be seen here, but it’s not really that important, because a few weeks later, Banixco agreed to provide Barba with a second, much more comprehensive list. This second list is featured in Barba’s article dated 7 March 2017.
The latter Banixco gold bar list file can be downloaded here. For each of the 7,265 gold bars listed (in 7265 Rows), the list contains 7 columns or variables of data, namely:
Sequence Number from 1 to 7265
“Serial Number” (which is an internal Bank of England sequence number)
Brand Code (an 8-digit code)
Gross Weight (troy ounces to 2 decimal places)
Assay (gold Fineness)
Fine Weight (troy ounces to 3 decimal places)
Although the Banixco list does not include the real serial numbers that each gold refiner stamps on its own gold bars, the combination of columns “refiner brand – gross weight – assay – fine weight” in the list should be adequate to uniquely identify each bar, because don’t forget, these are variable weight bars and each bar for a given refiner will have a different fine weight when expressed to 3 decimal places. The start of the list looks as per the below screenshot:
Overall, the 7265 gold bars weigh 2,919,911.55 troy ounces and contain a total of 2,912,000 fine troy ounces of gold.The list provided by Banixco is sorted by ‘Brand Code’ which is an 8-digit Bank of England database table field that consists of refiner code (digits 1-4), refiner location (digits 5-6) and sequence number (digits 7-8). For example, Valcambi is VALCCH01 i.e. VALC, CH = Switzerland, and 01.
The 2nd column in the list is a Bank of England internal ID bar number which is either 6 or 7 digits. On Mexico’s list, the highest number is 1047712 and the lowest number is 704989, but the numbers present on the list run in short and broken sequential ranges of, for example, 1039142-1039221 or 880338-880446. If this is a sequential internal series of numbers that started at 000001, it would suggest that more than 1 million individual Good Delivery Bars have passed through the Bank of England’s 10 gold vaults since the numbering series was initiated. The series may not be fully sequential at all, and could possibly also include some part of the number signifying vault location, although this is doubtful.
The Refiner Bar Names on Mexico’s Gold Bar List
There are 24 ‘Brand Codes’ listed on the Mexico’s gold bar list, including such refiners as South Africa’s Rand Refinery, Australia’s Perth Mint, Switzerland’s Valcambi, Argor-Heraeus and Metalor, the Royal Canadian Mint, Germany’s Heraeus, Johnson Matthey, the US Assay Office, the State Refinery (Moscow), the Central Bank of the Philippines Gold Refinery, and N.M. Rothschild. Many of these brands held at the Bank of England are the same refiner brands which are trusted and popular in the retail investment gold bar market, and carried by BullionStar, such as Perth Mint, Argor-Heraeus, Heraeus, Royal Canadian Mint, and Johnson Matthey.
Some refiners have, or have had over time, refinery operations in multiple geographic locations, so some refiners have multiple Brand Codes listed in the Bank of England gold bar database. One example is Johnson Matthey, which on the Banixco list is listed as 4 separate entities, namely Johnson Matthey Salt Lake City USA, Johnson Matthey and Co Ltd [GB], Johnson Matthey & Mallory Ltd. Toronto, and Johnson Matthey Hong Kong Ltd. Another example is Metalor, which is present on the Banixco list in 3 guises, namely Metalor Hong Kong, Metalor USA, and Metalor Technologies SA (Switzerland).
Other long-standing refiners have gone through various mergers over time and their historic parts are now all part of a larger refining group. This applies to “Perth Mint” bars, which on the Banixco list are represented by Western Australia Mint (Trading as AGR) , AGR Joint Venture Melbourne and the Royal Mint (Perth).
On an individual Brand Code basis, the below table shows these refinery brand names, and the number of gold bars of each brand name that show up on Mexico’s gold bar weight list.
First up is the Rand Refinery, with Banixco holding 1735 rand Refinery gold bars. Nearly a quarter of Banixco’s earmarked bars are Rand Refinery bars. It’s not surprising that on a refiner name basis, Banixco holds more Rand Refinery gold bars than any other bar brand. After all, Rand Refinery of South Africa is said to have refined over 50,000 tonnes of gold since it was established in 1921, which is about 30% of all the gold that has ever been mined. A lot of Rand Refinery bars were also historically sold in the London Gold Market and held within the bank of England vaults. This is probably still the case.
For example, according to the Bank of England archives, most of the gold held by the International Monetary Fund (IMF) at the Bank of England was (as of the late 1970s) in the form of Rand Refinery gold bars. Whether this is still the case is unclear, as the IMF is ultra secretive about its remaining gold reserves and never reports facts such as gold bar weight lists.
Second up is AGR Joint Venture, which is now technically part of the Perth Mint, with the Bank of Mexico holding 1519 of these bars. Together with the Rand refinery bars, these two brands makeup 45% of Banixco’s total holdings. Adding in the bars of Johnson Matthey Toronto and Valcambi Switzerland, nearly 70% of Mexico’s bars are from just 4 bar brands.
Grouping refiner names where appropriate such as all Johnson Matthey names and all Perth Mint related names, results in a slightly different ranking, with Perth Mint taking pole position with 1892 bars held by Banixco, and with Rand Refinery and Johnson matthey in exact joint second place with 1736 bars a piece in the Mexican holdings.
Under this grouping approach, 74% of Mexico’s gold bars have been manufactured by just 3 refinery groups, rising to nearly 85% if Valcambi bars are included.
One of the reasons for highlighting this, is that it could be useful for extrapolating the frequency of gold bar brands that might be held across gold accounts generally at the Bank of England. While this extrapolation might be flawed, it does suggest that there are certain refinery bars brands that are more common than others within the Bank of England vault network.
The Bank of England did not just go and transfer newly refined gold bars into the Banixco account. It populated the Banixco allocated gold holding (in 2011 or after) with a selection of bars from lots of different eras. Hence the presence of NM Rothschild bars, US Assay Office bars, old Royal Mint (Perth) bars, as well as AGR Joint venture bars. Its also possible that a bullion bank or bullion banks executed the order on behalf of Mexico with gold that these banks store at the Bank of England (bullion banks also store gold at the bank of England for those who were not aware of this fact).
AGR Joint Venture bars were only produced until 2003. See here for details of AGR’s history. NM Rothschild bars have not been produced since 1967. Royal Mint (Perth) bars are extremely old and have not been produced under this name for a very long time. LBMA Good Delivery records don’t even specify when Royal Mint (Perth) bars ceased to be produced. The last Johnson Matthey bars produced in England were in 2005. US Assay Office bars (from the New York Assay Office) haven’t been produced since 1997 at the latest, and mostly well before that. Therefore, even though the Banixco gold bar list doesn’t list year of manufacture for each bar, some inferences can be made to show that a lot of the bars allocated to the Mexican gold account at the Bank of England are old bars that are no longer in production. But that’s not surprising because gold is a store of wealth and has been for 1000s of years, so an old bar is as good as a newer bar.
The bar list is also interesting in that it shows that when the Bank of England (or a bullion bank with a gold holding at the Bank of England) either buys physical gold bars on behalf of a central bank customer, or allocates specific bars to a central bank gold account for a gold balance that was previously in a unallocated account, it is either transferring gold from a Bank of England inventory holding, or by buying gold from another central bank that’s already in its vaults, or else buying gold from a bullion bank that probably also has gold stored at the Bank of England, part of which may be gold that has flowed out of gold-backed Exchange Traded Funds that store their gold in the London vaults.
Which brings us to some critical points. Using the “refiner brand – gross weight – assay – fine weight” combination for bars on the Banixco list, it should be possible to cross reference these bars against records of gold bars that have been held over time in gold-backed ETFs such as GLD and IAU. Various gold researchers such as Warren James maintain databases with records of all gold bars that are in and that have ever been in gold-backed ETFs. If a bar on the Banixco list has a match in those database tables, then it proves that the Bank of England sources gold for its central bank customers that was at one time held in one of the ETFs. And this probably happens, since the bullion banks such as HSBC and JP Morgan are active in allocating and deallocating gold in and out of ETFs, and they hold gold accounts at the Bank of England and are active in the gold lending market.
More importantly, if in the future, a gold-backed ETF flags up one or more gold bars that were among the 7265 gold bars on the Banixco list, and Banixco hasn’t reported selling any gold, then it will prove that Banixco either lent or swapped some of ts gold while still accounting for it under ‘gold and gold receivables’ in its balance sheet, and it will prove that central bank gold is being double counted while on loan, i.e. claimed to be held by a central bank, while really being held in a gold-backed ETF.
On 5 February, the Financial Times of London (FT) featured a story revealing that the London Bullion Market Association (LBMA) plans to begin publishing data on the amount of real physical gold actually stored in the London precious metals vaulting network. The article titled “London gold traders to open vaults in transparency push” can be read here (accessible via FT subscription or via free monthly FT read limit).
This new LBMA ‘monthly vault data’ will, according to the FT’s sources, be published on a three-month lagged basis, and will:
“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 shadowy source quoted in the FT article is attributed to “a person involved in setting up the programme”, but at the same time, although “the move [to publish the data] is being led by the LBMA“, the same LBMA ”declined to comment” for the FT story. This then has all the hallmarks of a typical authorised leak to the media so as to prepare the wider market for the data release.
On 16 February, the World Gold Council in its “Gold Investor, February 2017” publication featured a focus box on the same gold vault topic in its “In the News” section on page 4, where it states:
“Enhanced transparency from the Bank of England
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.
As a leading custodian of gold, with one of the largest vaults in the world, the Bank of England’s decision is highly significant. Not only will it enhance the transparency of the Bank’s own gold operations; it will also support the drive towards greater transparency across the gold market.
The data reveals the total weight of gold held within the Bank of England’s vaults and includes five years of historical data.”
The Proposed Data
Based on these two announcements, it therefore looks like the gold vault data release will be a combined effort between the LBMA and the Bank of England, the blood brothers of the London Gold Market, with the Bank of England data being a subset of the overall LBMA data. While neither of the above pieces mention a release date for the first set of data, I understand that it will be this quarter, i.e. sometime before the end of March. On a 3 month lagged basis, the first lot of data would therefore probably cover month-end December 2016, because that would be a logical place to start the current dataset, rather than, for example, November 2016.
While the Bank of England data looks set to cover a 5 year historical period, there is no indication (from the FT article) that the wider LBMA vault data will do likewise. From the sparse information in the FT article, the LBMA data will “show gold bars held“. Does it mean number of gold bars, or combined weight of gold bars? What exactly it means, we will have to wait and see.
The Bank of England data will capture “total weight of gold held“. Notice that in the above World Gold Council piece it also states that the data will cover the amount of gold that the Bank of England “holds on behalf of other central banks.” There is no mention of the amount of gold that the Bank of England holds on behalf of commercial bullion banks.
Overall, this doesn’t exactly sound like it is “enhancing the transparency of the Bank’s own gold operations” as the World Gold Council puts it. Far from it. Enhancing the transparency of the Bank of England’s gold operations would require something along the lines of the following:
Identities of all central banks and official sector institutions (ECB / IMF / BIS / World Bank) holding active gold accounts at the Bank of England. Active gold accounts meaning non-zero balances
Identities of all commercial / bullion banks holding active gold accounts at the Bank of England
A percentage breakdown between the central bank gold held in the Bank of England vaults and the bullion bank gold held in the Bank of England vaults
An indicator for each gold account as to whether it is a set-aside earmarked custody account or whether it is a fine troy ounce balance account
Information for each central bank and official sector institution as to whether any of “its” gold is lent, swapped or repo’d
Information for the bullion bank gold accounts as to whether the gold recorded in those accounts is borrowed, sourced from swaps, sourced from repos, or otherwise held as collateral for loans
Information on the gold accounts of the 5 LPMCL clearing banks showing how much gold each of these institutions holds each month and whether the Bank of England supplies physical gold clearing balances to these banks
Information on when and how often the London-based gold-backed ETFs store gold at the Bank of England, not just using the Bank of England as sub-custodian, but also storage in their own names, i.e. does HSBC store gold in its own name at the Bank of England which is used to supply gold to the SPDR Gold Trust
Information on whether and how often the Bank of England intervenes into the London Gold Market and the LBMA Gold Price auctions so as to supply gold in price smoothing and price stabilisation operations in the way that the Bank of England’s Terry Smeeton seems to have been intervening into the London Gold Market in the 1980s
Information on the BIS gold holding and gold transactions settlements accounts at the Bank of England and the client sub-account details and central bank identities for these accounts
Information on gold location swaps between gold account holders at the Bank of England and gold accounts at the Federal Reserve Bank of New York, the Banque de France, and the Swiss National Bank, and BIS accounts in those locations
Gold for oil swaps and oil for gold swaps
Anything less is just not cricket and does not constitute transparency.
And its important to remember that any publication of gold vault data by the LBMA and Bank of England is not being done because the LBMA suddenly felt guilty, or suddenly had an epiphany on the road to Damascus, but, as the FT correctly points out:
“the LBMA, whose members include HSBC and JPMorgan, hopes to head off the challenge and persuade regulators that banks trading bullion should not have to face more onerous funding requirements.”
The Current Data
As a reminder, there is currently no official direct data published on the quantity of real physical gold bars held within the London gold vaulting system. This vaulting system comprises the vaults of eight vault operators (see below for list).
Once a year in its annual report, the Bank of England provides a Sterling (GBP) value of gold held by its gold custody customers, while the LBMA website states a relatively static total figure of “approximately 6,500 tonnes of gold held in London vaults” that it claims are in the vaults in its network. But beyond these figures, there is currently no official visibility into the quantity of London Good Delivery gold bars held in the London vaults. There are, various ways of estimating London gold vault data using the Bank of England annual figure and the LBMA figure together with Exchange Traded Fund gold holdings and central bank divulged gold holdings at the Bank of England.
The September 2015 estimates calculated that there were 6,256 tonnes of gold in total in the London vaults, with 5,134 tonnes at the Bank of England (as of end February 2015), and 1,122 tonnes in London “not at the Bank of England“, all of which was accounted for by gold-backed ETFs which store their gold in London. These calculations implied that there was nearly zero gold stored in London outside the Bank of England that was not accounted for by ETF holdings.
The “Tracking the gold held in London” estimates from September 2016 used a figure of 6,500 tonnes of gold in total in the London vaults, and showed that there were 4,725 tonnes inside the Bank of England vaults, of which about 3,800 tonnes was known to be held by central banks (and probably a lot of the remainder was held by central banks also) and that there were 1,775 tonnes of gold outside the Bank of England. The article also calculated that there were 1,679 tonnes of gold in the gold backed ETFs that store their gold in London, so again, there was very little gold in the London vault network that was not accounted for by ETFs and central bank gold.
The Vaults of London
Overall, there are 8 vault operators for gold within the LBMA vaulting network. These 8 vault operators are as follows:
The Bank of England
HSBC Bank plc
JP Morgan Chase
ICBC Standard Bank Plc
Malca-Amit Commodities Ltd
G4S Cash Solutions (UK) Limited
Loomis International (UK) Ltd
HSBC, JP Morgan and ICBC Standard are 3 of the London Gold Market’s clearing banks that form the private company London Precious Metals Clearing Limited (LPMCL). The other two member of LPMCL are Scotia Mocatta and UBS. Brink’s, Malca-Amit, G4S and Loomis are the aforementioned security companies. The LBMA website lists these operators, alongside their headquarters addresses.
Bizarrely, the FT article still parrots the LBMA’s spoon-fed line that the vaults are “in secret locations within the M25 orbital motorway”. But this is far from the truth. Many of the London vault locations are in the public domain as has been covered, for example, on this website, and the FT knows this:
It’s slightly disappointing that we spend time and effort informing the London financial media where some of the London gold vaults are, and then they continue to parrot the LBMA’s misleading “secret locations” line. I put this fake news down to a decision by the FT editors, who presumably have a stake in playing along with this charade so as not to rock the boat with the powerful investment banks that they are beholden to.
The FT also reminds us in its article that “last year a gold vault owned by Barclays, which can house $80bn of bullion, was bought by China’s ICBC Standard Bank.“
This Barclays vault in London was built by and is operated by Brink’s, and presumably after being taken over by ICBC Standard, it is still operated by Brink’s. Logistically then, this ICBC Standard vault is most likely within the Brink’s complex, a location which is also in the public domain, and which even hosts an assay office as was previously mentioned here over a year ago. The Barclays vault (operated by Brink’s) is even mentioned in a Brink’s letter to the SEC in February 2014, which can also be seen here -> Brinks letter to SEC February 2014.
Given the fact that there are eight sets of vaults in the London vault system (as overseen by various groups affiliated to the LBMA such as the LBMA Physical Committee, the LBMA Vault Managers Working Party, the gold clearers (London Precious Metals Clearing Limited), and even the LBMA Good Delivery List referees and staff, then one would expect that whatever monthly vault data that the LBMA or its affiliates publishes in the near future, will break out the gold bar holdings and have a distinct line item in the list for each vault operator such as:
HSBC – w tonnes
JP Morgan – x tonnes
ICBC Standard – y tonnes
Brink’s – z tonnes
At the LBMA conference in Singapore last October, there was talk that there were moves afoot for the Bank of England to begin publishing data on the custody gold it holds on a more regular basis. It was also mentioned that this data could be extended to include the commercial bank and security carrier vaults but that some of the interested parties were not in favour of the idea (perhaps the representative contingents of the powerful HSBC and JP Morgan). Whatever has happened in the meantime, it looks like some data will now be released in the near future covering all of the participating vaults. What this data will cover only time will tell, but more data than less is always welcome, and these data releases might also help show how near or how far we were with earlier estimates in trying to ascertain how much gold is in the London vaulting system that is not accounted for by ETF holding or central bank holdings.
Revealing the extent of the gold lending market in London is critical though, but this is sure to remain a well-kept secret, since the LBMA bullion banks and the Bank of England will surely not want the general market to have any clue as to which central banks don’t really have any gold while still claiming to have gold (the old gold and gold receivables trick), in other words, that there is serious double counting going on, and that some of the central bank gold has long gone out the door.
The European Central Bank (ECB), creator of the Euro, currently claims to hold 504.8 tonnes of gold reserves. These gold holdings are reflected on the ECB balance sheet and arose from transfers made to the ECB by Euro member national central banks, mainly in January 1999 at the birth of the Euro. As of the end of December 2015, these ECB gold reserves were valued on the ECB balance sheet at market prices and amounted to €15.79 billion.
The ECB very recently confirmed to BullionStar that its gold reserves are stored across 5 international locations. However, the ECB also confirmed that it does not physically audit its gold, nor will it divulge a bar list / weight list of these gold bar holdings.
Questions and Answers
BullionStar recently put a number of questions to the European Central Bank about the ECB’s gold holdings. The ECB Communications Directorate replied to these questions with answers that appear to include a number of facts about the ECB gold reserves which have not previously been published. The questions put to the ECB and its responses are listed below (underlining added):
Question 1: “The 2015 ECB Annual Report states that as at 31 December 2015, the ECB held 16,229,522 ounces of fine gold equivalent to 504.8 tonnes of gold. Given that the ECB gold holdings arose from transfers by the respective member central banks, could you confirm the storage locations in which this ECB gold is currently held (for example at the Bank of England etc), and the percentage breakdown of amount stored per storage location.”
ECB Response: “The gold of the ECB is located in London, Paris, Lisbon, New York and Rome. The ECB does not disclose its distribution over these places. The gold of the ECB is stored there because it was already stored there before ownership was transferred to the ECB and moving it was seen and is seen as too costly.“
Question 2: “Could you clarify as to how, if at all, this gold is audited, and whether it physical audited by the ECB or by a 3rd party?”
ECB Response: “The ECB has no physical audit of its gold bars. The gold bars that the ECB owns are individually identified and each year the ECB receives a detailed statement of these gold deposits. The central banks where the gold is stored are totally reliable.“
Question 3:“Finally, can the ECB supply a full weight list of the gold bars that comprise the 504.8 tonnes of gold referred to above?”
ECB Response: “The ECB does not disclose this information.“
London, New York, Paris, Rome, Lisbon
Given that some of the information shared by the ECB has arguably not been in the public record before, each of the 3 ECB answers above is worth further exploration.
