Eighteen months ago I wrote a short synopsis of a gold sales transaction by the central bank of El Salvador wherein it had sold 80% (about 5.5 tonnes) of its official gold reserves. The title of the post was “El Salvador’s gold reserves, the BIS, and the bullion banks“. If you thought, why the focus on the Banco Central de Reserva de El Salvador (BCR), it’s not a major player on the world gold market, you’d be correct, it’s not in its own right that important.
However, the point of the article was not to profile the gold transactions of a relatively obscure central bank in Central America, but to introduce the topic of central bank gold lending to LBMA bullion banks, and the use of short-term ‘gold deposits‘ offered by these bullion banks. The reason being is this is a very under-analysed topic and one which I will be devoting more time to in the future. Gold loans by central banks to bullion banks are one of the most opaque areas of the global gold market. The fact that I’m using the central bank of El Salvador as the example is immaterial, it’s just convenient since the BCR happens to report the details of its gold lending operations, unlike most central banks.
A Quick Recap
At the end of September 2014, the BCR claimed to hold 223,113 ozs of gold (6.94 tonnes), of which 189,646 ozs (5.9 tonnes) was held in the form of “deposits of physical gold” with the Bank for International Settlements (BIS), and 33,467 ozs (1.04 tonnes) which was held as “time deposits” of gold (up to 31 days) with 2 commercial bullion banks, namely Barclays Bank and the Bank of Nova Scotia.
The following table and all similar tables below are taken from the BCR’s ‘Statement of Assets backing the Liquidity Reserve’, or ‘Estado de Los Activos Que Respaldan la Reserva de Liquidez’, which it publishes every 3 months.
In November 2014, the BCR executed a small sale of 5007 ozs of its gold from its quantity held with the BIS, leaving a holding of 218,106 ozs (6.784 tonnes) as of 31 December 2014, comprising 184,639 ozs held in “deposits of physical gold” with the BIS, and 33,467 ozs of “time deposits” (of between 2 and 14 days duration) with 2 bullion banks, namely BNP Paribas and the Bank of Nova Scotia. Notice that as of the end of 2014, BNP Paribas was now holding one of the time deposits of gold, and that Barclays was not listed.
Notice also in the above table the tiny residual time deposit gold holding attributed to Standard Chartered Bank Plc. Rewind for a moment to 30 June 2014. At the end of June 2014, the BCR’s gold deposits were placed with 3 LBMA bullion banks, namely, Barclays, Bank of Nova Scotia, and Standard Chartered.
This is the way short-term gold deposit transactions work. A central bank places the short-term gold deposit with one of a small number of bullion banks, most likely at the Bank of England, and when the deposit expires after e.g. 1 month, the central bank places the deposit again, but not necessarily with the same bullion bank. The deposit rates on offer (by the bullion banks) and the placements by the central banks are communicated over a combination of Bloomberg terminals, or by phone and then the transactions are settled by Swift messages. More about the actual mechanics of this process in a future article.
BCR sold its gold at the BIS, put the rest on deposit
In March 2015, the BCR sold 174,000 ozs (5.412 tonnes ) of gold, which left El Salvador with 44,000 ozs. When I wrote about this transaction 18 months ago I had speculated that:
“Since the Salvadoreans had 189,646 ozs on deposit with the BIS and needed to sell 179,000 ozs, the gold sold was most definitely sold to the BIS or to another party with the BIS acting as agent.
It would not make sense to sell some or all of the time deposits that are out with the bullion banks such as Barclays and Scotia, since a large chunk of the BCR gold at the BIS would have to be sold also. It would be far easier to just deal with one set of transactions at the BIS.
The above would leave the time deposits of 33,467 ozs (and accrued interest) out with the bullion banks, rolling over each month as usual. The other roughly 11,000 ozs that the BCR held with the BIS could be left with the BIS, or else this too could be put out on deposit with the bullion banks.”
This speculation turns out to have been correct. By 31 March 2015, the BCR held 10,639 ozs of gold “deposits of physical gold” with the BIS, and the same 33,467 ozs of “time deposits“, but this time split evenly between BNP Paribas and Barclays. The entire 174,000 ozs of gold sold came from the “deposits of physical gold” that El Salvador held with the BIS.
By 30 June 2015, the central bank of El Salvador had moved its remaining 10,639 ozs of “deposits of physical gold” from the BIS, and placed it into “time deposits” with bullion banks, with the entire 44,106 ozs being evenly split across Bank of Nova Scotia, BNP Parias and Standard Chartered, each holding 14,702 ozs.
Over the 12 months from end of June 2014 to 30 June 2015, a combination of at least 4 LBMA bullion banks, namely, Barclays, Bank of Nova Scotia, Standard Chartered and BNP Paribas were holding short-term gold deposits on behalf of the central bank of El Salvador. I say at least 4 banks, because there could have been more. The snapshots every 3 months only reveal which banks held gold deposits on those dates, not the full list of deposits that could have been placed and matured over each 3 month period.
These time deposits are essentially obligations by the bullion bank in question to repay the central bank that amount of gold. The original gold which was first deposited into the LBMA system could have been sold, lent or otherwise encumbered. It has become a credit in the LBMA unallocated gold system. Ultimately it needs to be paid back to the central bank by whichever bullion bank holds the deposit when the central bank decides that it no longer wants to roll its short-term deposits. This is why the anology of pass the parcel is a suitable one.
Looking at the more recent 3 monthly snapshots from September 2015 to June 2016, the same 4 LBMA bullion bank names were still holding the BCR’s gold deposits, namely Bank of Nova Scotia, Barclays, Standard Chartered and BNP Paribas.
As of 30 September 2015 – Bank of Nova Scotia, Barclays and BNP Paribas, evenly split between the 3 of them.
