On 29 January 2018, the Commodity Futures Trading Commission (CFTC) Division of Enforcement together with the Criminal Division of the US Department of Justice and the FBI announced criminal and civil enforcement actions against 3 global investment banks and 5 traders for involvement in trade spoofing in precious metals futures contracts on the US-based Commodity Exchange (COMEX). COMEX is by far the largest and most active futures exchange in the world for trading precious metals futures including gold futures contracts and silver futures contracts.
The CFTC is bringing the charges under what it calls “commodities fraud and spoofing schemes“. Spoofing of orders is illegal under the US Commodity Exchange Act. The 3 banks in question are Deutsche Bank, UBS, and HSBC. As part of the CFTC’s prosecution, Deutsche Bank is being fined US$ 30 million, UBS US$ 15 million, and HSBC US$ 1.6 million.
The CFTC’s Order against the banks maintains that from at least February 2008 to at least September 2014, Deutsche Bank traders were involved in a scheme to manipulate precious metals futures prices by spoofing orders for those futures contracts, and also by extension that this spoofing triggered customer stop-loss orders.
Similarly, the CFTC Order says that UBS traders on the UBS precious metals spot trading desk were involved in spoofing orders in gold futures and silver futures contracts from January 2008 to at least December 2013, and likewise triggering customer stop-loss orders.
In the case of HSBC, the CFTC says that HSBC, through its New York office, spoofed orders in gold futures and other precious metals. However, the CFTC Order does not specify the period under which HSBC is accused of engaging in such spoofing. This may be because, according to the CFTC, HSBC cooperated during the CFTC’s investigation and offered to settle. But overall, the spoofing by one or more of the named banks was said to have run from January 2008 to at least September 2014.
As part of the process, the CFTC also announced civil enforcement actions against precious metals traders Andre Flotron formerly of UBS, and James Vorley and Cedric Chanu formerly of Deutsche Bank for what the CFTC describes as “spoofing and engaging in a manipulative and deceptive scheme in the precious metals futures market“.
According to the Department of Justice (DoJ) press release on the matter, Vorley (a UK citizen) and Chanu (a French citizen) are being charged in a criminal complaint in the Northern District of Illinois court with “conspiracy, wire fraud, commodities fraud, and spoofing offenses in connection with executing a scheme to defraud involving both solo and coordinated spoofing on the COMEX“. During that time, Vorley was based in London with Deutsche bank and Chanu was based in London and Singapore with Deutsche Bank.
Flotron is charged in an indictment in the District of Connecticut for “conspiracy to commit spoofing, wire fraud, and commodities fraud” during the time when he worked at UBS as a precious metals trader on the UBS trading desks in Zürich, Switzerland, and Stamford, Connecticut USA.
The DoJ statement also names Edward Bases and John Pacilio, and says that Bases and Pacilio are charged in a criminal complaint with “commodities fraud in connection with an alleged scheme to engage in both solo and coordinated spoofing on the COMEX“. Bases was at Deutsche Bank until June 2010 at which point he moved to a unit of Merrill Lynch. Pacilio worked for a unit of Merrill Lynch during 2010 and 2011 when some of his trade spoofing is alleged to have taken place.
Note that according to the DoJ “a complaint, information, or indictment is merely an allegation, and all defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law“.
For an excellent explanation of some of the spoofing activities that these traders are accused of have engaged in, please see the recent article ‘US Gold & Silver Futures Markets: “Easy” Targets‘ by specialist researcher Allan Flynn posted on the BullionStar website and on his own ‘COMEX We have a Problem’ website here.
Spot, Fixes and Futures in the Gold and Silver Markets
While gold and silver futures trading is one side of the wholesale precious metals markets, it is not the full picture, because as well as COMEX, the over-the-counter (OTC) London Gold and Silver Markets are key gold and silver trading venues for these same investment banks, as well as key components of gold and silver price determination. And central to the London Gold Market and London Silver Market are the daily fixing auctions for gold and silver.
The investment bank precious metals traders who trade gold and silver in the wholesale market do so not just through exchange traded futures contracts or OTC contracts, but both. And they constantly trade across the London and COMEX ‘venues’ at the same time. In both gold and silver, predominant price discovery for the international gold price and for the international silver price occurs in the London OTC Market and on COMEX.
Price movements in one location, for example on COMEX futures, get instantly reflected in the London OTC spot quotes, and vice versa. Therefore price quotes in the London market, including opening prices and round prices for the London daily Fixings can be influenced by moving the futures prices. For example, if there is collusion among traders to push the futures prices lower so as to benefit other traders who have positions based on Fixing levels, this can be done by the trader from one bank pushing the futures price lower, while a trader at a second bank benefits from this movement in terms of his exposure to the Fixing price which has also moved lower. Such price movements are documented in the ‘Final Notice’ that the UK Financial Conduct Authority (FCA) levied against Barclays Bank and one of its precious metals traders in May 2014 (See below for details).
As highlighted below, the majority of the banks mentioned in the CFTC fines were also central to these gold and silver fixings, and astoundingly one of the traders mentioned above and subject to the CFTC and DoJ actions, James Vorley, was even a director of both of the private companies that oversaw the London Gold and Silver Fixings.
With the CFTC / DoJ fines, complaints and indictments against the banks and their traders for manipulating gold and silver futures prices now in the public arena, the question of manipulation of the London Gold and Silver fixing auctions now comes back in focus, and the question now needs to be asked – where are the regulators in investigating (and perhaps prosecuting) banks and traders for gold and silver fixings manipulation?
Because even a superficial look at the banks and traders, the trading desks and their operations, the trader chat room transcripts, and the connections between the futures and fixings at the time of the fixings should give even the most dullard regulators and prosecutors pause for thought.
Deutsche Bank and HSBC – New York Futures and London Fixings
As a reminder, the London Silver Fixings were a daily auction of (paper) silver at midday in London that operated up until August 2014 when they were replaced by the LBMA Silver Price auction. The London Gold Fixings were a twice daily auction of (paper) gold at 10:30 am and 3:00 pm in London that operated up until March 2015 when they were replaced by the LBMA Gold Price auction.
The London Silver Fixings were administered by a private company called London Silver Market Fixing Ltd (LSMFL) whose three members were Deutsche Bank, HSBC and the Bank of Nova Scotia. Deutsche Bank, HSBC and Bank of Nova Scotia were also the only 3 entities allowed to take directly participate in the silver fixings, and each had become a member of the silver fixings by acquiring one of the 3 traditional companies that had run the fixings – ScotiaBank acquired Mocatta in 1997, Deutsche acquired the old Sharps Pixley in 1993, and HSBC had acquired Samuel Montagu and rebranded as HSBC during its 1990s reorganisation.
The London Gold Fixings were administered by a private company called London Gold Market Fixing Ltd (LSMFL) which had 5 members, namely Deutsche Bank, HSBC, Bank of Nova Scotia, Barclays, and Societe Generale (SocGen). Only these 5 banks were allowed to directly participate in the gold fixings. These 5 banks were also the only banks in the gold fixings from 2004 all the way to 2014.
So from “January 2008 to at least September 2014“, the period stipulated by the CFTC that covers manipulation of gold and silver futures, the same banks, i.e. Deutsche Bank and HSBC, were at all times active members of the daily gold and silver fixings in London.
Even more amazingly, James Vorley, the Deutsche Bank trader who is the subject of the CFTC / DoJ accusation of “conspiracy, wire fraud, commodities fraud, and spoofing offenses” on COMEX was a Director of both London Silver Market Fixing Ltd and London Gold Market Fixing Ltd from September 2009 until May 2014, which is all the way through the period of ‘at least February 2008 to at least September 2014’, when Deutsche Bank precious metals traders were involved in a scheme to manipulate precious metals futures prices by spoofing orders for those futures contracts. You couldn’t make this up!
Vorley, along with Deutsche’s Kevin Rodgers resigned from the London Gold and Silver Market fixing companies in May 2014, when Deutsche Bank dropped out of the daily gold and silver fixing auctions. Matthew Keen of Deutsche Bank had previously resigned as a director of the gold and silver fixing companies in January 2014 when he left the bank and was replaced by Rodgers who was Global Head of Foreign Exchange at Deutsche Bank at that time. But curiously, Rodgers also left Deutsche at the end of April 2014.
There is plenty written elsewhere on how the LBMA maintained its stranglehold over the London gold and Silver reference price benchmarks when the old tarnished fixings were no longer viable and the bullion banks running those fixings had to quickly pretend to distance themselves from the fixing while at the same time maintaining total control over the new versions of the auctions. But in summary, in August 2014, when the new LBMA Silver Price auction was launched by the LBMA with just 3 bank members, HSBC and Bank of Nova Scotia continued as 2 of these members. When the LBMA Gold Price auction was launched in March 2015, the existing incumbents of the old Gold Fixings namely Barclays, HSBC, Bank of Nova Scotia and SocGen, rejoined the new auction along with its new members, UBS and Goldman Sachs.
Barclays Mini-Puke: Gaming the Gold Fixing
In May 2014, the UK Financial Conduct Authority (FCA) fined Barclays Bank £26 million for systems and controls failings and conflicts of interests in relation to the London Gold Fixing auctions of which it was one of the 5 bullion bank participants. According to the FCA, these failings persisted from 2004 (when Barclays joined the fixings) until 2013. The year 2004 was also when the gold and silver fixings stopped being conducted in a room in Rothschilds offices and began to be conducted remotely.
As part of the May 2014 fines of Barclays, the FCA also fined Daniel Plunkett, one of the Barclays London-based precious metals traders, £95,000. While the fine for Plunkett was specifically to penalise his placement and cancellation of orders which were intended to manipulate prices within the rounds of the fixing, the commentary supplied by the FCA on the case is interesting in that it shows how gold futures price movements external to the fixings also very much influenced the fixing round prices during the auction that the FCA penalised Plunkett for.
At the start of the 28 June 2012 Gold Fixing at 3:00 p.m., the Chairman proposed an opening price of USD1,562.00. However, the proposed price quickly dropped to USD1,556.00, following a drop in the price of August COMEX Gold Futures (which was caused by significant selling in the August COMEX Gold Futures market, independent of Barclays and Mr Plunkett).
You can see here the interactions and influences that the COMEX gold futures prices movements had on the opening price that the Gold Fixing Chairman proposed to the begin the auction with. And now that we know there was collusion between the various precious metals traders across the bullion banks, it is not difficult to accept that the traders from one bank could be moving the futures lower to not only help themselves but as a favour to precious metals traders at other cartel banks that were also involved in the collusion schemes.