In January 1999, when the Euro currency was created (Stage 3 of Economic and Monetary Union), each founding member national central bank (NCB) of the Euro transferred a quantity of foreign reserve assets to the ECB. Of these transfers, 85% was paid to the ECB in the form of US dollars and Japanese Yen, and 15% was paid to the ECB in the form of physical gold.
Initially in January 1999, central banks of 11 countries that joined the Euro made these transfers to the ECB, and subsequently the central banks of a further 8 countries that later joined the Euro also executed similar transfers to the ECB.
All of the foreign exchange and gold reserves that were transferred to and are owned by the ECB are managed in a decentralised manner by the national central banks that initiated the transfers. Essentially, each national central bank acts as an agent for the ECB and each NCB still manages that portion of reserves that it transferred to the ECB. This also applies to the transferred gold and means that the gold transferred to the ECB never physically moved anywhere, it just stayed where it had been when the transfers of ownership were made.
That is why, as the ECB response to Question 1 states: “The gold of the ECB is stored there because it was already stored there before ownership was transferred to the ECB”.
What is probably most interesting about the latest ECB statement is that it names 5 city locations over which the ECB’s gold is stored. The 5 gold storage locations stated by the ECB are London, New York, Paris, Rome and Lisbon. Since the gold transferred to the ECB in 1999 by the national central banks would have already been stored in central banks gold vaults, these 5 city locations undoubtedly refer to the gold vaults of:
the Bank of England
the Federal Reserve Bank of New York
the Banque de France
the Banca d’Italia
Banco de Portugal
The fact the ECB’s gold holdings are supposedly stored at these 5 locations can be explained as follows:
Between 4th and 7th January 1999, 11 central banks transferred a total of €39.469 billion in reserve assets to the ECB (in the form of gold, cash and securities). Of this total, 15% was in the form of gold, amounting to 24 million ounces of gold (747 tonnes of gold) which was valued at that time at €246.368 per fine ounce of gold, or €5.92 billion. The 85% transferred in the form of currencies comprised 90% US Dollars and 10% Japanese Yen. See pages 152 and 153 of ECB annual report 1999 for more details.
The 11 central banks that made the transfers to the ECB in January 1999 were the central banks of Belgium, Netherlands, Germany, France, Luxembourg, Italy, Ireland, Austria, Finland, Spain and Portugal. See Table 1 for details of these gold transfers, and the amount of gold transferred to ECB ownership by each central bank.
The value of reserves transferred to the ECB by each national central bank were based on a percentage formula called a ‘capital key’ which also determined how much each central bank subscribed to the founding capital of the ECB. This capital key was based on equally weighting the percentage of population and GDP each Euro founding member economy represented, therefore central banks such as Deutsche Bundesbank, Banque de France, and Banca d’Italia comprised the largest transfers, as can be see in Table 1. It also meant that these 3 central banks transferred the largest amounts of gold to the ECB, with the Bundesbank for example transferring 232 tonnes of gold to the ECB.
The Bundesbank gold transfer to the ECB in January 1999 took place at the Bank of England. The Bundesbank actually confirmed in its own published gold holdings spreadsheet that this transfer took place at the Bank of England. See spreadsheet Column 5 (BoE tonnes), Rows 1998 and 1999, where the Bundesbank gold holdings fell by 332 tonnes between 1998 and 1999 from 1,521 tonnes to 1,189 tonnes and also see Column 20 where gold lending rose from 149 tonnes to 249 tonnes. Therefore, between 1998 and 1999, 232 tonnes of gold was transferred from the Bundesbank gold account at the bank of England to the ECB account at the Bank of England, and 100 tonnes was added to the Bundesbank’s gold loans.
Paris and Rome
The Banque de France currently stores the majority (over 90%) of its gold reserves in its own vaults in Paris, so it it realistic to assume that when the Banque de France transferred 159 tonnes of gold to the ECB in January 1999, it did so using gold stored in the Banque de France vaults in Paris. Likewise, it is realistic to assume that the Banca d’Italia, which currently stores half of its gold reserves at its own vaults in Rome, transferred 141 gold stored in its Rome vaults to the ECB in 1999. This would explain the Paris and Rome gold holdings of the ECB. While a few ex French colony central banks are known to have historically stored gold with the Banque de France in Paris, none of the founding members of the Euro (apart from the Bundesbank) are on the record as having stored gold in Paris, at least not for a long time. The Banca d’Italia is not known for storing gold on behalf of other national central banks.
Lisbon and New York
The Banco de Portugal currently holds its gold reserves in Lisbon and also at the Bank of England, the Federal Reserve Bank of New York (FRBNY), and with the BIS. The ECB gold stored in Lisbon, Portugal most likely refers to the 18.2 tonnes of gold transferred by the Banco de Portugal to the ECB in January 1999, because a) that makes most sense, and b) the Banco de Portugal is not known as a contemporary gold custodian for other central banks.
Of the other 7 central banks that transferred gold to the ECB in January 1999, the central banks of Austria, Belgium and Ireland store most of their gold at the Bank of England so are the most likely candidates to have made gold transfers to the ECB at the Bank of England. See BullionStar blog “Central bank gold at the Bank of England” for more details of where central banks are known to store gold.
The Netherlands and Finland currently store some of their gold reserves at the Bank of England and at the Federal Reserve Bank of New York and probably also did so in 1998/99, so one or both of these banks could have made transfers to the ECB at the FRBNY. Another contender for transferring gold held at the FRBNY is the Spanish central bank since it historically was a holder of gold at the NYFED. It’s not clear where the central bank of Luxembourg held or holds gold but it’s not material since Luxembourg only transferred just over 1 tonne to the ECB in January 1999.
Greece and Later Euro members
Greece joined the Euro in January 2001 and upon joining it transferred 19.5 tonnes of gold to the ECB. Greece is known for storing some of its gold at the FRBNY and some at the Bank of England, so Greece too is a candidate for possibly transferring New York held gold to the ECB. In theory, the ECB’s New York held gold may not have even arisen from direct transfers from Euro member central banks but could be the result of a location swap. Without the national central banks or the ECB providing this information, we just don’t know for sure how the ECB’s New York gold holdings arose.
Another 7 countries joined the Euro after Greece. These countries were Slovenia on 1st January 2007, Malta and Cyprus 1st January 2008, Slovakia 1st January 2009, Estonia 1st January 2011, Latvia 1st January 2014, and Lithuania 1st January 2015. The majority of these central banks made gold transfers to the ECB at the Bank of England. In total these 7 central banks only transferred 9.4 tonnes of gold to the ECB, so their transfers are not really material to the ECB’s gold holdings.
These sales explain why the ECB currently only holds 504.8 tonnes of gold:
i.e. 766.9 t (including Greece) – 271.5 t sales + 9.4 t smaller member transfers = 504.8 t
The ECB does not provide, nor has ever provided, any information as to where the 271.5 tonnes of gold involved in these 2005-2009 sales was stored when it was sold. The fact that the ECB still claims to hold gold in Paris, Rome and Lisbon, as well as London and New York, suggests that at least some of the gold transferred by the Banque de France, Banca d’Italia and Banco de Portugal in 1999 is still held by the ECB.
If the ECB had sold all the gold originally transferred to it by all central banks other than France, Italy, Portugal and Germany, this would only amount to 197 tonnes, so another 74 tonnes would have been needed to make up the shortfall, which would probably have come from the ECB holdings at the Bank of England since that is where most potential central bank and bullion bank buyers hold gold accounts and where most gold is traded on the international market.
Even taking into account Greece’s 19.4 tonne gold transfer to the ECB in January 2001, and excluding the French, Italian, German and Portuguese transfers in 1999, the ECB’s 271.5 tonnes of gold sales would still have burned through all the smaller transfers and left a shortfall. So the ECB gold sales may have come from gold sourced from all of its 5 storage loacations.
It’s also possible that one or more of the original 11 central banks transferred gold to the ECB that was stored at a location entirely distinct from the 5 currently named locations, for example gold stored at the Swiss National Bank. If that particular gold was then sold over the 2005-2009 period, it would not get picked up in the current locations. It’s also possible that some or all of the 271.5 tonnes of gold sold by the ECB over 2005-2009 had been loaned out, and that the ‘sales’ were just a book squaring exercise in ‘selling’ gold which the lenders failed to return, with the loan transactions being cash-settled.
No Physical Audit of ECB Gold
Given that the Euro is the 2nd largest reserve currency in the world and the 2nd most traded currency in the world, the ECB’s gold and how that gold is accounted for is certainly a topic of interest. Although the ECB’s gold doesn’t directly back the Euro, it backs the balance sheet of the central bank that manages and administers the Euro, i.e. the ECB.
The valuation of gold on the ECB’s annual balance sheet also adds to unrecognised gains on gold in the ECB’s revaluation account. Given gold’s substantial price appreciation between 1999 and 2015, the ECB’s unrecognised gains on gold amount to €11.9 billion as of 31 December 2015.
It is therefore shocking, but not entirely surprising, that the ECB doesn’t perform a physical audit of its gold bars and has never done so since initiating ownership of this gold in 1999. Shocking because this lack of physical audit goes against even the most basic accounting conventions and fails to independently prove that the gold is where its claimed to be, but not surprising because the world of central banking and gold arrogantly ignores and bulldozes through all generally accepted accounting conventions. Geographically, 2 of the locations where the ECB claims to store a percentage of its gold are not even in the Eurozone (London and New York), and infamously, the Bundesbank is taking 7 years to repatriate a large portion of its gold from New York, so the New York storage location of ECB gold holdings should immediately raise a red flag. Furthermore, the UK is moving (slowly) towards Brexit and away from the EU.
Recall the response above from the ECB:
“The ECB has no physical audit of its gold bars. The gold bars that the ECB owns are individually identified and each year the ECB receives a detailed statement of these gold deposits. The central banks where the gold is stored are totally reliable.“
Imagine a physical-gold backed Exchange Traded Fund (ETF) such as the SPDR Gold Trust or iShares Gold Trust coming out with such a statement. They would be run out of town. References to ‘totally reliable’ are all very fine, but ‘totally reliable’ wouldn’t stand up in court during an ownership claim case, and assurances of ‘totally reliable’ are not enough, especially in the gold storage and auditing businesses.
The ECB is essentially saying that these ‘statements’ of its gold deposits that it receives from its storage custodians are all that is needed to for an “audit” since the custodians are ‘totally reliable‘.
This auditing of pieces of paper (statements) by the ECB also sounds very similar to how the Banca d’Italia and the Deutsche Bundesbank conduct their gold auditing on externally held gold i.e. they also merely read pieces of paper. Banca d’Italia audits “annual certificates issued by the central banks that act as the depositories” (the FRBNY, the Bank of England, and the SNB/BIS).
The Bundesbank does likewise for its externally held gold (it audits bits of paper), and solely relies on statements from custodians that hold its gold abroad. The Bundesbank actually got into a lot of heat over this procedure in 2012 from the German Federal Court of Auditors who criticised the Bundesbank’s blasé attitude and lack of physical auditing, criticism which the Bundesbank’s executive director Andreas Dombret hilariously and unsuccessfully tried to bury in a speech to the FRBNY in New York in November 2012 in which he called the controversy a “bizarre public discussion” and “a phantom debate on the safety of our gold reserves“, and ridiculously referred to the movies Die Hard with a Vengeance and Goldfinger, to wit:
“The days in which Hollywood Germans such as Gerd Fröbe, better known as Goldfinger, and East German terrorist Simon Gruber, masterminded gold heists in US vaults are long gone. Nobody can seriously imagine scenarios like these, which are reminiscent of a James Bond movie with Goldfinger playing the role of a US Fed accounting clerk.”
Where is the ECB Gold Bar Weight List?
Since, as the ECB states, it’s gold bars are “individually identified“, then gold bar weight lists of the ECB’s gold do indeed exist. This then begs the question, where are these weight lists, and why not release them if the ECB has nothing to hide?
Quickly, to define a weight list, a gold bar weight list is an itemised list of all the gold bars held within a holding which uniquely identifies each bar in the holding. In the wholesale gold market, such as the London Gold Market, the LBMA’s “Good Delivery Rules” address weight lists, and state that for each gold bar on a weight list, it must list the bar serial number, the refiner name, the gross weight of the bar, the gold purity of the bar and the fine weight of the bar. The LBMA also state that “year of manufacture is one of the required ‘marks’ on the bar”.
Recall from above that when the ECB was asked to provide a full weight list of its 504.8 tonnes of gold bars, it responded: “The ECB does not disclose this information.“
After receiving this response, BullionStar then asked in a followup question as to why the ECB doesn’t disclose a weight list of the gold bars. The ECB responded (underlining added):
“We would like to inform you that, while the total weight and value of the gold held by the European Central Bank (ECB) can be considered to be of interest to the public, the weight of each gold bar is a technicality that does not affect the economic characteristics of the ECB’s gold holdings. Therefore the latter does not warrant a publication.“
It is a very simple task to publish such a weight list in an automated fashion. The large gold backed ETFs publish such weight lists online each and every day, which run in to the hundreds of pages. Publication of a weight list by the ECB would be a very simple process and would prove that the claimed bars are actually allocated and audited.
The more evidence that is gathered about the refusal of central banks to issue industry standard gold bar weight lists, the more it becomes obvious that there is a coordinated understanding between central banks never to release this information into the public domain.
The most likely reason for this gold bar weight list secrecy is that knowledge of the contents of central bank gold bar weight lists could begin to provide some visibility into central bank gold operations such as gold lending, gold swaps, location swaps, undisclosed central bank gold sales, and importantly, foreign exchange and gold market interventions. This is because with weight list comparisons, gold bars from one central bank weight list could begin turning up in another central bank weight list or else turning up in the transparent gold holdings of vehicles such as gold-backed Exchange Traded Funds.
Instead of being fixated with the ECB’s continual disastrous and extended QE policy, perhaps some financial journalists could bring themselves to asking Mario Draghi some questions about the ECB gold reserves at the next ECB press briefing, questions such as the percentage split in storage distribution between the 5 ECB gold storage locations, why ECB gold is being held in New York, why is there no physical audit of the gold by the ECB, why does the ECB not publish a weight list of gold bar holdings, and do the ECB or its national central bank agents intervene into the gold market using ECB gold reserves.
The lackadaisical attitude of the ECB to its gold reserves by never physically auditing them is also a poor example to set for all 28 of the central bank members of the European System of Central Banks (ESCB), and doesn’t bode well for any ESCB member central bank in being any less secretive than the ECB headquarters mothership.
If gold does re-emerge at the core of a revitalised international monetary system and takes on a currency backing role in the future, the haphazard and non-disclosed distribution of the ECB’s current gold reserves over 5 locations, the lack of physical gold audits, and the lack of public details of any of the ECB gold holdings won’t really inspire market confidence, and is proving to be even less transparent than similar metrics from that other secretive large gold holding bloc, i.e the USA.
“given the deteriorating state of Venezuela’s international finances and international reserves at the present time, it may be sooner rather than later before Venezuelan gold could be on the move again out of the country.
One thing is for sure. Gold leaving Venezuela on a flight back to London, New York, or elsewhere, will not get the fanfare and celebration that was accompanied by the same gold’s arrival into Caracas a few short years ago.“
Those predictions now seem to have come to pass because there is now evidence that the Banco Central Venezuela (BCV) shipped gold out of Maiquetía Airport (Caracas international Airport) in early July 2015, and there is also separate evidence that Venezuela’s official gold reserve holdings, which are managed by the BCV, dropped by 60 tonnes between March and April 2015. These are two distinct events.
The 60 tonne drop in gold reserves in March-April
On 28 and 29 October respectively, Bloomberg and Reuters filed reports highlighting a decline in Venezuela’s gold reserves through the end of May 2015. The Bloomberg report is here, the Reuters report is here. Both reports merely focused on the currency value of Venezuela’s gold reserves, and neither report addressed the critical metric that is needed in any discussion of central bank physical gold dealings, i.e. quantity or weight of gold. Furthermore, neither Bloomberg nor Reuters seems to grasp how the BCV values its gold reserves.
“Venezuelan central bank gold holdings declined in value by 19 percent between January and May, according to its financial statements, likely reflecting gold swap operations and lower bullion prices…
..Central bank financial statements posted this week on its website show monetary gold totaled 91.41 billion bolivars in January and 74.14 billion bolivars in May“
“The value of the central bank’s bullion holdings fell 28 percent at the end of May from a year earlier, while the spot price for the metal declined just 12 percent.”
The problem with the above is that comparing the change in value of Venezuelan gold reserves over two points in time relative to the spot price change of gold over those same two points in time is not the correct approach because the BCV does not use the latest market price to value its gold holdings. The BCV uses a nine month rolling average valuation price methodology.
Without knowing the correct valuation price used at each month-end valuation point, the quantity of gold being valued cannot be calculated accurately. Conversely, doing some simple research (looking up the footnotes to the BCV accounts) and a few quick spreadsheet calculations gives a very accurate estimate of quantity of gold held at each month-end valuation point. Perhaps next time the major financial news wires can go the extra mile.
[Note: The Spanish translations in this article use a combination of Google Translate and Yandex Translate, and some instinctive re-sequencing.]
“Oro monetario…se valora mensualmente utilizando el promedio móvil de los nueve (9) últimos meses del fixing a.m. fijado en el mercado de Londres,
“Monetary gold…is valued monthly using the moving(rolling) average of the last nine (9) months of a.m. fixings set in the London market“
Because the BCV holds a small percentage of its monetary gold in the form of gold coins, the valuation methodology also addresses how to value the coins, which, although not material to this discussion, is as follows:
“..más un porcentaje del valor promedio de la prima por el valor numismático que registren las monedas que conforman este activo.”
“..plus a percentage of the average value of the premium for the numismatic value of the coins which comprise this asset”
To check this moving average calculation and how it works, you can apply it to the 2014 year-end monetary gold valuation figure and make use of note 7 in the same set of accounts. Note 7 states:
“Nota 7 – Oro monetario
Al 31 de Diciembre de 2014, las existencias de oro monetario se encuentran contabilizadas a un precio promedio de USD 1.257,80 por onza troy y totalizan Bs. 91.879.349 miles, equivalentes a USD 14.620.691 miles y su composición y valoración se corresponde con los criterios descritos en la nota 3.3”
“At December 31, 2014, the stock of monetary gold is recorded at an average price of USD 1257.80 per troy ounce and total Bs. 91,879,349 thousands, equivalent to USD 14,620,691 thousands, and its composition and valuation corresponds to the criteria described in Note 3.3”
The Venezuelan accounting convention of USD 14.620.691 miles just means USD 14.6 billion.
361 tonnes of gold at year-end 2014
As at 31 December 2014, in its balance sheet, the BCV valued its monetary gold at Bs 91,879,349,000 (bolívares fuertes). Technically, since 2007, the Venezuelan currency is called the bolívar fuerte (strong bolivar) since at that time the Venezuelan government re-based the previous inflation ravaged bolivar and re-set 1000 old bolivars = 1 ‘strong’ bolivar. The updated name is in retrospect ironic given that the Venezuelan currency is now one of the weakest fiat currencies in the world as the Venezuelan economy begins to experience out-of-control price inflation.
This brings us to the next part of the BCV gold valuation equation. The BCV uses an ‘official’ Venezuelan exchange rate in its financial accounts. This official rate is a static 6.3 bolivars to the US dollar and is based on a February 2013 government edict called “Convenio Cambiario N° 14“.
Again, this exchange rate is another fantasy when compared to the unofficial market exchange rate for the Venezuelan bolivar in terms of the US dollar. This unofficial exchange rate, for example, is currently ~786 according to the Dolartoday website. The bolivar’s unofficial rate versus major currencies will no doubt go even higher in the near future as the currency continues to crumble and potentially goes into hyperinflationary territory.
The final part of the gold valuation equation is the London gold fixing (a.m.~morning) price (more recently LBMA Gold Price), whose daily price dataset can be downloaded here. Note that prior to 20th March 2015, the London gold auction ‘fixed’ price was known as the London gold fixing. Even though the London gold price is now still ‘fixed’ (in more ways than one) during the re-gigged auctions, the LBMA has opted for the less loaded name of the ‘LBMA Gold Price’ auction.
I calculate that the 9 month rolling average of the London morning gold price from 1 April 2014 to 31 December 2014 was USD 1257.49. This is pretty close to the BCV specified value of USD 1257.80 above. The BCV’s extra 31 basis points may reflect the numismatic premium on its gold coin holdings or some other calculation difference.
