Tag Archives: gold reserves

European Central Bank gold reserves held across 5 locations. ECB will not disclose Gold Bar List.

The European Central Bank (ECB), creator of the Euro, currently claims to hold 504.8 tonnes of gold reserves. These gold holdings are reflected on the ECB balance sheet and arose from transfers made to the ECB by Euro member national central banks, mainly in January 1999 at the birth of the Euro. As of the end of December 2015, these ECB gold reserves were valued on the ECB balance sheet at market prices and amounted to €15.79 billion. 

The ECB very recently confirmed to BullionStar that its gold reserves are stored across 5 international locations. However, the ECB also confirmed that it does not physically audit its gold, nor will it divulge a bar list / weight list of these gold bar holdings.

Questions and Answers

BullionStar recently put a number of questions to the European Central Bank about the ECB’s gold holdings. The ECB Communications Directorate replied to these questions with answers that appear to include a number of facts about the ECB gold reserves which have not previously been published. The questions put to the ECB and its responses are listed below (underlining added):

Question 1:The 2015 ECB Annual Report states that as at 31 December 2015, the ECB held 16,229,522 ounces of fine gold equivalent to 504.8 tonnes of goldGiven that the ECB gold holdings arose from transfers by the respective member central banks, could you confirm the storage locations in which this ECB gold is currently held (for example at the Bank of England etc), and the percentage breakdown of amount stored per storage location.”

ECB Response:The gold of the ECB is located in London, Paris, Lisbon, New York and Rome. The ECB does not disclose its distribution over these places. The gold of the ECB is stored there because it was already stored there before ownership was transferred to the ECB and moving it was seen and is seen as too costly.

Question 2: “Could you clarify as to how, if at all, this gold is audited, and whether it physical audited by the ECB or by a 3rd party?”

ECB Response:The ECB has no physical audit of its gold bars. The gold bars that the ECB owns are individually identified and each year the ECB receives a detailed statement of these gold deposits. The central banks where the gold is stored are totally reliable.

Question 3: “Finally, can the ECB supply a full weight list of the gold bars that comprise the 504.8 tonnes of gold referred to above?”

ECB Response:The ECB does not disclose this information.

euro-sign-frankfurt

London, New York, Paris, Rome, Lisbon

Given that some of the information shared by the ECB has arguably not been in the public record before, each of the 3 ECB answers above is worth further exploration.

In January 1999, when the Euro currency was created (Stage 3 of Economic and Monetary Union), each founding member national central bank (NCB) of the Euro transferred a quantity of foreign reserve assets to the ECB. Of these transfers, 85% was paid to the ECB in the form of US dollars and Japanese Yen, and 15% was paid to the ECB in the form of physical gold.

Initially in January 1999, central banks of 11 countries that joined the Euro made these transfers to the ECB, and subsequently the central banks of a further 8 countries that later joined the Euro also executed similar transfers to the ECB.

All of the foreign exchange and gold reserves that were transferred to and are owned by the ECB are managed in a decentralised manner by the national central banks that initiated the transfers. Essentially, each national central bank acts as an agent for the ECB and each NCB still manages that portion of reserves that it transferred to the ECB. This also applies to the transferred gold and means that the gold transferred to the ECB never physically moved anywhere, it just stayed where it had been when the transfers of ownership were made.

That is why, as the ECB response to Question 1 states: “The gold of the ECB is stored there because it was already stored there before ownership was transferred to the ECB”.

What is probably most interesting about the latest ECB statement is that it names 5 city locations over which the ECB’s gold is stored. The 5 gold storage locations stated by the ECB are London, New York, Paris, Rome and Lisbon. Since the gold transferred to the ECB in 1999 by the national central banks would have already been stored in central banks gold vaults, these 5 city locations undoubtedly refer to the gold vaults of:

  • the Bank of England
  • the Federal Reserve Bank of New York
  • the Banque de France
  • the Banca d’Italia
  • Banco de Portugal

The fact the ECB’s gold holdings are supposedly stored at these 5 locations can be explained as follows:

ecb-transfers
Table 1: Central bank FX and Gold transfers to the ECB, January 1999

Between 4th and 7th January 1999, 11 central banks transferred a total of €39.469 billion in reserve assets to the ECB (in the form of gold, cash and securities). Of this total, 15% was in the form of gold, amounting to 24 million ounces of gold (747 tonnes of gold) which was valued at that time at €246.368 per fine ounce of gold, or €5.92 billion. The 85% transferred in the form of currencies comprised 90% US Dollars and 10% Japanese Yen. See pages 152 and 153 of ECB annual report 1999 for more details.

The 11 central banks that made the transfers to the ECB in January 1999 were the central banks of Belgium, Netherlands, Germany, France, Luxembourg, Italy, Ireland, Austria, Finland, Spain and Portugal. See Table 1 for details of these gold transfers, and the amount of gold transferred to ECB ownership by each central bank.

The value of reserves transferred to the ECB by each national central bank were based on a percentage formula called a ‘capital key’ which also determined how much each central bank subscribed to the founding capital of the ECB. This capital key was based on equally weighting the percentage of population and GDP each Euro founding member economy represented, therefore central banks such as Deutsche Bundesbank, Banque de France, and Banca d’Italia comprised the largest transfers, as can be see in Table 1. It also meant that these 3 central banks transferred the largest amounts of gold to the ECB, with the Bundesbank for example transferring 232 tonnes of gold to the ECB.

The Bundesbank gold transfer to the ECB in January 1999 took place at the Bank of England. The Bundesbank actually confirmed in its own published gold holdings spreadsheet that this transfer took place at the Bank of England. See spreadsheet Column 5 (BoE tonnes), Rows 1998 and 1999, where the Bundesbank gold holdings fell by 332 tonnes between 1998 and 1999 from 1,521 tonnes to 1,189 tonnes and also see Column 20 where gold lending rose from 149 tonnes to 249 tonnes. Therefore, between 1998 and 1999, 232 tonnes of gold was transferred from the Bundesbank gold account at the bank of England to the ECB account at the Bank of England, and 100 tonnes was added to the Bundesbank’s gold loans.

Paris and Rome

The Banque de France currently stores the majority (over 90%) of its gold reserves in its own vaults in Paris, so it it realistic to assume that when the Banque de France transferred 159 tonnes of gold to the ECB in January 1999, it did so using gold stored in the Banque de France vaults in Paris. Likewise, it is realistic to assume that the Banca d’Italia, which currently stores half of its gold reserves at its own vaults in Rome, transferred 141 gold stored in its Rome vaults to the ECB in 1999. This would explain the Paris and Rome gold holdings of the ECB. While a few ex French colony central banks are known to have historically stored gold with the Banque de France in Paris, none of the founding members of the Euro (apart from the Bundesbank) are on the record as having stored gold in Paris, at least not for a long time. The Banca d’Italia is not known for storing gold on behalf of other national central banks.

Lisbon and New York

The Banco de Portugal currently holds its gold reserves in Lisbon and also at the Bank of England, the Federal Reserve Bank of New York (FRBNY), and with the BIS. The ECB gold stored in Lisbon, Portugal most likely refers to the 18.2 tonnes of gold transferred by the Banco de Portugal to the ECB in January 1999, because a) that makes most sense, and b) the Banco de Portugal is not known as a contemporary gold custodian for other central banks.

Of the other 7 central banks that transferred gold to the ECB in January 1999, the central banks of Austria, Belgium and Ireland store most of their gold at the Bank of England so are the most likely candidates to have made gold transfers to the ECB at the Bank of England. See BullionStar blog “Central bank gold at the Bank of England” for more details of where central banks are known to store gold.

The Netherlands and Finland currently store some of their gold reserves at the Bank of England and at the Federal Reserve Bank of New York and probably also did so in 1998/99, so one or both of these banks could have made transfers to the ECB at the FRBNY. Another contender for transferring gold held at the FRBNY is the Spanish central bank since it historically was a holder of gold at the NYFED. It’s not clear where the central bank of Luxembourg held or holds gold but it’s not material since Luxembourg only transferred just over 1 tonne to the ECB in January 1999.

Greece and Later Euro members

Greece joined the Euro in January 2001 and upon joining it transferred 19.5 tonnes of gold to the ECB. Greece is known for storing some of its gold at the FRBNY and some at the Bank of England, so Greece too is a candidate for possibly transferring New York held gold to the ECB. In theory, the ECB’s New York held gold may not have even arisen from direct transfers from Euro member central banks but could be the result of a location swap. Without the national central banks or the ECB providing this information, we just don’t know for sure how the ECB’s New York gold holdings arose.

Another 7 countries joined the Euro after Greece. These countries were Slovenia on 1st January 2007, Malta and Cyprus 1st January 2008, Slovakia 1st January 2009, Estonia 1st January 2011, Latvia 1st January 2014, and Lithuania 1st January 2015. The majority of these central banks made gold transfers to the ECB at the Bank of England. In total these 7 central banks only transferred 9.4 tonnes of gold to the ECB, so their transfers are not really material to the ECB’s gold holdings.

ECB Gold Sales: 271.5 tonnes

More importantly, the ECB sold 271.5 tonnes of gold between Q1 2005 and Q1 2009. These sales comprised 47 tonnes announced on 31 March 2005, 57 tonnes announced 31 March 2006,  37 tonnes over April and May 2007 announced 1 June 2007, 23 tonnes of sales completed on 30 November 2006, 42 tonnes announced 30 November 2007, 30 tonnes of completed sales announced 30 June 2008, and 35.5 tonnes completed in Q1 2009.

These sales explain why the ECB currently only holds 504.8 tonnes of gold:

i.e. 766.9 t (including Greece) – 271.5 t sales + 9.4 t smaller member transfers = 504.8 t

The ECB does not provide, nor has ever provided, any information as to where the 271.5 tonnes of gold  involved in these 2005-2009 sales was stored when it was sold. The fact that the ECB still claims to hold gold in Paris, Rome and Lisbon, as well as London and New York, suggests that at least some of the gold transferred by the Banque de France, Banca d’Italia and Banco de Portugal in 1999 is still held by the ECB.

If the ECB had sold all the gold originally transferred to it by all central banks other than France, Italy, Portugal and Germany, this would only amount to 197 tonnes, so another 74 tonnes would have been needed to make up the shortfall, which would probably have come from the ECB holdings at the Bank of England since that is where most potential central bank and bullion bank buyers hold gold accounts and where most gold is traded on the international market.

Even taking into account Greece’s 19.4 tonne gold transfer to the ECB in January 2001, and excluding the French, Italian, German and Portuguese transfers in 1999, the ECB’s 271.5 tonnes of gold sales would still have burned through all the smaller transfers and left a shortfall. So the ECB gold sales may have come from gold sourced from all of its 5 storage loacations.

It’s also possible that one or more of the original 11 central banks transferred gold to the ECB that was stored at a location entirely distinct from the 5 currently named locations, for example gold stored at the Swiss National Bank. If that particular gold was then sold over the 2005-2009 period, it would not get picked up in the current locations. It’s also possible that some or all of the 271.5 tonnes of gold sold by the ECB over 2005-2009 had been loaned out, and that the ‘sales’ were just a book squaring exercise in ‘selling’ gold which the lenders failed to return, with the loan transactions being cash-settled.