Banging the Fixes – Chat Room Transcripts from Class Action Suits
But there is also direct evidence of trader collusion to manipulate prices in the London gold and silver fixings in the form of trader chat room transcripts. This is not speculation, it is fact. Facts that have been documented in class action proceedings in the New York courts brought by plaintiffs against the bank member of the London Gold and Silver Market Fixing companies.
Again we turn to Allan Flynn, who was probably first to call attention to the manipulation of the silver market by these same banks with his extensive and succinct coverage of the evidence from the New York class action suits in his 8 December 2016 article ‘How to Trigger a Silver Avalanche by a Pebble: “Smash(ed) it Good”‘ posted on the BullionStar website and on Allan’s website here, and in his follow-up article from 14 December 2016 titled “When Gold Pops 1430 We Whack It“, posted on his website and on the ZeroHedge website here.
In the silver class action suit against Deutsche Bank, HSBC, the Bank of Nova Scotia, and UBS, Deutsche agreed in April 2016 to settle with the plaintiffs and to produce“instant messages, and other electronic communications” as part of the settlement. See BullionStar article ‘Deutsche Bank agrees to settle with Plaintiffs in London Silver Fixing litigation‘for full details of the April 2016 announcement.
Attorneys for the plaintiffs subsequently, as Allan Flynn documented “submitted samples of dozens of chat room messages between UBS and Deutsche Bank“, indicating “many efforts to artificially suppress gold prices, and to manipulate gold prices at the time of the Fixing.”
“One chat see’s a Deutsche Bank trader confirming with a UBS trader his trading had indeed influenced the Gold Fix: ‘u just said u sold on fix.‘ The UBS traded replied ‘yeah,’ ‘we smashed it good.‘
Another transcript example contained the following exchange:
“During a trading day which had been less successful the Deutsche Bank trader assured his opposite trader from Bank of Nova Scotia that ‘at least the fix will be fun . . . make it all back there!!!!!!‘”
So here we have precious metals traders actually colluding to artificially move the price levels on the fixings.
Technology Facilitated the Manipulation of the Fixes since 2004
In June 2015, I wrote an article on the BullionStar website titled “The pre-2015 London Gold Fixings – More technologically advanced than reported” in which I set out substantial evidence that the former Gold Fixings up until March 2015 were not some archaic dial-in telephone based auction using paper and pencils to set the price as the mainstream financial media choose to believe, but that the auctions since 2004 in both gold and silver employed sophisticated web-based technology apps, trading software, messaging apps and chat apps, all of which could also facilitate collusion and price manipulation across multiple trading desks in ‘rival’ banks.
When Rothschild pulled out of the Gold Fixings in 2004, Barclays took Rothschild’s place and the fixings moved to a remote model where traders from each of the 5 members banks of the Gold Fixing coordinated remotely instead of meeting twice a day face to face. At the same time, the fixing members introduced this new communication technology to assist their twice daily fixes.
In November 2014, the Swiss financial regulator FINMA announced that an investigation of UBS had found manipulation and attempted manipulation of by UBS Zurich employees of forex and precious metals benchmarks. At the time, Mark Branson, FINMA’s CEO said that “we have [also] seen clear attempts to manipulate fixes in the precious metals markets.”
According to FINMA, it found that chat groups between traders at multiple banks were central to how the manipulation was coordinated:
“In the improper business conduct in foreign exchange and precious metals trading, electronic communication platforms played a key role. The abusive practices were evidenced in the information exchanged between traders in chat groups. FINMA examined thousands of suspicious chat group conversations between traders at multiple banks.“
The introduction of new technology and chat apps from 2004 is also highly correlated with academic research findings showing “a decade of manipulation” of the gold fixing from 2004 until 2013. As highlighted in the Bloomberg article “Gold Fix Study Shows Signs of Decade of Bank Manipulation“
“Abrantes-Metz and Metz screened intraday trading in the spot gold market from 2001 to 2013 for sudden, unexplained moves that may indicate illegal behavior. From 2004, they observed frequent spikes in spot gold prices during the afternoon call. The moves weren’t replicated during the morning call and hadn’t happened before 2004, they found.
Large price moves during the afternoon call were also overwhelmingly in the same direction: down.
On days when the authors identified large price moves during the fix, they were downwards at least two-thirds of the time in six different years between 2004and 2013. In 2010, large moves during the fix were negative 92 percent of the time, the authors found.
There’s no obvious explanation as to why the patterns began in 2004, why they were more prevalent in the afternoon fixing, and why price moves tended to be downwards, Abrantes-Metz said in a telephone interview this week.”
Well, there is an obvious explanation. The downward price movements identified by Abrantes-Metz and Metz started in 2004 because that’s when the London gold fixings went to a remote model and technology including chat apps was introduced. The suspicious price movements were more prevalent in the London afternoon because that was also the New York morning where COMEX gold futures were more active and where New York based traders could force the futures down causing a corresponding drop in the opening prices and round prices in the fixing auctions.
Prosecuting banks and traders for price manipulation on COMEX futures while ignoring the far larger London market and its gold and silver fixings looks like a job half done. Trading desks and their traders are agnostic to trading venues and with interlinked markets, the COMEX and the London Fixings are two sides of the same coin.
With blatant evidence that the same banks and traders were involved in both markets, and with actual chat room transcripts now confirming that precious metals traders across multiple banks were colluding in fixing price manipulation, then why are their no active regulatory investigations of trader manipulation of the London Gold and Silver Fixings?
Is it because of lack of jurisdictional authority or are the regulators and criminal enforcement agencies such as the FCA, DoJ, FINMA and the German BAFIN too terrified of opening a can of worms into the huge liabilities that would arise from proving a decade long criminal manipulation of the London Gold and Silver price benchmarks and that were used throughout the world the value of everything from ISDA contracts to institutional precious metals products, to ETFs.
Recently, Russian television network RT extensively quoted me in a series of articles about the US Government’s gold reserves. The RT articles, published on the RT.com website, were based on a series of questions RT put to me about various aspects of the official US gold reserves. These gold reserves are held by the US Treasury, mostly in the custody of the US Mint. The US Mint is a branch of the US Treasury.
As the subject matter of US gold reserves is broad and wide-ranging, the RT questions and my answers and opinions covered a lot of material and RT therefore decided to divide it’s coverage into 2 articles. The first RT article covered the lack of transparency into the US gold reserves, the fact that has never been any of independent audits of the gold, and the fact that a lot of gold bars that the US claims to hold are actually low purity gold bars which do not conform to international industry standards on tradable wholesale gold bars (i.e. Good Delivery standards).
The first article also touched on the international reaction to and the effects on the US dollar that might unfold if the US gold reserves were found to be less than they are claimed to be.
The second RT article looked at the gold holding strategies of China and the Russian Federation, where the central banks of both nations have been actively accumulating their national gold reserves over the last 10-15 years, and where both central banks have been vocal about this monetary gold accumulation, possibly in preparation for a future return to a gold-backed monetary standard.
The second RT article also explored the scenario under which both China and Russia could have significantly more gold accumulated than they have publicly divulged, a situation which if revealed would put the spotlight back on to the claimed gold holdings of the US Treasury.
Following the RT articles, on 11 January, Beijing-based Chinese business and financial website BWChinese picked up on my quotes in the second RT.com article, and in a geo-political article about oil, the Renminbi, the US Dollar and gold (written in Chinese), the Chinese website linked the gold accumulation of China and Russia to part of a strategy of moving away from the dominance of the US dollar. The BWChinese article (in Chinese) can be seen here.
Then finally on 16 January, Moscow headquartered Sputnik news agency, in an article titled “Chinese Media Explain How Russia & China Can Escape ‘Dollar Domination”, profiled the BWChinese article, and essentially (and conveniently) summarized the entire Chinese article back into English. Interestingly, there was therefore coverage of the topic of official US gold reserves from Moscow across to Beijing, and back to Moscow again, all within the space of a week and spanning 3 media publications, namely RT, BWChinese and Sputnik.
As background to this media coverage, this blog post looks at the topics covered in the RT.com articles, and details the opinions and material that formed the basis to the original RT articles.
The claimed physical gold held by the US Government
The US Government claims to hold 8133.5 tonnes of physical gold in its official reserves. However its impossible to verify this number because the entire story around the US gold reserves is opaque and secretive. Therefore, it’s impossible to say how much, or how little, physical gold the US actually has. This is so because there has never been a full independent audit of the US gold reserves, and the custodians of the gold (the US Mint and the Federal Reserve of New York) will not let anybody into the vaults to view the gold or to count it.
Even the details that have been provided on the supposed US gold holdings show that a majority of the gold bars are low purity and in weights that don’t conform to industry standard ‘Good Delivery” gold bar specifications.
The US Government gold reserves are held in the name of the US Treasury and are supposedly held in Fort Knox, Kentucky, and West Point, New York, and in the US Mint in Denver. And further small amount of US Treasury gold (5%) is supposedly held in the vaults of the Federal Reserve bank of New York (FRBNY). The US Treasury reports on this gold in a monthly report called “Status Report of U.S. Government Gold Reserve”.
Of the 8133.5 tonnes, this means, based on the official reporting, that:
58% is allocated to Fort Knox, Kentucky: 4583 tonnes
20% is allocated to West Point, New York State: 1682 tonnes
16% is allocated to US Mint Denver, Colorado: 1364 tonnes
5% is allocated to the NYFED: 418 tonnes
Afur ther 1% of the US gold reserves are listed by the US Treasury as being in working stock of the US Mint (a figure which never changes), which is 86 tonnes (or 2,783,218 ounces). This working stock probably represents a loan of gold that the US Mint took from the gold stock, that is now a liability of the US Mint to the US Treasury. So overall, 7629 tonnes of the gold is supposedly held between Fort Knox, West Point and Denver, and these holdings are said to be held over 42 gold storage compartments.
Interestingly, both the Fort Knox depository and the West Point facility are adjacent to US army bases. But the US Mint facility in Denver is not. Notably, the US Mint website was recently updated and no longer claims that any US gold is stored in Denver. See BullionStar blog “Is there any gold bullion stored at the US Mint in Denver?” for more details.
A “Good Delivery” gold bar, as traded and accepted on the international wholesale gold market, and as generally held by central banks across the world, has to satisfy the following criteria:
Have a minimum gold content of 350 fine troy ounces (approx 10.9 kilograms) and a maximum gold content of 430 fine troy ounces (approx 13.4 kilograms).