However, the important point to all of this is that the manual calculation method of arriving at the BCV’s gold valuation price (by calculating the 9 month moving average directly) looks accurate and is in line with the BCV’s number. Based on the BCV’s 31 December 2014 monetary gold value of Bs 91,879,349,000, and the BCV’s USD 1257.80 valuation price, Venezuela held 360.64 tonnes of gold at year-end 2014. This 360.64 tonnes figure is pretty close to the figure reported by the World Gold Council of 361.02 tonnes as at end of fourth quarter 2014 (which itself is not set in stone).
The Sale of 61 tonnes?
The BCV publishes monthly balance sheets (including the monetary gold valuation figure), but currently there is a 4 month lag on date publication, so the latest balance sheet is from May 2015 (the same month-end date that Bloomberg and Reuters referred to above). The monthly balance sheets for January to May 2015 can be downloaded here, here, here, here and here:
Using the valuation methodology described above, and some simple reverse engineering, shows that over the two month period between the end of February 2015 and the end of April 2015, the BCV’s gold holdings dropped by over 60 tonnes, with a 33 tonne drop in gold reserves during March, followed by a 27.7 tonne drop in April. The data below is taken from the 6 monthly balance sheets from Dec 2014 to May 2015, and the LBMA daily price dataset.
My calculations for month-end January 2015 show Venezuela’s gold holdings to be 360.39 tonnes, nearly identical to the BCV’s month-end version for December 2014. I haven’t included any numismatic premium for gold coin holdings since its immaterial. My calculations show a 2.4 tonne increase in gold holdings at February month-end. I’m not sure what this increase refers to but it could be the monetization of some domestic gold mining production by the BCV (purchasing some Venezuelan mining output and classifying it as monetary gold), or conversion of some small residual BCV non-monetary gold holdings into monetary gold.
Adding domestically produced gold to monetary gold holdings in Venezuela has a precedent. So does conversion of already held non-monetary gold. For example in 2011 the BCV purchased 1.6 tonnes of domestic gold. The same year the BCV also converted 3.6 tonnes of ‘non-currency gold’ that it was already holding into monetary gold. For details, see section “Changes to Venezuela’s gold reserves since early August 2011” in my article “Venezuela’s Gold Reserves – Part 1: El Oro, El BCV, y Los Bancos de Lingotes“.
For March 2015, my calculations indicate that the BCV’s gold holdings witnessed a 33.17 tonne reduction, and ended the month at 329.64 tonnes. Similarly, in April 2015, my calculations find that the BCV gold reserves saw another outflow of 27.74 tonnes, bringing total holdings down to 301.90 tonnes. Between March and April, the combined gold reduction amounts to 60.91 tonnes. There was no material change in gold holdings between April and May, save a tiny 0.27 tonne increase, which could be calculation noise. The main damage to the gold holdings happened in the narrower time period of March and April, a fact that was not highlighted in the Reuters 4 month period reference, and the Bloomberg 1 year period reference.
Interestingly, this WGC spreadsheet states that as of the end of Q4 2014, Q1 2015, and Q2 2015, Venezuela’s gold reserves remained unchanged at 361.02 tonnes, and the WGC does not reflect any of the above monthly reductions in Venezuela’s gold holdings. The WGC spreadsheet also states in a disclaimer that “While the accuracy of any information communicated herewith has been checked, neither the World Gold Council nor any of its affiliates can guarantee such accuracy.”
This just goes to show the many problems that can arise by relying solely on IMF and WGC data sources for official sovereign gold holdings, in addition to the more problematic ‘gold receivables’ accounting fictions employed by central banks.
BCV operations: First and Second?
To see what was happening with Venezuela’s gold holdings in March and April 2015, it is worth reading the last few sections of my “Venezuela’s Gold Reserves – Part 2: From Repatriation to Reactivation” article, especially the last section about the 5 questions Maria Corina Machado, parliamentarian and opposition party leader in Venezuela, posed to Nelson Merentes, president of the BCV on 12 March 2015.
Also important to know from that article are:
a) the details of the Venezuelan gold swap with Citibank which emerged in late April and was for only 1.4 million ounces (43.5 tonnes post haircut), and the gold to be used in the swap was the 50 tonnes of gold that had been left by the BCV in the Bank of England vaults in January 2012
b) the BCV was in discussions with a number of investment banks about harnessing its gold reserves, and that the BCV revealed on 5 March that six investment banks were making a pitch to the BCV, namely Credit Suisse, Goldman, BTGP Brazilian, Deutsche, Bank of America and Citibank. The favourites were said to be from a short-list of Deutsche Bank, Bank of America and Citibank, but another Caracas media source thought that Credit Suisse and Bank of America were involved
c) Goldman Sachs had previously been discussing a gold swap with the BCV, this news becoming public in November 2013
The 61 tonne reduction in Venezuela’s gold reserves over March-April 2015 cannot be accounted by the Citi gold swap since a) the Citi gold swap was for less than 45 tonnes, b) gold swaps usually stay on central bank balance sheets as an asset of the central bank, and c) if there was a gold swap transaction that did get taken out of the balance sheet, it would not be a reduction over 2 months, it would be one transaction.
Therefore, I think that this 61 tonne reduction over March-April 2015 represents something else entirely. It could be another transaction with one or more of the other investment banks above, or it could be an entirely separate gold sale to another entity such as the Chinese government.
Since Banco Central Venezuela is entirely non-cooperative in answering questions about gold posed by the media, some speculation is, in my opinion, acceptable. For example, for the articles referenced above, Bloomberg states that “The central bank’s press department declined to comment on the decline in gold holdings.” Reuters states that “The central bank declined to comment“. Another example of arrogant central bankers who consider themselves above normal standards of accountability and transparency.
A few clues about the gold holdings reduction are in the letter Maria Corina Machado sent to Nelson Merentes on 12 March. In the letter Machado asked these 5 questions of Merentes:
Are all of Venezuela’s gold reserves in the vaults of the Central Bank of Venezuela as stated by the former president Hugo Chavéz on 17 agusto 2011, when he ordered “repatriation of our gold”?
Is the BCV in negotiations with foreign banks for the sale or pawning of monetary gold?
Is it true that in the operation to pawn gold currently under discussion, it is intended to dispose of gold with a market value of US$ 2.6 billion?Does this represent / involve almost 20% of the total gold reserves of the Republic, in this first operation?
Is it true that they would be negotiating a second operation similar to the previous one for an even greater amount?
Do these operations involveremoving the gold from the vaults of the BCV and returning it abroad?
Machado’s questions are very specific, i.e. US$2.6 billion, almost 20% of gold reserves, first operation, second operation, physical removal of gold, return of gold to abroad etc, and suggest that her questioning was based on sources that appear to have thought that this specific information was indeed factual.
In early March 2015, 20% of Venezuela’s gold reserves of 360 tonnes would be 72 tonnes, (while 61 tonnes would be 17% of gold reserves). Based on an average gold price of $1,200 in the first week of March, US$2.6 billion would be 67.4 tonnes. These figures are far closer to the actual reduction of gold holdings in March and April of 61 tonnes and suggest that there was a ‘first operation’ that was distinct from the gold swap with Citibank, and that necessitated the actual removal of 61 tonnes from the BCV balance sheet.
Then what about a ‘second operation‘ that could be ‘for an even greater amount‘ in the words of Machado?
Gold Flights from Caracas in July 2015
Caracas international Airport, where the flights laden with Venezuela’s repatriated gold arrived at during the period November 2011 to January 2012, is officially known as Simón Bolívar International Airport, but colloquially known as Maiquetía Airport since it’s in an area of Caracas called Maiquetía (the airport is beside the ocean).
On 01 July 2015, Venezuelan news site La Patilla published an article titled “El BCV reexporta para empeñarlo el oro que Chávez repatrió” (BCV re-exported for pledging, the gold that Chavez had repatriated), in which it featured two snippets from a letter written by the Banco Central Venezuela (BCV) to Maiquetia International Airport Air Customs (SENIAT) sometime just before July, probably written in June. SENIAT is the Venezuelan customs and tax authority, officially called Servicio Nacional Integrado de Administración Aduanera y Tributaria, or National Integrated Service for the Administration of Customs Duties and Taxes.
The first snippet of the BCV letter to SENIAT, and highlighted by La Patilla, stated:
“Tengo el agrado de dirigirme a usted en ocasión de manifestarle que el Banco Central de Venezuela realizará exportación de valores, cuyas especificaciones y demás características se detallarán en actas a suscribirse con con funcionarios del Ministerio del Poder Popular de Economía, Finanzas y Banca Pública -Seniat y este instituro, las cuales serán presentadas a las autoridades competentes el día de salida en la Aduana Principal Aérea de Maiquetía“
“I have the pleasure of addressing you on the occasion to inform you that the Central Bank of Venezuela will export values, whose specifications and other characteristics will be detailed in Minutes to be signed with officials from the Ministry of Popular Power for Economy, Finance and Public Bank -Seniat and this Institute, which will be presented to the competent authorities on the day of departure in Maiquetía’s Main Air Customs”
The La Patilla article commented that:
“Los “valores” a los que se refiere la comunicación sería oro monetario según nos respondieron dos economistas con experiencia en las operaciones del BCV.”
“According to two economists with experience of BCV operations who responded to us, the ‘values’ to which the communication refers to is monetary gold.“
The 2nd snippet of the letter, with the BCV stamp, is even more interesting, and I have included it below:
Although not fully legible on the very left hand side of the photo, the text, as far as I can make out, says:
“…el reconocimiento, pesaje y embalaja de la materia en referencia, en el Departamento de administracion del Efectivo, ubicado en el sótano 2 del elemento Sede de esta instituto. La…[ ]… actividad, se tiene previsto realizarla en los dias 02, 03 y 06/07/2015, a partir de las 8:00…[ ]. En caso de que la referida actividad se extienda más del tiempo prevista, le será notificado…[ ]
“acknowledgement, weighing and packing of the material in question, in the Cash Management Department, located in Basement 2 of the Headquarters of this Institute. The .. [ ].. activity is planned for the days 02, 03 and 07.06.2015, from 8:00…[ ]. In the event that the referred to activity extends beyond the planned time, you will be notified…[ ]”
It’s not unusual for letters about specific gold shipments from central banks to security carriers or other agencies to avoid to mention the actual cargo. I have seen the same approach used in historical Bank of England letters to companies like MAT Transport and the Metropolitan Police, phrases such as “we would like to go ahead with the matter we discussed’, and ‘we have now completed the aforementioned assignment bla bal bla, I trust everything was in order”. It’s merely phrased this way for security reasons.
Venezuela is short of hard currency bank notes such as USD and EUR. Venezuela would hardly be flying out hard currency cash. Nor would it be flying out worthless bolivar bank notes. The BCV letter refers to weighing and packing, which can only mean gold bullion.
The letter snippets in this ‘La Patilla’ news article look to be what they purport to be, and they do indeed appear genuine, so there is a high probability that the BCV was flying out cargos of monetary gold from Caracas International Airport on 2nd July (Thursday), 3rd July (Friday) and 7th July 2015 (Tuesday), and maybe after 7th July if the operation needed extended time as the contingency in the letter planned for.
When the last flight of repatriated gold flew into Caracas from Eorope on 30 January 2012, it was carrying 14 tonnes of gold in 28 crates. Based on this metric, 3 flights going out from Caracas in early July 2015 could carry 42 tonnes of gold, if not more. Therefore there is a realistic upper bound of at least 42 tonnes to the amount of gold that the BCV could have been flying out of Maiquetía airport on 2nd, 3rd and 7th July 2015.
This article has focused on two sets of events, 1) the drop in Venezuela’s monetary gold reserve holdings in March and April 2015 which looks to be distinct from the Bank of England vaulted gold used in the BCV-Citibank gold swap, and 2) a series of cargo flights of what looks like BCV monetary gold being flown out of Caracas International Airport in early July 2015.
Venezuela’s international reserves, managed by the BCV, are now down to USD 15.120 billion as at 29th October 2015, from USD 16.4 billion at the end of September 2015. Investment bank reports and the financial media are abuzz with speculation that (to paraphrase) “Venezuela will need to use its gold reserves to raise international funds for imports etc etc“. Which is no doubt true, but what the analyst reports and media reports are missing, in my opinion, is that a good chunk of Venezuela’s gold reserves are already in play and that any new repos, swaps or sales will have to line up and utilise whatever Venezuelan gold reserves are not already under lien, claim, encumbrance or collateralisation.
In the second half of October, Barclays’ two New York based Latin American economists, the two Alejandros (Arreaza and Grisanti) said that:
“Our quarterly cash flow model suggests that Venezuela will have a deficit of approximately USD10bn just during this quarter and will have to finance almost all of it with its own assets. Currently, liquid international reserves are likely less than USD0.5bn. The rest of the reserves are gold, SDRs and the position at the IMF. Therefore, assets besides reserves will need to be used.
We estimate that disposable assets (in and out of reserves) are about USD15.1bn. Assuming a gold repo of USD3.0bn before year-end, the disposable assets could end the year at about USD8.0bn. With these assets and a possible additional use of gold reserves, we expect Venezuela to meet its debt obligations at least until Q1 16″
Which is all very fine, except the fact that if the BCV gold reserves are 61 tonnes lighter due to outflows in March and April, and if there were additional gold outflows via international cargo flights in July, which looks likely, then a further USD 3 billion repo (circa 80 tonnes without deep haircut) will have to use additional BCV vaulted gold, a lot of which is in US Assay Office melt bars, which are not necessarily up to the expected quality of modern-day Good Delivery bars.
From my Part 1 article, I had calculated that “there were 12,357 bars held in the BCV vaults in Caracas before the gold repatriation started, and 25,176 bars in the BCV vaults when the repatriation completed“, since “12,819 good delivery bars” (160 tonnes) were repatriated. About 4,089 bars were left in London in 2012. The bars that were originally in Caracas are mainly if not exclusively US Assay office bars.
If the Caracas vaulted gold is being sold by Venezuela in the international market, it most likely would be of current Good Delivery standard (not US Assay office bars). With 160 tonnes of repatriated Good Delivery bars in 2011-2012, then if 61 tonnes was sold in March-April, and various flights happened in July 2015, there may not be enough modern Good Delivery bars remaining in Caracas to satisfy an additional USD 3 billion transaction.
In my Part 2 article in May, I had said:
“Venezuela (via the BCV) will put up 1.4 million ozs of gold as collateral in exchange for a $1 billion loan of foreign currency from Citibank. Since 1.4 million ozs of gold, valued at the late April 2015 price of $1,200, is roughly $1.68 billion, then Venezuela is having to accept a near 40% discount on the specified gold collateral.“
Note that 1.4 million ounces is about 43.5 tonnes.
Interestingly, Barclays analysts Feifei Li and Dane Davis in their ‘Metals Markets Outlook’ piece from 26 October 2015 (last week) titled ‘Mixed Messages’ reiterated the above view and said:
“Earlier this year Venezuela executed a gold swap to raise $1bn. About 45 tonnes of gold was committed, indicating a haircut of around 40% for gold prices at the time. If we apply a similar haircut to the current gold price, it would imply that close to 140 tonnes of gold would be needed for $3bn. Thus if $3bn extra gold swaps were executed, half of Venezuela’s 361 tonne gold reserve would have been utilised.”
But 140 tonnes of gold will bring into play a lot of Venezuela’s US Assay Office bars, given that some other counterparties have already raided the Caracas vaults to get the best bars. While a lot of Venezuela’s US Assay office bars probably contain the fine gold count that they claim to hold, some probably don’t, as was illustrated in the sardonic yet jovial Zerohedge article “No Indication Should, Of Course, Be Given To The Bundesbank…” published back in September 2012.
So its buyer beware time for the counterparties that are now queued up to get their hands on Venezuela’s last remaining ingots of gold, before the entire Caracas stash may well get looted.
That article highlighted that the amount of gold stored in custody at the Bank of England (BoE) fell by 350 tonnes during the year to 28 February 2015, after also falling by 755 tonnes during the year to end of February 2014. Therefore, by 28 February 2015, there was, according to the BoE’s own statement, £140 billion or 5134.37 tonnes of gold in custody of the BoE, or in other words ~ 410,720 Good Delivery gold bars.
The article also reviewed snapshots of the total amount of gold stored in the London vaults at various recent points in time.
Firstly, a reference on the London Bullion Market Association (LBMA) web site for a date sometime before 2013 stated that there had been 9,000 tonnes of gold (i.e. 720,000 Good Delivery bars) stored in London with two-thirds of this amount, or 6,000 tonnes, stored in the Bank of England (about 482,000 bars), and 3,000 tonnes stored in London ex Bank of England vaults (238,000 bars). (Nick Laird of Sharelynx subsequently pointed out to me that the earliest reference to this 9,000 tonne figure was from a LBMA presentation from November 2011.)
Secondly, by early 2014, the LBMA web site stated that there were only 7,500 tonnes of gold in all London vaults, i.e. ~600,000 bars, and of this total, three-quarters or 5,625 tonnes were at in Bank of England, ~ 450,000 bars, and only one-quarter or 1,875 tonnes was stored at LBMA London gold vaults excluding the Bank of England’s gold vaults.
So, the entire London market including the Bank of England had lost 1,500 tonnes (120,000 bars) between 2011 and early 2014, with 375 tonnes less in the BoE and 1,125 tonnes less in the London market outside the BoE.
Finally, on 15 June 2015, the LBMA stated that “There are ~500,000 bars in the London vaults, worth a total of ~US$237 billion”. This ~ 500,000 bars equates to 6,256 tonnes. (On 15th June 2015, the morning LBMA Gold Price was set at $1178.25, which would make $237 billion worth of gold equal to 201.145 million ounces, which is 6,256 tonnes).
Therefore, another ~1,250 tonnes of gold (approximately 100,000 Good Delivery bars) departed from the London gold vaults compared to the early 2014 quotation of 7,500 tonnes of gold in the London vaults.
So overall, between the 9,000 tonnes quotation in 2011, and the 6,256 tonnes 2015 quotation, some 2,750 tonnes (~ 220,000 Good Delivery bars) disappeared from the London gold vaults. With 6,256 tonnes of gold stored in the entire London vault network in 2015, and with 5,134 tonnes of this at the Bank of England, that would leave 1,122 tonnes of gold in London outside the Bank of England vaults.
To reiterate, “the London gold vaults“, in addition to the Bank of England gold vaults, refer to the storage vaults of JP Morgan and HSBC Bank in the City of London, the vaults of Brinks, Malca Amit and Via Mat (Loomis) located near London Heathrow Airport, the vault of G4S in Park Royal, and the Barclays vault managed by Brinks.
Because the Bank of England reveals in its annual report each year the value of gold it has stored in custody for its customers (central banks, international official sector institutions, and LBMA member banks), then it is possible to compare 3 years of gold tonnage figures, namely the years 2011, 2014 and 2015, and then show within each year how much of this gold is stored at the Bank of England, and how much is stored in London but outside the Bank of England vaults.
Nick Laird of www.sharelynx.com / www.goldchartsrus.com has done exactly this in the following sets of fantastic charts which he has created to graphically capture the above London gold trends, and a lot more besides. These charts are just a subset of a suite of inter-related gold charts that Nick has created to address this critical subject in the London Gold Market.
Although the Bank of England is not a LBMA member, the Bank of England gold vaults are a critical part of the LBMA gold vaulting and gold clearing system, and LBMA bullion banks maintain gold accounts with the Bank of England which facilitate, among other things, gold lending and gold swaps transactions with central banks. Hence the above and below charts are titled “LBMA Vaulted Gold in London”.
My “How many Good Delivery gold bars are in all the London Vaults” article had also quantified that nearly all of this ~1,122 tonnes consists of gold from physical gold-backed ETFs which store their gold in the London vaults. (previously rounded up to 1,125 tonnes for ease of calculation).
I had included 5 gold ETFs in my previous analysis namely, SPDR Gold Trust (GLD), Shares Gold Trust (IAU), ETF Securities – ETFS Physical Gold ETF (PHAU & PHGP), ETF Securities – Gold Bullion Securities (GBS & GBSS), and Source Physical Gold ETC (P-ETC), and also some smaller holdings at BullionVault and GoldMoney. In total these ETFs and other holdings accounted for just over 1,000 tonnes of gold in the London market.