On 31 December 2015 – Bank of Nova Scotia, BNP Paribas, and Standard Chartered, evenly split between the 3 of them.
On 30 March 2016 – Bank of Nova Scotia and BNP Paribas, evenly split between the 2 of them.
On 30 June 2016, the BCR gold deposits were held by Bank of Nova Scotia and BNP Paribas, evenly spilt between the 2. The 30 June 2016 file on the BCR website doesn’t open correctly so this data was taken from the Google cache of the file.
IMF Reporting standards
Finally, let’s take a quick look at what monetary gold and gold deposits actually are, as defined by the International Monetary Fund (IMF).
“Monetary gold is gold owned by the authorities and held as a reserve asset. Monetary Gold is a reserve asset for which there is no outstanding financial liability”, IMF Balance of Payments Manual (BPM)
In April 2006, Hidetoshi Takeda, of the IMF Statistics Department published a short opinion paper on the ‘Treatment of Gold Swaps and Gold Deposits (loans)‘ on behalf of the Reserve Assets Technical Expert Group (RESTEG) of the IMF Committee on Balance of Payments (BoP) Statistics. The paper was called “Issues Paper (RESTEG) #11“. In the Issues paper, Takeda states:
“monetary authority make gold deposits ‘to have their bullion physically deposited with a bullion bank, which may use the gold for trading purpose in world gold markets‘”
“‘The ownership of the gold effectively remains with the monetary authorities, which earn interest on the deposits, and the gold is returned to the monetary authorities on maturity of the deposits'”
” Balance of Payments Manual, fifth Edition (BPM5) is silent on the treatment of gold deposits/loans. However, the Guidelines states that, “To qualify as reserve assets, gold deposits must be available upon demand to the monetary authorities”
You can see from the above that once the gold balance that is represented by the gold deposit is under the control of a bullion bank as a unallocated balance, then it becomes an asset of the bullion bank and can be used in subsequent bullion bank transactions, such as being lent again, or used to support its trading book, etc.
The big question is whether the gold as represented by the gold deposit is available on demand by the central bank which lent it. For ‘available on demand’ think using an ATM or walking into your local bank and withdrawing some cash from your account. It’s as simple as that.
“Regarding the statistical treatment of gold deposits/loans, keeping the status quo is suggested. That is, if the deposited/loaned gold is available upon demand to the monetary authorities, it can be included in reserve assets as monetary gold. However, if the gold is not available upon demand, it should be removed from reserve assets“
Takeda’s paper also covers the topic of “Double counting of gold from outright sales of gold acquired through gold swaps or gold deposits/loans” where he says logically:
“double counting of gold can occur when a bullion bank sells outright gold acquired through gold deposits/loans from… monetary authorities”
If the gold sold is not removed from the central bank’s balance sheet, it could:
“pose a problem when international statistical standards allow swapped/deposited gold to remain in the reserve assets of the gold provider.”
Given that nothing has changed in the IMF’s reporting standards since 2006, i.e. the IMF did not take on board Takeda’s recommendations on gold loan accounting treatment, and given that all central banks still report gold as one line item of “gold and goldreceivables”, then you can see how these gold deposits that are being continually rolled over by central banks using a small number of LBMA bullion banks based in London a) are being double counted if the gold involved has been sold, b) only represent claims by a central bank on a bullion bank, and c) allow bullion banks to increase their unallocated balances which can then be used in myriad leveraged and hypothecated ‘gold’ trading transactions
If you think 4 LBMA bullion banks passing a parcel of central bank gold claims around between them is excessive, wait until you see 28 bullion banks doing the same thing! Coming soon in a future article.
the LBMA was established in 1987 by the Bank of England
the original bullion bank founding members and steering committee members of the LBMA represented 6 commercial banks active in the London Gold Market, namely, N.M. Rothschild, Mocatta & Goldsmid, Morgan Guaranty Trust, J. Aron, Sharps Pixley (former Sharps Pixley), and Rudolf Wolff & Co.
the Bank of England has been involved in the affairs of the LBMA from Day 1 in 1987, and continues to this day to have observer status on the LBMA Management Committee
the Bank of England has observer status on not just the LBMA Management Committee, but also on the LBMA Physical Committee and in the LBMA Vault Managers group
the Financial Conduct Authority (FCA) also has observer status on the LBMA Management Committee
although there are 2 other London financial market committees closely aligned with the Bank of England, and populated by bank representatives, that publish the minutes of their regular meetings, namely the Foreign Exchange Joint Standing Committee, the Sterling Money Markets Liaison Committee, the LBMA Management Committee does not publish the minutes of its meetings, so the public is in the dark as to what’s discussed in those meetings
Note that “observer status” does not mean to sit and observe on a committee, it just means that the observer has no voting rights at committee meetings. Note also that the structure of the LBMA Management Committee has recently changed to that of a Board, so the Committee is now called the LBMA Board.
One of the most interesting points in the previous article referred to the very recent appointment of a very recently departed Bank of England senior staff member, and former head of the Bank of England Foreign exchange Division, Paul Fisher, as the new ‘independent‘ chairman of the LBMA Management Committee / ‘Board’. Paul Fisher has also in the past, been the Bank of England’s representative, with observer status, on this very same LBMA Management Committee (now LBMA Board) that he is now becoming independent chairman of. Fisher is replacing outgoing LBMA Board chairman Grant Angwin, who if from Asahi Refining (formerly representing Johnson Matthey).
‘Independent’ Non-Executive Chairman
This article continues where the above analysis left off, and looks at the appointment of Fisher as the new ‘independent’ Non-Executive Chairman of the LBMA Board, considers the ‘independence’ of the appointment given the aforementioned very close relationship between the Bank of England and the LBMA, and examines the chairman’s appointment in the context of the UK Corporate Governance Code, which now governs the Constitution and operation of the LBMA Board.