Have a minimum acceptable fineness is 995.0 parts per thousand fine gold
US Official Gold Inventories – Low Purity Bars
Surprisingly, there are gold bar weight lists in the public domain detailing all of the gold bars that the US Treasury claims to hold. These weight lists were included as part of a submission to a June 2011 US House Committee on Financial Services hearing on oversight of US gold holdings.
The US Treasury gold claimed to be stored at the Federal bank of New York (FRBNY) vaults is listed in another weight list which can be seen here (http://financialservices.house.gov/uploadedfiles/112-41.pdf) starting on page 132 of the pdf (or page 128 of the document). According to this inventory statement, about 5% of the US Treasury’s gold is held at the FRBNY in the form of 31,204 bars stored in 11 compartments (listed as compartments A – K). See BullionStar blog post “The Keys to the Gold Vaults at the New York Fed – Part 3: ‘Coin Bars’, ‘Melts’ and the Bundesbank” for screenshots of the actual weight list of US Treasury gold listed as being at the FRBNY. You will notice that a lot of the gold bars, about 50 tonnes worth, are very old bars, and are listed as being in the form of low gold purity coin bars, bars that were fabricated from melting down gold coins.
These weight lists states that there are just under 700,000 gold bars in Fort Knox, West Point and Denver combined, and 31,000 bars held with the NY Fed vaults in New York.
Two short tables summarising the weight and purity of the US Treasury’s gold bar weight lists can be seen at the Goldchat blog site in an article titled from March 2014 titled “US deep storage gold reserves bar list made public“. These tables are as follows:
However, the Fort Knox – West Point – Denver weight list shows that nearly all the gold bars in Fort Knox and Denver are “coin bars”, again gold bars that were produced from melting down gold coins. Many of the gold bars listed as being in West Point are also coin melt bars. Around half of the US Treasury’s gold bars at the Federal Reserve Bank of New York are also in the form of coin bars.
In general, most of the US Treasury gold comprises bars that are either smaller and larger than the weights of Good Delivery bars and that are of low-grade purity bars (below the required purity of Good Delivery bars); e.g. a lot of the gold bars that the US treasury claims to hold have gold purity of 0.90 or 0.9167. Overall, less than 20% of the gold supposedly held between Fort Knox, West Point and Denver is Good Delivery Gold.
Without looking at a US Treasury weight list of claimed gold bar holdings, there are other data points which collaborative that the US official gold stock contains a lot of coin bar gold and other non-industry acceptable gold.
In March 1968, the London Gold Pool collapsed primarily because the US Fed and US Treasury did not have any Good Delivery Gold to supply to the London market. Bank of England memos at that time make this very clear as they say that:
“It has emerged in conversations with the Federal Reserve Bank that the majority of the gold held at Fort Knox is in the form of coin bars, and that in certain cases these bars have a gold content of less than 350 fine ounces. If the drain on U.S. stocks continues it is inevitable that the Federal Reserve Bank will be forced to deliver what bars they have.
Capacity to further refine coin bars to the current minimum fineness of .995 in the United States is entirely inadequate to cope with conversion on the scale that would be required if the Americans wished to continue to deliver bars assaying .995 or better. Equally the capacity in the U.K. is inadequate for this task.”
“it would appear that the circumstances might well be such that very few bars of the current acceptable fineness could be found” (by the Americans).
Additionally, nearly half of the US Treasury gold auctions over 1978-1979 were of coin bars, suggesting that the US Treasury did not have sufficient access to good delivery gold even back then, and that it had ran out of good delivery gold by 1979.
Between May 1978 and November 1979, the US Treasury engaged in 23 gold auctions, and started by selling 8.05 million ounces of high grade gold (99.5% fine) before switching to selling 7.75 million ounces of low grade gold (90% fine). That was over 15 million ounces (466 tonnes) of gold in total auctioned by the Treasury. The last US Treasury auctions were on 16 October 1979 when 750,000 ounces of low grade coin bars, and finally on 1 November 1979 when the Treasury auctioned 1,250,000 ounces of low grade coin bars.
Note, that Deutsche Bundesbank ‘officially’ holds some of its gold in the vaults of the New York Fed, and has never been on record as having held gold in the US Mint’s Fort Knox depository. But the delays on the Germans repatriating their gold from the US to Germany in 2013 – 2014, and the fact that a lot of bars had to be smelted into new bars suggests that whatever source it came from, it was from a source that supplied low-grade gold coin bars. Could it have been Fort Knox?
Impact on US position in global economy due to Russia and China increasing their official gold holdings
China and Russia have both been aggressively accumulating their official gold reserves over the last 10-15 years. The Bank of Russia, on behalf of the Russian Federation, claims to now hold 1828 tonnes of gold. The People’s Bank of China (PBoC), on behalf of the Chinese state, claims to hold 1842 tonnes of gold.
However, a decade ago, the Bank of Russia only held 400 tonnes of gold. And in 2001 the PBoC held less than 400 tonnes. But now both these nations hold a combined 3670 tonnes of gold. See BullionStar blog “Neck and Neck: Russian and Chinese Official Gold Reserves” from October 2017 for more details.
Interestingly, both Russia and China publicize and promote their accumulations of gold and publicly refer to gold a strategic monetary asset. They make no secret of this On the flip side, the US does the opposite, and constantly downplays the strategic role of gold. China and Russia appear to view gold as the only strategic monetary asset that can provide independence from the US dollar.
So there is a shift occurring in terms of Russia and China building up their gold reserves, to maybe in future have gold-backed currencies, and to move away from the global dominance of the (unbacked by gold) US dollar.
And even if the dollar is backed by oil (petro-dollar), the gold accumulation by China and Russia can still be seen as part of a strategy to move away from international trade denominated in US dollars.
Additionally, both China and Russia could conceivably be holding a lot more gold than they declare in their official gold reserves. China through other entities such as SAFE, or the large Chinese commercial banks, and Russia through entities such as the Gokhran.
If China and Russia combined showed that they held more gold on a combined bases than the US, this would, even symbolically, be a low to the US dollar and to the position of the US in the global economy.
Is it Still Important for a Country to Hold Vast Gold Reserves
Yes. Gold is an asset of last reserve for central banks. Gold is a high-quality asset, analogous to a war chest. Countries with larger gold reserves are more immune to crises. And if gold is revalued in a new international monetary system, the countries with more gold will be more powerful monetarily.
Physical gold is highly liquid, it doesn’t have any counterparty risk, it’s a safe haven asset in times of crisis, and its an asset that can be called upon for liquidity by central banks in times of monetary crises.
Central banks can also activate gold by lending, leasing and swapping part of their gold holdings to generate a return. Most central banks value gold at market prices on their balance sheets, which creates one of the most valuable assets on most central banks’ balance sheets.
Is Holding Physical Gold becoming an Outdated Concept in the Western World
It’s true that western investors seem to now place less emphasis on ownership of physical gold relative to the past. For example, look at the huge growth of over-the-counter trading in London of synthetic fractionally backed gold positions and the huge growth of gold futures trading on venues such as the COMEX, both of which are mostly cash-settled and both of which have very little to do with any underlying physical gold holdings. The growth of gold-backed ETFs where the holders cannot take delivery of any gold is also symptomatic of this dislocation. However, these trends are in the institutional space.
Physical gold demand among retail investors is still very strong. Just look at some of the large physical gold markets such as Germany, Switzerland, Austria and the US and Canada where retail investors still know the value and benefits of holding real physical gold, as opposed to paper promises.
If the US doesn’t have as much Physical Gold as it Claims, what does it mean for the US Dollar in International Trade.
If the US was shown to have less physical gold that it claims to have, it would have a negative effect on the US dollar is indirect ways, but not through an immediate weakening of the US dollar or an immediate shift away from using the US dollar for international trade.
Firstly, proof of lower US gold reserves than claimed would add pressure for a full independent audit of all US gold reserves. It would also put the spotlight on the gold reserves of other major trading blocs such as the Eurozone and China and Russia, and open up a debate as to what is the role of gold in the international monetary system. Which is something the US government constantly tries to avoid (i.e. discussion about gold). It might also precipitate a move by nations which seek to replace the US dollar to advance their agendas in introducing an international monetary system backed by gold, knowing that the US would be on the back foot.
It would also then refocus attention on international holders of US dollars pre-August 1971 when Nixon closed the gold window, because after all those outstanding dollars held at the time by foreign central banks are still technically convertibility into gold at the official gold price of the time.
Indirectly, if the US Treasury gold holdings were seen to be falsified, it would also add pressure on the central banks that claim to hold gold at the Federal Reserve Bank of New York to prove that they too hold the amount of gold they claim to on US soil.
Can We Expect a Proper Audit of US Treasury Gold Reserves
A proper audit of the US Treasury gold reserves would be in the form of a full and independent audit of all US Treasury claimed gold reserves at the same time, i.e. across the 4 claimed storage locations. Weighing all gold bars, checking assays and publishing a full weight list in the public domain. It would have to be conducted by a fully independent auditor.
Can we expect such as proper audit of the US gold reserves? No, never. The chances of that ever happening are practically zero since the US Treasury (via the US Mint) does not even let anyone in to see the US gold reserves. Nor does the NY Fed ever let anyone in to see all of the US gold (and foreign held gold) claimed to be held in the NY Fed vaults. There has never been at any one time a full physical independent audit of all the gold which the US Treasury claims to hold.
Even a summary explanation of the US gold ‘audit’ history is confusing and convoluted. Try explaining it to someone, and they will quickly come to the same conclusion.
For example, the physical gold audit at Fort Knox in 1953 was only conducted on gold within 3 compartments and this represented only 13.6% of the gold claimed to be held in Fort Knox at that time. Anyway, this historic audit is so long ago it is irrelevant since much of the US gold was sold off in the 1950s and 1960s.
There have supposedly been audits of the US Treasury gold since 1973, but these have been partial, confusing and have dragged out over many years (continuing audits), and most importantly, these audits have never been conducted by an independent auditor.
Over October and November 1974, a physical audit was carried out on 21% of the gold held at Fort Knox. This audit was done by the General Accounting Office (GAO), in conjunction with auditors from the US Mint, the Bureau of Government Financial Operations (BGFO), US Customs, and the Treasury Department’s Office of Audit.
In June 1975, the US Secretary of the Treasury ordered a continuing audit of all US Government-owned gold, with a target of auditing 10% of US gold every year. A committee comprising the US Mint, the US Bureau of Government Financial Operations (BGFO) and the Federal Reserve Bank of New York were appointed to carry out these continuing audits. Continuing audits were undertaken between 1975 and 1986, after which the Treasury claimed that 97% of all US gold had now been audited.