However, I had missed a few other gold ETFs which also store their gold in the London vaults. Nick Laird, whose Sharelynx website maintains up-to-date gold ETF data and gold holdings, took the initiative to fill in the missing ETF blanks and Nick re-calculated the more comprehensive ETF holdings figures for London, which worked out at an exact 1,116 tonnes of gold, astonishingly close to the implied figure represented by the 1,122 tonnes outside the Bank of England vaults.
The additional gold backed ETFs also included in Nick Laird’s wider catchment were Deutsche Bank db Physical Gold ETC and associated Deutsche ETFs, ABSA gold ETF (of South Africa), Merk Gold ETF, and some smaller holdings from Betashares and Standard Bank. The following chart from Sharelynx shows the full data for physically backed gold ETFs storing their gold in London:
We then discussed an approach, in conjunction with Koos Jansen and Bron Suchecki, to identify known central bank gold stored in the Bank of England vaults by tallying up this storage data on a country level basis. So, for example, assuming 5,134 tonnes of gold stored at the Bank of England in early 2015, the aim would be to try to account for as much of this gold as possible using central bank sources.
As mentioned in the ‘How many gold bars‘ article, the Bank of England stated in 2014 that 72 central banks (including a few official sector financial organisations) held gold accounts with the Bank. It is not known if any of these gold accounts are inactive or whether any of these accounts have zero gold holdings. The LBMA stated in 2011 that “The Bank of England acts as gold custodian for about 100 customers, including central banks and international financial institutions, LBMA members and the UK government”. Therefore there could also be more than 25 LBMA member commercial banks with gold accounts at the Bank of England.
Some of the Bank of England 5,134 tonne total would therefore be gold held in LBMA member bank gold accounts at the Bank of England, for which data is not public. Likewise, a lot of central banks do not reveal where their gold is stored, let alone how much is stored in specific vaults such as at the Bank of England and Federal Reserve Bank of New York.
However, many central banks have more recently begun to provide some information on where they say their official reserve gold is stored. Other central banks have always been to some extent transparent. Overall, a variety of sources, where possible, can be used to source locational data regarding central bank gold storage locations. There will continue to be gaps however, since some central banks remain non-cooperative, even when asked directly about where they stored their gold.
Tallying this type of central bank gold storage data will probably be a work in progress. However, there has to be a cut-off point for doing a first pass through the data, and this is a first pass. As a group, the European central banks have been especially forthcoming with gold storage data, compared to even 3-4 years ago (except for Spain). For other central banks, I looked in various places such as their financial accounts, and I contacted some of them by email with varying degrees of success. About half of the 72 central banks on the Bank of England’s list were identified, again, with varying degrees of accuracy.
The following fantastic chart by Nick Laird captures an overview of this Bank of England gold storage data. Essentially the chart shows that the banks listed hold, or have stated that they hold, the respective quantity listed, and in total the named banks could account for x tonnes gold stored at the bank of England. This is labelled ‘Known Gold‘. Given ‘Known Gold’, this leaves the residual as ‘Unknown Gold‘.
The remainder of this article explains the logic and the sources behind each country, and why that country appears on the list. When a central bank claims to have stored gold at the Bank of England, or the evidence suggests that, it does not necessarily mean that the gold in question is held in custody in a gold set aside account or that it is allocated in identifiable bars, or even that it is actually there. Many central banks engage in gold lending, or have done so in the last 15-20 years, and have at times, or permanently, transferred control of that gold to LBMA bullion banks.
Until all central banks come clean about what form their gold holdings are in, which will never happen, then the amount of central bank gold that’s encumbered by bullion banks or under claims, liens, loan agreements etc will not be apparent.
Germany holds 3,384 tonnes of gold, and 12.9%, or 438 tonnes are stored at the Bank of England. The Bundesbank’s ongoing repatriation of gold from New York and Paris does not alter the amount of Bundesbank gold held at the Bank of England.
“Most of Danmarks Nationalbank’s gold is stored at the Bank of England, where it has been since it was moved for safety reasons during the Cold War. In March 2014, Danmarks Nationalbank inspected its stock of gold in the Bank of England.”
Therefore, the assumption here is that 62.7 tonnes of Danish gold is stored at the Bank of England.
Note the Danmarks Nationalbank’s assertion that in order for gold to be lent it has to be moved to the London, since London is the centre of the gold lending market.
In 1999 “Almost 99 per cent, or 93 per cent of the Nationalbank’s total gold stock, had been lent.” The same 1999 Danish central bank article also said that:
I have underlined the above sentence since it’s of critical importance to understanding that in gold lending, central bank gold lent to LBMA bullion banks at the Bank of England does not necessarily move out of the Bank of England vaults. Lent gold may or may not move out the door, depending on what the borrower plans to do with the borrowed gold.
It also means that the total gold in custody figure that the Bank of England reveals each year (for example £140 billion in February 2015), consists of:
a) central bank gold stored at the Bank of England
b) bullion bank gold stored at the Bank of England
c) central bank gold that has been lent or swapped with bullion banks (gold deposits and gold swaps) and that has not been moved out of the Bank of England vaults. This category of gold is still in custody at the Bank of England. The central bank claims to still own it, the bullion bank has control over it, and the Bank of England still counts it as being in its custody.
The Netherlands holds 612.5 tonnes of gold, and 18%, or 110 tonnes are stored at the Bank of England.
Notice that the UK gold reserves includes holdings of gold coin, as well as gold bars.
Ireland hold 6 tonnes of gold in its official reserves, a small amount of which is in the form of gold coins, but nearly all of which is in the form of gold bars stored at the Bank of England.
Recently, I submitted a Freedom of information (FOI) request to the Central Bank of Ireland requesting information such as a weight list of Ireland’s gold stored at the Bank of England. After the FOI request was refused and the Central Bank of Ireland claimed there was no weight list, I appealed the refusal and was provided with a SWIFT ‘account statement’ from 2010 that the Bank of England had provided to the Central Bank of Ireland. See below:
This statement shows that as of 31 December 2010, the Central Bank of Ireland held 453 gold bars at the Bank of England with a total fine ounce content of 182,555.914 ounces, which equates to an average gold content of 402.993 fine ounces per bar. It also equates to 5.678 tonnes, which rounded up is 5.7 tonnes of gold stored at the Bank of England.
The fact that no weight list could be tracked down is highly suspicious, as is the fact that Ireland had in earlier years engaged in gold lending, so did not, at various times in the 2000s have all of its gold allocated in the Bank of England. How a central bank can claim to hold gold bars but at the same time cannot request a weight list of those same bars is illogical and suggests there is a lot more that the Central Bank of Ireland will not reveal.
Belgium holds 227 tonnes of gold, most of which is stored at the Bank of England with smaller amounts held with the Bank of Canada and with the Bank for International Settlements. Banque Nationale de Belgique (aka Nationale Bank van België (NBB)) does not publish an exact breakdown of the percentage stored at each location, however, in March 2013 in the Belgian Parliament, the deputy Prime Minister and Minister for Finance gave the following response in answer to a question about the Belgian gold reserves:
“Most of the gold reserves of the National Bank of Belgium (NBB) is indeed held with the Bank of England. A much smaller amount held with the Bank of Canada and the Bank for International Settlements. A very limited amount stored in the National Bank of Belgium.”
Furthermore, there were a series of reports in late 2014 and early 2015 that would suggest that Belgium stores 200 tonnes of its gold at the Bank of England. Firstly, in December 2014, VTM-nieuws in Belgium reported that the NBB governor Luc Coene had said that the NBB was investigating repatriating all of its gold. See Koos Jansen article here.
On 4 February 2015, Belgian newspaper Het Nieuwsblad said that Belgium would repatriate 200 tonnes of gold from the Bank of England, but the next day on 5 February 2015, another Belgian newspaper De Tijd reported that NBB Luc Coene denied the repatriation report, and quoted him as saying:
“There are other and more effective ways to verify if the gold in London is really ours. We have an audit committee that inspects the Belgian gold in the UK regularly”.
Therefore, the assumption here, backed up by evidence, is that Belgium stores 200 tonnes of gold at the Bank of England.
Australia holds approximately 80 tonnes of gold in its official reserves, with 1 tonne on loan, and 99.9% of gold holdings stored at the Bank of England. See 2014 annual report, page 33. According to a weight list of its gold held at the Bank of England, released via an FOIA request in 2014, Australia stores approximately 78.8 tonnes of gold at the Bank of England.
South Korea (Bank of Korea) holds 104.4 tonnes of gold, 100% of which, or 104.4 tonnes is stored at the Bank of England. The Bank confirmed this to me in an emailon 11 September 2015. See email here ->
International Monetary Fund
The IMF currently claims to hold 2,814 tonnes of gold after apparently selling 403.3 tonnes over 2009 and 2010 (222 tonnes in ‘off-market transactions and 181.3 tonnes in ‘on-market transactions’). Prior to 2009, IMF gold holdings had been 3,217 tonnes, and had been essentially static at this figure since 1980 [In 1999 IMF undertook some accounting related gold sale transactions which where merely sale and buyback bookkeeping transactions].
Although the IMF no longer provide a breakdown of how much of its gold is stored in each location where it stores gold, the amount of gold held by the IMF at the Bank of England can be calculated by retracing IMF transactions from a time when the IMF did provide such details. In January 1976, the IMF held 898 tonnes of gold at the Bank of England in London, 3,341 tonnes at the Federal Reserve Bank of New York, 389 tonnes at the Banque de France in Paris, and 144 tonnes at the Reserve Bank of India in Nagpur, India. Therefore, of the IMF’s total 4,772 tonnes holdings at that time, 70% was stored in New York, 19% in London, 8% in Paris and 3% in India. See here and here.
In the late 1970s, the IMF sold 50 million ounces of gold via two methods, namely, 25 million ounces by ‘public’ auctions, and 25 million ounces by distributions to member countries.
In the four-year period between mid-1976 and mid-1980, the IMF sold 25 million ounces of gold to the commercial sector via 45 auctions. Thirty five of these auctions delivered gold at the FRBNY, 7 of these auctions delivered gold at the Bank of England, and 3 of the auctions delivered gold at the Banque de France.
Of the 7 auctions that delivered the IMF’s gold at the Bank of England, these auctions in total delivered 3.74 million ounces [Dec-76: 780,000 ozs, Aug-77: 525,000 ozs, Nov-77: 525,000 ozs, May-78: 525,000 ozs, Oct-78: 470,000 ozs, Mar-79: 470,000, and Dec 79:444,000 ozs], which is 116 tonnes. See IMF annual report 1980.
The IMF also sold 25 million ozs of gold to its member countries within four tranches over the 3 year period from January 1977 to early 1980. These sales, which were also called gold ‘distributions’ or ‘restitutions’ and covered between 112 and 127 member countries across the tranches, were initially quite complicated in the way they were structured since they involved IMF rules around quotas which necessitated the gold being transferred to creditor countries of the IMF and then transferred to the purchasing countries. In the later sales in 1979 and 1980 countries could purchase directly from the IMF.
Countries could choose where to receive their purchased gold, i.e. London, New York, Paris or Nagpur, however, the US, UK, France and India, which had the largest IMF quotas and hence the largest gold distributions, all had to receive their gold at the respective IMF depository in their own country. I don’t have the distribution figures to hand at the moment for the 25 million ozs sold to countries, but about 18 countries took delivery from the Banque de France in Paris, with the rest choosing delivery from New York and London.
Therefore an assumption is needed on the amount of gold the IMF ‘distributed’ to member countries from its Bank of England holdings between 1977 and 1980. Of the 25 million ounces distributed, the US received 5.734 million ozs, the UK received 2.396 million ozs (75 tonnes), France received 1.284 million ozs, and India received 805,000 ozs. Subtracting all of these from 25 million ozs leaves 14.78 million ozs which was distributed to the other ~120 countries. Since the IMF held 70% of its holdings at the FRBNY in 1976, 19% at the Bank of England and 8% at the Banque de France, apportioning these three weights to the remaining 14.78 million ozs would result in 10.76 million ozs (332 tonnes) being sold from the FRBNY, 2.867 million ozs (89 tonnes) from the Bank of England and 1.24 million ozs (38.5 tonnes) from the Banque de France.
Adding this 89 tonnes to the 75 tonnes received by the UK would be 164 tonnes distributed from the Bank of England IMF gold holdings. Add to this the 116 tonnes of London stored IMF gold sold in the auctions equals 280 tonnes. Subtracting this 280 tonnes from the IMF’s London holdings of 898 tonnes in January 1976 leaves 618 tonnes.
In 2009 the IMF said that it had sold 200 tonnes of gold to India, 2 tonnes to Mauritius, 10 tonnes to Sri Lanka,and then 10 tonnes to Bangladesh in 2010. The Bangladesh figures reflect its 10 tonne purchase. However, at the moment, there has been no exact confirmation that the 200 tonnes that India bought is in London. It probably is in London, but leaving this amount under the IMF holdings instead of in India’s holdings makes no difference. Subtracting the Bangladesh sale of 10 tonnes, and rounding down slightly, there are 600 tonnes of IMF gold (excluding the 2009 India 200 tonnes sale) storedat the Bank of England.
The IMF sales of gold to Sri Lanka and Mauritius in 2009 of a combined total of 12 tonnes probably came out of the IMF’s London holdings also. The IMF’s sale of 181.3 tonnes of gold in 2010 via ‘on-market transactions’ may also have come out of the IMF’s London stored gold. These ‘on-market transactions” look to have used the BIS as pricing agent, and the IMF have gone to great lengths to hide the full details of these sales from public view. More about that in a future article.
The Reserve Bank of India holds 557.75 tonnes of gold. Of this total, a combined 265.49 tonnes are stored (outside India) at the Bank of England and with the Bank for International Settlements. In 2009 India purchased 200 tonnes of gold from the IMF via an ‘off-market transaction‘. A slide from this presentation sums up this information.
The questions then are, is the 200 tonne purchase from the IMF stored at the Bank of England, and how much of the earlier 65.49 tonnes is stored at the Bank of England.
A 2013 article in the Indian Business Standard which was reprinted from “Reserve Bank of India history series. Volume 4, 1981-1997, Part A”, explains that in 1991, the Reserve Bank of India entered 2 separate gold loan deals, one deal with UBS in Switzerland (which required 18.36 tonnes of RBI gold to be sent to Switzerland) and the other deal with the Bank of England and Bank of Japan (where 46.91 tonnes was required to be sent to the Bank of England). Together those 2 transactions equals 65.27 tonnes which is 0.222 tonnes short of the 65.49 total.
After the gold loan deals expired, it looks like 18.36 tonnes of Indian gold were left in Switzerland and transferred to safekeeping or deposit with the BIS, and 46.91 tonnes of Indian gold was left at the Bank of England.
Regarding India’s purchase of 200 tonnes of gold in 2009, the IMF only has gold 4 depositories, namely, the Bank of England, Federal Reserve Bank of New York, Banque de France, and the Reserve Bank of India in Nagpur, India. Given that the Indian gold stored abroad is “with the Bank of England and the Bank for International Settlements“, then for the 200 tonnes of IMF gold to end up being classified as ‘with’ the BIS, it would have to have either been transferred internally at one of the IMF depositories to aBIS account, or transferred via a location swap or a physical shipment to a BIS gold account at the vaults of the Swiss National Bank in Berne.
For now, the 200 tonnes of gold sold by the IMF to India in 2009 is reflected in the IMF holdings and not the India holdings. It does not make a difference to the calculations, since the 200 tonnes is still at the Bank of England.
Bulgaria has 40.1 tonnes of official gold reserves. The latest BNB annual report states that 513,000 ozs are in standard gold form, and 775,000 ozs are in gold deposits.
The Bank for International Settlements (BIS), headquartered in Basle, Switzerland does not have run any gold vaults of its own. However, the BIS is a big player in the global central bank gold market, and it offers its central bank clientele gold safekeeping (and settlement) services using central bank vaults in London, New York and Berne. These services are possible because the BIS maintains gold accounts at the Bank of England, the Federal Reserve Bank of New York, and the Swiss National Bank in Berne. BIS gold accounts can act like omnibus accounts in that many central banks can hold gold in sub-accounts under a BIS gold account at each of these institutions in London, New York and Berne.
Gold can then be transferred around locations using gold swaps where one of the counterparties to the gold swap is the BIS.
The BIS is involved with gold in 3 main categories.
a) the BIS holds gold in custody for customers, off of the BIS balance sheet
b) the BIS has its own gold holdings which are classified as its gold investment portfolio, and which are on its balance sheet
c) the BIS accepts gold deposits from central banks. These gold deposits appear as a liability on the BIS balance sheet. Then the BIS turns around and places these gold liabilities in the market under its own name. These placing are also in the form of gold deposits and gold loans with other institutions including commercial banks. These ‘assets’ are then classified on the BIS balance sheet as BIS’ “gold banking” assets.
a) In its latest annual report, as of the end of March 2015, the BIS stated that it holds 443 tonnes of gold under earmark for its central bank customers on a custody basis. This gold is not on the BIS balance sheet. i.e. it is ‘off-balance sheet’ gold held by the BIS.
b) The BIS also holds 108 tonnes of its own gold (on balance sheet within an investment portfolio). This BIS gold is either kept in custody or transferred to bullion banks as gold deposits. The BIS does not provide granular data in its annual report as to how much of its own gold is ever put into gold deposits.
c) As of 31 March 2015, the BIS had 510 tonnes of gold assets on its balance sheet. Of this total, 108 tonnes was the BIS’ own gold, leaving 403 tonnes as banking assets (i.e. customer gold . Of this same 510 tonnes total, 55 tonnes were classified as gold loans, so 457 tonnes were not gold loans. If all 55 tonnes of gold loans were from customer gold, this would leave 348 tonnes of customer backed gold banking assets. On the same date (31 March 2015), the BIS held 356 tonnes of gold deposits from customers (sight deposits and short-term deposits) on the liability side of its balance sheet which originate entirely from central banks depositing gold with the BIS in sight and term deposits.
The question then is how to reflect BIS gold storage holdings at the Bank of England. While most if not all gold deposit transactions between central banks/BIS and bullion banks take place in London, the data is not readily published.
It was therefore decided, in the spirit of being conservative, to make an assumption on the BIS gold, and only use BIS customer custody gold and BIS own gold as inputs, and because BIS has gold accounts with 3 vaults (London, NY and Berne), to then just divide by 3 and say that one-third of BIS own gold and one-third of BIS ‘central bank custody gold’ is in London This would be 183.66 tonnes, i.e. (108+443)/3.
Therefore, this model states that 183.66 tonnes of BIS gold is stored in the Bank of England. This is probably being very conservative, especially given that no on-balance gold deposited by BIS customers is reflected in this figure.
In September 2010, the IMF sold 10 tonnes of gold to Bangladesh Bank, bringing total gold holdings up from 3.5 tonnes to 13.5 tonnes. The fact that this gold is stored at the Bank of England shows that the IMF sold this gold from its holdings that were stored at the Bank of England. (Note, Bangladesh has recently added some small amounts of domestic confiscated gold to its reserves).
Mexico’s central bank, Banco de Mexico (Banxico) currently hold 122.1 tonnes of gold. At the end of 2012, Mexican official gold reserves totalled 4,034,802 ounces (125 tonnes), of which only 194,539 ounces (6 tonnes) was in Mexico, and 119 tonnes abroad.
With Banxico now holding 122 tonnes according to the World Gold Council, and not 125 tonnes, the assumption is that the 3 tonne reduction came from domestic holdings.
Poland holds 102.9 tonnes of gold in its reserves. Poland’s central bank (Narodowi Bank Polski (NBP)) published a guide to Poland’s gold in 2014 in which it confirmed that nearly all of its gold is at the Bank of England. See pages 86-90 of the guide.
“How much gold did Poland possess before 1998? Approximately 746,463 ounces, of which almost 721 thousand was invested in deposits in commercial banks. In turn, the gold kept in the country was mainly coins, gold bars and various types of gold “scrap” bought by NBP.” (page 86)
Before 1998, only 25,463 ozs of NBP gold was kept in Poland, and 721,000 ozs (22.43 tonnes) was deposited with bullion banks. Poland then bought 80 tonnes of gold in 1998, bringing its gold reserves up to nearly 103 tonnes. The purchase was done as follows:
“…we used the services of a bank which constantly carries out similar transactions. Next, we made a location swap and the whole of NBP’s foreign gold reserves were deposited onto our account in the Bank of England.” (page 88)
It is likely that the NBP is referring to the BIS as the bank which purchased the gold on behalf of Poland, and then transferred it from one of the BIS gold accounts at the Bank of England to the NBP gold account at the Bank of England.