As I commented previously:
Arguably, the pièce de résistance of these Bank of England / FCA relationships with the LBMA Management Committee, is the fact that Paul Fisher, the newly appointed ‘independent‘ Chairman of the LBMA Board, a.k.a. LBMA Management Committee, has already previously been the Bank of England’s “observer” on the LBMA Management Committee.”
This was confirmed in Fisher’s speech to the 2004 LBMA Annual Conference in Shanghai, Fisher, when then Head of Foreign Exchange at the Bank of England, he stated:
“I am glad to be invited to the LBMA’s Management Committee meetings as an observer.”
Fisher was Head of Foreign Exchange Division at the Bank of England from 2000 to 2009, so could in theory have been a Bank of England observer on the LBMA Management Committee throughout this period. The Foreign Exchange Division of the Bank of England is responsible for managing the Sterling exchange rate, and for managing HM Treasury’s official reserves held in the Exchange Equalisation Account (EEA), including HM Treasury’s official gold reserves. One would think that when the LBMA announced in a press release in July of this year that Fisher was being appointed as the new LBMA chairman, that the fact that he had previously attended the LBMA Management Committee meetings would be a fact of relevance to the appointment. However, surprisingly, or maybe not so surprisingly, this fact was omitted from the press release.
“The LBMA is delighted to announce the appointment of Dr Paul Fisher as the new Chairman of the Association, effective from 5 September, 2016. Paul is due to retire from the Bank of England at the end of July.”
The press release goes on to say:
“Paul brings with him a wealth of financial market experience following his 26 years at the Bank of England. Prior to joining the LBMA, his last role was as Deputy Head of the Prudential Regulation Authority. Paul was selected by the LBMA Board following an independent Executive search procedure.”
“Previously, from 2002, he [Paul Fisher] ran the Bank’s Foreign Exchange Division where he had a constructive relationship with the LBMA and developed a working knowledge of the bullion market.”
Notwithstanding the capability of the appointment, there is absolutely zero mention in this press release of the fact that Paul Fisher used to be the Bank of England observer on the LBMA Management Committee, a committee that he is now being made chair of. Why so? Was it to make the relationship appear more distant that it actually was, thereby reinforcing the perception of ‘independence’?
In addition, the recently added bio of Paul Fisher on the LBMA Board listings features text identical to the press release, with no indication that Fisher previously attended the LBMA Management Committee meetings.
Notice also the reference to an “Executive search procedure” being used to support the new chairman’s appointment.
At this point, it’s instructive to examine what drove the re-definition of the LBMA Management Committee to become the LBMA “Board”, and the appointment process to that board of an ‘independent‘ Non-Executive Chairperson. It can be seen from the LBMA website archive that until July of this year, the entity providing oversight and strategic direction to the LBMA was the ‘LBMA Management Committee':
Only in July following a LBMA General Meeting on 29 June did the website description change to LBMA Board:
The new Board structure of the LBMA allows it to have 3 representatives from LBMA Market Making firms, 3 representatives from LBMA Full Member entities, 3 ‘independent’ non -executive directors (inclusive of the ‘independent’ chairman), and up to 3 representatives from the LBMA Executive staff, including the LBMA CEO.
One of the first references to a future change in governance structure at the LBMA came in October 2015 at the LBMA annual conference, held in Rome. At this conference, Ruth Crowell, CEO projected that in the future:
“To enhance its governance, the new Board will include for the first time Non-Executive Directors whilst giving more power to the Executive so as to ensure any conflicts of interest are eliminated.”
On 29 April 2016, a LBMA “Future Events” summary document confirmed that a General Meeting (akin to an EGM) of LBMA members would be convened on Wednesday 29 June 2016 in London so as to “update the LBMA’s legal structure and governance“. The same “Future Events” summary also highlighted a change in schedule to the LBMA’s Annual General Meeting (AGM), which due to the 29 June General Meeting, would now be held on 27 September 2016 with an agenda item to “incorporate, into the constitution of the LBMA, the governance and legal structure changes agreed at the General Meeting in June“.
It would be quite presumptuous for any normal organisation of members, in the month of April, to not only assume that resolutions that were only being put to its membership in the month of June would be passed, but to also actually hard-code these assumptions into the agenda of a scheduled September meeting. However, this was what was written in the “Future Events” document and appears to be the pre-ordained roadmap that the LBMA Management Committee had already set in stone.
On Thursday 30 June, the day after its General Meeting in London, the LBMA issued a press release in which it confirmed (as it had predicted) that “Members of the LBMA approved by an overwhelming majority a number of important changes to its Memorandum & Articles of Association“.
As well as endorsing the LBMA’s expansion to acquire the responsibilities of the London Platinum and Palladium Market (LPPM), which was the first motion for consideration at the meeting, the press release confirmed that the membership had endorsed the appointment of an independent Non-Executive Chairman:
“The second change was to further enhance the governance of the Association. TheUK Corporate Governance Code was incorporated and will govern both the Constitution as well as the operation of the Board. While it is vital for the Board to have a strong voice for its Members, it is important that any actual and perceived conflicts between these parties are balanced by having independence on that Board. This independence protects the interests of the wider membership as well as the individuals themselves serving on the Board. To address this, the LBMA has added an independent Non-Executive Chairman as well as two additional Non-Executive Directors (NEDs).”
Notice the reference to 2 other independent non-executive directors. Nine business days later, on 13 July 2016, the LBMA issued a further press release revealing that ex Bank of England Head of Foreign Exchange and former observer on the LBMA Management Committee, Paul Fisher had been appointed as the “independent Non-Executive Chairman“.