By September 1982, the continuing audit program had supposedly audited 100% of the gold stored at Fort Knox. By September 1984, the continuing audit program had supposedly audited 99.9% of the gold stored at the Denver Mint.
But in 1983, the US Department of Treasury’s Office of the Inspector General (OIG) issued revised audit guidelines and more than 1,700 tonnes at Fort Knox and Denver being supposedly re-audited between July 1983 and July 1986.
Then from 1986 to 1992, the US Mint supposedly undertook additional audits of gold storage compartments that hadn’t been placed under official joint seal by the continuing audits committee.
In 1993 the OIG took over the annual audits of US Mint held gold. By 2008, all the gold held by the Mint had been placed under official seal. In 2010, the OIG claims to have renewed the joint seals on all 42 gold storage compartments at the US Mint storage facilities.
These annual audits merely consist of checking the official joint seals put on the vault compartment doors during the continuing audits from 1974 until 1986,
There should be 13 annual audit reports of the continuing audit. But 7 of these audit reports are missing and neither the OIG or the Treasury Department, or the National Archives can produce them.
Is physical gold still moving from West to East
Yes, there is a trend of physical gold moving from West to East, much of which goes to China and India. In the case of China, gold imported into the Chinese market cannot easily flow back out of China due to general prohibitions on gold exports out of China. And so it stays there and is accumulated by the Chinese population. The People’s Bank of China (PBoC) (Chinese central bank) has also been accumulating gold reserves, some of which it buys on the international gold market (e.g. in London) and transports by air to Beijing.
In the case of India, much of the gold imported into India stays there as is it horded by the Indian population. Net imports of gold into India are nearly as high as gross gold imports, since gold exports from India are quite low (mostly in the form of gold jewellery).
A final Point – Chinese gold at the NY Fed: 600 tonnes
After translating the 11 January BWChinese article from Chinese into English, I noticed that the last few paragraphs discussed Chinese gold being held at the Federal Reserve Bank of New York, and the inability of the Chinese to get this gold back. The relevant paragraphs are as follows (which I translated and re-edited):
“A BWC Chinese network report mentioned that the Federal Reserve had on several occasions rejected China’s request to ship back about 600 tonnes of gold reserves stored in underground vaults in the New York.
Some analysts said at the time that for China to overcome the sanctions imposed by the United States, it had no choice but to use gold as collateral. A report by People’s Daily’s “IFC” in December 2012, “How Much Gold Has Been Pocketed by the United States” has been confirmed:
It is reported that more than 60 countries have allocated some or most of their gold reserves hidden in the New York Federal Reserve Bank’s underground vault.
Some experts said that China once had shipped 600 tons of gold reserves to the United States and continuing its search, found that China first deposited its gold reserves with the United States in 1990.”
This is the first time I have heard of such a scenario. Perhaps its true. If its true, it could mean that the People’s Bank of China (PBoC), the agent of the Chinese State, could still be holding a significant quantity of its gold in the vaults of the NY Fed, that the Fed will not return. There again, maybe it’s not true, or my translation might be wrong. Perhaps a native Chinese speaker can read the text and translate it into English properly. The text is as follows:
Although the US is very secretive about its official gold reserves and their storage, so too are the Russians and the Chinese. But whereas the Americans downplay the role of gold as a monetary asset, the Russians and Chinese do the opposite and openly talk about the strategic importance of gold.
I find it interesting that it takes a Russian media publication and a Chinese media publication to openly discuss the state of the US gold reserves, while at the same time the mainstream US financial media will never do any serious investigative analysis of the official gold reserves in their own country.
What would Trump make of all of this? Especially since he is supposed to like the shiny stuff himself. Perhaps an enterprising US reporter can ask Trump next time they are in the same room. Perhaps trump would tell him to get “out’. Perhaps not. last word goes to Trump, who in March 2015 said the following in interview with WMUR-TV, New Hampshire, in a segment called ‘Conversation with the Candidate’,:
“In some ways, I like the gold standard and there is something very nice about it but you have to go back at the right time… We used to have a very solid country because it was based on a gold standard for it.
We do not have that anymore. There is something very nice about the concept of that. It would be very hard to do at this point and one of the problems is we do not have the gold. Other places have the gold.“
On the afternoon of Monday, August 21, US Treasury Secretary Steven Mnuchin, Senate Majority Leader Mitch McConnell, Kentucky Governor Matt Bevin, and Kentucky Congressman Brett Guthrie took a visit to the vault of the US Mint’s gold depository in Fort Knox, Kentucky, a vault which, according to the US Treasury, holds gold bars containing 147,341,858 fine troy ounces of gold (4583 tonnes of gold).
The trip was notable in that it is one of the rare occasions in history that a US political/congressional delegation has ever visited the Fort Knox depository, and Mnuchin is now only the 3rd treasury secretary ever to make this visit.
The trip was also notable in that unlike previous political excursions to the vault, the Mnuchin-led visit was very low-key, it was announced to the media and public at extremely short notice, and there is no evidence that any media representatives participated, or at least if they did, they have kept very quiet about it.
In contrast, the previous congressional visit to the Fort Knox depository in September 1974 was heavily publicised in advance, was accompanied by 100 news reporters and photographers, and it even documented the visit via photographs and film which were released to the public.
Mnuchin’s visit to the vault merely appears to have taken the form of a quick peek into one of the cramped vault compartments within the Fort Knox vault, and therefore can only be seen as an odd PR stunt whose real intent remains unclear, which does nothing to improve the transparency of the notoriously secretive gold depository, and which on balance has now re-opened scrutiny on how much gold is, or is not, actually stored in the compartments of the Fort Knox vault.
The trip to the Fort Knox vault was only announced by Mnuchin on Monday morning, August 21 (the morning of the Fort Knox visit) during a speech to the Chamber of Commerce in Louisville, Kentucky, which Mnuchin and Mitch McConnell were attending.
As Grace Schneider, a business reporter for the Louisville, Kentucky based Courier-Journal tweeted that morning:
So Mnuchin announced the visit literally a few hours before it took place. Fort Knox is located about 40 miles south-west of Louisville. In his Monday morning speech at the Chamber of Commerce, the Washington Examiner reports that Mnuchin made the bizarre comment that “I assume the gold is still there”. McConnell, at the same time, quipped that “we’re going to find out”. Mnuchin’s comment is bizarre because as US Treasury Secretary, he is top official of the US Treasury.
The US Treasury owns the gold in Fort Knox. The US Mint is just the custodian. The Director of the US Mint and all other senior officials report to Mnuchin. At any time, Mnuchin can get a full and complete high-level briefing on the real status of the US gold reserves. He can also get a full de-briefing on the extent to which the US gold reserves have been audited over the years – or not audited as the case may be. To say that he assumes the gold is still there shows either a flippant view of the expected accountability of a US Treasury Secretary, or else a disregard for the responsibility to which the US public has entrusted him.
It’s not clear whether any journalists actually accompanied the politicians on last Monday’s visit to the Fort Knox depository. An article by an AP journalist from Kentucky named Adam Beam was published on August 22, the day after the visit to the Fort Knox depository.
Beam, based in Frankfort, Kentucky is listed as a Kentucky Statehouse reporter for AP, so would presumably, due to this role, be well-known in Kentucky political circles and would have privileged access to the Mnuchin & Co delegation. AP’s Beam wrote that:
“Inside the famed vaults at Fort Knox, Senate Majority Leader Mitch McConnell held a 27-pound gold bar in his hands Monday as part of the first civilian delegation to see most of the country’s bullion reserves in more than 40 years.”
But AP’s Beam also wrote in the same article that:
“in an interview, McConnell said he could not say much about the visit for security reasons”
suggesting that Beam may not have been on the actual visit to the vault, because if he was, he would have no need to interview McConnell and could have recorded the vault details himself. if the AP Kentucky Statehouse reporter wasn’t even on the visit, what hope was there for other reporters?
As far as I can see from related coverage, there are no photos of any of the delegation either inside the depository. This would suggest that there were no media photographers nor camera people present inside the vault. For such a historic trip, this is itself quite bizarre. Until that is, you realize that in 1978, the US Mint made the internal plans and structures of Fort Knox classified, which effectively bans any photography or filming from inside the depository.
Only One Compartment Viewed
The same AP article quoted Kentucky Governor Matt Bevin as saying that [Fort Knox] “officials had to cut a seal to open the vault for them“. What Bevin means is that the seal on the door of one of the compartments in the vault was cut so that they could open the door to the compartment. According to the US Mint, Fort Knox stores US Treasury gold bars in 13 compartments within the Fort Knox vault. See BullionStar article “Second Thoughts On US Official Gold Reserves Audits” for details.
By opening just one of the 13 compartments for Mnuchin & Co to peer into, that leaves 12 of the supposed gold storage compartments that were not opened. Still, this didn’t stop Mnuchin stating on Twitter that “Glad gold is safe“. This is a ridiculous statement from a US Treasury Secretary when you consider what the actual visit consisted of, and it would be remiss of the US public to put any trust in it.
Kentucky Governor Matt Bevin also said something similar in a radio interview following the vault visit, i.e. that the delegation only saw a subset of the supposed gold. Interviewed by Newradio 840 WHAS, and quoted by televison channel WHAS 11, Governor Bevin said:
“I didn’t see every bit of it [the gold], but the amount that I saw was impressive”
The US Treasury Secretary takes a quick look into one of 13 compartments in the vault and says “Yep, the gold is safe, it’s there“. Imagine a commercial gold vault operating on the basis of how Fort Knox operates. It couldn’t. I have been in BullionStar’s precious metals vault in Singapore. I have looked around. There are a lot of gold bars, silver bars, gold coins and silver coins. But I couldn’t say based on a quick casual observation that ‘yep, all the gold and silver is there’.
That’s why there is a rigorous inventory system at BullionStar, and that’s why BullionStar employs a transparent multi-layered auditing system comprising 5 different audit schemes that are all accessible to customers. To ensure that at any given time, both BullionStar staff and customers know exactly what is inside the BullionStar vault.