So that is 102.9 tonnes stored at the Bank of England.
Note also that, the Polish central bank explains that “It can be assumed that the gold that has been placed on the market at any time is precisely the gold that is held by the central banks in London“. In other words, central banks that have places gold on deposit (lent it) have done so with gold that they have stored in the Bank of England. See the following screenshot:
Note 6.1 on page 136 of the 2013 NBP annual report states:
“Gold and gold receivables The item comprises gold stored at NBP and deposited in a foreign bank account. As at 31 December 2013, NBP held 3,308.9 thousand ounces of gold (102.9 tonnes).”
This statement about the “gold stored at NBP and deposited in a foreign bank account” has been in a few of the recent NBP annual reports. In April 2013, before the NBP had published the guide to its gold, I asked the NBP by email, based on the statement, to clarify if the gold held abroad is held in custody, for example at the Bank of England or FRBNY or held in time deposits with commercial banks?”
The NBP responded: “Narodowy Bank Polski does not make gold time deposits with commercial banks”.
This may be true if the NBP is using sight deposits, but the 2013 answer, like so many other central banks currently, avoided providing any real information to the question.
Given that nearly all NBP’s 102.9 tonnes of gold was in the Bank of England when the 80 tonnes purchase was made in 1998, the assumption here is that still is the case, and that for simplicity, 100 tonnes of Poland’s gold is at the Bank of England.
Romania has 103.7 tonnes of gold in its official reserves.
In percentage terms, as at 31 December 2014, 27% of Romania’s gold was in ‘standard form’ which presumably means Good Delivery Bars (400 oz bars), 14% in gold coins, and 59% in ‘Deposits’ abroad. (59% of 103.7 tonnes is 61.2 tonnes)
Note the gold deposits with Bank of Nova Scotia and Fortis Bank Bruxelles in 2005 and additionally with the same two banks and with Barclays and Morgan Stanley NY in 2004.
Since the percentage breakdownbetween Romania’s bullionbankdeposits (59%), standardbars (27%) and coins (14%) hasn’t varied much since 2005, and was at a similar mix over various years that I checked such as 2011 and 2014, the conclusion is that Romania has had more than 50% of its gold on constant deposit since at least 2004 (i.e. the original allocated gold is long gone).
The 2005 annual report also states that there were 61 tonnes of Romanian gold stored at the Bank of England. Since Romania had just under 105 tonnes of gold in 2005, this 61 tonnes was referring to the gold deposits, which central banks, as illustrated in numerous other examples, continue to count as their gold even though it has been lent to bullion banks.
Romania therefore had or has 61 tonnes of gold stored at the bank of England.
Note also the reference to central vault, which probably refers to a vault in Bucharest.
The Philippines hold 225 tonnes of gold in its official reserves. In November 2000, when the Bangko Sentral ng Pilipinas (BSP) held 225 tonnes of gold, it explained in a press release titled ‘Shipment of Gold Reserves‘ that it ended up storing 95% of its gold at the Bank of England due to the use of location swaps with a counterparty (probably the BIS) that took delivery of BSP gold, and transferred gold to the BSP account at the Bank of England.
Since 2000, the BSP gold reserves have risen, fallen, and risen again and now total 195 tonnes. Assuming the ‘95% of its gold’ storage arrangement is still in place, then the Philippines has 95% of 195 tonnes, or 185 tonnes stored at the Bank of England.
Greece claims to hold 112.6 tonnes of gold. In 2013, the Greek finance ministry on behalf of the Greek central bank stated that half of Greece’s gold reserves were ‘under custody’ of the Bank of Greece, and the other half was ‘under custody’ of the Federal Reserve Bank of New York (FRBNY), the Bank of England and (very vaguely) Switzerland. Who actually controls Greece’s gold reserves at this point in time is anybody’s guess.
Given that the Federal Reserve Bank of New York was listed by the Greek MinFin as a foreign gold storage location ahead of the Bank of England, the assumption here is that of the 50% of Greece’s gold held abroad, the FRBNY holds more of this portion than the Bank of England. And so the assumption is that the Bank of England holds 40% of the foreign half, i.e. 20% of the total of Greece’s gold, with the FRBNY holding 50% of the foreign half. Taking 112 tonnes of gold as Greece’s total gold holding, 40% of this is 22.4 tonnes stored at the Bank of England. (Note, Greek gold reserves keep increasing incrementally each month by small amounts. As I am not sure what these increases relates to, a recent rounded figure of 112 tonnes has been chosen).
The Banca d’Italia holds 2.451.8 tonnes of gold. Although in 2014, the Banca d’Italia released a document in which it confirmed that some of this gold is held at the Bank of England, there is no evidence to suggest that Italy’s gold in London amounts to more than a few tonnes left over from 1960s transactions.
Bank of England gold set-aside ledgers show that in 1969 there were less than 1000 ‘Good Delivery’ gold bars in the Banca d’Italia gold account at the Bank of England, weighing less than 400,000 ozs in total. This is equal to about 12 tonnes. Most of the Italian gold at the Bank of England was flown back to Rome (and Milan) in the 1960s.
Since there is no public documentation that Banca d’Italia has ever engaged in gold lending (as far as I am aware), then there would be no need for Italy to keep a lot of gold at the Bank of England. Nearly all of Italy’s foreign held gold (over 1,200 tonnes) looks to be in New York (assuming it hasn’t been swapped or used as loan collateral). Italy could have engaged in non-public gold transactions from the Bank of England using gold location swaps from the FRBNY, or from Rome, but there is no evidence of this.
So, this model assumes 12 tonnes of Italian gold is stored at the Bank of England.
Brazil hold 67.2 tonnes of gold reserves. In 2012, Banco Central do Brasil told me by email that all of its gold reserves were in the form of ‘fixed term gold deposits at commercial banks only’. Since the gold would be required to be stored at the Bank of England for these gold deposit transactions to take place, Brazil therefore holds 67.2 tonnes of gold at the Bank of England. See email below:
Banco Central del Ecuador conducted a 3 year gold swap with Goldman Sachs in June 2014 where it swapped 466,000 ozs for US dollar cash This swapped amount of gold has been factored into the World Gold Council data for Ecuador, and the Ecuadorian reserves dropped by 14.5 tonnes in Q2 2014. from 23.28 tonnes to 11.78 tonnes. This swapped amount of 14.5 tonnes is most probably stored at the Bank of England, since Goldman Sachs proposed a similar deal with Venezuela in 2014 where the gold was required to be at the Bank of England for the swap to be initiated.
Bolivia Central de Bolivia holds 42.5 tonnes of gold, all of which is permanently on deposit with bullion banks. The Bolivian Central Bank is very transparent in explaining where its gold is ‘invested’. Hence, it has (until recently) even provided in its financial accounts, the names of the bullion banks which happened to hold its ‘gold deposits’ and the amounts held by each bank.
A recent Banco Central de Bolivia report for 2014 is less revealing and only shows the country distribution of the gold deposits, with 39% in the UK and the rest in France. While this probably refers to the headquarters of the actual bullion banks in question, i.e. Natixis is French etc, it could mean the gold is being attributed to the Bank of England and the Banque de France, so, a conservative approach here is to attribute 39% of 42.5 tonnes to the Bank of England, i.e. 16.6 tonnes stored at the Bank of England.
Peru holds 34.7 tonnes of gold in its official reserves.
At the end of December 2013, Banco Central de Reserva del Peru held 552,191 ounces (17 tonnes) of gold coins which were stored in the Bank’s own vault, and 562,651 troy ounces of “good delivery” gold bars (17.5 tonnes) which were stored in banks abroad, of which 249,702 ounces were in custody and 312,949 ounces in the form of short-term interest bearing deposits. See 2013 annual report.
Since the gold bars are all ‘good delivery’ bars (which is not the case at the FRBNY), and since Peru has still recently been engaging in gold lending, then the evidence suggests that 17.5 tonnes of Peru’s gold is stored at the Bank of England.
Latvia hold 6.62 tonnes of gold in its official reserves after joining the Euro on 1 January 2014 and after transferring just over 1 tonne of gold to the European Central Bank (ECB). All of Latvia’s gold is stored at the Bank of England, therefore Latvia stores 6.62 tonnes of gold at the Bank of England.
Before this transfer of gold to the ECB, Latvia had 248,706 ozs of gold, and it transferred 35,322 ozs to ECB, leaving 213,384 ozs.
The ECB holds 504.8 tonnes of gold. This gold was transferred by the Euro members to the ECB at the launch of the Euro by 1 January 1999. All the ECB gold is de-centrally managed, meaning that it stays where it was when transferred and is still locally ‘managed’ by the bank which transferred that gold to the ECB. Some banks may have transferred gold stored at FRBNY in fulfillment of their requirement, some banks may have transferred gold at the BoE, and countries such as France and Italy may have transferred amounts which are still stored at Banque de France and Banca d’Italia etc. Some of the ECB gold, such as the smaller amount transferred by Latvia, is in the Bank of England. Other amounts of the ECB’s gold are most certainly also at the Bank of England in London.
It would be a separate project to track these transfers. The 1 tonne of Latvian gold transferred to the ECB at the start o 2014 was included in the figures here just as a placeholder, so as to acknowledge that ECB gold is at the Bank of England. Given that the Euro is a competing currency to the US Dollar, the ECB may have more gold than not stored in Europe and not at the Federal Reserve Bank of New York, since ECB gold would logically be safer not stored in the main Reserve Bank of a competing currency bloc.
In its 2014 annual report, the Bank of Iceland said that “The Bank resumed lending gold for investment purposes in June 2014“, and “The Bank loaned gold to foreign financial institutions during the year”.
The Bank of Iceland lent 99.7% of its gold during 2014 because this is the percentage of the gold reserves which are not payable on demand, but are payable in less than 3 months. See below screenshot.
For the purposes of this exercise, Iceland stores 2 tonnes of gold at the Bank of England.
Ghana’s central bank, the Bank of Ghana, holds 8.7 tonnes of gold in its official reserves (precisely 280,872.439 ozs). Of this total, 39.3%, or 3.42 tonnes is held at the Bank of England, with 27.5% at the Federal Reserve Bank of New York, and 29.5% with investment bank UBS. See 2014 annual report.
Interestingly, Ghana refers to its gold account at the Bank of England as a ‘gold set aside’ account, which is the correct name for a Bank of England gold custody account of allocated gold. Probably more interestingly is that most central banks do not use this ‘set aside’ term.
A number of central banks refuse to confirm the location of their gold reserves. I will document this in a future posting. Some of the large holders undoubtedly hold quite a lot of gold at the Bank of England, as do a number of smaller holders. Countries that could fit into this category include Spain, France, Colombia, Lithuania, Sri Lanka, Mauritius, Pakistan, Egypt, Slovenia, Macedonia, Malaysia, Thailand and South Africa. In fact any central bank which has engaged in gold lending is a candidate for having some of its gold stored at the Bank of England.
Spanish people take note. Spain refused to say where its 281.6 tonnes of gold is stored, and Banco de España has the dubious record of being Europe’s least transparent bank as regards gold reserves storage locations. Maybe a project for Spanish journalists.
Banque de France keeps 9% of its 2,435 tonnes of gold reserves abroad, and has in the past engaged in gold lending. So this 9%, or 219 tonnes, is probably stored at the Bank of England.
The ECB and BIS no doubt have more gold stored at the Bank of England than the figures currently reflect. This would also increase the ‘known gold’ total. Egypt is another country which has had a gold set aside account at the Bank of England so is in my view an obvious candidate for the list.
Adding to the known total is therefore a work in progress.
Venezuela’s gold reserves have rarely stayed out of the financial news headlines over the last four years. From initial gold repatriation announcements in August 2011, through to gold shipments from Europe to Venezuela’s capital, Caracas, in late 2011 and early 2012, as well as the more recent negotiations on using gold in swaps and for loan collateral, the Venezuelan gold story has filled many column inches.
However, much of the coverage has been disjointed and purely focused on the story of the day. The analysis below aims to take a broader overview and to provide a big picture treatment. To understand where Venezuela’s gold got to where it is today, you have to understand where it’s been.
The analysis is divided into two parts. Part 1 starts with a short historical overview of Venezuela’s gold up to 1992, followed by an examination of where the gold, and the claims on gold, were located just prior to repatriation in 2011. It also drills down into the composition of the gold now held in the BCV vaults and shows that these bars would be expected to consist of roughly equal percentages of London Good Delivery bars and US Assay Office ‘melt’ bars.
Part 2 examines the actual repatriation exercises in late 2011 and early 2012, and takes a look at the renewed circling of the Venezuelan gold by the international investment banks, most recently illustrated by Venezuela’s gold swap negotiations with Goldman Sachs in late 2013, and the more recent gold swap agreement with Citibank in April 2015.
Since Venezuela was able to fly 160 tonnes of gold on cargo flights across the Atlantic Ocean from Europe to Caracas in 2 months, it begs the question, why has the German Bundesbank not been able to fly 300 tonnes of gold from New York to Frankfurt in 4 months?
El Oro y El BCV – Some History
According to the World Gold Council’s latest list of IMF collated and reported World Official Gold Holdings as of May 2015 (IFS), Venezuela’s central bank, Banco Central de Venezuela (BCV), officially holds 367.6 tonnes of gold within its international reserves, ranking Venezuela as the world’s 16th largest official gold holder. This gold comprises 68.9%, by value, of Venezuela’s total international reserves. Given that many of the countries on the IMF list employ very opaque reporting standards for their gold, Venezuela would probably rank a number of places higher in a more realistic world list, even since re-commencing active management of some of its gold reserves through swaps.
The BCV was established as Venezuela’s central bank in 1939 and has it’s headquarters in Caracas. As early as 1940, the BCV’s international reserves totalled $31 million, of which $29 million (~26 tonnes) was in the form of monetary gold. This gold had been mostly transferred to the BCV from Venezuela’s private banks, and was used as a backing for bank-note issuance which was a function that the BCV took over from the private banks.
33 Liberty: Federal Reserve Bank of New York, Manhattan
In 1942, the BCV’s gold reserves totalled $67 million dollars (59.78 tonnes), with 36.23 tonnes in the BCV vaults and 23.55 tonnes in the custody in the gold vault of the Federal Reserve Bank of New York (FRBNY) under 33 Liberty in Manhattan.
By the end of World War II, the BCV’s gold holdings had increased to approximately 180 tonnes, most of which was classified as monetary gold. This rapid accumulation of gold at the Federal Reserve Bank of New York (in the form of US Assay office melt bars) arose from US payments of gold to Venezuela in exchange for Venezuelan oil exports to the US, i.e. gold-for-oil transactions.
Following World War II, the BCV continued to convert any surplus income not required for import payments into gold, and in 1948 Venezuela had built up holdings of 287 tonnes of gold, making it the 8th largest gold holder in the world, and the largest gold holder in Latin America. During this period, the BCV says that it “streamlined the transfer of gold” from FRBNY custody to the BCV vaults in Caracas. In 1957, the BCV also bought two large ‘lots’ of fine gold bars from the IMF. As a result, in 1957-1958, Venezuelan gold holdings reached their highest level ever at nearly 640 tonnes.
The gold-for-oil transactions between Venezuela and the US are also referenced in the BCV’s 2011 Economic Report (large file – page 91) which states:
“A mediados de los años cincuenta, el acervo de oro alcanzó 639 toneladas, en la medida en que las exportaciones petroleras a Estados Unidos fueron pagadas a la nación con barras de oro del Banco de la Reserva Federal de Nueva York.”
“In the mid-fifties, the stock of gold reached 639 tonnes, to the extent that oil exports to the United States were paid to the nation with gold bars of the Federal Reserve Bank of New York.”
In 1961, the BCV needed to acquire foreign exchange from the IMF, some or all of which was paid for with gold, and Venezuela’s gold reserves fell by nearly 300 tonnes, to approximately 340 tonnes, and then rose slightly in the 1960s to between 356 and 357 tonnes.
Fast forwarding to 1986, the BCV made a decision to engage in the “proactive management of monetary gold in the international market“, and in the late 1980’s moved “a significant portion” of gold from its vaults in Caracas to the Bank of England vaults in London as a prelude to “investing” this gold in the London Gold Market. The BCV adopted the good delivery standard for the gold sent to London and invested these holdings in interest-earning financial transactions such as swaps and gold deposits. These gold operations were established with “first-class financial institutions as enshrined in the Central Bank Law“, which “narrowed” the allowable counter-parties (i.e. narrowed the counter-parties to certain LBMA bullion banks).
To the Bank of England and beyond
Specifically, as at 31 December 1986, 14.7% of Venezuela’s 356 tonnes of gold was held at the FRB vaults in New York, and 85.3% was held at the BCV vaults in Caracas. Six years later, on 31 December 1992, 14.7% of this same 356 tonne quantity of gold was still at the FRB in New York, 43.3% was still at the BCV in Caracas, but now 28.5% had moved to the Bank of England and 13.4% was said to be with the BIS (note: this adds up to 99.9% due to rounding errors).
There are slight discrepancies in the data sources as to whether the BCV held 357 tonnes or 356 tonnes in the late 1980s / early 1990s, but the Venezuelan Government figures at the end of December 1992 were 154.5 tonnes in Caracas (43.3% of the gold reserves), 101.8 tonnes at the Bank of England (28.5%), 52.2 tonnes in the FRBNY (14.7%), and 47.79 tonnes with the BIS (13.4%). This gold distribution adds up to 356.29 tonnes.
Note that initially in the late 1980’s, 89.72 tonnes of gold was transferred from the BCV to the Bank of England, and this amount appears to have been augmented slightly to 101.8 tonnes by the end of 1992. This would also suggest that the gold deposited with the BIS was via the BIS’ gold account at the Bank of England in London.
Various Venezuelan news articles such as here claim that gold began to be moved to London, initially surreptitiously, from the BCV in Caracas beginning with 8 tonnes on 5 August 1988, and then another 8 tonnes on 21 February 1989 when the newly elected president, Carlos Andres Perez, came to power for a second time.
The above historical account should go someway towards explaining how Venezuelan gold ended up at the Bank of England in the late 1980s and early 1990s. However, it is not the full story. To get a fuller picture, you also have to work in reverse from 2011 back to 1992. Luckily, the BCV has provided a roadmap that helps in this regard.
Blueprint of Venezuelan gold holdings as at 8 August 2011
In early August 2011, Venezuela’s president, Hugo Chávez, pronounced a series of directives which would dramatically alter how the country’s international reserves were invested and managed. These directives, which were contained in a document titled “Proposed relocation of the International Reserves“, called for:
the transfer of operating reserves from banks in Europe and the US to banks in Russia, China and Brazil, within a two month period
the transfer of monetary gold held abroad back to the BCV vaults in Venezuela, within a two month period
Note that the BCV classifies international reserves into a) operating reserves (“liquid reserves”), comprising short-term cash and cash like instruments invested with institutions such as investment banks and the BIS, and b) non-operational reserves such as gold and SDRs.
Throughout the 1990s and 2000s, the BCV’s gold holdings had remained static at 357 tonnes until the 2008/2009 period. During 2008, the BCV’s board made a decision to send its non-monetary gold holdings abroad for “strategic use” (i.e. investment operations). Some of this non-monetary gold was purchased from Venezuelan gold mine production. In early 2009 and 2010, the BCV “monetized its non-monetary gold” by having it refined into good delivery bars and then moved this gold to London to participate in return generating transactions. This led to the 357 tonnes total rising to 361 tonnes in 2009 and then 364 tonnes in 2010. By 2011, Venezuela’s gold holdings had reached nearly 366 tonnes.