Draghi resumes ECB press conference after being attacked by protester

No Physical Audit of ECB Gold

Given that the Euro is the 2nd largest reserve currency in the world and the 2nd most traded currency in the world, the ECB’s gold and how that gold is accounted for is certainly a topic of interest. Although the ECB’s gold doesn’t directly back the Euro, it backs the balance sheet of the central bank that manages and administers the Euro, i.e. the ECB.

The valuation of gold on the ECB’s annual balance sheet also adds to unrecognised gains on gold in the ECB’s revaluation account. Given gold’s substantial price appreciation between 1999 and 2015, the ECB’s unrecognised gains on gold amount to €11.9 billion as of 31 December 2015.

It is therefore shocking, but not entirely surprising, that the ECB doesn’t perform a physical audit of its gold bars and has never done so since initiating ownership of this gold in 1999. Shocking because this lack of physical audit goes against even the most basic accounting conventions and fails to independently prove that the gold is where its claimed to be, but not surprising because the world of central banking and gold arrogantly ignores and bulldozes through all generally accepted accounting conventions. Geographically, 2 of the locations where the ECB claims to store a percentage of its gold are not even in the Eurozone (London and New York), and infamously, the Bundesbank is taking 7 years to repatriate a large portion of its gold from New York, so the New York storage location of ECB gold holdings should immediately raise a red flag. Furthermore, the UK is moving (slowly) towards Brexit and away from the EU.

Recall the response above from the ECB:

The ECB has no physical audit of its gold bars. The gold bars that the ECB owns are individually identified and each year the ECB receives a detailed statement of these gold deposits. The central banks where the gold is stored are totally reliable.

Imagine a physical-gold backed Exchange Traded Fund (ETF) such as the SPDR Gold Trust or iShares Gold Trust coming out with such a statement. They would be run out of town. References to ‘totally reliable’ are all very fine, but ‘totally reliable’ wouldn’t stand up in court during an ownership claim case, and assurances of ‘totally reliable’ are not enough, especially in the gold storage and auditing businesses.

The ECB is essentially saying that these ‘statements’ of its gold deposits that it receives from its storage custodians are all that is needed to for an “audit” since the custodians are ‘totally reliable‘.

This auditing of pieces of paper (statements) by the ECB also sounds very similar to how the Banca d’Italia and the Deutsche Bundesbank conduct their gold auditing on externally held gold i.e. they also merely read pieces of paper. Banca d’Italia auditsannual certificates issued by the central banks that act as the depositories” (the FRBNY, the Bank of England, and the SNB/BIS).

The Bundesbank does likewise for its externally held gold (it audits bits of paper), and solely relies on statements from custodians that hold its gold abroad. The Bundesbank actually got into a lot of heat over this procedure in 2012 from the German Federal Court of Auditors who criticised the Bundesbank’s blasé attitude and lack of physical auditing, criticism which the Bundesbank’s executive director Andreas Dombret hilariously and unsuccessfully tried to bury in a speech to the FRBNY  in New York in November 2012 in which he called the controversy a “bizarre public discussion” and “a phantom debate on the safety of our gold reserves“, and ridiculously referred to the movies Die Hard with a Vengeance and Goldfinger, to wit:

“The days in which Hollywood Germans such as Gerd Fröbe, better known as Goldfinger, and East German terrorist Simon Gruber, masterminded gold heists in US vaults are long gone. Nobody can seriously imagine scenarios like these, which are reminiscent of a James Bond movie with Goldfinger playing the role of a US Fed accounting clerk.”

Where is the ECB Gold Bar Weight List?

Since, as the ECB states, it’s gold bars are “individually identified“, then gold bar weight lists of the ECB’s gold do indeed exist. This then begs the question, where are these weight lists, and why not release them if the ECB has nothing to hide?

Quickly, to define a weight list, a gold bar weight list is an itemised list of all the gold bars held within a holding which uniquely identifies each bar in the holding. In the wholesale gold market, such as the London Gold Market, the LBMA’s “Good Delivery Rules” address weight lists, and state that for each gold bar on a weight list, it must list the bar serial number, the refiner name, the gross weight of the bar, the gold purity of the bar and the fine weight of the bar. The LBMA also state that “year of manufacture is one of the required ‘marks’ on the bar”.

Recall from above that when the ECB was asked to provide a full weight list of its 504.8 tonnes of gold bars, it responded: The ECB does not disclose this information.

After receiving this response, BullionStar then asked in a followup question as to why the ECB doesn’t disclose a weight list of the gold bars. The ECB responded (underlining added):

“We would like to inform you that, while the total weight and value of the gold held by the European Central Bank (ECB) can be considered to be of interest to the public, the weight of each gold bar is a technicality that does not affect the economic characteristics of the ECB’s gold holdings. Therefore the latter does not warrant a publication.

It is a very simple task to publish such a weight list in an automated fashion. The large gold backed ETFs publish such weight lists online each and every day, which run in to the hundreds of pages. Publication of a weight list by the ECB would be a very simple process and would prove that the claimed bars are actually allocated and audited.

This ECB excuse is frankly foolish and pathetic and is yet another poorly crafted excuse in the litany of poorly crafted excuses issued by large gold holding central banks in Europe to justify not publishing gold bar weight lists. The Dutch central bank recently refused to issue a gold bar weight list since it said it would be too costly and administratively burdensome. The Austrian central bank in refusing to publish a weight list claimed as an excuse that it “does not have the required list online“. Last year in 2015, the German Bundesbank issued a half-baked useless list of its gold bar holdings which was without the industry standard required refiner brand and bar serial number details.  (For more details, see Koos Jansen BullionStar blogs “Dutch Central Bank Refuses To Publish Gold Bar List For Dubious Reasons“, and “Central Bank Austria Claims To Have Audited Gold at BOE. Refuses To Release Audit Reports & Gold Bar List“, and a Peter Boehringer guest post “Guest Post: 47 years after 1968, Bundesbank STILL fails to deliver a gold bar number list“).

The more evidence that is gathered about the refusal of central banks to issue industry standard gold bar weight lists, the more it becomes obvious that there is a coordinated understanding between central banks never to release this information into the public domain.

The most likely reason for this gold bar weight list secrecy is that knowledge of the contents of central bank gold bar weight lists could begin to provide some visibility into central bank gold operations such as gold lending, gold swaps, location swaps, undisclosed central bank gold sales, and importantly, foreign exchange and gold market interventions. This is because with weight list comparisons, gold bars from one central bank weight list could begin turning up in another central bank weight list or else turning up in the transparent gold holdings of vehicles such as gold-backed Exchange Traded Funds.

Conclusion

Instead of being fixated with the ECB’s continual disastrous and extended QE policy, perhaps some financial journalists could bring themselves to asking Mario Draghi some questions about the ECB gold reserves at the next ECB press briefing, questions such as the percentage split in storage distribution between the 5 ECB gold storage locations, why ECB gold is being held in New York, why is there no physical audit of the gold by the ECB, why does the ECB not publish a weight list of gold bar holdings, and do the ECB or its national central bank agents intervene into the gold market using ECB gold reserves.

The lackadaisical attitude of the ECB to its gold reserves by never physically auditing them is also a poor example to set for all 28 of the central bank members of the European System of Central Banks (ESCB), and doesn’t bode well for any ESCB member central bank in being any less secretive than the ECB headquarters mothership.

If gold does re-emerge at the core of a revitalised international monetary system and takes on a currency backing role in the future, the haphazard and non-disclosed distribution of the ECB’s current gold reserves over 5 locations, the lack of physical gold audits, and the lack of public details of any of the ECB gold holdings won’t really inspire market confidence, and is proving to be even less transparent than similar metrics from that other secretive large gold holding bloc, i.e the USA.

From Gold Trains to Gold Loans – Banca d’Italia’s Mammoth Gold Reserves

Italy’s gold has had an eventful history. Robbed by the Nazis and taken to Berlin. Loaded on to gold trains and sent to Switzerland. Flown from London to Milan and Rome. Used as super-sized collateral for gold backed loans from West Germany while sitting quietly in a vault in New York. Leveraged as a springboard to prepare for Euro membership entry.  Inspired Italian senators to visit the Palazzo Koch in Rome. Half of it is now in permanent residency in downtown Manhattan, or is it? Even Mario Draghi, European Central Bank (ECB) president, has a view on Italy’s gold. The below commentary tries to make sense of it all by bringing together pieces of the Italian gold jigsaw that I have collected.

2,451.8 tonnes

According to officially reported gold holdings, and excluding the gold holdings of the International Monetary Fund (IMF), Italy’s central bank, the Banca d’Italia, which holds Italy’s gold reserves, is ranked as the world’s third largest official holder of gold after the US and Germany, with total gold holdings of 2,451.8 tonnes, worth more than US$ 105 billion at current market prices. Notable, Italy’s gold is owned by the Banca d’Italia, and not owned by the Italian State. This contrasts to most European nations where the gold reserves are owned by the state and are merely held and managed by that country’s respective central bank under an official mandate.

Italy’s gold reserves have remained constant at 2451.8 tonnes since 1999. Although the Banca d’Italia has been a signatory to all 4 Central Bank Gold Agreements and could have conducted gold sales within the limits of the agreements between 1999 and the present, it did not engage in any gold sales under either CBGA1 (1999-2004), CBGA2 (2004-2009), or CBGA3 (2009-2014), and as of now, has not conducted any sales under CBGA4 (2014-2019). With 2,451.8 tonnes of gold, the Banca d’Italia holds marginally more than the Banque de France, which claims official gold holdings of 2,435.8 tonnes.

Gold as a percentage of total reserves for both banks is very similar, with Italy’s gold comprising 69.7% of total reserve assets against 67.2% for France. Similarly, German’s gold reserves, at 3,378.2 tonnes, are 70.1% of its total reserves. See the World Gold Council’s Latest World Official Gold Reserves data for details.

So it appears that the big three European gold holders consider their gold to be a critical part of their foreign reserves and are keeping the ratio of their gold to total reserves within around the 70% mark.

Towards Transparency?

In April 2014, Banca d’Italia published a 3 page report about Italy’s gold reserves titled “Le Riserve Auree della Banca D’Italia” (published only in Italian). The report highlights that Italy’s gold is held in four storage locations, one of which is in Italy.

Specifically, in the report, Banca d’Italia confirmed that 1,199.4 tonnes of its gold, approximately half the total, is held in the Bank’s vaults which are located in the basement levels of its Palazzo Koch headquarters in Rome. The majority of remainder is stored in the Federal Reserve Bank’s gold vault in New York. The report also states that small amounts of Banca d’Italia gold are stored at the vaults of the Swiss National Bank in Berne, Switzerland, and at the vaults of the Bank of England in London.

As to why Italian gold is stored abroad in New York, London and Berne and not in other countries, is explained by historical data, and explained below.

++ Bankitalia: Visco, statuto riafferma indipendenza ++

Palazzo Koch

In its Palazza Koch vaults in Rome, the Banca d’Italia claims to store 1199.4 tonnes of gold. Of this total, 1195.3 tonnes are in the form of gold bars (represented by 95,493 bars), and 4.1 tonnes are in the form of gold coins (represented by 871,713 coins). While most of the bars in Rome are prism-shaped (trapezoidal), there are also brick-shaped bars with rounded corners (made by the US Mint’s New York Assay Office) and also ‘panetto’ (loaf-shaped) ‘English’ bars. The average weight of the bars in Palazzo Koch is 12.5 kg (400 oz), with bar weights ranging from relatively small 4.2 kgs up to some very large 19.7 kgs bars. The average fineness / gold purity of the Rome stored bars is 996.2 fine, with some of the holdings being 999.99 fine bars.