But the US Treasury seems to think its sufficient that a quick unrecorded trip by 4 US political insiders can somehow instill confidence that all the gold that is claimed to be in Fort Knox is actually there. In case readers may think BullionStar is being unfair to the US Treasury, its worth noting that there have been many articles published on the BullionStar website by Koos Jansen that highlight the myriad of inconsistencies about the supposed gold reserves stored at Fort Knox and US government auditing of said gold reserves. See for example:
As a freebie trip for 4 select political insiders, last Monday’s trip to Fort Knox was undoubtedly a memorable one for them. In the same radio interview Bevin said that:
“This is like the mother of all field trips. This is pretty cool”
But as a validation and verification of over 56% of the supposed US Official Gold Reserves, the visit was a complete farce. Announced the morning it took place. No evidence that any media were allowed to participate. Only peeked into one of the 13 storage compartments. And then to round it off, Mnuchin (an ex Goldmanite) tweets that ‘Glad gold is safe“. You couldn’t make this up. And finally, no mention of the fact that most of the gold bars even supposedly stored in Fort Knox are low purity ‘coin bars’ made from melted down gold coins. In fact, of all the gold bars reported to be held within the US Gold Reserves, only 16% of these bars are of LBMA Good Delivery size and purity range.
“In the Governor’s absence I attended the meeting in Zijlstra’s room in the BIS on the afternoon of Monday, 10th December to continue discussions about a possible gold pool. Emminger, de la Geniere, de Strycker, Leutwiler, Larre and Pohl were present.”
13 December 1979 – Kit McMahon to Gordon Richardson, Bank of England
A central bank Gold Pool which many people will be familiar with operated in the gold market between November 1961 and March 1968. That Gold Pool was known as the London Gold Pool.
This article is not about the 1961-1968 London Gold Pool. This article is about collusive central bank discussions relating to an entirely different and more recent central bank Gold Pool arrangement. These discussions about a second Gold Pool began in late 1979, i.e. more than 11 years after the London Gold Pool had been abandoned. This article is Part 1 of a 2 part series. Part 2 will be published shortly.
These discussions about a new Gold Pool arrangement took place in an era of soaring free market gold prices and in the midst of the run-up in the gold price to US$850 in January 1980.
The discussions and meetings about a new Gold Pool in 1979 and 1980 and beyond which are detailed below, occurred at the highest levels in the central banking world and involved the world’s most powerful central bankers, some of whose names will be familiar to readers. The aim of these central bank discussions and meetings was to reach agreement on joint central bank action to subdue and manipulate the free market gold price in the early 1980s. Many of these collusive meetings were private meetings between a handful of Group of 10 (G10) central bank governors, and took place in the actual office of the president of the Bank of International Settlements in Basle, Switzerland.
Above all, these central bank meetings show intent. Intent by a group of powerful central banks to manipulate a free market gold price so as to distort free market gold pricing signals. So these documents are timeless in that regard. The documents also illustrate the concern that a rising gold price in the free market creates for senior central bankers, and importantly, also shows that these same central bankers have no qualms, at least from a legal or moral perspective, of intervening to manipulate a gold price when they see it as a threat to their fiat currency monetary system.
The 1961-1968 London Gold Pool was a collusive arrangement between 8 major central banks to attempt to keep a lid on the official gold price at US $35 per ounce. That Gold Pool was instigated at the headquarters of the Bank for International Settlements (BIS) in Basle, Switzerland and monitored at the BIS by the governors of the Pool’s member central banks. However, day-to-day activities of the 1961-1968 Gold Pool were executed by the Pool’s agent, the Bank of England in London. Hence it was dubbed the London Gold Pool. Famously, this London Gold Pool collapsed on Thursday 14 March 1968 when speculative buying in the London Gold Market overwhelmed available Gold Pool supplies from member central banks.
Whereas the members of the 1961-1968 London Gold Pool consisted of the central banks of the United States, United Kingdom, West Germany, the Netherlands, Switzerland, France, Belgium and Italy, the discussions about a new Gold Pool that took place in 1979, 1980 and beyond, involved the very same central banks.
The 1961 -1968 Gold Pool was both a selling syndicate, where the members pooled their gold reserves to intervene in the London gold market, and a buying syndicate where the member central banks attempted to replenish gold that had been used in the gold price capping operations. Similarly, as you will see below, the discussions on a new Gold Pool in 1979 and 1980 involved participant West European central banks which on the whole wished to be able to buy gold for the Pool as well as sell gold from the Pool.
Central to illustrating how the most powerful central bankers in the world colluded to attempt to establish a new Gold Pool are a number of internal documents from the Bank of England which provide a detailed blueprint on the evolution of these collusive discussions at the BIS, as well as providing detailed insights into the thinking of the senior Bank of England executives involved in the meetings. These internal correspondence documents from 1979 and 1980 can be thought of as the equivalent of internal emails in the era before corporate email systems.
As you will see below, so many names of high level central bankers crop up in the discussions and documents, that to provide context, this necessitated some short background summaries on who these people were and what roles they occupied. It is also necessary to provide some brief context on gold price movements during the period under discussion.
The Gold Price Run-up during 1979 and 1980
When the London Gold Pool collapsed in mid-March 1968, a two-tier gold market took its place, with the private market gold price breaking higher, while central banks continued to trade gold with the Federal Reserve Bank of New York (FRBNY) and US Treasury at the official price of US$ 35 per ounce. However, in August 1971, Nixon closed this FRBNY / Treasury ‘Gold Window’ by ending the convertibility of US dollar liabilities into gold that had been an option for foreign central banks and foreign governments. This was the birth of the free-floating gold price.
By the end of 1974, the US dollar gold price had soared to $187 per troy ounce. Following this, the next 3 years saw the gold price first trade down to near $100 during August 1976 before resuming its uptrend. Year-end gold prices over this period were in the $135 – $165 range. In 1978, the price again broke to a record high and finished the year at $226 per ounce. See chart below.
But it was in 1979 that the US dollar gold price really took off, setting record after record. In July 1979, the $300 level was breached for the first time. During October 1979, the gold price then took out $400 for the first time. During December 1979, the gold price hit $500. While these late 1979 price increases were in themselves phenomenal, what then occurred in January 1980 was even more striking, for in the space of a few weeks, the price rocketed up first through $600, then $700, and then through the $800 level before peaking in late January 1980 at a then record of $850 per ounce. See chart below.
The mid-1970s saw a flurry of official gold sales to the market which although strategically designed in part to subdue the gold price, in practice didn’t achieve that goal over the medium term. Between June 1976 and May 1980, the International Monetary Fund sold 25 million ounces (777 tonnes) of gold in 45 public auctions. Between May 1978 and November 1979, the US Treasury sold 8.05 million ounces of high grade gold (99.5% fine) and 7.75 million ounces of low grade gold (90% fine) in 23 auctions to the private market. That’s just over 15 million ounces (466 tonnes) of gold in total auctioned by the Treasury. The last US Treasury auctions were on 16 October 1979 when 750,000 ounces of low grade coin bars were auctioned, and then on 1 November 1979 when the Treasury implemented a variable sales quantity approach and auctioned 1,250,000 ounces of low grade coin bars. On 15 January 1980, the US Treasury Secretary announced an official end of US gold sales.
As the 1980 annual report of the bank for International Settlements noted when reviewing the 1979 gold market:
“The further increase in [gold] supplies was overshadowed by the dramatic rise in the demand for gold which, in the space of little over a year, caused the London market price to increase more than fourfold to a peak of $850 per ounce in January 1980.”
“In addition to its sheer magnitude, last year’s  gold price rise had three other remarkable features: firstly, it took place against all major currencies, including those whose value had increased most during the 1970s. Secondly, it took place at a time of generally rising interest rates in the industrialised world, one effect of which was to increase the cost of holding gold. Thirdly, it took place at a time when, by and large, the dollar was strengthening in the exchange markets.”
It is against this background of surging gold prices, pre-existing gold auctions, turmoil in currency markets, slow growth and high inflation, that the first of the collusive Gold Pool discussions took place between September 1979 and January 1980 at the BIS.
Gold Pool Revival
There now follows a series of confidential memorandums and briefings from the Bank of England, the first of which, marked ‘SECRET‘ was an analysis written by the Bank of England’s John Sangster to the attention of the Bank of England’s Christopher McMahon. Documents are in blue text and italics, with bold and underlining added where appropriate. A lot of the text in the documents is self-explanatory and the underlying and bold text just draws attention to sections of particular interest.
Christopher McMahon, known as ‘Kit’ McMahon, was an executive director at the Bank of England from 1970 to 1980, before becoming Deputy Governor of the Bank of England on 1 March 1980. Prior to McMahon’s promotion, Jasper Hollom was Deputy Governor of the Bank of England. Kit McMahon’s full name is Christopher William McMahon, hence he signed his his internal Bank of England memos and correspondence with the initials ‘CWM’.
McMahon left the Bank of England in 1986 to take up the role of Chief Executive and Deputy Chairman of Midland Bank. In 1987, McMahon was also made Chairman of Midland Bank. McMahon left Midland in 1991. Since 1974, Midland Bank had also owned Samuel Montagu, one of the five traditional bullion firms of the London Gold Market. HSBC acquired full ownership of Midland in 1992 after acquiring a 15% stake in 1987 when McMahon was Chairman and Chief Executive of Midland. See profiles of McMahon here and here.
John Sangster’s full name was John Laing Sangster, hence he signed his internal Bank of England memos and analysis with the initials ‘JLS’.
During the 1970s and early 1980s, Sangster was the Bank of England’s foreign exchange and gold specialist. In March 1980, Sangster became one of six newly appointed assistant directors at the Bank of England. To give some idea of the senior level at which Sangster was operating at that time at the Bank, when he was promoted to assistant director in March 1980, two of Sangster’s contemporaries that also made assistant director at the time were Eddie George (gilt-edged operations area) and David Walker (economics area). Sangster retired from the Bank of England in 1982. Eddie George went on to be Governor of the Bank of England from 1993 to 2003. David Walker went on to head a whole host of institutions in the City of London including the chairmanship of Barclays Bank.
The first document which follows was written on 21 September 1979 when the gold price closed at $376.41.
Mr McMahon Copy to Mr Byatt
It is just possible that over the next few weeks some central banks may try to discuss a possible revival of the gold pool. Rather like the sterling credit of June 1976, a number of people could spontaneously be thinking that the time is ripe for some joint action.
The main arguments would be: –
(a) gold is even now so much part of the international monetary system that its present performance is a significant element in general currency instability;
(b) whereas previously the weakness in the dollar had been boosting gold, latterly the strength of gold has itself contributed to the dollar’s renewed weakness;
(c) the market now looks overbought, and there is a need to break the psychologyof “the market can only go one way and that is up”. Such an attitude has obvious dangers in any market but given gold’s residual monetary connections, there must be a danger that financial institutions could become over exposed in this area;
(d) a joint demonstration by central bankswould be all the more salutary since the market firmly believes that central banks are only interested in putting a floor under the price and that none wishes to stem its rise.