Type of bars held and monetary coins
In page 17 of its Powerpoint presentation (March 2010), the BCV lists an inventory of its monetary gold as consisting of:
Amonedado (coins) comprising “Eagles, Liberty and Indian Head”
Barras Bóvedas BCV (bars in the BCV vaults) comprising “Fed Melted Bars” *
Bóvedas BI y otros (bars in Bank of England and others) comprising “Good Delivery” bars
* The “Fed Melted Bars” that the BCV refer to are US Assay Office melts (batches of ~ 18 to 22 bars), and the BCV notes that these bars “exceed 995 fine, but lack a refiner seal certifying assay“. What the BCV means is that although these bars have the correct fineness to be good delivery bars, they are not good delivery until they have been individually weighted and individually stamped (i.e. until the Melts have been broken). See “The Keys to the Gold Vaults at the New York Fed – Part 3: ‘Coin Bars’, ‘Melts’ and the Bundesbank” for an explanation of US Assay Office ‘melts’.
Based on this BCV inventory, the entire repatriation by Venezuela would be expected to have consisted of London Good Delivery bars. It also would mean that following the repatriation, the BCV vaults held a roughly 50% – 50% combination of US Assay Office ‘melt’ bars and London Good Delivery bars. See section below on ‘How many Gold Bars did Venezuela have in August 2011’.
Venezuela’s Gold in August 2011
The August 2011 international reserves document from Chávez, which was actually issued by the then BCV president, Nelson Merentes, and the then Venezuelan finance minister, Jorge Giordani, included a detailed breakdown of the composition and location of Venezuela’s gold reserves as at 8 August 2011, in the form of the table below. This table illustrates that Venezuela’s gold that was held abroad had experienced some very interesting transformations between 1992 and 2011.
Gold on deposit vs Gold time deposits
According to the table, as at 8 August 2011, Venezuela held 365.82 tonnes of gold, with 154.47 tonnes in Venezuela custodied in the vaults of the BCV (42.22% of the gold), and 211.35 tonnes held abroad (57.78% of the gold). The gold held abroad was classified into two broad categories, namely, “Sólo Depositado” (gold deposited only or on deposit only) totalling 128.48 tonnes, and “A Plazo” (gold ‘time’ deposits or ‘term’ deposits) totalling 82.87 tonnes.
Since the English equivalent of these two phrases can be confusing, the “Sólo Depositado” can be considered to be physical gold that has been deposited with a bank, much like a sight deposit at a bank, while the “A Plazo” is gold lent by the central bank to commercial bullion banks whereby the banks pay interest to the central bank for borrowing the gold. The central bank has a claim to the gold that it lent, and the bullion banks have a gold liability to the central bank.
Bank of England, the BIS, and J.P. Morgan
Of the 128.48 tonnes of physical gold deposited abroad, this was deposited with three entities, namely, TheBank of England, TheBank for International Settlements, and J.P. Morgan. The lion’s share of this deposited gold, 99.21 tonnes, was with the Bank of England. A further 11.85 tonnes was deposited via the BIS and a further 17.42 tonnes was deposited with JP Morgan. Each of these three entities is listed next to the country of its “headquarters” i.e. England, Switzerland and the US, respectively.
It’s not clear if the Venezuelan gold held by the Bank of England was held ‘underearmark‘ (i.e. specific bars allocated in custody via a Bailor-Bailee relationship), or held ‘on a fine ounce basis‘ (i.e. within a larger pool of gold (pool allocated) where Venezuela would own a specific number of fine ounces but not specific bars). Given that there is no mention of ‘earmarked’ gold in the table, and given that the deposit was described as a sight deposit (see below), the gold attributed to the Bank of England was probably held as a deposit on a fine ounce basis.
The same logic would apply to the gold deposited into a BIS account (probably also at the Bank of England). Gold lending only works if the lent gold is fungible which enables the Bank of England or the BIS to transfer bars to the borrowers and get back other bars at a future date. Its unclear from the table as to where the gold deposited with JP Morgan was stored, and also unclear if this gold was unencumbered and free of other liens, claims and hypothecations.
Table 1: How Venezuela’s gold reserves were distributed as of 8 August 2011
Of the 82.87 tonnes of lent gold that comprised gold time deposits (22.65% of Venezuela’s gold), these time deposits were shared out between five bullion banks, namely, The Bank of Nova Scotia, Barclays, Standard Chartered, HSBC and BNP Paribas. The countries listed next to these five bank are, in all cases, the countries where their ‘headquarters’ are based, except for BNP Paribas, which strangely, is listed with a country of ‘United States’ despite its headquarters being located in Paris, France. So it appears that a BNP Paribas US entity was involved in borrowing Venezuelan gold. Note that BNP merged with Paribas in 2000 after a takeover battle involving Société Générale.
These gold time deposits represent the gold that was lent by the BCV to the bullion market in order to generate a return to the BCV. This gold, when lent, was either sold or lent on further by the original bullion bank borrowers or used by them in a proprietary manner, or some combination of the three.
Note that London entities of all six bullion banks in the above table are members of the London Bullion Market Association (LBMA). Five of them are now LBMA market makers (except BNP Paribas), and four of them are clearing members of London Precious Metals Clearing Ltd (LPMCL), namely HSBC, JP Morgan, Scotia and Barclays.
For all of the above deposits / investments, the BCV’s allocation table specified the year of commencement of operations (fecha de inicio de operaciones), and in the case of the time deposits, the expiration date of the placements (fecha de vencimiento de colocaciones). For the gold on deposit with the Bank of England, BIS and JP Morgan, these deposits were described as ‘sight’ deposits with no expiration date.
In this table from 2011, the gold on deposit at the Bank of England is stated as having commenced in 1980. However, this contradicts the BCV pie-chart (see graphic above) which stated that in 1986, the Venezuelan gold was only held at the BCV and the FRBNY, and also contradicts the BCV history which maintained that “initially in the late 1980’s, 89.72 tonnes was transferred from the BCV to the Bank of England”.
Given that all bar gold at the BCV and the FRBNY would have been in the form of US Assay Office melts, it implies that all of the Venezuelan bars that ended up at the Bank of England and in the London market needed to be, at a minimum, individually weighted and stamped when received. Given that there have been concerns about the quality of US Assay Office 995 fine bars (for example the gold given by the FRBNY to the Bundesbank in 1968), some US Assay Office bar holders may decide to refine them to bring them up to a correct and trustable good delivery standard.
According to the BCV table, Venezuela only deposited gold with the BIS beginning in April 2009, while the gold deposit with JP Morgan commenced in 1999 (so the JP Morgan deposit was in existence for more than 11 years). Note that JP Morgan merged with Chase Manhattan in 2000. Since Venezuela had previous deposited gold with the BIS from as early as December 1992, the record of an April 2009 deposit with the BIS looks like a fresh allocation to a BIS account at that time.
Scotia, Barclays, StanChar, HSBC and BNP Paribas – Time Deposits
Of the five gold time deposits arrangements, the relationship with Bank of Nova Scotia was stated as commencing in 1992, while the operations with the other four bullion banks are listed as beginning in 2004. However, a note to the table states that “Since 2004, the Central Bank has kept automated records of the operations with these institutions. However, the first operations (manual) are dated from previous years” (i.e. prior to 2004).
Interestingly, three of these bullion banks, namely Barclays, Bank of Nova Scotia, and Standard Chartered, are the same three banks that the central bank of El Salvador had recently engaged in gold time deposits with. See “El Salvador’s gold reserves, the BIS, and the bullion banks” for details. In fact, these three names crop up hosting gold time deposits with other Latin American central banks. More on that in a future article.
The gold time deposits appear to have been generally for periods of approximately one month because, as of 8 August 2011, all of the deposits expired between 8 and 14 September 2011.
Note, the final ‘total’ row in the above table is named ‘Total Oro‘ but only totals to 237.34 tonnes. This looks like a typo whereby the 154.47 tonnes at the BCV was added to the 82.87 tonnes of time deposits, but the 128.48 tonnes of real gold deposits were omitted.
The transformation of Venezuela’s gold from 1992 to 2011
Given that we know the geographic allocation of Venezuela’s gold on 31 December 1992 (start of period) and also know how the geographic allocation stood in August 2011 (end of period), as well as when the end of period distributions started, it’s possible to draw some observations.
Recall that at the end of 1992, Venezuela held 154.5 tonnes of gold at the BCV vaults in Caracas (43.3%), 101.8 tonnes at the Bank of England (28.5%), 52.2 tonnes in the FRBNY (14.7%), and 47.79 tonnes with the BIS (13.4%). A total of 356.29 tonnes, and note that the FRBNY and BIS holdings add up to 99.99 tonnes (let’s call it 100 tonnes).
At the beginning of August 2011, Venezuela held 154.47 tonnes at the BCV, 99.21 tonnes at the Bank of England, 17.42 tonnes with JP Morgan, 11.82 tonnes with the BIS, and 82.87 tonnes as time deposits with fivebullion banks. A total of 365.82 tonnes, i.e. 9.53 tonnes more than in 1992.
Through the 1990s and 2000s
1. The 154.5 tonnes of physical gold that was at the BCV in Caracas in 1992 was still at the BCV in August 2011.
2. Gold, in a practically equivalent amount to that deposited at the Bank of England by December 1992 (i.e. 101.8 tonnes) was still deposited at the Bank of England in August 2011 (i.e. a 2.59 ton reduction to 99.21 tonnes). This was not necessarily the same gold though since it could have been involved in multiple transactions between 1992-2011.
3. The gold that was’ in custody’ at the Federal Reserve Bank of New York (FRBNY) in 1992 (i.e. 52.2 tonnes) was no longer accounted for as being at the FRBNY in 2011. This gold may have been physically moved to the Bank of England or else swapped to London, however, some or all of it may have stayed in the FRBNY vault or in the vicinity of New York. This is so because some bullion banks such as JP Morgan have in the past had gold accounts at the FRBNY when they held sovereign gold as collateral for loan advances (e.g. lending to Spain in the 1950s).
The FRBNY will insist that commercial banks cannot hold gold accounts at the FRBNY, however, commercial banks have been named gold account holders at the FRBNY (holding gold as collateral) in the past. Furthermore, JP Morgan’s gold vault is right next door to the FRBNY gold vault(s) and may be connected to the FRBNY vault area. See “The Keys to the Gold Vaults at the New York Fed – Part 2: The Auxiliary Vault” for details. So it’s possible that the 17.42 tonnes that was deposited with JP Morgan was held in New York in JP Morgan’s vault or in the name of JP Morgan at the FRBNY vault.
Interestingly, given that there were 52.2 tonnes of Venezuela’s gold at the FRBNY in 1992, its notable that the totals for the gold deposit with JP Morgan, and the time deposits with BNP Paribas (US), Bank of Nova Scotia and Standard Chartered in the above table add up to a combined 51.41 tonnes, which is quite close to the 52.2 ton FRBNY total (a difference of 0.79 tonnes). So the FRBNY gold could have been divided out to these four entities in the 1990s and 2000s.
4. The 47.79 tonnes at the BIS in 1992 had, by 2011, become only 11.82 tonnes at the BIS, i.e. a drop of 35.97 tonnes. Gold deposited to the Bank of England by a foreign central bank can be transferred in and out of the BIS gold accounts at the Bank of England and also in and out of the commercial LBMA bullion bank gold accounts at the Bank of England. Given these transfer possibilities, it’s not surprising that Venezuela’s gold positions with the BIS have fluctuated widely over time.
5. From being stored with four official sector entities in 1992 (according to the BCV data), the Venezuelan gold, in 2011, was being ‘minded’ by nine entities, six of which were commercial bullion banks / investment banks.
6. Roughly speaking, the combined 100 tonnes of gold custodied by the FRBNY and the BIS in 1992 had become 112.14 tonnes in 2011 spread over the BIS, JP Morgan, Barclays, HSBC, Scotia, StanChar and BNP Paribas. This transformation in the 1990s and 2000s of custodied gold into lent gold as well as physical gold deposited with a bullion bank (in the case of JP Morgan) is in line with the BCV’s stated intention in the late 1980s to proactively move some of its gold to London (in the form of good delivery gold), so as to actively participate in the financial market for gold and earn a return on the participating gold.
The 12.14 tonne increase from 1992 to 2011 among the above entities was due to a real increase in 9.53 tonnes of Venezuela’s gold over 1992 to 2011 (non-monetary gold converted to monetary gold and sent to London) as well as a net 2.59 ton reduction in the amount of gold deposited with the Bank of England (9.53 + 2.59 = 12.12).
This 12.14 ton net increase, when added to the reduction of 35.97 tonnes held with the BIS, equals 48.11 tonnes, which is very close to the combined gold lent (time deposits) to Barclays and HSBC of 48.89 tonnes ( i.e. 45.84 + 3.05 = 48.89 tonnes), and just leaves a 0.78 ton difference, which is the residual amount that was left over in the above FRBNY calculation. So in theory, the Barclays and HSBC time deposits could have been sourced from a transfer from Venezuela’s BIS gold account balance as well as the extra gold that the BCV sent to London in 2009 and 2010.
7. There may have been many other bullion banks that held gold time deposits for Venezuela over the period 1992 – 2011. The 2011 data is just an end-of-period snapshot. Likewise, some of Venezuela’s gold could have moved in and out of Bank of England and BIS gold accounts, and, less likely, moved in and out of a FRB gold account, over the intervening period. Without the inventory records, it’s not possible to know.
Changes to Venezuela’s gold reserves since early August 2011
Venezuela’s current gold holdings (in May 2015) of 367.6 tonnes versus early August 2011 total holdings of 366 tonnes mask some fluctuations over the period which were due to various small purchases and sale transactions.
“Purchases of gold made by the BCV in the country reached 1.6 tonnes of fine gold for Bs. 328.88 million. In 2012, 3.6 tonnes of non-currency gold in stock were refined to the condition of good delivery. Those bars bought directly from the domestic market comprised this stock. This amount was monetized and included as asset of the reserves in currency gold of the issuing body, thus maintaining the same heritage of the previous year.”
“According to the latest IMF data, Venezuela sold 3.7 tonnes in August alone, bringing total sales so far this year to about 10.9 tonnes. Venezuela now has 362 tonnes of gold reserves, compared to 372.9 tonnes at the beginning of this year .”
Other small purchases since the end of 2012 brought the total back up to the current 367 tonnes.
How many Gold Bars did Venezuela have in August 2011?
In the BCV’s 2011 Economic Report (see link above) on page 92, it states that:
“El instituto emisor logró la repatriación de 160 toneladas de oro monetario (12.819 barras good delivery)”
“The Central Bank managed the repatriation of 160 tonnes of monetary gold (12,819 good delivery bars)”
In a Venezuelan media article from November 2011, it states that:
“El pasado 23 de agosto, Merentes anunció la repatriación de 16.908 lingotes de oro de los 29.265 lingotes que Venezuela posee.”
“On August 23, Merentes announced the repatriation of 16,908 gold bullion ingots of the 29,265 ingots that Venezuela owns.”
These bar numbers roughly equate to tonnes as follows. Assuming a good delivery bar is a 400 oz bar, then 12,819 bars = 159.49 tonnes, and 16,908 bars = 210.36 tonnes, and the difference of 4,089 bars = 50.87 tonnes. The total of 29,265 bars = 364.10 tonnes. These figures are very close to the stated gold totals in the above BCV table from August 2011.
The reference to 16,908 bars was therefore assuming that all the gold held abroad was being repatriated, which turned out not to be the case and approximately 50 tonnes was left behind at the Bank of England in London. From the numbers above we therefore know that Venezuela owned 29,265 bars in total, with 16,908 bars held abroad (including claims on bars containing the equivalent number of fine ounces that were deposited or lent), of which 12,819 bars were repatriated, and 4,089 bars left in the Bank of England’s vaults. It also means that there were 12,357 bars held in the BCV vaults in Caracas before the gold repatriation started, and 25,176 bars in the BCV vaults when the repatriation completed.
Both the gold repatriated and the gold left in the Bank of England are assumed to be entirely made up of London Good Delivery bars, since all the bars that entered the London market would have to be Good Delivery bars. The gold that was in the BCV vaults in Caracas prior to the repatriation is assumed to entirely consist of US Assay Office or other US Mint ‘melts’. Therefore, following repatriation of the gold, 50.92% of the bars in the BCV vaults should have been London Good Delivery bars, and 49.08% should have been in the form of US ‘melts’.
Since there were 211.35 tonnes of Venezuela’s gold stored abroad, the average fineness of the good delivery bars was 401.875 fine ounces. Since there were 154.47 tonnes of Venezuela’s gold stored in Caracas before the repatriation, most if not all of which were in the form of US Assay Office melt bars, the average fineness of these bars was therefore 401.90 fine ounces. This is assuming the ingot numbers are correct and that they were not reverse calculated in any way by the BCV from older records of bar numbers and fine ounces.
The Chávez declaration from 8 August 2011 called for the transfer of gold back to Venezuela so that 90% of the country’s gold would end up stored in the BCV vaults, and interestingly, it envisaged that the gold transfers would be completed by October 2011.
This timeline of an August – October repatriation never materialised, and the gold shipments to Caracas only commenced in late November 2011 and ended on the last day of January 2012. It’s unclear as to what caused this delay or indeed if the October deadline was merely an unrealistic expectation by Chavez and the BCV, or a real delay caused by gold sourcing or other logistical issues from the Bank of England, BIS and bullion banks. Neither the BCV nor the media (Venezuelan or international) appears to have covered or explained this shifting completion deadline.
What is clear is that the move by Venezuela to repatriate very large quantities of gold, which was publicly announced in early August 2011, was one of the key drivers that caused a run-up in the gold price before, during, and after August 2011, and which culminated in a multi-year high price of over $1900 on 6 September 2011. See BullionStarChart for US Dollar gold price movements before, during, and after August 2011.
With five bullion banks needing to provide nearly 83 tonnes of gold to Venezuela in a short space of time so as to close out their gold deposit liabilities, it would be realistic to assume that this had a material impact on bullion demand in the London and possibly wider gold market. Based on normal protocols as well as market intelligence, the bullion banks in question, as well as the BIS and Bank of England would most likely have known about the approaching BCV/Chavez announcement for a significant period of time prior to August 2011.
As to whether demand tightness was heightened even more by Venezuela’s closing out of physical deposits with the Bank of England, BIS and JP Morgan is hard to quantify. It would depend on the extent to which these deposits were free of other claims, that might necessitate sourcing replacement gold elsewhere.
The manner in which all of the gold was sourced for fulfilling Venezuela’s repatriation request may never fully be known. What is known is that the repatriation operations to fly the gold to Caracas International Airport, and transport it to the BCV’s downtown vaults, included some of the largest and most public gold moving operations that most people are ever likely to witness.
These operations, over a two month period from the end of November 2011 to the end of January 2012 included gold flown in on Air France and World Airways aircraft.
Part 2 of this Venezuelan gold reserves analysis, titled “Venezuela’s Gold Reserves – Part 2: From Repatriation to Reactivation“, covers the gold repatriation operations and these very public airport operations, and features some interesting videos of the transport operations taken by camera crews who were effectively part of the operation. Part 2 also covers the extensive re-involvement with Venezuela’s gold reserves by some of the largest names in global investment banking.
According to a Reuters report from 24 April, the central bank of El Salvador, Banco Central de Reserva de El Salvador (BCR), sold approximately 80% of its gold reserves during March 2015. This sale comprised 5.412 tons of gold and raised $206 million for the Bank.
Reuters initiated its story based on updates to the International Monetary Fund’s gold reserve data, which this month was updated on 24 April. Each month, the IMF updates its International Financial Statistics dataset with economic data (on a one to two month lag) including country gold reserve data reported to it by member countries.
However, the Reuters story was very brief and failed to explain any of the details about El Salvador’s gold or the March gold sales. Therefore, to correct this situation, the full story is explained below.
IMF gold reserve data by country
The IMF elibrary web site is the entry point for retrieving monthly country gold reserve data (by volume in fine troy ounces) for any IMF member country. Note that on the IMF’s site, gold reserve data is part of the International Financial Statistics (IFS) dataset and not part of the International Reserves dataset. The IFS dataset was subscription-based until January 2015, after which the IMF made a number of datasets, including IFS, free to access.
IFS gold reserve data for El Salvador shows that starting with a total of 223,000 ounces of gold in November 2014, the central bank’s gold reserves fell by 5,000 ozs to 218,000 ozs in December 2014, before dropping by another 174,000 ozs to 44,000 ozs in March 2015, making an overall fall of 179,000 ozs between November and March. See table below:
Looking at El Salvador’s quarterly gold reserve data since Q2 2014, as well as its annual gold reserve data since 2011, shows that the only movements in the country’s gold holdings over the last 4 years were the December 2014 and March 2015 gold sales. See table below:
However, the best source of information on the Banco Central de Reserva de El Salvador’s (BCR) gold holdings, is of course, the bank’s own publications. The BCR, like a number of other central banks in the region, divulges relatively more information about its gold holdings than most other central banks in other parts of the world.