The Banca d’Italia also states that 141 tonnes of gold that it transferred to the ECB in 1999 as a requirement for membership of the Euro is also stored in Palazzo Koch. This would put the total gold holdings in the Palazzo Koch vaults at 1340 tonnes. Gold transferred to the ECB by its Euro member central banks is managed by the ECB on a decentralised basis, and is held by the ECB in whatever location it was stored in when the initial transfers occurred, subject to various location swaps which may have taken place since 1999.

The Vault is revealed

While the Banca d’Italia’s 3 page report appears to be the first official written and self-published confirmation from the Bank which lists the exact storage sites of its gold reserves, these four storage locations were also confirmed to Italian TV station RAI in 2010 when an RAI presenter and crew were allowed to film a report from inside the Bank’s gold vaults in Rome.

This RAI broadcast was for an episode of ‘Passaggio a Nord Ovest’, presented by Alberto Angela.

Translation of Video

For those who don’t speak Italian, such as myself, I asked an Italian friend to translate Alberto Angela’s video report and the other voice-overs in the report. The translation of the above video is as follows:

Banca D’Italia features a secret and extremely important place which represents Italy’s wealth: it’s our gold reserve.

We’ve had a special permission to visit this place, called “the sacristy of gold.” Here there’s a big protected door, and three high personnel from Banca d’Italia who are opening the door for me. Three keys are needed to open the door of the vault, one after the other and operated by three different people. Obviously we can’t show the security systems nor the faces of these men, but the door is huge, at least half a metre, and leads to another gate where again three keys must be used. Past this, that’s where our country’s gold is kept. 

Here we are. It’s exciting to get in here, the environment is simple, sober. [general commentary, then camera shows a large amount of gold]

This is not all the gold we own, as part of it is also stored in The Federal Reserve in the US, in the Bank of England in the UK and in Banca dei Regolamenti Nazionali in Switzerland. I’m speechless when exploring the sacristy, … you don’t see this every day. 

The value of all this gold is established by the  European Central Bank, that also establishes its price. The overall value appears in the end of year balance. In 2005 the gold was valued at 20 miliardi of Euros (billions)

There are three types of lingotti (square-shaped gold). {he says how much the bars weigh}

They feature some signs on them, to say that they have been checked. Some are almost 100% gold, pure gold. There’s also a serial number on the gold, and a swastika on some of them as the Nazi took away all our gold, transferring it first to the north of Italy and then to Germany and Switzerland. At the end of the war part of it came back featuring the Nazi sign.

This gold represents the symbol of our wealth, without this we wouldn’t be able to deal with the rest of the world, it’s a symbol for Italy, a guarantee, like a family’s jewelry. They can be used to get loans as happened when Italy asked for a loan from Germany and they demanded, as a guarantee, the value in gold. So the name Germany was put on this gold at the time.

{the reporter then talks about going from gold to notes and ‘convertibility’ – trust in the States is now the guarantee for exchanges, and not gold, says the voice. It’s a relation of trust … Banca d’Italia keeps an eye on this. After Maastricht, a lot of our gold has left Italy to join the other countries’ gold to create the communitarian reserve of the Euro}”

Note that the reporter, Angela, states that in addition to Rome, the Italian gold is stored at the Federal Reserve Bank in New York, the Bank of England in London, and at the Bank of International Settlements (BIS) in Switzerland. The reporter uses the exact words “Banca dei Regolamenti Nazionali”.

The BIS and SNB

This BIS as Italy’s gold custodian was also confirmed in 2009 by Italian newspaper “La Repubblica”, which published an article about Italy’s gold, stating that it was held in Rome, at the Federal Reserve in New York, in the ‘vaults’ of the BIS in Basel, and in the vaults of the Bank of England.

This apparent inconsistency between a) the Banca d’Italia’s report, which claims that its gold in Switzerland is at the Swiss National Bank (SNB) in Berne, and b) the RAI broadcast, which states that some Italian gold is stored with the BIS in Switzerland, is technically not a contradiction since the BIS does not maintain its own gold storage facilities in Switzerland. The BIS just makes use of the SNB’s gold vaults in Berne.

If you look on its website, under foreign exchange and gold services, the BIS specifically states that it uses ‘Berne’ as one of its safekeeping facilities for gold, i.e. it offers its clients “safekeeping and settlements facilities available loco London, Berne or New York”. Loco refers to settlement location of a precious metals transaction. By confirming that its Swiss storage is with the BIS, and that it also stores gold at the Swiss National Bank in Berne, the Banca d’Italia has, maybe inadvertently, confirmed that the BIS makes use of the Swiss National Bank’s gold vaults, and that the SNB vaults are in fact in Berne. while its knwn that the SNB gold vaults are in Berne, the SNB rarely, if ever, talks about this.

However, in 2008, Berne-based Swiss newspaper “Der Bund” published an article revealing that the SNB’s gold vaults are in Berne underneath the Bundesplatz Square. Bundesplatz Square is adjacent to the SNB’s headquarters at No. 1 Bundsplatz. BIS literature, such as the official BIS history publication “Central bank Cooperation at the Bank for International Settlements, 1930 – 1973” also confirms that the SNB gold vaults are in Berne and that the BIS and the Banca d’Italia have held gold accounts with the SNB in Berne since at least the 1930s. Note that the SNB actually has two headquarters, one in Berne, the other in Zurich at Börsenstrasse.Its quite possible that some of the SNB custodied gold is also stored in the vaults of its Zurich headquarters under Paradeplatz or Bürkliplatz.

Simple Questions met with Ultra-Secrecy

In April 2014, in two emails, I asked the Banca d’Italia’s press office specifically about this SNB / BIS situation, and also about the Banca d’Italia gold stored in New York, (and also about gold leasing – see separate section below). My questions were as follows:

“The Banca dItalia states in its April (2014) gold document that the Italian gold held in Switzerland is stored at the Swiss National Bank in Berne. Previous profiles of the Banca dItalia gold storage arrangements in an RAI TV broadcast in 2010 and in a La Republica newspaper article in 2009 state that the Italian gold in Switzerland is deposited with the Bank of International Settlements (BIS).

Given that the BIS use the SNB vaults in Berne to store gold deposited with them (since they don’t have their own gold storage facilities in Switzerland), then the reference to the SNB is not surprising.

However, my question is, does the Banca dItalia store its gold in Berne as gold sight deposits with the BIS or as earmarked custody gold with the SNB, or a combination of the two?”

“Is the gold of the Banca d’Italia that is held by the Federal Reserve Bank of New York held under earmark (custody), or held in a sight account?”

The Banca d’Italia responded (simultaneously on all questions):
“This is to inform you that unfortunately Banca d’Italia will not be giving information in addition to the website note.
Regards
Press and External Relations Division, Secretariat To The Governing Board And Communications Directorate, Bank of Italy”

By ‘website note’, the press and external relations division was referring to the 3 page report on gold reserves (see above) that the Bank published in April 2014.

Nazi Bars in Rome

The RAI television broadcast from 2010 was also notable in that it revealed that the Banca d’Italia holds bars of varied origins in its Rome vaults, including bars stamped with the official Bank of England stamp, and bars from the US Assay Office in New York including a featured bar from 1947. There are also Russian bars shown in the RAI video, one of which is shown in the video with the CCCP lettering, the hammer and sickle stamp, and the letters HKUM.

More surprisingly perhaps, is the fact that the Banca d’Italia also holds Nazi gold bars from the Prussian Mint in Berlin. The RAI broadcast video shows a 1940 Nazi bar from Berlin, stamped with the eagle and swastika insignia and with Prussian mint markings. The Nazi bar holdings can be explained by the fact that the Italian gold was confiscated by the Nazis during World War 2 and ended up being moved out of Rome up to the north of Italy and then most of it was transported onwards to Berlin in Germany or else to Switzerland. Following the war, some of the gold given back to the Italians as part of the Tripartite Commission payouts happened to be Prussian Mint bars stamped with the Nazi symbol (see below for historical account of Italian gold movements during World War 2).

riserve auree1
A view of the gold on shelves in the Palazzo Koch vaults, Rome

The Foreign held Italian gold

The Banca d’Italia gold document does not specify how much of the Italian gold is held in New York, London and Berne, apart from stating that most of the gold that is not stored in Rome is stored in New York. Note that this is even less transparent than the brief information that the Deutsche Bundesbank publishes about its gold reserves storage locations. However, the Banca d’Italia document does state that “the bulk” of foreign stored gold is in New York (“la parte più consistente è custodita a New York“), and that  “contingents of smaller size” are located in London and Berne (“Altri contingenti di dimensioni più contenute si trovano a Berna, presso la Banca Nazionale Svizzera, e a Londra presso la Banca d’Inghilterra“).

While one could argue about the meaning of ‘the bulk’ in terms of quantity, essentially the Banca d’Italia gold document implies that the London and Berne holdings are not very large. More specifically, it is possible using historical data and records of Italian gold movements to infer that there is little Italian gold in London and Berne.

Not a lot in London

It does not look like Banca d’Italia holds anything other than a very small amount of gold in London. During the late 1960s, mainly between 1966 and 1968, the Banca d’Italia transported most of the gold that it had stored at the Bank of England vaults back to Italy. Regular shipments were exported and delivered by MAT (the secure transport company) to the Banca d’Italia’s vaults in both Rome and Milan, sometimes about 4 tonnes at a time, sometimes 10 tonnes at a time. Historic Bank of England gold account “set-aside” ledger entries (C142/5 Bullion Office Set Aside Ledger, A-K, 1943-1971) show that by the end of 1969, the Banca d’Italia only held 988 gold bars in London, weighing 396,000 ozs,  or approximately 12.34 tonnes. In support of the veracity of this statement, see the specific ledger entry below.

banca-d-italia-boe-dec-1969-12-3-tonnes

During the Banca d’Italia’s gold transport period out of the Bank of England, various other transfers were also made from the Banca d’Italia gold account to the BIS gold account at the Bank of England. Since Italian gold reserves have not in total changed very much since December 1969, it is realistic to assume that the Banca d’Italia’s London gold holdings have not changed dramatically since December 1969, unless there have been location swaps executed since that time between London and New York or between London and Berne. This would generally only have been done for a specific reason such as to allow Italian gold lending through the London market. Significant gold lending only began in London in the mid-1980s, and the Banca d’Italia has never been on public record as having engaged in gold lending on the London Gold Lending Market.

Another possibility is that the Italians now use the BIS gold account(s) to hold gold in London in the same way that they do in Berne. This would allow the statement that some of the Italian gold is held in London to be true, even though the gold would, in this case, be held via the BIS gold account at the Bank of England, and not directly by a Banca d’Italia gold custody account in London.