(e) it could flush out more Russian selling
There would obviously be no question of any permanent stabilisation of the gold price, merely at a critical time holding it within a target area. Such an operation could be mounted alongside the existing US auctions, although it is arguable that these have become too predictable and could, for the time being at least, be better subsumed in a new gold pool arrangement. As far as I know, nothing has yet been mooted to or by the FRBNY, and if there is no American interest the matter would be dropped. Nor would others consider the proposal, if there were no provision for the recapture of gold, were the market temporarily mastered.
There is nothing for us to do at the moment but be aware of the potential for discussion.. If the idea got off the ground and given the comparative paucity of our gold holding, it would obviously [page 2] be preferable to ensure that contributions were made in proportion to gold holdings rather than on any other basis.
21st September 1979
The actual memorandum from JLS to McMahon can be seen here:Page 1andPage 2. The links may take a little while to load first time.
Not surprisingly, as the Bank of England’s gold and foreign exchange specialist, Sangster was privy to the views and conversations of other central banks in this area at that time, for he correctly predicted that a group of central banks were about to embark on discussions about a new Gold Pool.
Sangster also correctly predicted that the European central banks’ preferred structure of the interventions be in the form of a Pool in which the gold used could be recaptured. Notably, Sangster’s assessment of the need for American buyin to the scheme also proved accurate.
It was convention in that day at the Bank of England for internal correspondence to be circulated to the recipients who then read it and added hand-written notes which they signed with their initials before returning the original circulated pages to the author. This was in the time before the advent of corporate email.
Hand-written note on JLS memorandum to Sangster, 21 September 1979
In the above memorandum, a hand-written note by Kit McMahon signed with the initials CWM at the top of page 1 reads as follows:
“Paul Jeanty told me that Zijlstra had told him personally a couple of weeks ago that he would now be in favour of a central bank operation to stabilise the price within a moving band. Leutwiler (frequently) and Clappier have said this to him in the past and he believes (I do not know on what evidence) that de Stryker and Baffi would go along with such a plan. All recognise, however, that Emminger has no disposition to support.
As above, there will be many famous names throughout this article, each of which needs to be briefly profiled so as to add context.
At the time of this correspondence, Paul Jeanty was Deputy Chairman of Samuel Montagu & Co, one of the five bullion dealers in the London Gold Market. Samuel Montagu & Co had been a wholly owned subsidiary of Midland Bank since 1974.
A Who’s Who of Central Bankers
Zijlstra refers to Dr. Jelle Zijlstra, Chairman and President of the Bank for International Settlements (BIS) from 1967 to December 1981. Zijlstra was also simultaneously President of the Dutch central bank, De Nederlandsche Bank (DNB) from 1967 until the end of 1981.Notably,Zijlstra was also Dutch Prime Minister for a short period during 1966-67.
Leutwiler refers to Fritz Leutwiler, Chairman of the Swiss National Bank (Switzerland’s central bank) from May 1974 to December 1984. Leutwiler was also a member of the board of the BIS from 1974 to 1984, and served as President of the BIS between January 1982 and December 1984, as well as Chairman of the Board of the BIS from January 1982 to December 1984.
De Stryker refers to Cecil de Strycker, Governor of the National Bank of Belgium from February 1975 to the end of February 1982. At that time, De Stryker was also president of the European Monetary Cooperation Fund and then president of the Committee of Governors of the Central Banks of the Member States of the European Economic Community.
Clappier refers to Bernard Clappier, Governor of the Banque de France from 1974 to 1979. Clappier was also vice-governor of the Banque de France from 1964 to 1973.
The reference to Baffi is Paolo Baffi, Governor of the Banca d’Italia from July 1975 until October 1979, and also a board member of the BIS since 1975. Baffi became Vice-Chairman of the BIS in 1988.
Emminger refers to Otmar Emminger, President of the Deutsche Bundesbank from 1 June 1977 to 31 December 1979. Emminger was one of the principal architects of the IMF’s synthetic Special Drawing Right (SDR) in 1969 which was designed to be a competitor of and replacement for gold.
The next document below, from 18 October 1979 contains references to the above people and also references to other important central bankers, so it is best, at this stage, to explain these additional names also.
THE GOVERNOR of the Bank of England – Gordon Richardson. Richardson was Governor of the Bank of England for 10 years from 1973 to 1983, and a non-executive director of the Bank of England between 1967 and 1973. He was chairman of J. Henry Schroder Wagg from 1962 to 1972, and chairman of Schroders from 1966 to 1973. Richardson was also a director of Saudi International Bank in London. Saudi International Bank was formerly known as Al Bank Al Saudi Al Alami when it was incorporated in London in 1975, and is now known as Gulf International Bank UK Limited.
Ciampi refers to Carlo Ciampi. Ciampi was Governor of Banca d’Italia from October 1979 to April 1993, and also Vice-Chairman of the Bank for International Settlements between 1994 and 1996. Notably, Ciampi was also Prime Minister of Italy from April 1993 until May 1994, and President of Italy from May 1999 until May 2006.
Schmidt refers to Helmut Schmidt, Chancellor (head of state) of the Federal Republic of Germany (West Germany) from 1974 to 1982.
Guth refers to Wilfried Guth, Chairman of the Board of Deutsche Bank (the commercial bank) from 1976, and from 1985 Chairman of the Supervisory Board of Deutsche Bank until 1990.
Al Quraishi refers to Abdulaziz Al-Quraishi. Al-Quraishi was Governor of the Saudi Arabian Monetary Agency (SAMA) from 1974 to 1983. He was also Chairman of Saudi International Bank in London from 1987 to 1996, and was on the Board of Saudi International Bank at the same time as Gordon Richardson.
The Americans: Miller, Solomon, Volcker and Wallich
Miller refers to William Miller. Miller was US Secretary of the Treasury from August 1979 to January 1981. Before that, he was chairman of the Board of Governors of the Federal Reserve System from March 1978 to August 1979.
Solomon refers to Anthony Solomon. From March 1977 to March 1980, Solomon was US Undersecretary of the Treasury for Monetary Affairs. In April 1980, he became President of the New York Fed and stayed in that position until the end of 1984.
Volcker refers to Paul Volcker. In August 1979, Volcker took over from Miller as chairman of the Board of Governors of the Federal Reserve System. Prior to that, Volcker was President of the New York Fed from 1975 to 1979. Volcker had also been Undersecretary of the Treasury for Monetary Affairs 1969 to 1974.
Wallich is a reference to Henry Wallich. Wallich was an economist, who among other things, was a member of the Board of Governors of the Federal Reserve System from 1974 to 1986. He was also a member of the Congressional Gold Commission in 1981-1982.
Gold Pool Discussions in Belgrade
This second document below was written by Kit McMahon on 18 October 1979 and addressed to the Bank of England Governor, Gordon Richardson. On 18 October 1979 the gold price closed at $386.84. The reference to Belgrade refers to the annual conference of the International Monetary Fund and World Bank which took place at the beginning of October 1979 at the Sava Center in Belgrade, the capital of the former Yugoslavia. Finance ministers and central bankers from 138 countries attended this IMF annual conference in Belgrade.
THE GOVERNOR O/R
Paul Jeanty came to see me this afternoon to report on a conversation be had with Leutwiler the other day in Zurich.
Leutwiler told him that the Americans had come to see him in Belgrade (the whole team of them – Miller, Solomon, Volcker and Wallich). To Fritz’s great surprise they had asked him whether he might organise a gold selling operation (it was mainly Volcker and Solomon who did the talking). They had apparently mentioned the possibility of being prepared to sell 10% of official reserves and were apparently prepared to join in themselves.
Fritz had replied that if an operation was mounted, nothing like 10% of reserves would be necessary; but that any gold that he sold he would want to buy back later on at a lower price. Again to his surprise the Americans had not demurred at this – a very big change from previous attitudes.
Fritz had told Jeanty, what Jeanty already knew, that Zijlstra would be interested; however, apparently Clappier indicated that he was against. This was a reversal of view which Leutwiler attributed to pressure from the Élysée which was itself influenced by the Germans. Leutwiler had also said that whereas Baffi had been in favour he had no knowledge of Ciampi’s attitude.
Emminger continued to be strongly against. Apparently, however, some attempt had been made to persuade Schmidt of the value of this idea. According to Leutwiler, Guth had urged it on him, but Schmidt does not appear to be prepared to oppose the Bundesbank.
There seems to be some disposition among those in favour to believe that OPEC are increasingly concerned that gold is outpacing oil and increasingly prepared to use this as an argument for higher oil prices. Jeanty asked Leutwiler whether he was sure that Al Quraishi would not rock the boat
and start buying if other central banks sent the price down. Leutwiler had assured him that he had often discussed it with Quraishi and that there would be no problem there. He then apparently gave a very interesting piece of information that Quraishi and Zijlstra are meeting with Emminger in Frankfurt next Tuesday – though not necessarily on this subject. Jeanty suggested it might be a plea to be allowed to diversify.
Finally, according to Jeanty, Fritz had asked if he would be likely to be seeing me, making it fairly clear that he would like the gist of these conversations to get to us. He knew that our reserves are small but he hoped that we might provide moral backing for an initiative to put pressure on Emminger.
I applied to all this, as I have to similar discussions on previous occasions, in a rather discouraging way, saying that while I disliked the instability of the gold price, I thought it was symptomatic more than causal of currency problems and that their would be a sharp fall if and when Volcker’s policy succeeded. Moreover, while it would be easy and nice for central banks to force the price down too hard and quickly, thereafter – and particularly when they started buying back, they could well find that they were riding a tiger.
I would have said this to Jeanty whatever my views, but in fact I remain extremely doubtful about the wisdom of any enterprise of this kind – at least divorced from much more wide-ranging agreements about currency stability. However, I thought the conversation was of interest in a number of ways not least in providing further evidence of the way central bankers will talk to major operators in the gold market. I imagine you might want to have some further conversations on this subject with your colleagues in Basle.
18th October 1979
The above memorandum from McMahon to Richardson can be seen here: Page 1 and Page 2. The links may take a little while to load first time.
The following key points are notable from McMahon’s analysis. Zijlstra, as BIS President and as president of the Dutch central bank was in clear favour of the Gold Pool idea.
At the IMF conference in Belgrade at the start of October 1979, the representatives of the US Treasury (Miller and Solomon) and of the Fed Board of Governors (Volcker and Wallich) approached Fritz Leutwiler, chairman of the Swiss National Bank to discuss coordinated gold sales.