Executive Search Procedure
Recall also that the 13 July press release stated “Paul was selected by the LBMA Board following an independent Executive search procedure.””
Nine days is an extremely short period of time to commence, execute, and complete an ‘independent Executive search procedure‘. It immediately throws up questions such as which search firm was retained to run the independent Executive search procedure?, which candidates did the search firm identify?, was there a short-list of candidates?, who was on such a short-list?, what were the criteria that led to the selection of the winning candidate above other candidates?, and how could such a process have been run and completed in such a limited period of time when similar search and selection processes for chairpersons of corporate boards usually take months to complete?
How independent is it also to have a former divisional head of the Bank of England as chairman of the London Gold Market when the Bank of England is the largest custodian of gold in the London Gold Market, and operates in the London Gold Market with absolute secrecy on behalf of its central bank and bullion bank customers.
Since the LBMA voluntarily incorporated the UK Corporate Governance Code into the operations of its Board following the General Meeting on 29 June, its instructive to examine what this UK Corporate Governance Code has to say about the appointment of an independent chairman to a board, and to what extent the Corporate Governance Code principles were adhered to in the LBMA’s ‘independent‘ chairman selection process.
UK Corporate Governance Code
The LBMA is a private company (company number 02205480) limited by guarantee without share capital, with an incorporation filing at UK Companies House on 14 December 1987. Stock exchange-listed companies in the UK are required to implement the principles of the UK Corporate Governance Code and comply with these principles or else explain (to their shareholders) why they have not complied (called the “comply or explain” doctrine). In the world of listed equities, monitoring and interacting with companies about their corporate governance is a very important area of institutional and hedge fund management. It has to be so as the share owners are able to monitor and grasp if any governance issues arise at any of companies held within their institutional / hedge fund equity portfolios.
Non-listed companies in the UK are also encouraged to apply the principles of the Code, but are not obliged to. When a private company chooses to incorporate the UK Corporate Governance Code to govern its Constitution and operation of its Board, one would expect that it would also then ‘comply’ to the principles of the Code or else ‘explain’ in the spirit of the Code, why it is not in compliance.
The UK Corporate Governance Code is administered by the Financial Reporting Council (FRC). The April 2016 version of the Code can be read here. The main principles of the Code are divided into 5 sections, namely, Leadership (section A), Effectiveness (section B), Accountability (section C), Remuneration (section D), and Relations with Shareholders (Section E).
One of the main principles of Section B is as follows:
“There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board. “
Section A also addresses the independence of the chairman, and Section A.3.1. states that:
“The chairman should on appointment meet the independence criteria set out in B.1.1″
Section B.1.1, in part, states that:
“The board should determine whether the director is independent in character and judgement and whether there are relationships or circumstances which are likely to affect, or could appear to affect, the director’s judgement. The board should state its reasons if it determines that a director is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination, including if the director:
has, or has had within the last three years, a material business relationship with the company either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the company;
represents a significant shareholder;”
It goes without saying that the Bank of England has a material business relationship with the commercial banks which are represented on the LBMA Board, and I would argue that although the LBMA has no share capital, because the Bank of England has a material business relationship with the LBMA, and because since Paul Fisher was a senior employee of the Bank of England until July of this year, then the LBMA should “state its reasons as to why it determines that this director is independent“.
Furthermore, although the Bank of England is not a ‘significant shareholder’ of the LBMA, it is the next best thing, i.e. it has a significant and vested interest in the workings of the LBMA and interacts with LBMA banks through the London vaulting system, the gold lending market, and in its regulatory capacity of the LBMA member banks. The Bank of England also established the LBMA in 1987 don’t forget, so the extremely close relationship between the two is of material concern when a senior employee of the former suddenly becomes chairman of the latter.
Section B.2 addresses ‘Appointments to the Board':
There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board“
“There should be a nomination committee which should lead the process for board appointments and make recommendations to the board. A majority of members of the nomination committee should be independent non-executive directors.
The nomination committee should make available its terms of reference, explaining its role and the authority delegated to it by the board. 
[Footnote 7]: The requirement to make the information available would be met by including the information on a website that is maintained by or on behalf of the company.“
Was there a nomination committee? As of the time of appointing the new chairman to the LBMA Board, there were zero independent non-executive directors on the Board. And, excluding the newly appointed chairman, there are still zero other independent non-executive directors on the LBMA Board.
If there was a nomination committee, notwithstanding that it couldn’t by definition have a majority of independent non-executive directors when overseeing a search process for an independent chairman, then did it “make available its terms of reference” “on a website that is maintained by or on behalf of the company.” Not that I can see on any part of the LBMA website.
Section B.2.4. of the UK Corporate Governance Code includes the text:
“Where an external search consultancy has been used, it should be identified in the annual report and a statement made as to whether it has any other connection with the company.“
The company here being the LBMA (which is a private company). There has been no public identification as to the identity of the external search consultancy that the LBMA state was used in the appointment of Paul Fisher as ‘independent’ non-executive chairman.
Section B.3.2. states:
“The terms and conditions of appointment of non-executive directors should be made available for inspection.
[Footnote 9]: The terms and conditions of appointment of non-executive directors should be made available for inspection by any person at the company’s registered office during normal business hours and at the AGM (for 15 minutes prior to the meeting and during the meeting).
There is no reference on the LBMA website as to the terms and conditions of appointment of non-executive directors being made available for inspection by any person at the company’s registered office, nor was this communicated in the LBMA’s press release wherein it announced the appointment of the ‘independent’ non-executive chairman. It is one thing to claim to incorporate the UK Corporate Governance Code into a Board’s operations, but an entirely different matter to actually implement the principles into the operations of the Board. Given the above, I can’t see how the LBMA has done much of the latter.