Little in Berne

There does not appear to have been any Italian gold left in Berne after WWII (see historical details below), so whatever Italian balance is currently in Berne has been built up since 1946. Of relevance to the gold vaults in Berne, both the central banks of Finland (Bank of Finland) and Sweden (Riksbank) recently published the international locations of their gold reserves, and revealed that only very small percentages of their gold is kept in the Swiss National Bank vaults in Switzerland. Of the Riksbank’s 125.7 tonnes of gold reserves, only 2.8 tonnes (2.2%) is stored in the SNB vaults. For the Bank of Finland, only 7%, or 3.4 tonnes of its 49.1 tonnes of gold reserves are stored with the SNB in Switzerland.

Mostly in Manhattan

If this Swedish-Finnish 2-7% range of allocations held at the SNB was applied to the Italian gold that held outside Italy, it would result in between 25 tonnes and 87.6 tonnes of Italian gold being held at the SNB vaults in Berne. Factoring in 12 tonnes held at the Bank of England and a small amount held in Berne, this would imply nearly 1,200 tonnes of Italian gold at the Federal Reserve in New York.

There were at least 543 tonnes of Italian gold at the Federal Reserve in New York in the mid-1970s, since this was the quantity of Italian gold collateral that the Bundesbank held at the New York Fed during its first gold loan to Italy between 1974 and 1976 (see discussion below of the 1970s West Germany – Italy gold loan). If the quantities in London and Berne are as low as they appear to be, this 543 tonnes used as collateral might not have even been half the gold that Italy has custodied with the Federal Reserve Bank of New York.

A gold vault in Milan

It’s notable that the Banca d’Italia has used a vault in the city of Milan to store gold as recently as the late 1960s, although there is no mention of a Milan vault in the Banca d’Italia’s 2014 gold document. This would either imply that the gold stored in Milan in the 1960s was transported to Rome at a later date, or else that the Rome statistics may represent combined holdings stored in Rome and Milan, and are just rolled up to Rome for reporting purposes, since Rome is the head office of the Banca d’Italia. The Banca d’Italia’s Milan vault did feature as a key part of Italian gold movements during World War 2 (see below).

Historical Italian Gold

Like other central banks, the Banca d’Italia states that it uses 4 storage locations partly due to historical reasons and partly based on a deliberate strategy gold storage diversification strategy.

Although the Banca d’Italia held 498 tonnes of gold in 1925, Italian gold reserves fell to 420 tonnes in 1930, and continued to decline throughout the 1930s, falling to 240 tonnes in 1935, before another sharp fall to 122 tonnes in 1940 at the beginning of World War 2. With both Rome and Northern Italy under German occupation in 1943, the German occupiers pressurised the Banca d’Italia’s governor Azzolini to move the Italian gold north. Ultimately this led to 119 tonnes of Italian gold being transported by train from Rome to the Banca d’Italia’s vaults in Milan. But the transfer to Milan turned out to be just an interim stopover since the Germans continued to pile on pressure to move the Italian gold to Berlin.

The fascist government that controlled Northern Italy at that time initially resisted the German plan, but negotiated a compromise and agreed to move 92.3 tonnes of gold to a castle in Fortezza, in the far north of Italy near the Austrian border, close to the Brenner Pass and likewise very close (via Austria) to the German border.

Eventually the fascist government capitulated fully to the German demands and 49.6 tonnes of Italian was moved from Fortezza to the Reichsbank vaults in Berlin, followed by an additional transfer of 21.7 tonnes, so in total 71.3 tonnes of Italian gold ended up in the Reichsbank in Berlin. See here for graphic showing these wartime movements of Italian gold, and a comprehensive discussion (in Italian).

In the 1930s, the Bank for International Settlements Bank had invested substantially in Italian short-term treasury bills, which had a built-in gold conversion guarantee. Likewise, the Swiss National Bank held or was the representative for claims on some of the Italian gold. With the German pressure on the Italian gold in 1943, the BIS and SNB both became anxious about their investments and requested that their Italian gold-related be fully converted into gold with a view to moving the converted gold to the SNB vaults in Berne, Switzerland.

The Gold Trains to Berne

After intense negotiations, which the Banca d’Italia also supported (since it would allow some of the Italian gold to go to Switzerland and so avoid Berlin), the SNB and BIS succeeded in releasing the gold transfers, and over 72 years ago on 20th April 1944, 23.4 tonnes of Italian gold was sent by train from Como in Italy to Chiasso in Switzerland and then onwards by another train to Berne.

This required four railcars, two with 89 crates of gold weighing 12,605 kgs for the BIS (1,068 bars in total), and two other railcars of gold bars for the SNB which probably contained 9-10 tonnes – since this was the balance of Italian gold which did not go to Berlin or to the BIS but which had been moved to Fortezza from Milan.

A few days later on 25th April 1944, the Banca’Italia also executed an additional intra-account transfer in the Berne vault to the benefit of the BIS. This was part of a location swap with the BIS. To quote the official BIS historical narrative:

On 25th April 1944, the Bank of Italy transferred an additional 3,190 kgs of fine gold from its own gold account with the Swiss National Bank in Berne to the BIS gold account there.” (Central Bank Cooperation at the Bank for International Settlements, 1930-1973, Gianni Toniolo, BIS).

The actual transfer comprised 244 gold bars containing 2,966 kgs. An additional 233 kgs was debited from the Banca d’Italia sight account with the BIS, which suggests that the Italians only had 2,966 kgs in physical gold stored in Berne with the balance having to come from their sight deposit with the BIS (i.e. unallocated storage). (See “Note on gold shipments and gold exchanges organised by the Bank for International Settlements, 1st June 1938 – 31st May 1945.

The above suggests that the Banca d’Italia had no gold in Berne at the end of WWII. In fact, after WWII ended in 1945, the Italians essentially had very little gold anywhere except for small amounts that were left in Fortezza and found by the Allies, which was then returned to the Italians. Italy started buying gold again in 1946 with a 1.8 tonne purchase from the Banque de France. The Italians also began receiving gold back as reparations from the Tripartite Commission for the Restoration of Monetary Gold (TGC), getting 31.7 tonnes a few years after WWII ended, and another 12.7 tonnes in 1958. Since 71.4 tonnes had been taken by the Germans to Berlin, the Italians ended up with a net loss of about 27 tonnes due to theft and/or other war losses.

Some of these post-WWII gold reparations contained the Nazi Prussian Mint bars which are now stored in the Banca d’Italia’s Rome vaults. The initial gold bar reparations for Italy in the late 1940s came from the TGC account set up at the Bank of England. Records from the Clinton Library show that Italy received 575 Prussian bars set-aside from the TCG account in its early allocations. Prussian bars also made it to the Federal Reserve in New York. The same records show that were over 2,500 Prussian Mint bars held under earmark at the FRBNY for various customers as of January 1956 including the BIS, IMF, SNB, Bank of England, Netherlands and Canada among others. Some of these bars were later remelted into US Assay Office bars. (The Gold Report, Presidential Advisory Commission on Holocaust Assets in the United States, July 2000, Clinton Library).

In a similar way to other major European central banks, the Banca d’Italia’s gold reserves were mainly built up during the late 1950s and early 1960s. Although the Banca d’Italia was a relatively important official gold holder during the first half of the 20th century, it ‘only’ held 402 tonnes of gold as of 1957. But starting in 1958 and running through to the late 1960s, Italy’s gold reserves rose by nearly 600% to exceed 2,560 tonnes in 1970. See page 19 of “Central Bank Gold Reserves, An Historical perspective since 1845, by Timothy Green, Research Study No. 23, published by World Gold Council, for data on Italian gold reserve totals during the 1950s and 1960s.

Since 1970, Italy’s gold holdings have remained fairly constant, although at times some of the Italian gold has been used in various financial transactions such as:

  • gold collateral against a loan from Germany during the 1970s
  • contributions to the European Monetary Cooperation Fund (EMCF)
  • contributions to the European Central Bank (ECB)

The gold collateral transactions with Germany and the EMCF and ECB contributions explain why, in the absence of purchases or sales, Italy’s historic gold holdings statistics appear to fluctuate widely at various times since the mid-1970s.

l’Ufficio Italiano dei Cambi (UIC)

Until the 1960s, most, if not all of Italy’s official gold reserves were held not by the Banca d’Italia, but by an associated entity called l’Ufficio Italiano dei Cambi (UIC). In English, UIC translates as the “Italian Foreign Exchange Office”. The UIC was created in 1945. One of its tasks was the management of Italy’s foreign exchange reserves (also including gold).

Therefore the Italian gold purchases in the 1950s and 1960s were conducted for the account of the UIC, not the Banca d’Italia. However, during the 1960s there were two huge transfers of gold from the UIC to the Banca d’Italia, one transfer in 1960 and the second in 1965. In total, these two transactions represented a transfer of 1,889 tonnes from the UIC to the Banca d’Italia. The UIC’s main function then became the management of the national currency and not the nation’s gold. The UIC ceased to exist in January 2008 when all of its tasks and powers were transferred to the Banca d’Italia.

DB

Gold Collateral for the Bundesbank – 1970s

In 1974, Italy required international financial aid to overcome an economic and currency crisis and ended up negotiating financial help from the Deutsche Bundesbank. This took the form of a dollar-gold collateral transaction, with the Bundesbank providing a US$ 2 billion loan secured on Italian gold collateral of equivalent value. On 5th September 1974, Karl Klasen, President of the Bundesbank, sent the specifics of the collateral agreement to Guido Carli, Governor of the Banca ‘dItalia. The details of the transaction were as follows:

US$ 2 billion was transferred from the Bundesbank to the Banca d’Italia for value date 5th September. Simultaneously, for value date 5th September, the Banca d’Italia earmarked 16,778,523.49 ounces of gold (about 522 tonnes) from its gold holdings stored at the Federal Reserve Bank in New York into the name of the Bundesbank, and received a gold claim against the Bundesbank for the same amount.  (2A96 Deutsche Bundesbank Files, 1974, Bank of England Archives).

The gold collateral was valued at $149 per ounce based on a formula of 80% of the average London gold fixing price during July and August 1974. The loan was for a six month maturity but could be rolled over up to three times, i.e. up to two years in total. It turns out that the loan was rolled over up to the maximum two years allowed. Not only that, but the entire gold-backed dollar loan was renewed in September 1976 with larger gold collateral of 17.5 million ounces or about 543 tonnes. This gold loan renewal in 1976 was underwritten by the UIC, and the 543 tonnes of gold was transferred from the Banca’Italia to the UIC prior to the loan renewal. Note that Paolo Baffi had become Governor of the Banca d’Italia in 1975, taking over from Guido Carli.

In September 1978, at the 2 year maturity date of the renewal, the 543 tonnes of gold was returned to the ownership of the Italians but instead of being transferred to the Banca d’Italia, the 543 tonnes was transferred to the balance sheet of the UIC, since the UIC had been involved in underwriting the entire loan agreement. This 543 tonnes of gold stayed on the UIC books and was revalued over the years, thereby creating a large capital gain for the UIC.

Gold capital gain Controversy – 1997/98

When the gold held by the UIC was sold to the Banca d’Italia in 1997, the UIC realised a capital gain of 7.6 billion Lira which then became taxable. The UIC then owed the Italian Exchequer 4 billion Lira, 3.4 billion Lira of which was transferred to the Italian State in November 1997. At the time in 1997, Italy was preparing for entry to the Euro, and needed to keep its deficit under the 3% ceiling required by the Maastricht Treaty criteria. Eurostat ruled that this windfall transfer to the Italian Exchequer was not allowed to be offset against the government deficit. See here for January 1998 statement from Eurostat.