The Bank for International Settlements, Barclays and Scotia
Section 7 of this statement addresses the BCR’s gold deposits (Depósitos en Oro) and is quite detailed in the information that it provides. See screenshot below:
As of 30th September 2014, the BCR claimed a gold holding of 223,113.213 troy ounces. Exactly 85% of this gold holding (189,646 ozs) was said to be held as deposits of physical gold (Depósitos de oro físico) with the Bank for International Settlements (BIS). The BIS offers gold “safekeeping and settlements facilities” that are “available loco London, Berne or New York“, i.e. the BIS maintains gold accounts in three locations, so El Salvador’s gold could have been held with the BIS in any of these three locations.
The remainder of the gold holdings comprised 31 day time deposits in gold (Depósitos a plazo en oro) placed with two bullion banks, and derivative coverage (Derivado de Cobertura) with the BIS in the form of two put options entered into in March 2014.
The time deposits in gold were placed in equal sizes with Barclays Bank and the Bank of Nova Scotia. Each of these time deposits represented 7.5% of El Salvador’s gold holdings, specifically 16,733 ozs with Barclays and 16,734 ozs with Scotia, and 15% in total. The combined deposits also totalled 33,467 ozs, just over 1 ton. Interest on gold deposits is usually paid in gold that accrues and is added to the outstanding deposit total, so this amount in excess of 1 ton may represent interest payable to the BCR by the bullion banks.
Note that both Barclays and Scotia were two of the member banks of the recently defunct London Gold Market Fixing Company which managed the daily London gold fixings, and the two banks are also now two of the seven participants in the new LBMA Gold Price auction which recently replaced the gold fixings. Barclays and Scotia are also two of the six member bullion clearing banks which constitute London Precious Metals Clearing Ltd (LPMCL).
There was also a residual line item under the BCR’s time deposits in gold attributed to a third bullion bank, Standard Chartered. Finally, the BIS derivatives coverage line item accounted for 2,180 ozs.
At the stated valuation price of $1,216.50 per ounce, the above totals add up to 225,293 ozs of gold, but subtracting the derivatives line item of 2,180 ozs yields 223,113 ozs, which is the total gold holding that the BCR claims to hold. The gold representing the derivatives (put options explained below) line item seems to represent a loss on the puts expressed in gold that the BCR makes an adjustment for by subtracting it from its ‘total’ gold holding, hence it reported a gold holding of 223,113 ozs.
The last notes to the above section 7 state that:
“OnMarch 12, 2014, twoput options with a maturity of one year were entered into, with a notional value of11,200and211,913.213troyounces respectively, atan exercise priceof US $1,100.00per troyounce.
However, on 30 June the BCR had an active time deposit in gold placed with Standard Chartered as well as with Barclays and Scotia, and so was using three bullion banks for placing its gold deposits.
Using a valuation price of $1,315 per troy ounce, the June report shows that Barclays held a time deposit in gold for the BCR of 16,733 ozs, Scotia held a deposit of 8,467 ozs and Standard Chartered held a deposit of 8,267 ozs. These deposits also rolled over with a one month maturity.
The gold deposit with Barclays in June 2014 is identical to that of September 2014, so it was just being renewed by the BCR every month and rolling over with Barclays. Note that the Scotia and StanChar deposits of 8,267 ozs and 8,467 ozs respectively, add up to 16,734 ozs, so between June and September, these two deposits were combined at some point when they matured and were then placed together with Scotia.
In the June accounts, the amount of gold attributed to the ‘derivatives’ (put options) is only 711 ozs, or US$935,761 and so the total amount of gold listed below adds up to 223,825 ozs. Subtracting the 711 ozs (loss) again gives 223,113 ozs, the BCR’s published gold holding. Gold was trading at about $1,300 in June 2014 but there was still about 9 months left until the expiration date of the options.
Gold Deposits = Gold Lending
It’s important to grasp what these gold deposits with bullion banks are. This is merely gold lending by a central bank which has lent this gold out to LBMA bullion banks at very low deposit rates of maybe 0.5% – 1.00%. The LBMA bullion banks, at the time the lending first occurred, obtained the physical gold and immediately sold it.
These are short-term gold deposits, which keep maturing every month or so, therefore a central bank has to keep renewing them, either with the same LBMA bullion bank or another LBMA bullion bank which is in the market quoting to take these deposits. The central banks do this by sending MT60* series SWIFT messages to the bullion banks. These gold deposits that a central bank puts out can stay out for years and years after they were first entered into. For example, Bolivia has had gold deposits out with LBMA bullion banks since 1997, or over 17 years. I will write about Bolivia’s gold lending in detail at some point.
None of the LBMA bullion banks actually has this gold on deposit, since its been sold. The banks just take over the obligation to pay the gold back to the central bank. So the claims that the central bank has to the bullion banks just keep switching around. One month the claims could be on Barclays, Scotia and Standard Chartered. A few months later the claims could be to Natixis, BNP Paribas and HSBC etc etc.
Lots of central banks engage in this activity, they just don’t report it in as much detail as, for example, El Salvador or Bolivia. The Austrian federal auditors recently published a report which showed that Austria’s central bank, the OeNB, was actively engaging in gold lending with multiple bullion banks, with up to 10 counter-parties in 2009. See here.
Selling its Gold did not make sense for El Salvador
In its 24 April story, Reuters reported from San Salvador that a central bank of El Salvador official had said that the gold sales were to “diversify risk and take advantage of the metal’s appreciation”, as well as to protect the Bank’s reserve portfolio “against market volatility”. This explanation doesn’t make a lot of sense especially since the put options were out of the money in March 2015.
Firstly, the gold price has not appreciated very much recently, and in US dollar terms it has fallen notably since September 2011. El Salvador’s gold holdings did not change at all over 2011-2014 and their value went down, not up. So, at this time, the reference to the “metal’s appreciation” is bogus, since even if the cost price was substantially lower, a far better time to sell would have been in 2011-2012.
Secondly, gold as a reserve asset in a central bank reserve portfolio is held precisely because it provides diversification and can act as an inflation hedge, currency hedge and also represents a reserve asset or war chest of last resort. In the World Gold Council’s latest ‘World_Official_Gold_Holdings_as_of_April2015_IFS’ report from early April, when El Salvador was listed as holding 6.8 tons of gold, this represented 9.9% of the BCR’s total reserves.
Emerging market central banks have been actively increasing their gold reserves in recent years, so as to increase the gold percentage in their reserves to something approaching 10%. Since El Salvador had an enviable ratio of nearly 10% of gold to total reserves that many emerging central banks are striving to reach, it does not make any sense as to why the BCR suddenly turned around and ruined this ratio, by selling nearly four-fifths of its gold. The BCR’s gold to total reserves ratio is now a miniscule 2% of its total reserve portfolio. There may therefore have been other considerations at play between El Salvador and the BIS such as the BIS suggesting the sale.
So, which gold did El Salvador sell?
Recall that the BCR’s two put options with the BIS were entered into on 12 March 2014 and had a maturity of one year and a strike price of US$ 1,100 per troy ounce. One put was for a notional value of 11,200 troy ounces and the other was for a notional value of 211,913.213 troy ounces. But with the strike price at $1,100 there was no value in exercising them.
For the month of March, the US dollar gold price traded in a range from about $1,220 down to $1,150. From 2nd to 12th March, gold also traded roughly in a range from near $1,220 at the start of the month, down to near $1,150 on 12th March, but still above $1,100.
Recall that as of 30 September 2014, the central bank of El Salvador had 223,113 ozs of gold, of which 189,646 ozs was held in “deposits of physical gold” with the BIS, and 33,467 ozs was held as time deposits of gold with commercial bullion banks.
In November 2014, as stated, the Salvadoreans sold 5,000 oz, leaving 218,113 ozs, and then the major sale occurred in March 2015 of 174,000 oz (or 5.412 tons). In total that’s 179,000 ozs of sales, leaving El Salvador with 44,000 ozs.
Since the Salvadoreans had 189,646 ozs on deposit with the BIS and needed to sell 179,000 ozs, the gold sold was most definitely sold to the BIS or to another party with the BIS acting as agent. On its website, under ‘foreign exchange and gold services”, the BIS states that it offers “purchases and sales of gold: spot, outright, swap or options“.
It would not make sense to sell some or all of the time deposits that are out with the bullion banks such as Barclays and Scotia, since a large chunk of the BCR gold at the BIS would have to be sold also. It would be far easier to just deal with one set of transactions at the BIS. And additionally, the bullion banks do not have El Salvador’s gold, they would need to use their own stocks or go out into the market to buy gold in order to repay the BCR.
The above would leave the time deposits of 33,467 ozs (and accrued interest) out with the bullion banks, rolling over each month as usual. The other roughly 11,000 ozs that the BCR held with the BIS could be left with the BIS, or else this too could be put out on deposit with the bullion banks.
The case of the El Salvador gold sales demonstrates that central banks can and do use the gold depositing facilities of the Bank for International Settlements, and also the gold lending services of LBMA commercial bullion banks such as Barclays, the Bank of Scotia and Standard Chartered amongst many others. The case of El Salvador also shows that central banks actively use derivatives such as put options within the management of the gold component of their reserve portfolios.
It would be naive to think that the bullion banks and the BIS are just providing these services to small emerging market central banks in Central America. It would be more realistic to suggest that the bullion banks and the BIS are providing these gold reserve portfolio services (with scale) to many central banks.
It’s also a shame that neither Reuters nor any other financial news organisation sees fit to write anything of substance about El Salvador or other central banks and the real workings of the interbank and BIS gold market given that it’s not that difficult to produce an article such as the above within a few hours of research and writing.
With the current structure of the London gold price fixings disappearing in the very near future, there is an unusual story that I’d like to share about the gold fixings. It concerns the Bank of England’s ‘gold activities’ in the daily London Gold Fixings during the 1980s, and my attempts to get the Bank to explain what these ‘gold activities’ consisted of.
These ‘gold activities’ of the Bank came to light within some comments that senior Bank of England employee Oliver Page wrote about fellow senior Bank of England colleague and contemporary Terry Smeeton:
Before looking at Mr. Smeeton’s ‘gold activities’, it’s worth getting a sense of the roles of Terry Smeeton and Oliver Page at the Bank of England by briefly looking at the career profiles of these two gents.
Terry Smeeton and Oliver Page
In the 1980s and 1990s, Terry Smeeton was one of the Bank of England’s experts on the gold market, and he rose to attain the position of Head of Foreign Exchange and Gold at the Bank. Smeeton joined the Bank of England in 1960 and remained at ‘The Old Lady’ until retiring in 1998. After leaving Threadneedle Street in March 1998, Smeeton went on to be a non-executive director of Standard Bank from July 1998 to September 2007, and in 2002 was appointed as advisory board member to the Dubai Metals and Commodities Centre (DMCC) and head of the centre’s Gold Management committee. Terry Smeeton passed away in September 2007.
In the 1990s while still at the Bank, Smeeton was also the Bank of England’s representative on the G-10 Gold and Foreign Exchange Committee at the Bank for International Settlements in Basel, as these Committee meeting minutes from 1997 highlight.
Frank Veneroso of Veneroso Associates, who is well-known for his in-depth analysis of the gold lending market, has stated that it was actually comments about the gold lending market made by Terry Smeeton in 1995 that triggered Veneroso to undertake his ground-breaking gold lending market analysis. Veneroso has also highlighted previously that Smeeton was critical of HM Treasury’s 1999 decision to auction off a substantial part of the UK’s gold reserves.
Oliver Pagejoined the Bank of England in 1968 and went on to be Chief Manager, Reserves Management in 1989, and Deputy Director, Supervision and Surveillance in 1996. In 1998, when the Financial Services Authority (FSA) was established, Page moved from the Bank of England to become the FSA’s Director of its Complex Groups Division (later called Major Financial Groups Division), and was also the FSA’s representative on the Basel Committee of Banking Supervisors. Page received an OBE in 2004, and retired from the FSA in April 2006, after which he became a non-executive director of Mitsubishi UFJ Securities International. Oliver Page passed away in 2012.
After Terry Smeeton died in September 2007, Oliver Page wrote Mr. Smeeton’s obituary which was published in the industry journal ‘Central Banking’, and on the journal’s website.
In the obituary, Oliver Page said of Smeeton:
“On his work, the foreign exchange and gold markets were his great enthusiasms. So his work in the Bank of England, mainly in the Foreign
Exchange Division, suited him perfectly. The gold markets were an aspect of the financial world where he became internationally renowned.
While I was in the foreign exchange division in the 1980s, I was responsible for the risk management and performance system used to monitor activity. Through this period, Terry’s gold activities, often partly aimed at helping the London Market’s daily gold fixes, produced an overall profit.
So he was not just a talker on gold, he was a successful operator. He was very disappointed when large-scale gold sales were made in the 1990s at what turned out to be the 30-year low of the market.”
Certain phrases in Page’s tribute to Smeeton, specifically in relation to the gold fixings, struck me as very odd and raised a number of questions in my mind:
Firstly, what were Smeeton’s ‘gold activities‘ in the daily gold fixes ‘through this period’ during the 1980s?
Secondly, what was the Bank of England foreign exchange and gold division doing entering the London gold fixings to ‘help’ the daily gold fixes? And why did this activity happen ‘often’?
These ‘gold activities’ do not sound like normal Bank of England customer deals being placed into the daily fixings. However it does sound like central bank intervention into the price setting process.
(Note that at this time in the 1980s, NM Rothschild was the permanent chair of the fixings and the Bank used Rothschild as its broker. The other four fixing members during the 1980s were Mocatta, Sharps Pixley, Samuel Montagu/Midland, and Johnson Matthey/Mase Westpac. Rothschild departed from the gold fixings in 2004.)
Thirdly, why exactly is it so noteworthy for Oliver Page to have mentioned that Smeeton “produced an overall profit” from his ‘gold activities‘. Could it be that Smeeton’s activities were not primarily motivated by profit maximisation? Regular Bank of England ‘buy and hold’ or sell orders on behalf of central bank customers would not fall under the ‘noteworthy at having made a profit’ category.
Interestingly, in the London Gold Pool in the 1960s (which comprised both a buying syndicate and a selling syndicate), making a profit on the Pool’s gold transactions was considered a bonus, since that was not the primary purpose of the Pool’s consortium.
The Fix is In
In February 2012, after reading Oliver Page’s observations on Smeeton, I emailed the Bank of England, and asked them to explain Mr. Page’s 1980s references to Mr. Smeeton. My question was:
“What were Terry Smeeton’s “gold activities” while he was in the foreign exchange department that “partly aimed at helping the London Market daily gold fixes” and that produced “an overall profit” over the period, while being monitored by Oliver Page using the risk and performance monitoring system?”
The Bank of England “Public Information & Enquiries Group” responded as follows:
“The Bank of England does not have a rolein the daily fixing of gold prices. There are five members (listed below) of the Gold Fixing, all of whom are Market Making members of the LBMA:
• Bank of Nova Scotia • Barclays Capital • Deutsche Bank AG London • HSBC USA NA London • Societe Generale”
Since the bank didn’t address my question, I responded back to the Bank with a second email, reiterating the question:
“But if the Bank of England has no role in the fixing then what role was Terry Smeeton in the foreign exchange department playing,with “gold activities” that “partly aimed at helping the London Market daily gold fixes” and that produced “an overall profit” over the period, while being monitored by Oliver Page using the risk and performance monitoring system?
A different person from the Bank’s Public Information & Enquiries Group then responded to my second email as follows:
“The Bank no longer plays a role in the daily gold fixing. But for many years the Bank had a supervisory role in the London gold market,and was involved in the fixing process, as described in the following excerpt from the Bank’s Quarterly Bulletin (1964, p16 ‘The London Gold Market‘):
'The Bank of England are not physically represented at the fixing. But they are able, like any other operator, effectively to participate in the fixing by passing orders by telephone through their bullion broker and at the fixing they use exclusively the services of the chairman of the market, namely, Rothschilds.
The Bank operate for a number of different parties; they are first the managers of the Exchange Equalisation Account, which may be a natural buyer or seller of gold :
secondly, they are the agent for the largest single regular seller of gold in the world, namely the South African Reserve Bank, which is responsible for the disposal of new production in South Africa :
thirdly, they execute orders for their many other central bank customers :
fourthly, the Bank aim, as in the case of the foreign exchange and gilt-edged markets, to exercise, so far as they are able, a moderating influence on the market, in order to avoid violent and unnecessary movements in the price and thus to assist the market in the carrying on of its business.'
From 1968, the Bank was a less regular participant in the daily gold fixings, although contact between the Bank and the members of the gold market remained close.
In particular, the Bank (including Mr Smeeton in his role in the Bank’s Foreign Exchange Division) continued to execute orders for central bank customers of the Bank, and to manage gold held in the Exchange Equalisation Account.
The Bank no longer has supervisory responsibility for the London bullion market. Responsibility for the regulation of the major participants in the market lies with the Financial Services Authority (FSA) under the Financial Services and Markets Act 2000.
Guidelines for the conduct of gold business not covered by the Act are set out in The London Code of Conduct for Non-Investment Products (the NIPs code).”
Avoiding the Question
Yet again, the second response from the Bank of England didn’t address my question directly, but while circumventing a direct answer, it did contain some very interesting information. Let’s examine the Bank’s second response in more detail.
1. There was no attempt in the Bank’s answer to address the crux of the issue, i.e. what Smeeton was doing in the 1980s ‘helping’ the fixing with ‘gold activities’ that produced an overall profit and that required risk management.
Executing physical gold orders for the Exchange Equalisation Fund (EEA) or for other bank customers via one of the five gold fixing members is not an activity that could reasonably be described as ‘helping’ the fixing and not the type of activity that would be noteworthy as ‘producing an overall profit’, or that would need risk management monitoring.
Nor is gold lending between central bank customers of the Bank of England and the London gold market bullion bank participants something that would have required the Bank’s foreign exchange and gold desk, and Terry Smeeton, to ‘help’ the twice daily London gold price auction fixings.
Gold lending only began in the London gold market in the early to mid 1980s and initially was only undertaken on a limited scale.
So, why the reluctance by the Bank to answer my question directly?
2. Interestingly, the Bank’s response contained an extract (see grayed area above) from a 1964 Bank of England publication about the London Gold Market which explained the four main reasons why the Bank was involved in the gold fixings, and referred to the Bank of England as being “a moderating influence” on the gold market so as “to avoid violent and unnecessary movements in the price.”
Was the inclusion of this 1964 extract about the Fixings by the Bank’s Enquiries and Information Office a tacit admission from the Bank that it continued to be a ‘moderating influence’ on the gold price into the 1980s and perhaps beyond? Why include this Fixing explanation from 1964 to explain a question about the 1980s?
3. The Bank’s email response to me also mentioned 1968 and stated that “From 1968, the Bank was a less regular participant in the daily gold fixings”. This reference to 1968 is a reference to the collapse of the London Gold Pool in March 1968 before which the Gold Pool (managed by the Bank of England) attempted to control the gold price and keep it near $35 per ounce. Since I had asked about the 1980s and not 1968, the inclusion of this reference is, in my view, highly unusual but telling.
The comment from the Bank that since 1968 “contact between the Bank and the members of the gold market remained close” is also noteworthy.
4. The Bank’s response said that Smeeton executed orders for central bank customers and also ‘managed gold’ held in the Exchange Equalisation Account. The Bank did not elaborate on what was meant by ‘managing’ EEA gold. (Note, the UK gold reserves are owned by HM Treasury and held within the Exchange Equalisation Account which is somewhat similar to the US Exchange Stabilization Fund. The Bank of England acts as custodian of the UK gold reserves on behalf of HM Treasury.)
If you look at the data on UK official gold reserves over the 1980s, such as in ‘Central Bank Gold Reserves: A historical perspective‘ by Timothy Green, you will see that the official UK gold reserves were totally static throughout the 1980s at between 591 tonnes and 592 tonnes. i.e. They did not change (see table below, last row). In fact, most of the large gold holding countries maintained static gold reserve holdings throughout the 1980s which would suggest very little customer order activity for the Bank of England gold order desk.