Further ‘Independent’ Non-Executive Director Appointments
Given the opacity in the appointment of the Bank of England’s Paul Fisher as the new ‘independent’ non-executive chairman, it is therefore not unreasonable to suggest that the entire appointment process was a pre-ordained shoo-in. Without substantially more transparency from the LBMA, this view is understandable. Nor have there been any announcements about the appointment of “two additional Non-Executive Directors (NEDs)” that was claimed in the LBMA’s 30 June press release.
The LBMA held its Annual General Meeting this past week, on Tuesday 27 September. During the AGM, the outgoing chairman, Grant Angwin commented in his speech that:
” I’m delighted to have by my side Dr. Paul Fisher who will be replacing me as the first Independent Non-Executive Chairman of your Association – Paul will introduce himself to you in a moment.Paul and I will Co-Chair the Board until the end of this year. This is the first major step to making the Board more independent, Paul will be joined by up to 2 other Independent Directors in the near future.“
“The Board will now comprise of 6 representatives from the market – three each in the categories of Market Markers and Full Members, up to 3 Independent Non-Executive Directors (of which one will be the Chairman) and up to 3 LBMA Executive Directors. We expect to make further announcements on these roles very shortly.”
Given that the new chairman has been appointed, it is odd, in my view, that the 2 other independent directors have yet to be appointed and their identities announced. Likewise, for the 2 new directors from the LBMA Executive, who, if and when they join the Board, will give the LBMA Executive 3 seats on the Board. Surely the AGM would have been the ideal venue in which to make these announcements, since other board changes were being voted on at this meeting.
The New Board Profile
For completeness, the changes to the LBMA Board’s composition that did take place at the AGM, based on Board member resolutions that were put to a vote, are explained below:
Grant Anwin – Asahi Refining (co-chairman of Board)
Paul Fisher (new chairman of Board)
Ruth Crowell – Chief Executive of LBMA
Steven Lowe – Bank of Nova Scotia-ScotiaMocatta (and vice-chairman of Board)
Peter Drabwell – HSBC Bank
Sid Tipples – JP Morgan Chase
Jeremy East – Standard Chartered
Robert Davis, Toronto Dominion Bank
Philip Aubertin – UBS (‘Observer’ status)
Alan Finn, Malca-Amit
Mehdi Barkhordar, PAMP
Notice that there were 5 LBMA Marking Making reps on the Board, namely from HSBC, JP Morgan, Scotia, Standard Chartered and Toronto Dominion Bank. There was also an ‘observer’ from full LBMA Market Maker UBS. There were 3 Full Member representatives, namely from PAMP, Malca-Amit (the security carrier), and Asahi Refining.
At the AGM on 27 September, there was a vote on the Full Member reps to the Board, of which there are 3 positions in the new Board. The existing Full Member reps had to stand down and they, and other Full Member candidates, could re-stand for election:
Grant Angwin, Asahi Refining (and co-chairman of the Board)
Mehdi Barkhordar, PAMP
Hitoshi Kosai, Tanaka Kikinzoku Kogyo
Because there were 5 Market Maker reps already on the Board, and the new Board structure only allowed 3, there was also an election on which 3 of the 5 would remain: The results were:
Steven Lowe, Bank of Nova Scotia-ScotiaMocatta
Peter Drabwell, HSBC Bank
Sid Tipples, JP Morgan Chase
Noticeably, these 3 remaining reps represent what are probably the 3 most powerful bullion banks in the LBMA / LPMCL system, HSBC, JP Morgan and Scotia, two of which, HSBC and JP Morgan, operate large commercial gold vaults in London, and all 3 of which operate large commercial COMEX approved gold vaults in New York City. The reps from HSBC and Scotia have also been very long serving members of the LBMA Management Committee / Board, having been re-elected in 2015.
The AGM voting results press release also added that:
“The other two Non-Executive Directors of the LBMA Board will be announced in the near future.”
Given the aforementioned profile of the new ‘independent’ LBMA Board Chairman and ex Bank of England senior staffer Paul Fisher, it will be intriguing to examine the new independence credentials of these 2 new Non-Executive Directors who will be announced in the near future. Will they be truly independent, or will they be former bullion bankers previously affiliated with the LBMA and the London Gold Market, or ex FCA people previously affiliated with the LBMA, or maybe a combination of the two.
As per the UK Corporate Governance Code:
“There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board”. The board should also “state its reasons if it determines that a director is independent“. If an external search consultancy is used in finding either of the 2 new non-executive directors, there should be a “statement made as to whether it [the search consultancy] has any other connection with the company [the LBMA]“.
If 2 extra executive directors are also added to the Board from the LBMA’s staffers, to bring the number of Board directors up to 12, who will these 2 people be? My money in the first instance would be on the LBMA’s senior legal counsel (for regulatory reasons) and the LBMA’s communications officer. Whether the minutes of future or past LBMA Board meetings will ever be made public is another matter, but given the persistent secrecy that surrounds all important matters in the London Gold Market, it would probably be very naive to think that real LBMA communication via, for example LBMA Board meeting minutes, will ever see the light of day.
The London Bullion Market Association (LBMA) is a London-based, globally active, trade association for “the promotion and regulation of commerce relating to the London Bullion Market”. The “London Bullion Market” here collectively refers to the London Gold Market and the London Silver Market. The remit of the LBMA has very recently also been extended to cover the London Platinum and Palladium Market (LPPM).
While it is generally known to many, vaguely or otherwise, that the Bank of England has a vested ‘interest’ in the London gold market, the consistently close relationship between the Bank of England and the LBMA tends not to be fully appreciated. This close and familial relationship even extends to the very recent appointment of a very recently departed Bank of England senior staff member, and former head of the Bank of England Foreign exchange Division, Paul Fisher, as the new ‘independent‘ chairman of the LBMA Management Committee (a committee which has recently been rechristened as a ‘Board’). Note that at the Bank of England, the Bank’s gold trading activities fall under the remit of the ‘Foreign Exchange’ area, so should be more correctly called Bank of England Foreign Exchange and Gold Division. For example, a former holder of this position in the 1980s, Terry Smeeton, had a title of Head of Foreign Exchange and Gold at the Bank of England.