However, a European Parliament parliamentary set of question in March 1998 to the European Council seems to suggests that the UIC tax payment to the Italian Exchequer was offset against Italy’s public sector deficit, and that it helped to keep the Italian deficit under the critical 3% Masstrict ceiling, thereby helping Italy to qualify for Euro membership. The parliamentary questions were from Italian politician Umberto Bossi:

“Does the Council intend to finally ascertain the nature of this transaction?

Does the Council intend to establish whether it is permissible to encourage tax revenues of this kind to be offset against the public sector deficit?

If not, does the Council not consider that this incident shows yet again that Italy has not changed its ways and is prepared to stoop to dubious accounting practices in order to enter Europe?”

The answer to this parliamentary question in June 1998 seems vague, but did not deny that the tax windfall generated by the capital gain on the 543 tonnes of gold may have helped improve the Italian fiscal condition in the run-up to Euro qualification and entry.

EMCF and EURO

As referenced above, Italian gold has been contributed to various European monetary experiments since the 1970s. This explains why the yearly official total figures of Italian gold fluctuate widely over the 1970s-1990s period, and indeed have also fluctuated since 1999.

In 1979, Italy’s gold reserves dropped by 20% and stayed that way until 1998 when they increased again to the previous 1979 level. This was due to Italy contributing to the European Monetary Cooperation Fund (EMCF) which was a fund within the European Exchange Rate Mechanism (ERM) of the European Monetary System (EMS). In exchange for providing 20% of their gold and dollar reserves to the EMCF, member countries received claims denominated in European Currency Units (ECUs). [The ECU was an abstract precursor to the Euro]. The gold that was transferred to the EMCF was accounted for as gold swaps, but there was no physical movement of gold, it was just a book entry to represent a change in ownership to the EMCF.

In 1999, with the advent of the Euro (initially as a virtual currency), central bank members of the Eurozone had to again transfer gold, this time to the European Central Bank (ECB). The ECB stipulated that each member had to transfer foreign reserves assets, and 15% of these transfers had to be in the form of gold. In Italy’s case it transferred 141 tonnes of gold to the ECB, so Italy’s gold reserves fell by this amount.

The gold owned by the ECB is not centrally stored and managed by the ECB. It stays wherever it was when transferred by each member country, and the ECB delegates the management of its gold reserves to each member central bank, so essentially, it’s just another accounting transaction. It’s unclear whether the ECB gold managed by the Banca d’Italia on behalf of the ECB is “managed” any differently to the non-ECB gold (i.e. its unclear whether the same investment policy always applies to both gold holdings). One person who would certainly know the answer to that questions is Mario Draghi, current president of the ECB, former governor of the Banca d’Italia, and also born in Rome, home of the Palazzo Koch gold vault.

Is any Italian Gold pledged or leased out?

Banca d’Italia annual reports follow International Monetary Fund reporting conventions and classify the gold in its balance sheet as ‘gold and gold receivables‘. In September 2011, when I asked the Banca d’Italia to clarify what percentage of the asset category ‘gold and gold receivables’ in its 2010 balance sheet referred to gold held, and what percentage represented gold receivables, the Bank’s press office replied succinctly that “it’s only gold, no receivables.”

Following the publication of the Bank’s three page gold document in April 2014, I asked the Banca d’Italia press office a number of questions (see above), one of which was about gold leasing:

Are any of the Bank’s gold reserves subject to lease agreements, and if so, what percentage of the gold is leased out? Is any of the Bank’s gold swapped or pledged in any other way?

As mentioned above, the Banca d’Italia’s response was:

This is to inform you that unfortunately Banca d’Italia will not be giving information in addition to the website note.
Regards
Press and External Relations Division, Secretariat To The Governing Board And Communications Directorate, Bank of Italy”

 

Gold Audits

The Banca d’Italia states in its 3 page gold document that external auditors verify the gold held in Rome each year in conjunction with the Bank’s own internal auditors. For the gold held abroad, the external auditors are said to audit this using annual certificates issued by the central banks that act as the depositories (the  depositories being the Federal Reserve Bank of New York, the Bank of England, and either the BIS or perhaps the SNB depending on the type of certificate that is issued for BIS deposits).

This approach is analogous to the methodology used to audit the German gold reserves stored abroad, i.e. there is no independent physical audit of the gold stored abroad by the Bundesbank. The paper-pushing auditors merely audit pieces of paper.

As regards the Banca d’Italia’s gold holdings at the Bank for International Settlements (BIS), these holdings could either be in the form of a “Gold Sight Account” or a “Gold Ear-Marked Account”, as explained here by the Bank of Japan in 2000 when it switched its gold holdings at the BIS from a gold sight account to a gold earmarked account:

“The Bank of Japan has recently transferred its claims against the Bank for International Settlements (BIS) embodied in a “Gold Sight Account” to a “Gold Ear-marked Account” with the BIS.” (July 2000)

If the Banca d’Italia’s gold holdings at the BIS are just in a sight account, then this is just a claim on a balance of gold, not a holding of specific gold bars.

It’s also surprising to me that the mainstream media have taken a significant, albeit superficial, interest in the Bundesbank’s ongoing exercise to repatriate 300 tonnes of its gold reserves from New York to Frankfurt, but zero interest in the fact that the Banca d’Italia supposedly has a huge amount of gold stored in New York that has never physically audited it and does not even see a need to repatriate it.

Banca d’Italia office in Manhattan

Like the Bundesbank,  the Banca d’Italia also maintains a representative office in New York, at 800 Third Avenue – 26th Floor, New York – NY 10022 (see representative office contact details here). The head of this representative office is Giovanni D’Intignano (see LinkedIn). Therefore, it should be very easy for the Banca d’Italia to ask the Federal Reserve Bank of New York to conduct an on-site physical gold audit of the Italian gold at the vaults of the New York Fed, all 1000 plus tonnes of it.

In fact, the Banca d’Italia also maintains another of its only 3 representative offices abroad in London at 2 Royal Exchange, London EC3V 3DG, which is right across the road from the Bank of England’s headquarters and gold vaults. It should therefore also be a simple matter for the Banca d’Italia to also organise a physical on-site audit of its gold reserves stored at the Bank of England in London, something the Bank of England has been allowing its gold storage customers to do since 2013.

Political Awakening

There has been a developing political trend recently in Italy for more transparency on the Italian gold and also calls for its ownership and title to be protected against control by outside entities.

In January 2012, Italian politican Rampelli Fabio (co-signed by Marco Marsilio) submitted some written questions to the Italian Ministry of Economy and Finance, a department headed at the time by Mario Monti (Monti was also simultaneously Italian Prime Minister at that time), asking the following questions about the Italian gold (questions 4-14567 : Italian version and English version):

“When and under what agreement or statutory provision were the storage location decisions (regarding New York, London and BIS Switzerland) taken and whether that strategic decision is still considered to serve the interests of Italy?

Who owns the gold reserves held at Palazzo Koch (in Rome) and the gold reserves held at the foreign locations?

Does Italy have full availability to the gold reserves held at the Bank of Italy and at the foreign locations?”

Even though these questions were submitted nearly 5 years ago, the official status of the questions on the parliamentary website still says “In Progress”,  suggesting that they have not been answered by the Ministry of Finance. I can find no other evidence elsewhere either that these questions were ever answered.

Senators visit Palazzo Koch vault

Three Italian senators of the political party Movimento Cinque Stelle visited the Banca d’Italia gold vaults in Rome on 31 March 2014 and are calling for the ownership of the gold to be transferred from the Banca d’Italia to the Italian public so that its control cannot be compromised. See video below of their before and after visit which was broadcast from outside the Palazzo Koch vault in Rome.

These 3 representative (in the above video) are Senator Giuseppe Vacciano, Senator Andrea Cioffi and Senator Francesco Molinari.  I do not have a direct English translation of this video, however, anyone interested can translate this page from Italian,  which was published on 3 April 2014, and features Senator Vacciano explaining the senators’ vault visit.

In his report, Vacciano confirm some interesting facts, such as that the Italian gold belongs to the Banca d’Italia and not the Italian State.  The ownership issue is also confirmed by the Banca d’Italia’s 3 page gold report (see above) which states:

“La proprietà delle riserve ufficiali è assegnata per legge alla Banca d’Italia” – (Ownership of official reserves is assigned by law to the Bank of Italy)

Unusually for a central bank, Banca d’Italia’s share capital is held by a diverse range of Italian banks and other financial institutions as well as by the Italian state

Vaccciano also confirmed that in the vault they saw some South African gold bars, many American gold bars, and “several bearing the Nazi eagle”. And in a similar way to the RAI reporter Alberto Angela, who said in 2010 that he was speechless when viewing the gold in the sacristy, Vacciano says:

from a purely human perspective, we could see with our own eyes a quantity of precious metal that goes beyond an ordinary perception … I must say that arouses feelings that are difficult to explain“.

Italian Citizens

The Italian business community and public appear to be quite aware of the importance of the country’s gold reserves. In May 2013, the World Gold Council conducted a survey of Italian business leaders and citizens which included various questions about the Italian gold reserves. The findings showed that 92% of business leaders and 85% of citizens thought that the Italian gold reserves should play an important role in Italy’s economic recovery. There was very little appetite to sell any of the gold reserves, with only 4% of both citizens and business leaders being in favour of any gold sales. Finally, 61% of the business leaders and 52% of the citizens questioned were in favour of utilising the gold reserves in some way without selling any of them. The World Gold Council interpreted this sentiment as allowing the possibility for a future Italian gold-backed bond to be issued with Italian gold as collateral. The Italian gold could thus play a role similar to that used to collateralise the international loans from West Germany to Italy in the 1970s.

Mario Draghi – Last Word

For now, the last word on the Italian goes to Draghi. Even Mario Draghi, former governor of the Banca d’Italia, and current president of the European Central Bank, has a similar view to the Italian public about not selling the Italian gold. In the video below of a 2013 answer to a question from Sprott’s Tekoa Da Silva, Draghi says that he never thought it wise to sell Italy’s gold since it acts as a ‘reserve of safety’. However, as would be expected from a smoke-and-mirrors central banker, Draghi doesn’t reveal very much beyond generalities, and certainly no details of storage locations or whether the Italian gold comprises gold receivables as well as unencumbered gold.

 

Venezuela’s Gold Reserves – Part 2: From Repatriation to Reactivation

This is Part 2 of a two-part series. Part 1, titled “Venezuela’s Gold Reserves – Part 1: El Oro, El BCV, y Los Bancos de Lingotes“, provided a historical overview of Venezuela’s gold and looked at where the gold, and the claims on gold, were located just prior to repatriation in 2011, especially the gold held abroad.

Part 1 was necessary so as to set the scene for the, in some ways, theatrical gold flights and convoys of Part 2, and to also illustrate that a percentage of Venezuela’s gold (50 tonnes) was retained in the vaults of the Bank of England so as to be available for activation into international gold transactions.

And so, the analysis below covers Venezuela’s actual gold repatriation operations in late 2011 and early 2012, especially the first and last flight. You will see that the first batch of gold bars came in on an Air France cargo flight, which opens up key questions about France and the Banque de France as a source for some of the repatriated gold. You will also see the arrival and unloading of the last flight, a World Airways cargo freighter.