Therefore the unchanging nature of the EEA gold reserves during the 1980s again does not explain the Bank’s reference to Smeeton as ‘managing’ the EEA gold in the 1980s.
What were these ‘Gold activities’?
I had previously come across the Bank of England’s 1964 London gold market essay and it’s reference to the Bank acting as a ‘moderating influence’ on the gold price. The same passage that the Bank quoted to me is also in a 1976 book called “The Arena of International Finance” by Charles Coombs (page 46). Coombs was head of foreign open market operations at the Federal Reserve Bank of New York from the 1950s until the 1970s.
The Bank of England’s 1964 essay is from it’s Q1 quarterly bulletin and was published in March 1964. This was soon after the launch of the London gold pool but the reference to the role of the Bank as a ‘moderating influence’ against ‘violent and unnecessary movements in the price’ goes back to before the beginning of the London Gold Pool.
Prior to the Gold Pool commencing operations in 1962, the Bank of England was already single-handedly intervening into the London good market aiming to ‘smoothen’ the gold price so that it reverted to near $35 per ounce, by participating in the daily fixing (there was only one fixing at that time, the morning fixing). The Bank aimed to keep the London price near the U.S. Treasury gold window price so as to prevent speculative arbitrage between the two prices (excluding 1/4% US Treasury fee and transport costs).
It was based on these Bank of England operations that Charles Coombs at the Federal Reserve Bank suggested to the Bank of England in 1961 that they consider creating a gold pool amongst the U.S. and major European central banks.
Charles Coombs stated in his 1976 book, ‘The Arena of International Finance’ (page 50), that in 1960:
“The Bank of England, having assumed some responsibility for selling gold to maintain orderly market conditions, was in the awkward position of being squeezed out of the market by other central bank buyers whenever gold became available.”
A recent history of the Bank of England also refers to the Bank of England’s intervention prior to the commencement of the London Gold Pool in 1962:
“The selling consortium was in operation to prevent an unduly rise in the price when demand was strong. It had to be specifically activated by the members. It’s operations did not affect the extent of intervention in the market and the Bank continued to intervene in its own judgement.”
(Source: Page 190, ‘The Bank of England: 1950s to 1979’ by Forrest Capie, Cambridge University Press).
The Bank of England have historically used the terms ‘smoothing operation’ and ‘stabilisation operation’ when referring to operations and interventions into the gold and foreign exchange markets. A price smoothing operation is a softer, less radical version of a price stabilisation operation.
Upon reading Oliver Page’s comments about Smeeten, my initial theory was that Terry Smeeton and the Bank’s Foreign Exchange Division had also been intervening into the daily gold fixings during the 1980s so as to smoothen the gold price, via offering and bidding from a special account that sold/lent at one price (high) and bought back again at a lower price (low).
Since I asked the Bank to explain Oliver Page’s comments and they declined to do so, this even crystallised my theory somewhat. I usually prefer not to speculate. My approach is to clarify information first and try to validate it. Only if it cannot be validated can some speculation come into play. But if the Bank of England can’t answer a simple question directly, then they are inviting speculation.
My speculation thesis is that in the 1980s, Smeeton and the Bank were using a pool of gold to create artificial supply into the gold fixings so as to influence the gold price, either selling gold directly during the fixings, or lending gold short-term to the chair or lending short-term to some of the four other fixing members.
Intervention of course is two-way, so could also consist of creating demand in the fixings so as to support the price. Keeping a price within a trading ‘band’ is often a goal of financial market intervention. The mechanics of a demand side intervention would merely be the opposite of the possible tactics illustrated below.
Supplying or selling metal into the fixings and buying it back later is a gold trading tactic that would (in the Bank’s eyes) “partially help the fixings” while “producing an overall profit” for the Bank’s Foreign Exchange Division, and also a set of transactions where the trading P & L would need monitoring and risk management (from Oliver Page). The profit creation would be generated by selling high and buying low, much like a trader’s short sell trade and similar to what the Bank of England and the London Gold Pool selling syndicate did in the 1960s.
Within this scenario, I think Smeeton could have been doing a number of things via these ‘gold activities’:
– influencing the opening price of the fixing in the hours before a fixing by trading in the market so that the fixing Chair would call a certain opening price targeted by the Bank
– putting in orders to the fixing from a special gold account so as to affect overall supply and demand and target a certain opening price
– using an open line to the Chair to put in offers based on the market’s natural business and the quotes from the order books on the call
– lending to some of the five gold broker participants on a short-term basis from the EEA account or another account so as to influence supply (the five brokers all had allocated gold accounts at the Bank of England from the late 1970s onwards)
– and finally, buying back or squaring off the above transactions at some point so as to try to “produce an overall profit”
By the 1980s the five London gold brokers and fixing members all maintained allocated gold accounts at the Bank of England and had storage space in the Bank’s vaults. This development occurred in the late 1970s, and was done initially for security reasons so as to minimise the transport of gold bullion around the City of London.
It would therefore be very straightforward in the 1980s for the Bank to manage transfers and allocations between a gold pool account and gold accounts of one or more of the five London gold market brokers held at the Bank.
[In fact, gold transfers between the Bank of England and the London gold market regularly happen to this day in a different guise via the Bank acting as clearer of last resort with the six bullion bank members of London Precious Metals Clearing Ltd (LPMCL).]
As to whether a 1980s Bank of England gold pool would be sourced from EEA gold, or include other customer gold, or would be a distinct separate account is not that important. Even if such an operation within the Bank’s Foreign Exchange Division was stand-alone and not coordinated with other central banks, the G10 central banks would obviously be briefed on it given their perennial close coordination on gold market issues via Basel.
The February 1998 edition of the LBMA’s Alchemist magazine features an interview with Terry Smeeton just before he retired from the Bank of England in March 1998. In the interview, on pages 2 and 3, when asked about his view on the relationship between the Bank and the London gold market, particularly in light of gold market supervision moving from the Bank to the FSA in 1998, Smeeton said:
“When I started in the Bank of England’s foreign exchange area, we really only had the operational role, which we still, of course, have today. There was no formal supervision of the gold market, but the Bank has always maintained a maternal eye on the market, and that remained the case until the Financial Services Act and the introduction of the Section 43 regime.”
Could this Bank of England ‘maternal eye’ that Terry Smeeton refers to have extended to intervention into the gold fixings in the 1980s so as to be a ‘moderating influence’, and to “avoid violent and unnecessary movements” in the gold price?
To answer that question, you’d have to ask the Bank of England. And they probably wouldn’t tell you one way or the other.
Over time, the Federal Reserve Bank of New York (FRBNY) has become increasingly less transparent in sharing information about its Manhattan gold vaults. I use gold vaults in the plural because there are two gold vaults at the New York Fed’s headquarters, namely, the main vault and the auxiliary vault.
During the 1970s, New York Fed financial writer Charles Parnow wrote some informative and revealing material profiling the Fed’s Manhattan gold storage arrangements, however, the original text from these publications has been gradually rewritten, distilled, and watered down over time, and today hardly anything of substance about the Fed’s gold vaults makes it on to the New York Fed’s web site.
Luckily, most of this older information is still available from various on-line sources including a number of versions of an FRBNY publication titled ‘Key to the Gold Vault’, and another publication called ‘A Day at the Fed’. Old newspaper articles provide additional coverage.
Although most of the information in the Fed’s brochures has been covered elsewhere and is fairly well-known, there are a number of important and mostly forgotten facts from the early editions of these brochures which I think make an analysis of this material worthwhile. These facts centre on the following:
a) The FRBNY’s Auxiliary vault and its probable location
b) The arrival of low-grade Coin Bars at the FRB in New York in 1968
c) The substantial withdrawals of gold from New York from 1991 to the present day
d) The noticeable decline since the late 1970s in the number of central banks with gold holdings at the FRBNY
Chink of Light?
In October 2010 the Financial Times touched upon a small part of the FRBNY’s gold operations in an article titled ‘Chink of light shed on New York Fed gold’. The article, written by the FT’s Jack Farchy, reported that the FRBNY had revised down from 60 to 36 the number of foreign central bank customers that it claimed to hold gold on behalf of.
According to the FT, this change shed “a rare chink of light on the opaque activities of central banks in the gold market.”
The New York Fed was prompted to explain its gold customer revision after the FT had asked the FRB why a 2004 version of its ‘Key to the Gold Vault’ brochure claimed to hold gold for 60 foreign central banks while the 2008 version of the same publication cited the figure of 36 central banks.
The Fed’s explanation to the FT was that “the revision was the result of a change in the way it counts the countries that use its services to store gold” and that “its previous claim of approximately 60 countries referred to the number of foreign central banks with accounts at the NY Fed, including those that did not hold any gold.”
From 60 to 36 gold customers?
However, as we shall see below, the 2004 publication (and a 1998 version) explicitly referred to “Bullion at the Federal Reserve Bank of New York belonging to some 60 foreign central banks and international monetary organizations”, so this Fed explanation to the FT contradicts what it actually stated in its own publications in 2004 and 1998.
Adding to the confusion, the Fed spokesperson also told the FT (in 2010) that “there has been no change in the number of accounts with active gold holdings in recent years.”
Since gold at the Fed is supposed to be held solely under earmark via distinct bar holdings and weight lists (i.e. not fungible), it’s unclear as to what the Fed meant by ‘active gold holdings’.
The Financial Times also pointed out that after they had contacted the NY Fed in October 2010, “the central bank removed the old (2004) brochure (pdf) from its website.”
The Fed seems to have a penchant for removing gold information from its web site, because in late 2012, the 2008 version of the ‘Key to the Gold Vault’, which used to be here, was also removed from the NY Fed web site, and replaced by the FRBNY’s current rather sketchy gold vault information offering which can be found on its web site here. Interestingly, late 2012 was when the Deutsche Bundesbank first announced that it planned to repatriate some of its gold holdings from the New York Fed.
The current gold information on the FRB´s website merely consists of a spartan one page summary of text from previous versions of the ‘Key to the Gold Vault’, but in my view, most of the important information has been omitted.
While the FT thought that the two ‘Key to the Gold Vault’ brochures, dated 2004 and 2008, were “the only known information about the vault”, this is not the case. In total I sourced four versions of this document on the web in addition to a lot of other relevant information.
Both the 2008 and 2004 versions of the ‘Key to the Gold Vault’, as well as a 1998 version, are available to download from old imprints of the Fed’s web site using the Internet Archive (or WayBack Machine). There is also a 1991 version of the document available elsewhere on the web.
The 1991 version contains far more details about the New York gold than the subsequent versions in 1998, 2004 and 2008, and reading through the versions, you can see that nearly everything in the later editions seems to have been replicated from the 1991 version.
A limited extract from the 1991 version of ‘Key to the Gold Vault’ is also featured on the Minneapolis Fed web site, here.
There is also another revealing FRBNY publication called ‘A Day at the Fed’ which is relevant to the Fed’s gold vaults. Unfortunately, the ‘A Day at the Fed’ document does not appear to be available on-line any longer and is not accessible via the Wayback Machine. There is a copy of the ‘A Day at the Fed’ uploaded here – A Day at the Fed – Charles Parnow.
The 1991 version of ‘Key to the Gold Vault’ was itself based on far earlier versions of the brochure going all the way back to 1973, so some of these forgotten details about the gold go back over 40 years, to an era in which the NY Fed seemed to be, for whatever reason, less secretive.
According to Worldcat, the global library cataloging web site, the ‘Key to the Gold Vault’ was originally authored by Charles J Parnow, with the first edition published by the FRBNY in 1973. Additionally, the ‘A Day at the Fed’ booklet was also authored by Charles Parnow in 1973. Many of the subsequent versions of these documents just appear to have been reprints and reissues, with small rewrites, and then gradually, large chunks of the material were edited out over time.
Both of these publications have also been widely drawn on by journalists over the years when writing newspaper and on-line articles about the Fed’s New York gold vault(s).
Here are the various WorldCat entries for ‘Key to the Gold Vault’ and the ‘A Day at the Fed’
“After graduating from NYU with a B.S. degree in journalism and finance, Mr. Parnow’s career in writing began as a financial writer for United Press International (UPI). He subsequently held positions at the Federal Reserve Bank of New York where he composed print and multimedia educational material for both adults and children, and was the editor of the company magazine. Before retiring Charles was a senior writer of public information for the New York Stock Exchange. Mr. Parnow was a member of the New York Financial Writer’s Association and the Overseas Press Club.”
Charles Parnow was therefore an insider at the New York Fed and everything that he wrote for publication would have been well researched and based on fact. Parnow also appears to have been a well-regarded author on financial matters, and is probably familiar to financially savvy New Yorkers of a certain age. His accomplished writing style comes across while reading the earlier versions of the Fed material.
It’s unclear as to what input if any Parnow would have had after writing the original versions of the publications in the early 1970s. Its also unclear how long Parnow stayed working at the FRB. It would appear that other Fed media staff just re-edited his publications over the years as they saw fit.
Central banks pull back their holdings back from the NY Fed
While the 1991 version to the key to gold vault does not state the number of central bank customers that the FRB holds gold on behalf of, the 1998, 2004 and 2008 versions do, as follows:
“Bullion at the Federal Reserve Bank of New York — the world’s largest repository of gold — belongs to some 60 foreign central banks and international monetary organizations.” (page 5, 1998)
“Bullion at the Federal Reserve Bank of New York belonging to some 60 foreign central banks and international monetary organizations is stored in 122 separate compartments in the main and auxiliary vaults.” (page 5, 2004)
“Bullion at the Federal Reserve Bank of New York belonging to some 36 foreign governments, central banks and official international organizations is stored in 122 separate compartments in the main and auxiliary vaults.” (page 5, 2008)
Notice the reference to the Auxiliary vault in the 2004 and 2008 statements but not the 1998 version.
International Monetary Organizations or Official International Organizations just refers to institutions such as the International Monetary Fund (IMF) and the Bank for International Settlements (BIS).
As you can see from above, the phrase ‘bullion….belonging to some 60 foreign central banks” can’t really have more than one meaning, so the FRBNY’s explanation to the FT in 2010 about the sharp drop in the number of gold customers between 2004 and 2008 makes little sense, i.e. that the “previous claim of approximately 60 countries referred to the number of foreign central banks with accounts at the NY Fed, including those that did not hold any gold”,
The Fed’s explanation makes absolutely no sense at all in light of the fact that this 60 customer figure of gold holders was also quoted by the Fed in 1998, six years prior to 2004, and has been quoted extensively by newspapers and other media from 2004 onwards without the Fed attempting to correct or clarify the total.
For example, in January 2005, in an article about a rare 1933 double eagle $20 gold piece being stored at the FRB’s main gold vault, the New York Times wrote:
“Until last week, the world’s most expensive coin was hidden in the world’s most valuable gold vault. That is to say, in the brilliantly lighted blue-and-white stronghold of E Level, the deepest sanctuary of the Federal Reserve Bank of New York, the city’s bank of banks. The coin was locked in a compartment at bedrock, 80 feet below Liberty Street in Lower Manhattan, surrounded by $90 billion worth of gold bars — some 550,000 of them — from 60 foreign institutions.”
“The Federal Reserve Bank of New York holds the world’s largest accumulation of monetary gold. Only a small portion belongs to the U.S. government. The bank serves as guardian for it, as well as the gold monetary reserves of approximately 60 foreign governments, central banks and international organizations.”
Perhaps the 2004 reference to 60 foreign central banks was copied from the 1998 version of Key to the Gold Vault. In that case, the 60 gold customer total would have been correct as of 1998 but not in 2004.
This would suggest that the large decline in central bank customer gold holders took place prior to 2004, some of it most likely due to gold being withdraw for central bank sales and leasing activities, and some possibly after the September 11, 2001 Trade Center destruction, which would certainly have made foreign central banks more reluctant to hold gold in down town Manhattan vaults.
So, we can conclude that at least 24 central banks ceased to have gold holdings at the NY Fed between the late 1990s and 2008.
If you go back even further and search on-line newspaper archives, there are also some references in the 1970s to the number of central banks that stored gold at the New York Fed.
For example, this October 1978 article states that “about 85 individual countries are represented” as gold customers of the FRBNY. You may notice that most of the text in this newspaper article was taken directly from one of the ‘Key to the Gold Vault’ brochures:
A March 1973 article stated that “the (gold) owners are spread among 70 foreign central banks, government agencies, and international monetary agencies”.
This December 1960 article states “the bank stores for free the gold of 72 foreign governments, central banks, and international agencies.” It also says there were 96 cages (not 122 cages), some of which were sub-divided into smaller units.
This July 1963 article also mentions 96 compartments (not 122) and holdings of a massive 13,000 tonnes:
“13,000 tonnes in the vault on level E, with 960,000 bars stored in 96 compartments and owned by 70 foreign governments.”
So, from about 70 countries in the 1960s and early 1970s, the number of countries holding gold at the Fed seems to have peaked at around 85 in the late 1970s before dropping to a range near 60 in the 1990s, and then 36 in 2008. Notice the huge decline of ~50 gold account holders between 1978 and 2008.
The rise customer numbers in 1978 was no doubt partially due to some central banks opening up gold accounts at the Fed in order to receive restituted gold from the IMF during the gold restitutions around that time.
Remembering that the US Treasury also holds about 5% of its supposed gold reserves at the FRBNY, then, as of 2008 there were 36 foreign central banks and the US Treasury (i.e. 37 institutions) holding gold reserves at the FRBNY.
Surprisingly, the US Treasury in its gold custodial inventory of gold held at the FRBNY lists claims that it holds 31,204 bars in 11 compartments, but the schedule lists these 11 compartments as letters from A to K, and not numbers as are written on the compartments/cages in the FRBNY main vault.
The US Treasury gold supposedly stored at the FRBNY is listed here, starting on page 132 of the pdf (or page 128 of file).
Millions of Ozs in the Vaults
Since the early 1970s there has been a consistent drop in the amount of gold held by foreign account holders at the NY fed. Some quotes follow:
“(The vault) contained approximately 315 million troy ounces of gold early in 1991, comprising approximately 28 percent of the world’s official monetary gold reserves.” (Introduction, Key to the Gold Vault (KTTGV) 1991)
“In 1997, the New York Fed held about 275 million troy ounces of gold, or 8,600 tons, worth approximately $12 billion at the official U.S. Government price ($42.22 per fine troy ounce)” (A Day at the Fed 1997)
“In the middle of 1997, the Fed’s vault contained roughly 269 million troy ounces of gold.” (page 6, KTTGV 1998).
“In mid – 2004, the Fed’s vault contained roughly 266 (226) million troy ounces of gold”. (page 6, 2004 KTTGV)
Note:The 266 million ounces was a typo in the 2004 brochure, and they meant to write 226 million ounces because they quoted a valuation of $90 billion based on a price of $400 per ounce. See explanation below.
“As of early 2008, the Fed’s vault contained roughly 216 million troy ounces of gold.” (page 6, KTGV 2008).
“As of 2012, the vault housed approximately 530,000 gold bars, with a combined weight of approximately 6,700 tons” Current NY Fed gold page on web site. This would be 212 million troy ounces if all the bars were 400oz good delivery bars (of 995 fineness or above).
Note: The NY Fed also used their 2010 update to the Financial Times to state that whereas their 2004 brochure claimed that they held 266 million ounces of gold on behalf of central bank customers, this should in fact have said 226 million ounces. This discrepancy is definitely just a typo since the same sentence in the brochure quoted a total gold holding value of $90 billion at $400 per ounce, which equates to 225 million ounces..
So, gold holdings at the FRBNY fell from 316 million ounces in 1991, to between 269 – 275 million in 1998, to 226 million in 2004, and 216 million in 2008, and 212 million in the last few years. That’s a 100 million ounce drop from 1991 to 2008 , or 3110 tonnes.
That this 100 million ounce outflow of gold from the Fed´s New York vaults took place in conjunction with a marked decline in the number of foreign central bank gold account holders at the Fed, suggests that some of the customers withdrew all of their New York gold holdings and ceased to be gold customers.
Part 2 of The Keys to the Gold Vaults at the New York Fed will focus on the FRB´s rarely talked about Auxiliary Vault, while Part 3 will shed some light on ‘coin bars’ and look at why coin bars arrived at the Fed’s Manhattan vaults, and where they might have gone since then.
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