At the time, this was alluded to within the financial media, but only in a very general way and there was no mention of a Gold Pool. On 2 October 1979, the New York Times wrote:
“The United States Government, weighing new plans to stabilize the dollar on exchange markets, suggested today that it might increased the amount of gold it offers at monthly auctions and that it was considering the possibility of internationally coordinated bullion sales.
Anthony M Solomon, Treasury Secretary for Monetary Affairs, said the international effort had been discussed with ‘various’ Government representatives on the fringes of the Belgrade annual meeting of the IMF and World Bank.”
The Americans appear to have had a change of mind by the time they met in Belgrade since they were by then comfortable with the notion of recapturing any gold used in price manipulation operations. i.e. a Gold Pool, but by implication they had previously not been in favour of trying to recapture any gold sold.
Note that Volcker and Miller had also met with Helmut Schmidt and Otmar Emminger in Hamburg on their way to Belgrade when they held a meeting to discuss how best to defend the US dollar on the currency markets.
Bernard Clappier, governor of the Banque de France, was by then less in favour of a Pool due to political pressure from the Élysée, which in this context refers to the French Council of Ministers who meet at the Élysée Palace, home of the French president. But that French reluctance was attributed to influence from the Bundesbank which was itself reluctant to engage in the scheme, but as revealed below, this was more due to the Bundesbank’s desire that the US monetary authorities fix the larger currency / dollar issues of the day in parallel with engaging in any Gold Pool operations.
Volcker Headed back to Washington for FOMC Meeting
During the Belgrade IMF conference, Paul Volcker had unexpectedly and suddenly left Belgrade on Tuesday 2nd October and headed back to Washington. He did this to convene a special secret and previously unscheduled meeting of the Fed’s FOMC which occurred on Saturday 6 October 1979. It was at this meeting that Volcker announced the now famous change in Fed policy that saw it shift its focus to monitoring and managing the volume of bank reserves in the financial system as opposed to trying to micro manage the federal funds rate level, and which ushered in much higher interest rates and a recession in an attempt to rein in inflation.
But there are also some interesting references in the transcripts of that 6 October FOMC meeting and in a transcript of a 5 October FOMC conference call preparatory meeting, that make reference to the discussions on gold that Volcker, Miller, Solomon and Wallich had with their European central banker peers while in Belgrade. In the 5 October FOMC conference call meeting Volcker said:
“Let me summarize some of this by saying that late last week–actually beginning before then but particularly late last week and in the very early part of this week–these markets, by which I mean the gold market very obviously and the foreign exchange markets, were “depressed.” I guess that’s the right word. And the atmosphere was very nervous. I think that has been largely turned around by an expectation that there will be some action.“
In its 6 October 1979 FOMC meeting, Volcker makes reference to the soundings which the Americans made in Belgrade with other central bankers:
“The possibility of gold sales has been canvassed up and down. “
“The question has been debated up and down and I think it is essentially unsettled. There is a possibility [of gold sales], particularly if the gold market acts up again, but there has been no firm consensus reached on that point simply because in our mutual discussions some concern was expressed about whether they are effective or not effective over a period of time. They might be effective immediately. But if the gold sales have a nice effect immediately and we test it a little while later and the gold price goes up again, the question arises: Is it confidence inspiring or is it not?
Or is it really better over a period of time just to leave the [gold] market alone? I think that question has to be left on that basis for the time being.”
“We will have cooperation, I think, from our foreign partners either on gold or on intervention to the degree that they feel that we have done something here; that is an essential part of setting the stage. We will get that kind of cooperation, I suppose, with the limitations of enthusiasm that are inherent in my earlier comments. I don’t mean to suggest that that type of activity is “out” if we mutually think it is advantageous. On the contrary, it is ‘”in” over a period of time with an appropriate background. But it is not “in” in the sense of announcing an international package of that type this weekend.”
Interestingly, on the same day, 18 October 1979, a former Bank of England executive, George Bolton, rang the Bank of England to relay news about rumoured clandestine gold sales by the US to the Saudis:
THE DEPUTY GOVERNOR Copies to DAHB and JLS
Sir George Bolton rang to say that he had heard from a reasonably reliable source of a story current in both Washington and New York. This was to the effect that the USA were planning to sell 10 mn. ounces of gold in four separate unannounced operations before the end of this year. He said that it was being undertaken to placate the Saudi Arabians.
P.W.F. Ironmonger, Governor’s Office 18th October 1979
Sir George Bolton had been an executive director of the Bank of England in the 1950s and a non-executive director of the Bank of England in the 1960s, and is attributed as having playing an important role in the development of the Eurodollar market in London. It is not clear why Bolton was still relaying market intelligence to the Bank of England in 1979. Perhaps he did this on an informal basis for the Governors.
However, it is very interesting that Bolton said that the Americans were selling 10 million ounces (311 tonnes) of gold to the Saudis to placate them, and this ties in with McMahon’s comments to Richardson that “OPEC are increasingly concerned that gold is outpacing oil”, but that Al Quraishi of the Saudi Arabian Monetary Authority (SAMA) “would not rock the boat” and buy gold on the market if a new gold pool was selling, but that at the same time Leutwiler thought that Al Quraishi and SAMA were eager to “diversify” i.e. reinvest their oil revenues in a more diversified way including in physical gold.
Since the last US Treasury gold auction was on 1 November 1979 for 1.25 million ounces of low grade coin bar gold, were 10 million ounces of gold sold directly to the Saudis out of US gold stockpiles, 10 million ounces which were never reported to the market? Or did the US use another central bank’s gold as part of a gold swap to ‘placate’ the Saudis with? These questions remain unanswered, but its important to remember the gold and oil connection and the importance to which the Western European and US monetary authorities attached to ‘keeping the Saudis happy’. More on these oil and gold connections in Part 2.
First Gold Pool Meeting – 12 November 1979
In the above memorandum dated 18 October 1979 that Kit McMahon sent to Govenror Gordon Richardson about the Belgrade discussions and the establishment of a new Gold Pool, there is a hand-written reply in red pen from Richardson to McMahon written on 4 November 1979, as follows:
Thank you for this interesting note which I read some days ago. I agree with your comment at X at the bottom of Page 2. I will pursue with Fritz at Baslebut I wonder if it has not now died. GR 4/11’
Fritz refers to Fritz Leutwiler, then Chairman of the Swiss National Bank. X refers to “conversation was of interest in a number of ways not least in providing further evidence of the way central bankers will talk to major operators in the gold market”. A hand-written reply from McMahon to Richardson reads “possible but still worth raising, CWM”.
There is also another handwritten note at the top of page 1 which reads “Copy for November Basle Dossier”.
However, the Gold Pool initiative did not die as Richardson thought it might, for on Tuesday 6 November 1979, Zijlstra called a meeting for the following Monday 12 November to take place at his office at the BIS, and invited the central bank governors of the Bank of England, the Bundesbank, the Banque de France, the Swiss National Bank, the Belgian central bank, and of course, the Dutch central bank which was represented by Zijlstra himself.
NOTE FOR RECORD
Copies to: The Governor, The Deputy Governor, Mr McMahon, Mr Payton, Mr Balfour, Mr Sangster
“Dr. Zijlstra telephoned the Governor to say that he is holding a meeting in his room at the BIS at 10:30am on Monday 12th November. Others invited to attend are de Strycker, Leutwiler, Clappier and Emminger or Pohl. Dr. Zijlstra said that the subject would be that about which the Governor and he spoke while in Belgrade (possibly gold).”
L.C.W Mayes, Governor’s Office 6th November 1979
Handwritten on the note was “Basle Dossier“, and the initials GR in red (for Gordon Richard) with the date 8/11.
The last few months of 1979 was a period that witnessed new governors being installed at both the Banque de France and Banca d’Italia and a new president at the Bundesbank. At the Banca d’Italia, Paolo Baffi resigned on 7 October 1979, and Carlo Ciampi (then deputy governor) became governor. At the Banque de France, Bernard Clappier stepped down as governor on 23 November 1979 , and Renaud de La Genière took his place. At the Bundesbank, Otmar Emminger retired in December 1979, and Karl Otto Pohl became President.
This explains why the meeting invitation above says “Emminger or Pohl” because November and December 1979 was a transition time at the Bundesbank between Emminger and Pohl. Pohl only joined the Bundesbank in 1977, first serving as vice-president between 1 June 1977 to 31 December 1979. Pohl then became president of the Bundesbank on 1 January 1980 and remained as Bundesbank President until 31 July 1991.
This adhoc Gold Pool discussion meeting by a subset of G10 central bank governors at the BIS in Basle, Switzerland, was the first of 3 such meetings that took place on 12 November 1979, 10 December 1979, and 7 January 1980, respectively, and variously involved G10 central banker governors Zijlstra, Leutwiler, Richardson, Emminger, Pöhl, McMahon, de Strycker, de la Genière, Clappier, as well as René Larre, the BIS General Manager.
The Bank of England archives only have a summary of the meeting which took place on 10 December 1979 (which is covered below). The very fact that there is a record of the 10 December 1979 meeting is itself a streak of luck since Kit McMahon attended the meeting that day in the place of Gordon Richardson, since, according to the Governor’s Diary for that day, Richardson had to leave the BIS early on 10 December to return to London in order to attend a meeting with the Prime Minister Margaret Thatcher at 10 Downing Street.
Additionally, when asked for minutes of these 3 meetings from 12 November 1979, 10 December 1979, and 7 January 1980 where the attendees were the above governors, the BIS Archives claimed it did not have such minutes and responded:
“The Gold Pool came to an end in 1968, so I take it that you are referring to meetings of the Gold and Foreign Exchange Committee. We do have some minutes for this meeting, but unfortunately not for the period which interests you.”
Preparing for the 12 November Gold Pool Meeting
Hand-written on the invitation notice for the 12 November meeting is a note from McMahon to Sangster which says: “JLS, Can you provide a short brief & factual background and thoughts on the advisability of any form of central bank action? (see attached note of a conversation with Jeanty)”. [This is the ‘Paul Jeanty came to see me‘ memorandum from above].
Sangster saw this note from McMahon on 7 November and responded as follows (remember that Sangster had read the “Paul Jeanty – Leutwiler” memorandum). Below is the third main document of the series. It was written by John Sangster on 7 November 1979, a day on which the US dollar gold price closed at $382.92.
Mr McMahon Copies to: Mr Byatt
(handwritten: ‘Copy to the Governor’)
POSSIBLE GOLD POOL
This heat may be now off this question although on a longer term view gold still looks substantially overpriced, unless oil-producing countries are determined to pre-empt a large proportion of current supplies.