The analysis wraps up with a look at the gold swap discussions between Venezuela and a set of investment banks which culminated in a gold swap being agreed with Citibank. The question then arises as to whether further similar gold swaps are in store for Venezuela’s domestically held monetary gold.

convoy

The Repatriation – Flights and Convoys

The Venezuelan gold repatriation transport operation took just over two months to complete, beginning on 25 November 2011, and winding up on 30 January 2012. During this time, 23 shipments (by air) are said to have arrived in Caracas, with 160 tonnes of gold flown in.

As Banco Central de Venezuela (BCV) governor Nelson Merentes stated in an end of year 2012 report (page 16):

“In 2012, the central bank completed the repatriation of monetary gold , which began in late 2011. This unprecedented process, which reaffirms the sovereignty of the nation, constitutes the largest movement of physical gold in the world market in recent years . A total of 23 gold shipments were moved, totalling 160 tonnes of metal that had been custodied abroad.”

Notwithstanding the fact that the German Bundesbank claims to have quietly and secretively moved 940 tonnes of its gold from the Bank of England in London to its Bundesbank headquarters in Frankfurt between 2000 and 2001, the Venezuelan gold repatriation is still probably the “largest movement of physical gold in the world market” since that time.

merentes car

The first and last shipments of Venezuela’s gold repatriation arrived into Maiquetía Airport (aka Simón Bolívar International Airport) in Venezuela’s capital, Caracas, so the presumption is that the other shipments did also. Both the first and last shipments received huge media coverage in Venezuela and extensive coverage internationally. Given that the Venezuelan State facilitated and encouraged this domestic media coverage, as well as street scenes thronged with Chavez supporters, this is not surprising. The majority of the other shipments after the first and before the last ones got little or no coverage, probably due to security procedures.

Reuters quoted Nelson Merentes on the day of the first shipment arrived as saying that:

“We cannot give exact dates (for when the rest of the bars will arrive) due to questions of security. When we bring the last shipment, the people will learn about it.

The Reuters report also quoted a Venezuelan government source as saying that there would be ‘several’ cargo flights.

“A senior government source involved in transporting the bars, which amount to 90 percent of Venezuela’s gold held abroad, has told Reuters they will be shipped in several cargo flights that will be completed before the end of the year.

The total cost of the operation will be no more than $9 million, the source said, without elaborating.”

The First Shipment (by air) came from France

The gold from the first shipment, which consisted of 5 tonnes of gold, was moved from Maiquetía airport to the central bank vaults in Caracas on Friday 25 November 2011 amid much fanfare and coverage. Although the airport to bank journey happened on 25 November, an article here claims that the “the repatriation of gold reserves began on 23 November”.

In various news footage videos below, which cover the transport of the gold from the airport on 25 November 2011, there are no shots of any aircraft being unloaded, which may suggest that the first shipment did indeed arrive prior to 25 November, possibly on 23 November. The first shipment was flown in using Air France (see below).

In contrast, during the last operation on 30 January 2012, the arrival of the aircraft into the airport played a starring role in proceedings, possibly because the shipments were then being wrapped up and there was little harm in broadcasting the identify of aircraft, which you will see below was a chartered World Airways MD-11 cargo freighter.

The first video below from 25 November 2011 shows black plastic crates (presumably with the gold in them) on pallets which in turn are on trailers, positioned beside a line of armoured cars ready for loading.

Very interestingly, central bank governor Merentes (at 0:22) states that this first shipment of gold came from European countries “via Francia” (by way of France).

This is very odd that the first shipment came from France. Given that the gold was stored at the Bank of England and with the BIS, none of the Venezuelan gold should ever have been in France. And with air charters from Europe, there would be no need to fly into and out of a French airport en route from London to Caracas.

A November 2013 article from Venezuelan newspaper ‘El Nacional’ stated that the first batch of gold had come directly from France:

Los primeros lingotes vinieron de Francia en medio de un operativo denominado Oro Patrio y en el que participaron más de 500 funcionarios.”

The first ingots came from France in the middle of an operation called Golden Homeland and in which over 500 staff participated.”

The most compelling piece of evidence, however, that the first shipment came from France is the fact that the gold was flown into Caracas on Air France, and there were labels on the side of the crates stating this. See screenshot below taken from one of the videos:

Air France - air waybill

This label above shows the ‘Air Waybill No’ of ‘057-53208470′, the ‘Destination’ of CCS (Caracas), and the ‘Total No of Pieces’ – 10, i.e. 10 crates.

See also the below photo of one of the crates, with the same Air Waybill number 057-53208470, after it was loaded into the back of one of the armoured security cars:

Air France labelled crate on pallet

Air France Cargo fleet consists of 2 long-range Boeing 777- 200LRF cargo freighters, registration numbers F-GUOB and F-GUOC. You can see a video of F-GUOC taking off (from another airport) here.

These 777F aircraft have “a maximum payload of 102 tonnes, a total capacity of 37 pallets and a maindeck that can take 3-metre pallets“. The videos below of the first gold shipment, and the video of the last unloading on 30 January 2012, shows these huge 3-metre pallets on the ground and, in the case of the last shipment, being unloaded.

Since the gold in the first shipment was flown from France, this gold may have come from the Banque de France in Paris, which would suggest that the bullion banks and/or the BIS had to resort to sourcing gold from the Banque de France. BNP Paribas was one of the five bullion banks that had a borrowed gold liability to the BCV, so this fact may be relevant. (See a section below about the French connection).

The second Venezuelan video from 25 November 2011 states that gold which was located in US, Canadian, and English banks was being repatriated to Venezuela. This does not mean, however, that the gold flights originated in all or any of these locations. The US, Canada and England just refer to the headquarters of the bullion banks involved in the repatriation.

The third video from 25 November 2011 refers to “foreign banks,” “principally in Europe,” and mainly English banks.

Reuters quoted Merentes as having said that “The gold comes from several European countries.

 

1. Length: 2:26 – Nelson Merentes interview, and gold ready for loading. 25 November 2011

 

2. Length: 2:06 – Armoured cars and convoy getting ready to leave the airport, and then departing the airport. 25 November 2011

 

3. Length 1:53 – Convoy leaves airport and drives to the central bank. 25 November 2011

 

4. Length 11:03 – Air France label is shown beginning at 9:42. This longer video has extended footage of the unloading and loading operation. 25 November 2011

 

The BCV’s 2011 Economic Report (see link above, page 92) states that the first shipment on 25 November 2011 consisted of 5 tonnes of gold. In the media coverage of the first shipment, the exact tonnage of gold involved was not stated beyond the fact that  “Nelson Merentes said a little over 300 million dollars was brought in the first batch of gold that came to the country on Friday.”

At a price of $1,688 per ounce on 25 November 2011, that would be roughly 5.5 tonnes. Whether it was 5 tonnes of 5.5 tonnes is not that important. With each of the crates holding 500 kgs or 0.5 tonnes, that would be 10 – 11 crates in the first shipment. There appear to have been 10 crates given that’s what it said on the crate labels and that’s what the BCV maintain their were.

Once the gold was loaded up into the fleet of security vans, a huge convoy of military vehicles and personnel (said to be between 400 – 500 personnel) accompanied the vans out from the airport (by the ocean) and around the mountain to the central bank building in downtown Caracas, on a route, some of which was lined with Chavez’ supporters, especially where they had congregated near the bank’s entrance.

 As mentioned, there was little coverage after the first shipment, although a local media article referred to a second shipment arriving from Europe on Tuesday 6 December 2011. After this, the media didn’t really cover the repatriation until the last shipment arrived by air on Monday 30 January 2012.

repatriation gold caracas

The Last Shipment – The Final Flight of MD-11, N275WA

The final shipment arrived into Maiquetía – Simón Bolívar airport on Monday 30 January 2012 consisting of 14 tonnes of gold in 28 boxes. The novel significance of the media coverage on this day was that news crews were allowed to film the airplane taxiing into the landing area and unloading its cargo.

The arriving aircraft was a three-engine long-range McDonnell Douglas MD-11 CF (convertible freighter), registration number N275WA, serial number MSN 48631, registered to World Airways. You can see the fleet number (nose code) of ‘275’ above the front (nose) wheel in the photo below.

flight N275WA

Six of these MD-11 CFs were built and World Airways were flying two of them at this time. Ironically, the parent company of World Airways, called Global Aviation Holdings Inc, filed for chapter 11 bankruptcy protection on 5 February 2012, six days after N275WA had delivered the last shipment of Venezuela’s gold to Caracas. Interestingly, Global Aviation Holdings was also “the largest commercial provider of charter air transportation for the US military”.

Other photos of World Airways’ N275WA from around the world can be seen here and here. N275WA, which had been converted into a freighter in 2002, went out of service and into storage in July 2012. Global Aviation Holdings again entered bankruptcy in November 2013, after which time World Airways was shut down. This explains why one of the MD-11 captain for World Airways (possibly captaining some of the gold flights) left World Airways in March 2014.

See video below of aircraft N275WA arriving into Caracas on 30 November 2012

 

5. Length 1:53 – N275WA arriving and unloading its cargo on 30 November 2012

 

6. Length 3:27 – This is a well produced promotional video from “Servicio Pan Americano de Protección”, the company that transported the gold from the airport to the bank. The video shows the entire unloading and loading operation from 30 January 2012 and is well worth watching.

 

An MD-11 CF freighter can transport 26 large pallets and has a maximum payload of 89,000 kgs (or 89 metric tonnes). Technically, Venezuela could have had all of its repatriated gold flown in on a lot less than 23 flights. Insurance and other risk management considerations probably dictated the diversification requirement, as well as the gold possibly only becoming available in piecemeal fashion from November 2011 to January 2012.

BCV address and lot 20

If there were indeed 23 flights over 2 months totalling 160/161 tonnes, each flight could have flown in 7 tonnes of gold, since this adds up to 161 tonnes (23 * 7). Given that the last batch was said to be 14 tonnes and the first batch 5 tonnes, each of the other 21 flights could have carried a batch of about 6.70 tonnes.

However, a number of batches could have arrived on the same flight, such as the last flight which is said to have flown 14 tonnes. Video footage from the last shipment day, 30 January 2012, shows a crate with lot number ’20’ displayed on it – See above screen shot. So there were at least 20 ‘lots’. Overall, there would have been about 360 crates.

Given that Venezuela was able to repatriate 160 tonnes of gold in cargo flights over the Atlantic Ocean from Europe within 2 months, this proves that the German Bundesbank could have easily repatriated its intended target of 300 tonnes of gold from New York in 2013, by flying the entire 300 tonnes over to Frankfurt within 4 months. Venezuela’s successful operation proves that the Bundesbank’s seven-year repatriation plan is laughable, and that the excuses coming out of Frankfurt are hiding something far more critical to the Bundesbank and the Federal Reserve and US Treasury than logistical flight details.

 

The French Connection – Banque de France

It’s not clear where the last gold shipment on World Airways N275WA aircraft originated from, although Nelson Merentes made the general statement for the overall operation that “the gold comes from several European countries.