What is also unappreciated is that the same Paul Fisher has in the past, been the Bank of England’s representative, with observer status, on this very same LBMA Management Committee that he is now becoming independent chairman of. This is an ‘elephant in the room’ if ever there was one, which the mainstream financial media in London conveniently chooses to ignore.
As you will see below, the UK’s Financial Conduct Authority (FCA) also has a close, and again, very low-key but embedded relationship with this LBMA Management Committee.
At the ‘Behest’ of the Bank of England
The LBMA states in one of its Alchemist magazine articles, that its Association “was established at the behest of the Bank of England” in 1987, with Robert Guy of N.M. Rothschild, the then chairman of the London Gold Fixing, spearheading the coordination of the Association’s formation. Elsewhere, in a recent summary brochure of its activities, the LBMA states that it was “set up in 1987 by the Bank of England, which was at the time the bullion market’s regulator”, while a recently added historical timeline on the LBMA website, under the year 1987, states “LBMA established by the Bank of England as an umbrella association for the London Bullion Market.”
‘Established at the behest of“, “set up by” or “established by“, take your pick, but they all clearly mean the same thing; that the Bank of England was the guiding hand behind the LBMA’s formation.
Prior to the formation of the LBMA, and before a change of regulatory focus in 1986, the London Gold Market and London Silver Market had primarily followed a model of self-regulation, but the Bank of England had always been heavily involved in the market’s supervision and operations, especially in the Gold Market. Even reading a random sample of the Bank of England’s archive catalogue material will make it patently clear how close the Bank of England has always been to the commercial London Gold Market. For scores of years, the London Gold Market to a large extent merely constituted the Bank of England and the five member firms of the London gold fixing, namely NM Rothschild, Mocatta & Goldsmid, Sharps Pixley, Samuel Montagu, and Johnson Matthey.
According to the 1993 book, “The International Gold Trade” by Tony Warwick-Ching, a combination of the advent of the Financial Services Act of 1986 which introduced supervisory changes to the UK’s markets, and the growing power of other bullion banks and brokers in the London precious metals market in the 1980s, acted as a combined impetus for the LBMA’s formation in 1987.
As Warwick-Ching stated:
“The LBMA was partly a response to a growing demand of concerns who were not members of the [gold] fixing for a greater involvement at the heart of the bullion market.”
Morgan and J.Aron join the Party
Specifically, according to its Memorandum of Association, the LBMA was formed into a Company on 24 November 1987 by N.M. Rothschild & Sons Limited, J.Aron & Company (UK) Limited, Mocatta & Goldsmid Limited, Morgan Guaranty Trust Company of New York, Sharps Pixley Limited, and Rudolf Wolff & Company Limited. This company is “a company limited by guarantee and not having a share capital”. Given their participation from the outset, presumably J Aron (now part of Goldman Sachs) and Morgan Guaranty (now part of JP Morgan Chase) were members of the ‘growing demand of concern‘ contingent alluded to by Warwick-Ching, who wanted a bigger say in the gold market’s inner sanctum.
The authorising subscribers of the original Memorandum, on behalf of their respective companies were, Robert Guy (Rothschild), Neil Newitt (J. Aron), Keith Smith (Mocatta & Goldsmid), Guy Field (Morgan Guaranty Trust), Les Edgar (Sharps Pixley), and John Wolff (Rudolf Wolff & Company), and they requested that “We, the subscribers to the Memorandum of Association, wish to be formed into a company pursuant to this Memorandum.” The original steering committee of the LBMA comprised five of the above, Robert Guy (Chairman), Guy Field (Vice Chairman), Keith Smith, John Wolff, Neil Newitt, as well as Jack Spall of Sharps Pixley, the father of Jonathan Spall (current consultant to the LBMA). Note that the incorporation filing at UK Companies House for the LBMA is dated 14 December 1987, about 3 weeks after the date listed on the original Memorandum of Association.
As early as April 1988, there were 13 “Market Maker” members and 48 ‘Ordinary’ members in the LBMA. The market maker members had to be ‘listed money market institutions’, which meant that they were institutions listed under section 43 of the Financial Services Act 1986 (on a list actually maintained by the Bank of England) who conducted various transactions, including bullion market transactions, which were exempt from authorisation.
“The Bank of England has been intrinsically linked with the London bullion market since its foundation in 1694.”
“Although the Bank isn’t a member of the LBMA, members of the LBMA hold gold custody accounts with the Bank”
“The Bank’s vaults hold approximately two-thirds of all the gold held in London vaults and as such plays a significant role in the liquidity within the London gold market. Customers are able to buy or sell gold to other customers, by making or receiving book entry transfers, with ownership transferred in the Bank’s back office system… The service provides a very important element of the gold market infrastructure in London, helping LBMA members and central banks to trade in a secure and efficient way.”
A Bank of England presentation to the 2013 LBMA conference in Rome, titled the-bank-of-englands-gold-vault-operations, gives a good overview of the Bank’s provision of book entry transfers to its central bank and bullion bank clients for the smooth running of the London Gold Lending Market, a market which is totally opaque and completely undocumented. In fact the Bank of England sits at the heart of this gold lending market.
As a historical account of the LBMA’s 1987 formation states:
“From the Steering Committee’s inception, The Bank of England, which held responsibility for the supervision of the wholesale bullion market, was involved in the Association’s affairs and assisted in the drafting of the relevant Code of Conduct. Observers continue to attend Management Committee Meetings to the present day.”