However, in the case of the first shipment on Air France from France, there are not that many places where the flight could have come from, the main suspect being from Charles de Gaulle airport (CDG) in Paris, where Air France has one of its two main cargo hubs (the other hub being Amsterdam – i.e. these are Air France-KLM’s two cargo hubs). This then also makes a good case for the first shipment of gold having come from the Banque de France. If this was the case, then it meant that bullion banks and/or the BIS needed to source gold from the Banque de France. Would this have been feasible? Yes.

A May 2012 article from CentralBanking.com (subscription only) quoted George Milling-Stanley, independent gold consultant, and formerly of the World Gold Council, who had some interesting insights into the role of the Banque de France in being able to mobilise gold:

‘”Gold stored at the Bank of England vaults … can easily be mobilised into the market via trading strategies, or posted as collateral for a currency loan. The London vaults of JPMorgan, HSBC, and other bullion dealing investment banks have a similar status,” says Milling-Stanley.’

‘Of the Banque de France, Milling-Stanley says it has “recently become more active in this space [mobilising gold into the market], acting primarily as an interface between the Bank for International Settlements in Basel [BIS] and commercial banks requiring dollar liquidity. These commercial banks are primarily located in Europe, especially in France”.’

Milling-Stanley’s reference to the Banque de France acting as an interface to the BIS and commercial banks in Europe may be implying that the Banque de France was a party to the 2010 BIS gold swaps which involved 10 commercial banks including BNP Paribas, Societe Generale and HSBC.

In July 2010 the FT said that “three big banks – HSBC, Société Générale and BNP Paribas – were among more than 10 based in Europe that swapped gold with the Bank for International Settlements in a series of unusual deals.” Note that BNP Paribas and HSBC are two of the five bullion banks with which the BCV had outstanding gold loans to in August 2011.

Despite the BIS’ cryptic, short, and obscure explanation that in these swaps, the commercial banks provided gold to the BIS in return for US dollar liquidity, it could be the case that commercial bullion banks borrowed central bank gold held at the Banque de France via financing from the BIS as part of a tripartite transaction.

Under this type of tripartite transaction, which was first proposed by Adrian Douglas, a Venezuelan – Banque de France version would have involved the Banque de France arranging gold lending to the bullion banks who then transfer the title of this gold to the BIS. The BIS transfers US dollars to the bullion banks who then either transfer this currency to the Banque de France, or owe a cash obligation to the Banque de France. The gold is recorded in the name of the BIS but is actually kept in the Banque de France until required by the bullion banks who borrowed it, then, when needed, gold is withdrawn by the bullion banks and used to pay back central bank gold lenders such as Venezuela’s BCV. Either French gold or Banque de France customer gold (such as IMF gold in Paris) could have been used in such a transaction. This would explain why Venezuela received crates of gold flown in to Caracas by Air France cargo.

The FT also noted in its 2010 BIS gold swap article that “In a short note in its annual report, published at the end of June, the BIS said it had taken 346 tonnes of gold in exchange for foreign currency in “swap operations” in the financial year to March 31.” (2010)

This 346 tonne BIS gold swap figure was said to have continued to grow after March 2010 and was estimated to be as high as 380 tonnes by July 2010.

Venezuela’s 50 tonnes of gold at the Bank of England

At the time of the arrival of the last gold shipment to Caracas in January 2012, Nelson Merentes was reported to have noted that “gold stored in BCV will reach 86% of the total while the rest, about 50 tonnes, will stay in the banks in which the Republic needs to maintain open accounts for international financial operations.” In August 2011, Chavez had referred to wanting to reach a target of 90% of the gold being stored in Caracas, but 86% is quite close.

The 50 ton amount remaining at the Bank of England was possibly chosen as a ’round number’ tonnage by the BCV and its international advisors. From the above bar/ingot total calculations, it seems that there were 4,089 good delivery bars left in London. This 50 tonnes, left in situ in London in January 2012, was to play a far greater role in Venezuela’s international financing arrangements than many envisaged at the time.

 

 

Maduro

The Reactivation of Venezuela’s Gold Reserves

The death of Venezuelan president Hugo Chavez in March 2013, and the election of Nicolás Maduro as his successor marked a re-establishment of the relationship between the international investment banks and the Venezuelan central bank.

Recall that in August 2011 when Chavez called for the repatriation of Venezuela’s gold reserves, he also called for the transfer of the BCV’s operating reserves away from US and European banks. These operating reserves, such as cash deposits and short-term fixed interest investments, had been invested with the BIS (BPI in Spanish), Barclays, JP Morgan, BNP Paribas, Deutsche Bank, the FRB (repos), the World Bank and Bladex (the Panamanian based LatAm trade bank). Sight deposits were with JP Morgan, time deposits with the other commercial banks and the BIS, and it negotiable (fixed rate) instruments with the BIS (FIXBIS). See “Proposed Relocation of the International Reserves“.

Operating Reserves August 2011

Prior to the Chavez about-turn, Venezuela had cultivated close working relationships with some of the biggest global investment banks (or vice-versa), and seemed to be especially fond of Wall Street banks. This is illustrated, obviously, by the manner in which it used the investment banks to invest both the operating and gold components of its international reserves, where the names involved read like a who’s who of investment banking giants. But as important as the deposit taking banks appear to be to Venezuela, the advisory and corporate finance relationships look to be as equally important.

According to the Venezuelan media, in the early 2000s, JP Morgan was said to be very close to the Venezuelan finance ministry and finance minister Alejandro Dopazo, and Credit Suisse New York was also said to have had a close relationship with the government.

The use of Venezuelan gold as loan collateral was also not something new to the Maduro years. A Venezuelan media report from August 2011 claims that a few years prior to 2011, Venezuela was involved in financing discussions with New York based investment banks where the banks raised the issue of gold collateral as a means of lowering the required coupon in the financing strategies and products being discussed. These meetings were said to have taken place in the New York offices of Francisco Illaramendi, former manager of the PDVSA pension funds. According to the media report, Deutsche Bank, Credit Suisse and Barclays separately proposed that in order to  “avoid the penalty of high coupons, Venezuela could place ‘equivalent in gold in the banks’ to support the issue”, with Credit Suisse proposing that Venezuelan gold be deposited with it in London and Barclays proposing likewise.

Since the Maduro presidency, the investment banks, and especially the Wall Street based banks, have been actively involved again in Venezuela’s financial affairs. Late last year, in December 2014, Venezuela sold Goldman Sachs a $4 billion credit owed to Venezuela by the Dominican Republic which was outstanding under the Petrocaribe arrangement. Petrocaribe is a regional oil programme by which Venezuela supplies oil to other countries in the region.

Lazard, the French investment bank, is a financial advisor to the state of Venezuela, and last year Lazard was chosen by Venezuela to handle the sale of Citgo Petroleum on behalf of the Venezuelan state owned oil company PDVSA (Petróleos de Venezuela S.A.). Citgo is a US subsidiary of PVDSA. This sale didn’t go ahead but then Deutsche Bank’s New York office was chosen in January 2014 to handle a bond and loan capital raising exercise for Citgo and advisory services for PDVSA. Deutsche had previously worked with PDVSA.

Bank of America-Merrill Lynch also now has a close relationship with the Venezuelan central bank and the Venezuelan government in the form of its chief economist for the Andean region, Francisco Rodríguez. Rodríguez, was chief economist to the National Assembly of Venezuela from 2000-2004, and joined Bank of America in 2011. More about Rodríguez below.

outriders

Goldman Gold Swap Plan

The first sign that Venezuela’s gold was back in the sights of the investment banks came in November 2013, when it was reported that the BCV (and the Venezuelan government) were in negotiations with Goldman Sachs about the arrangement of a gold exchange, in other words, a gold – US dollar swap with gold as collateral. A lot of the reporting at the time did not provide very much detail about this swap, so here are some summary details of the Goldman gold swap.

The gold swap was to be between the Central Bank of Venezuela (BCV) and Goldman Sachs International in London. Eudomar Tovar was BCV president at that time. The swap would involve Venezuela swapping gold from it’s reserves with Goldman Sachs international in exchange for a US dollar loan, with the gold serving as collateral for the loan.

The swap was to be for a four-year duration between 2016 and 2020 (although another media source said it was to be for a seven-year duration from late 2013 until late 2020). The swap was to be for 1.45 million ounces of gold (or nearly 1.45 million ounces according to one media source) which was expected to be deposited at the Bank of England and transferred to Goldman Sachs International at an agreed time. At the time, 1.45m ozs of gold was valued at over $1.85 billion at the then market price of $1,282 per ounce. Venezuela would also pay an annual interest rate of 8% on the loan.

BCV Goldman Adar gold swap

The above screenshot is from a document here.

If the price of gold fell over the life of the swap, the BCV would need to deposit more gold into a margin account. If the price of gold rose, Goldman Sachs International would be required to deposit more currency into a margin account.  At the swap’s maturity, the contributions made by each party into the margin accounts would be returned to the respective parties.

The swap was said to contain a built-in hedge that would benefit Goldman, which reflected a 10% adjustment of the value of the swap if the gold price fell. The gold swap was said to be tradable on the market. The terms of the swap allowed the BCV to repay the loan and keep the gold, but if the BCV didnt repay the loan, the gold would go Goldman. One report said that the gold would continue to appear on the BCV’s balance sheet throughout the term of the swap.

The BCV had contracted Adar Capital Partners (of which Diego Marynberg is a director), as a consultant to design the swap with Goldman Sachs International. Adar Capital Partners would received 0.25% per annum of the value of the gold in the contract at beginning of each year over the life of the contract.

Any dispute between the parties would  be resolved in English courts. Some media articles on the BCV-Goldman gold swap can be viewed in Spanish here and here and here.

Given that there were said to be 16,908 of Venezuela’s gold bars held abroad, of which 12,819 bars were repatriated, this left 4,089 of Venezuela’s bars in the vaults of the Bank of England from early 2012. These 4,089 bars are roughly equal to 51 tonnes, or 1.635 million ounces. It looks like the Goldman swap factored in a 10% adjustment on 50 tonnes of gold (roughly 1,607,500 ozs) at the Bank of England,  to arrive at 1.45 million ounces (i.e. 1,607,500 * 0.9 = 1,446,750 ozs). This is the 10% adjustment referred to above. So Goldman would have had an extra buffer built-in as protection against a downward gold price movement.

The discussion of the swap at the time in November 2013 did not reveal what US dollar amount the BCV was to receive from Goldman in exchange for transferring 1.45 million ozs of gold to Goldman. i.e. it did not reveal the intended discount that the BCV was expected to take on gold with a US dollar value of $1.85 billion.

The BCV maintains that this gold swap with Goldman Sachs International did not go ahead, despite what look like detailed terms and negotiations. But the framework of the gold swap discussed with Goldman Sachs looks very similar to the swap structure that was ultimately chosen in April 2015, so it appears that the BCV re-used in some way the plan that they had drawn up with Adar Capital Partners and Goldman Sachs.

Goldman and Ecuador

Where Goldman did get a Latin American gold swap out the door was Ecuador, approximately six months after its negotiations with Venezuela hit a wall.

In early June 2014, it was announced that Ecuador had agreed to swap 1,165 bars of gold as collateral with Goldman, and in return Goldman agreed to provide Ecuador with “instruments of high security and liquidity” i.e. a loan. This gold swap was for 3 years, from 2014 to 2017 after which it will be reversed and Ecuador will get its gold back and pay the 2017 gold price to Goldman.

Rodríguez, Bank of America and the BCV vault visit

In September 2014, there was a rather unusual story from Bloomberg in which Francisco Rodríguez, the Bank of America economist (see above), related the fact that he had been allowed a rare visit into the Venezuelan central bank gold vault to view the gold bars. Rodríguez maintains that he was at a routine meeting in the BCV headquarters when his request to see the gold was granted, and that he and four other people who had attended the meeting were brought down to the underground vault in which all of the gold was stacked in “five small cells that were not even full to the top”, and that the bars were of “different types”.

While Rodríguez is said to be close to the BCV and the Venezuelan government, it still seems odd that at a routine meeting, a Bank of America representative (and some unnamed others) would pop down to see the gold in the vault, while external attendees at countless other meetings at the BCV’s headquarters would not do this tour. Could it he that the Bank of America was running the slide ruler over the Venezuelan gold in preparation for a loan of their own to the Venezuelan State?

Role Call Recall

At this point its worth recalling some of the banks that were interacting with the Venezuelan state and finance ministry, and/or interacting with the BCV (not including the gold deposits and gold lending).

In 2011, Venezuela’s operating reserves were invested with Barclays, JP Morgan, BNP Paribas and Deutsche Bank. Earlier in the 2000s, JP Morgan, Credit Suisse and Deutsche were said to be close to or working with Venezuela on various financing matters.

It was also said that a few years prior to 2011, Barclays, Credit Suisse and Deutsche, at meetings in New York held in the PDVSA offices, had proposed that Venezuela could put up gold as collateral so as to lower coupons on unspecified products.

Then there was Goldman Sachs purchasing outstanding debt that the Dominican Republic owed to Venezuela. Then there were Lazard and Deutsche advising the PDVSA and/or Citgo in the US. Finally there was Goldman Sachs negotiating a gold swap with Venezuela in 2013, and Bank of America taking a look at the gold in the BCV vaults in 2014.

 

Investment Bank beauty parade – March 2015

The topic of Venezuelan gold swaps was again raised on 10 March 2015 when Reuters reported that the BCV was said to be in advanced discussions with a group of Wall Street banks about conducting a 4 year gold swap for 1.4 milion ozs of gold, and that the swap operation would be agreed by the end of April. Reuters reported that the discussions involved at least two institutions, namely “Bank of America and Credit Suisse”.

At the time, the swap was said to involve an exchange of 1.4 million ozs (43.5 tonnes) of Venezuelan gold for cash, on which interest would be paid, and that Venezuela had the option of re-purchasing the gold after the expiry of the 4 year term. Interestingly, it was also said that Venezuela “would most likely be able to maintain the gold as part of its foreign currency reserves” during the swap, i.e. double-counting of gold reserves.

Amid the publicity about these March 2015 swap discussions, confusion arose as to whether the Goldman Sachs gold swap had happened or not, but the BCV stated generally that although it had “received proposals to carry out a similar operation” in late 2013, it “denied any agreements had been completed.“

Local media went further, and named additional investment bank names said to be involved in the pitch to secure the gold swap deal. On 5 March 2015, Nelson Bocaranda Sardi claimed in Venezuelan newspaper El Univeral that there was a pitch competition (implied to be for effect) by Credit Suisse, Goldman, BTGP Brazilian, Deutsche, Bank of America and Citibank, and that it was really a three horse race in which Deutsche Bank, Bank of America and Citibank would be chosen for the gold swap, but for $500 million each. Furthermore, Sardi said that Venezuela was paying $70 million to each bank as a risk premium. El Universal was previously said to be critical of Chavez, but may now not be so critical of Maduro.

On 12 March, on a web site of an organisation called Aporrea, Fresia Ipinza retorted (possibly with more up-to-date information) that rumours were saying that the gold swap would be over 4 years for 1.4 million ozs, and that allegedly Bank of America and Credit Suisse were involved. Aporrea were known to be Chavez supporters.

So, its very possible that the list of investment banks pitching to Venezuela for the gold swap were as follows: Bank of America, Credit Suisse, Citibank, Deutsche Bank, Goldman Sachs and BTGP. BTGP refers to BTG Pactual, a Brazilian investment bank.

Citigroup Rescue

 

The Citibank Gold Swap

In the last week of April 2015, it emerged that Citibank had exclusively won the mandate for the gold swap with Venezuela. It was reported that Citi was chosen from a group of ‘five’ banks that had pitched.

A combination of sources (see links) yield the following details about the gold swap with Citi. The details are said to be derived from newspaper ‘El Nacional’ and also a former director of the BCV, and also from Reuters.

Venezuela (via the BCV) will put up 1.4 million ozs of gold as collateral in exchange for a $1 billion loan of foreign currency from Citibank. Since 1.4 million ozs of gold, valued at the late April 2015 price of $1,200, is roughly $1.68 billion, then Venezuela is having to accept a near 40% discount on the specified gold collateral. Venezuela also pays interest on the loan at between 6% and 7% per annum.

The swap is for a 4 year duration, and Venezuela will have the “right of first refusal” to re-purchase the gold after 4 years. The 1.4 million ozs of gold (43.5 tonnes and just less than 3,500 Good Delivery bars equivalent) will be held at the vaults of the Bank of England. If Venezuela does not pay the interest payments on time, Citibank can gain control of the gold. The loan was expected to be for $1.5 billion but its unclear why this changed, but probably would have something to do with a bigger haircut being imposed.

According to ‘Venezuela Analysis‘ the “current value [of the gold] will continue to appear on the Central Bank’s balance sheet – an advantage that Goldman Sachs denied the country in earlier talks.” ‘Venezuela Analysis’ also said that some sources think Citibank holds title to the gold, while other say Venezuela holds title. Another relevant newspaper link is here.

None of the media commentary mentioned Adar Capital Partners Ltd in conjunction with the Citibank swap but its possible that this company could have been involved in the more recent swap negotiations, given that it was involved in the late 2013 gold swap negotiations involving Goldman Sachs and a lot of the swap terms are similar. On the other hand, the BCV could have just taken its gold swap file on the Goldman proposal out of the top drawer and reused the Goldman – Adar plan.

Why might Venezuela need a loan now?

Does Venezuela really need extra foreign currency now? In some ways, yes. Venezuela’s international reserves keep falling and as Nathan Crooks of Bloomberg said recently, reserves are now under $18.8 billion and at the lowest level since October 2003.

Venezuela’s international reserves fell by about US$2 billion during April from a level of $20.8 billion at the beginning of April. Lower oil prices have impacted the country’s ability to comfortably meet principal and interest payments on foreign bond borrowings and  for financing imports. Inflation in Venezuela is running high, and there are reports of a shortage of essential goods and an impact on some public services. In short, the economy is contracting.

Rodriguez, the Bank of America economist, said that the gold swap was the ‘logical’ course of action for Venezuela to take. As to why Venezuela can’t negotiate oil swap deals in the current environment or get more financing from the BRICS or China, that is probably more of an international political issue and a reputational issue with the international capital markets.

 

Maria Corina Machado

On 12 March 2015, Maria Corina Machado, a deputy in the Venezuelan National Assembly and political leader of the opposition party, sent an offical letter to Nelson Merentes, president of the BCV, asking the following 5 questions about the gold swap, which at the time, in early March, was being rumoured.

Questions 1 and 2 are quite standard and to be expected in light of the general rumours about the swap, but questions 3, 4, and 5 seem to suggest that Machado had heard something about the negotiations that made her think that the size of the swap was going to be far larger ($2.6 billion), and that there would be a ‘second operation’ with an even larger swap, and that this would require moving gold out of Venezuela again. See the 5 questions below:

  1. ¿Está todo el oro de las reservas venezolanas en las bóvedas del BCV de Venezuela tal como afirmó el ex presidente el Hugo Chavéz 17 de agusto 2011, cuando ordenó “repatriacion de nuestro oro”?

Are all of Venezuela’s gold reserves in the vaults of the Central Bank of Venezuela as stated by the former president Hugo Chavéz on 17 agusto 2011, when he ordered “repatriation of our gold”?

2. ¿Está el BCV en negociación con la banca extranjera para la venta o empeño del oro monetario?

Is the BCV in negotiations with foreign banks for the sale or pawning of monetary gold?

3. ¿Es cierto que en la operacion de empeño del oro actualmente en discusión se pretende disponer de oro por un valor de mercado de 2,6 mil millones US$?
¿Esto representaría comprometer casi el 20% del total de reservas en oro de la Républica en esta primera operación?

Is it true that in the operation to pawn gold currently under discussion, it is intended to dispose of gold with a market value of US$ 2.6 billion?
Does this represent / involve almost the 20% of the total gold reserves of the Republic, in this first operation?

4. ¿Es cierto que estarían negociando una segunda operacion de empeño similar a la anterior por un monto aun mayor?

Is it true that they would be negotiating a second operation similar to the previous one for an even greater amount?

5. ¿Estas operaciones implican sacar el oro de las bóvedas del BCV y regresarlas al exterior?

Do these operations involve removing the gold from the vaults of the BCV and returning it abroad?

In the letter, Machado claimed that “the [gold swap] exchange would jeopardize the achievement of economic stability” and “would compromise the future of the Republic and the welfare of millions of Venezuelans“.

She also called for the monetary gold bullion held by the BCV and the exact amount held abroad  to be “certified by an independent and trusted international body”.

There does not seem to be any publicly available response from the central bank to Machado’s letter, so its unclear as to which answers, if any, Machado received from the BCV. However, given the deteriorating state of Venezuela’s international finances and international reserves at the present time, it may be sooner rather than later before Venezuelan gold could be on the move again out of the country.

One thing is for sure. Gold leaving Venezuela on a flight back to London, New York, or elsewhere, will not get the fanfare and celebration that was accompanied by the same gold’s arrival into Caracas a few short years ago.

 

Venezuela’s Gold Reserves – Part 1: El Oro, El BCV, y Los Bancos de Lingotes

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?

repatriacion del oro armoured-cars

 

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.

In March 2010, the BCV published a very useful Powerpoint presentation (in Spanish) explaining the history of the Bank’s gold reserves and how it’s gold had been accumulated since 1940. Some additional history about the Venezuelan gold is also contained in a short Venezuelan Government publication also in Spanish (Venezuela oro encarteasamblea Reservas Int).

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).

Distribution of Venezuelan gold in 1986 and 1992

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.

Eagles Liberty Indian head

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_for_settlements

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, The Bank of England, The Bank 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 ‘under earmark‘ (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

Distribution of Venezuelan monetary gold as at 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.

BoE Gold and forklift

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 five bullion banks. A total of 365.82 tonnes, i.e. 9.53 tonnes more than in 1992.

Bullion-Banks

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.

Chavez sign

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.

In late August 2011, Nelson Merentes, president of the BCV, announced that Venezuela would be purchasing 7 additional tonnes of monetary gold. This would have brought the total holdings up to 373 tonnes at the end of 2011.

Then, in the BCV’s end of year 2012 report (page 16) it was announced that:

“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.”

However, in October 2012, the FT reported that:

“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 [2011].”

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.

 

gunners

Delayed Repatriation?

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 BullionStar Chart 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.