This steering committee ultimately became the LBMA Management Committee, and, in the last few months, has become the LBMA ‘Board’. So the Bank of England is, for all intents and purposes, a highly active partner within the LBMA’s governance structure. As a confirmation of this point, at the LBMA annual general meeting in July 2014, the then chairman of the LBMA Management Committee chairman, David Gornall, of Natixis stated in his speech that:
“The LBMA is also privileged in having an observer from the Bank of England on the Management Committee. The Bank’s presence is of inestimable benefit to us.”
As to what inestimable benefit David Gornall was referring to, or in what way a Bank of England observer participates on the LBMA Management Committee, was not elaborated on. Nor can it be gleaned from any meeting minutes from LBMA Management Committee meetings, because such minutes are not made publicly available (See below).
For anyone not familiar with the concept of an observer on a corporate committee or board, it does not refer to someone who just sits there and observes, as the name may suggest. An observer refers to an attendee at the committee / board meetings who actively participates in discussions but who has no voting rights on committee / board resolutions. Observers can and do fully participate in meeting apart from voting. When voting occurs, they may (or may not) be asked to leave the room.
At the LBMA annual general meeting in June 2013, David Gornall, also chairman of the LBMA Management Committee at that time, revealed that not only was there a Bank of England observer on the Management committee, but there was also an observer from the UK financial regulator, the Financial Conduct Authority (FCA), on the same committee:
“The LBMA is also privileged in having observers from both the Bank of England and the FCA on the Management Committee. Their presence is of inestimable benefit to us.”
In fact, there are many such references within various LBMA related speeches. At the LBMA Precious Metals Conference in September 2013, Matthew Hunt of the Bank of England stated:
“More specifically on gold, even though we are not active traders in the market but we are a large custodian, some of the people in our team responsible for gold observationsit on the LBMA Management Committee and the LBMA Physical Committee as observers. Thus we retain a significant engagement with the gold market via that route.”
Notably the Bank of England has a team of people responsible for gold observation, but not for the observation of other commodities such as zinc, lean hogs, live cattle, heating oil, soybeans, sugar, beaver pelts etc etc.
In March 2013, Luke Thorn of the Bank of England, while addressing a LBMA Assaying and Refining Seminar, stated:
“We are not a member of the LBMA, but we continue to play a key role in the London market. We have observer status on the Management, Physical and Vault Committees.”
There are therefore Bank of England observers on 3 LBMA Committees. So, who are these Bank of England and FCA observer representatives? That is not an easy question to answer. There is no mention on the LBMA website’s committee page, and has never been any mention, of any Bank of England observers or FCA observers on the LBMA Management Committee (now Board). Nor are there any published minutes on the LBMA website of any LBMA Management Committee meetings, or the meetings of any of the other five LBMA sub-committees, such meeting minutes as would generally list the attendees of such meetings. More about the lack of minutes below.
Turning briefly to the physical and vault committees, the LBMA website has a listing for its physical committee and does mention that a Bank of England observer called Jennifer Ashton currently is on this committee.
“The Physical Committee is made up of industry experts from the physical bullion market. It is responsible for monitoring, developing and protecting the Good Delivery List and works closely with sub-Groups such as the LBMA Referees and the LBMA’s Vault Managers Working Party”
There is however, no formal listing of the Vault Manager ‘s group as a LBMA committee within the LBMA’s committee listings section. The only informative reference to such a committee on the LBMA web site is in the good delivery rules explained section, which states:
“The Vault Managers Working Group, comprising the Bank of England and representatives from those LBMA members with their own vaulting facilities in London, meet regularly to consider issues relating to bar quality and vault procedures. Vault Managers are required to document every case of bar rejection and provide the associated information to the LBMA Executive”
Who is on this committee from the Bank of England, let alone from any of the other committee member companies is not disclosed.
Turning again to the identities of LBMA Management Committee observers, and going back slightly further to the LBMA Annual General Meeting on 20 June 2012, the Chairman, the omnipresent David Gornall of Natixis London Branch, stated:
“Talking of the Management Committee, let me remind you that we are very fortunate to have observers from both the Bank of England and the FSA on the committee. I would like to thank Trevor Stone and Don Groves for their participation in our affairs”.
From a speech at the 2009 LBMA annual conference by Michael Cross, the then Head of Foreign Exchange at the Bank of England, we learn that the Bank of England’s Banking Services area:
“is where Trevor Stone and his colleagues, who will also be known to many of you, work. The Banking Services area provides wholesale banking and custody services to a wide range of bank customers”
On 30 September 2013, the ever-present David Gornall in another speech, this time to the LBMA annual conference in Rome, had this to say:
“We are grateful for the communication and feedback on our work from regulators, particularly that of own regulator the FCA. We are delighted to be joined by Don Groves of the FCA during tomorrow’s financial market regulation session. Don is a long-time observer on the LBMA Management Committee and we thank him for his participation and continued dialogue on our regulatory questions facing the London Market.”
The next day, on 1 October 2013, at the same conference, Ruth Crowell, the then Deputy CEO of the LBMA (and current LBMA CEO) introduced Don Groves as follows:
“With that, I am going to turn it over to Don Groves from the Financial Conduct Authority. Don is a technical specialist in the market contact area of the FCA’s Market Monitoring Department, where he is responsible for reviewing allegations of market misconduct, including market abuse and insider dealing.
Don specialises in the UK commodity markets and has been in market conduct for a number of years. We are also very privileged to have Don as an observer on the LBMA’s Management Committee.“
Groves joined the FCA in 1999, and left the FCA in March 2015. While his LinkedIn profile has very detailed listings of his duties while at the FCA, there is no reference to the fact that he ever sat on the LBMA Management Committee, which strikes me as odd, unless that is a deliberate omission. A previous version of Groves’ LinkedIn profile states:
“I am considered to be an expert in Market Conduct matters and market abuse in the UK. I conduct project work pertaining to market conduct issues, contribute to the drafting of European legislation pertaining to market abuse and am an experienced public speaker. My main area of interest is the UK’s commodities markets.
Is it not odd that a FCA regulator was a long-time observer sitting on the LBMA Management Committee, but that the FCA has never had anything to say about the London Gold Market. Perhaps it’s because of the following, which gives the impression of a compliant and embedded regulator. As the FT wrote in October 2013 in an article titled “Gold and oil benchmarks face tighter regulation“:
“I don‘t want to give the impression that the UK is picking on the bullion market or anything else,” Mr Groves told the London Bullion Market Association precious metals conference in Rome. “But a consumer focus is what politicians are looking at…so there’s going to be more focus from us as regulators, on consumer issues.”
“However, [Groves]admitted the regulator did not know enough about physical markets and had launched a project to increase its knowledge. “We are going out as the FCA and learning about those markets,” he said.
What exactly the FCA was doing sitting on the LBMA Management Committee remains unclear, because, to reiterate, there are no publicly available minutes of the Committee’s meetings. At a guess, perhaps Groves was “learning about physical markets“, specifically the physical gold market.
Its also relevant to note that the Bank of England and FCA both crop up as observers when the LBMA holds various seminars, such as the seminar it held in the City of London on 24 October 2014 to showcase various solution providers that were competing to provide the infrastructure for the LBMA Gold Price fixing auction competition that was running at that time:
According to the LBMA press release, “Both the Bank of England and the Financial Conduct Authority attended the seminar as observers.”
Where are the LBMA Mgt Committee Meeting Minutes?
Through the Non-Investment Products Code (NIPs), the Bank of England interfaces closely with the UK’s foreign exchange, money and bullion markets. The Bank of England explains NIPs as follows:
“The Non-Investment Products Code
This Code has been drawn up by market practitioners in the United Kingdom representing principals and brokers in the foreign exchange, money and bullion markets to underpin the professionalism and high standards of these markets.
It applies to trading in the wholesale markets in Non-Investment Products (NIPs), specifically the sterling, foreign exchange and bullion wholesale deposit markets, and the spot and forward foreign exchange and bullion markets.”
“Footnote : Co-ordinated by the Foreign Exchange Joint Standing Committee, the Sterling Money Markets Liaison Group and the Management Committee of the London Bullion Market Association”
Of the three, the Foreign Exchange Joint Standing Committee is chaired and administered by the Bank of England. The Sterling Money Markets Liaison Group (now known as the Sterling Money Markets Liaison Committee) is also chaired and administered by the Bank of England.
However, the only tiny piece of information offered about the LBMA on the Bank of England website is as follows:
“The Bullion element of the NIPs Code is being replaced by a new code which will be established by the London Bullion Markets Association (LBMA). Further information on the bullion code can be found on the LMBA website.”
Conveniently, the Bank of England passes the buck back to a web site (LBMA’s website) which is notoriously bereft of any information about the meetings of the LBMA Management Committee, the agendas of such meetings, the minutes of such meetings, and the attendees at these meetings. Why is this opacity allowed by the FCA and Bank of England when the foreign exchange and money market brethren have to submit to published minutes of their meetings, which in many cases involve the same banks and institutions? Could it be that discussion of the London Gold Market is highly secretive and a no-go area, and that the institutions involved have a free pass from the Bank of England and FCA to continue their discussions in private, away from the public eye?
Pièce de Résistance
Arguably, the pièce de résistance of these Bank of England / FCA relationships with the LBMA Management Committee, is the fact that Paul Fisher, the newly appointed ‘independent‘ Chairman of the LBMA Board, formerly known as the LBMA Management Committee, has already previously been the Bank of England’s “observer” on the LBMA Management Committee.
In his speech to the 2004 LBMA Annual Conference in Shanghai, Fisher, the then Head of Foreign Exchange at the Bank of England, while discussing the “Non-Investment Products Code”, a code which regulates the bullion market, the foreign exchange market, and the wholesale money market, stated that:
“In the bullion section, the work is led by the LBMA and the whole is coordinated by the Bank of England. Partly on that basis, I am glad to be invited to the LBMA’s Management Committee meetings as an observer. I’d just like to pay tribute to the professionalism and integrity with which I see the Management Committee operating for the best interests of the global marketplace for bullion.”
One of the more bizarre parts of Fisher’s appointment, in my view, is that when the LBMA announced in a press release last July (2016) that Fisher was being appointed as the new LBMA chairman, there was no mention of the fact that he had previously attended the LBMA Management Committee meetings. One would think that this would be a very relevant when considering the ‘independence’ of the appointment?
On hearing the news on 13 July about the appointment of the Bank of England’s Paul Fisher as ‘independent’ non-executive chairman of the LBMA Board, James G Rickards, the well-known gold author and commentator, tweeted the below, which succinctly sums up the elephant in the room, which the mainstream media chooses to ignore.
This appointment reinforces the link, or bridge, between the two entities, which is now even more set in stone than previously. It’s as if the Bank of England, at this time, has felt the need to put it’s man directly at the head of the LBMA. The timing may be relevant, but in what way is not yet clear.
A forthcoming article looks at this appointment of a former Bank of England Head of Foreign Exchange as the new ‘independent’ Non-Executive Chairman of the LBMA Board, considers what, if anything, is independent about the appointment given the extremely close relationship between the Bank of England and the LBMA, and examines the appointment in the context of the UK Corporate Governance Code, which now governs the Constitution and operation of the LBMA Board.
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.
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