$ per fine ounce
End 1974 almost 200
September 1976 almost back to 100
July 1978 through 200
July 1979 through 300
October 1979 through 400
There could obviously be endless argument about when the price was right. One can perhaps say no more than that 200 was obviously too high at end of 1974, as 100 was too low almost two years later. If these brackets are omitted, it seems difficult to justify a price over 300 now. I should certainly be reluctant to recommend purchases, other than for the jobbing book, at above this price.
It is largely possible that German opposition to any thoughts of a revived ad hoc gold pool was largely tactical. They did not wish to give the US the excuse for further delay by diverting attention with another attack on symptoms, when a fundamental policy appraisal was under way. This would be rather like the general opposition to the third sterling balance arrangement in 1976 before the IMF deal was complete. If this view of the German opposition were correct, the discussion could now revive with more chance of success – particularly as the gold price has become a reflection on currencies in general and not just on the dollar in particular. If it is thought that the US has now got its policy right the action on the gold price could bring the sort of success that would sustain faith while waiting for the important result to come through. Would such an action be any more than the correction of erratic fluctuations which we all advocate in a greater or lesser degree in currencies, but in a market more notoriously subject to violent swings.
Of course the action might fail when it comes to the other leg of the smoothing operation in that the pool might not succeed in buying back at lower levels all that it had previously sold. That is a risk that would have to be accepted from the outset: there should be no question of chasing the price back beyond the level at which the selling operation started.
Given that the US auctions are now discretionary it would obviously be advisable for such sales to be subsumed in any general pool arrangement.
By way of illustration, should we become involved in a G.10 plus Switzerland co-operative endeavour and contributions were clearly in proportion to total gold holdings, our share would be just under 2 7/8%
7th November 1979
The pages of this memorandum from Sangster to McMahon can be seen here: Page 1 and Page 2. The links may take a little while to load first time.
Second Gold Pool Meeting – 10 December 1979
Since there are no records available from the BIS nor elsewhere as to what transpired at the first Gold Pool meeting on 12 November, the best way to glean the thinking from the participants of that meeting is by examining the discussions that took place in the 2nd Gold Pool meeting on 10 December 1979, a meeting for which there is a detailed summary, courtesy of a briefing memorandum from Kit McMahon to Gordon Richardson.
The invitation for the 10 December meeting at Zijlstra’s office at the BIS in Basle was relayed to the Governor’s office at the Bank of England on 6 October 1979 and was, probably not surprisingly for that time, scrawled as a short note on some small blue paper:
President Zijlstra’s secretary rang yesterday to invite you to a meeting he is intending to hold on Monday 10th December from 10.00am. This meeting follows the one held on 12th November. The subject will be the same – gold.
I said I would revert if you were unable to attend.
[Initials illegible] 6/12/79”
Gordon Richardson saw and acknowledged this note with his initials GR in red pen on the note, and the date 6/12 – see below.
The following document is the fourth main document in the Bank of England series covered here. This document is the briefing letter from Kit McMahon to Gordon Richardson referring to the Gold Pool discussion meeting which took place in the office of the BIS President Jelle Dijlstra on Monday 10 December 1979. This is probably the most important documented featured in Part 1 of this two part article series, since it provides an in-depth insight into one of the collusive Gold Pool discussion meetings which the most powerful central bank governors of the time attended discussing the creation of a syndicate to manipulate down the free market price of gold. On 10 December 1979, the gold price closed at $428.14.
In the meeting document, the name Larre refers to RenéLarre, General Manager of the BIS. Larre was BIS General Manager from May 1971 to February 1981.
De la Geniere refers to Renaud de La Genière, Governor of the Banque de France from 1979 to 1984.
The other participants at the 10 December meeting were BIS President Jelle Zijlstra, Chairman of the Swiss National Bank Fritz Leutwiler, Bank of England executive director Kit McMahon, outgoing Bundesbank President Otmar Emminger, incoming Bundesbank president Karl Otto Pohl, and Governor of the National Bank of Belgium Cecil de Strycker.
To: The Governors Copies to : Mr Payton, Mr Balfour, Mr Sangster , Mr Byatt only
In the Governor’s absence I attended the meeting in Zijlstra’s room in the BIS on the afternoon of Monday, 10th December to continue discussions about a possible gold pool. Emminger, de la Geniere, de Strycker, Leutwiler, Larre and Pohl were present.
Larre began by outlining a way in which a possible gold pool might be handled. The BIS could undertake all the operations on behalf of a group of central banks on the basis of rather general criteria which would be reviewed monthly. The criteria would take into account not merely the developments of the price of gold but the affect any such developments appeared to be having on the dollar. Thus they would envisage selling only when gold was relatively strong and the dollar relatively weak and buying only in the reverse circumstances. They thought that they at least might start with a sum of around 20 tons (equals around $300 million at present prices). They could take running profits of losses on their books for a considerable period and though participating central banks would have to envisage the possibility of an ultimate loss or gain in gold, in practice all that might be involved would be a loss or gain in dollars. On this point both Zijlstra and Leutwiler emphasised that they were already liable to suffer substantial losses on their dollar reserves and would not be worried by the potential losses that they might they might sustain on this scheme.
In answer to a question from me, Zijlstra confirmed that the US realised that if any gold pool were developed, the European central banks would intend to buy back in due course any gold they sold. He said they were unhappy that the Europeans were not prepared to sell gold outright but they accepted it. Larre pointed out in parenthesis that TonySolomon was probably the only American now or in the recent past that would be prepared to accept such a line. He knew that Wallich and probably Volcker was against the whole idea.
Zijlstra and Leutwiler said they were both strongly in favour of going ahead on the basis Larre had suggested. They then asked what the other thought.
Emminger said that he had put this proposition to his Central Bank Council who were unanimously against it. His hands were therefore at present totally tied.
De Strycker said he was extremely doubtful about the scheme. He thought it was neither desirable nor necessary and carried considerable dangers. De la Geniere was also negative stressing the great political dangers for him of selling any French gold in this indirect way.
Leutwiler then suggested that they should do it the other way round: wait until the gold price went below 400 and then start the operation by buying. When the BIS had bought, say, 20 tons they would have a masse de manoeuvre which they could then sell. La Geniere said that this might be easier for him and he would consider the possibility of doing something along these lines. Emminger also said, though without much confidence, that it was possible that if the operation were to start along these lines and if it appeared to be going well, it might be possible to persuade the Central Bank Council to join in.
Leutwiler and Zijlstra then said that although they did not think a very large group was necessary to undertake the operation it probably had to be bigger than Two: specifically they really needed either the French of the Germans. Zijlstra said that although he had formal powers to do this he did not wish to do it without carrying his Government with him. The Government was still doubtful and would probably need to know that a number of other countries were going along with it.
At various points during the meeting there was a discussion about publicity for the operation and at an early point Zijlstra said that publicity was both inevitable and desirable if the operation was to have a maximum effect. He brushed aside my suggestion that while the publicity for any selling operations would be helpful, that attached to the later (or on the revised scheme, earlier) buying could be rather inflammatory. However, if the scheme were to be
simply a BIS one, publicity would not necessarily, or perhaps desirably, arise. This point was not really addressed in the discussion.
I made a number of sceptical points about the failure of commodity stabilisation schemes of all kinds in the past and the dangers of getting drawn in gradually to bigger and bigger commitments. Leutwiler said that there was no danger because the losses would be small. I said that I envisaged political dangers. If it got known that the central banks were involving themselves in the price of gold, however much they said it was only a smoothing rather than a stabilising operation, they would find themselves on a tiger. If the price of gold went on rising they would either have to increase their efforts or add to the upward pressure o gold by pulling out.
None of this carried any weight with anybody except perhaps de Strycker. In any case I was not asked for any commitment from us. There was, in fact, no discussion of whether or how contributions to the scheme would be based, but presumably it would be in relation to gold holdings so that they would not expect much from us.
The meeting ended with Leutwiler saying he would approach the Canadians and Japanese to see how they felt about the idea while Zijlstra would talk to the Italians. All would then think further about it and revert in January.
I must say I remain personally extremely sceptical about the desirability and efficacy of any scheme along the lines so far suggested.
13th December 1979
The pages of this meeting description from McMahon can be seen here: Page 1, Page 2 and Page 3. The links may take a little while to load first time.
The Essence of the 10 December Meeting
The following key points are notable from McMahon’s briefing of the 10 December Gold Pool discussions meeting. McMahon opens by stating that the meeting was called “to continue discussions about a possible gold pool“. This proves there was an earlier meeting in November as per the invitation for the November meeting despite the fact that no minutes or summary exist for the November meeting.
Zijlstra and Leutwiler acted as the 2 main advocates of the proposed Gold Pool arrangement. This is important to remember because Zijlstra was the President of the BIS at that time and Leutwiler became President of the BIS at the beginning of 1982 taking over from Zijlstra. So the heads of the BIS in the early 1980s were both firm advocates of the need for a new Gold Pool. Zijlstra and Leutwiler probably also represented the two most independent central banks present at the discussions, namey the Dutch and Swiss central banks.
The following countries were represented at the 10 December meeting: UK, Switzerland, West Germany, France, Netherlands, Belgium. The following central banks were represented at the meeting:
Zijlstra – BIS and Netherlands central bank
McMahon – Bank of England
Emminger – Deutsche Bundesbank
Pohl – Deutsche Bundesbank
de la Geniere – Banque de France
de Strycker – Belgian central bank
Leutwiler – Swiss National Bank
Larre – Bank for International Settlements
The fact that Emminger had already put the suggestion to his Central Bank Council implies that this was probably a take-away after the November meeting. According to the Bundesbank 1979 annual report, there were 18 members of the Central bank Council (including Emminger and Pohl).
The market mechanics of the proposals discussed in the meeting are also classic collusive Gold Pool tactics to torpedo the gold price by “selling only when gold was relatively strong and the dollar relatively weak and buying only in the reverse circumstances.”
The discussion also made it clear that the preferred approach would be to operate as both a selling syndicate and a buying consortium as “European central banks would intend to buy back in due course any gold they sold.” It was even suggested that thebuying could occur first so as to create an inventory of physical gold with which to use to fund the selling interventions, i.e “wait until the gold price went below 400 and then start the operation by buying. When the BIS had bought, say, 20 tons they would have a masse de manoeuvre which they could then sell.”
Given that René Larre the BIS general manager began the meeting shows that he was coordinating or spearheading this meeting in his capacity as BIS general manager. It is also very interesting that McMahon states that “the BIS could undertake all the operations on behalf of a group of central banks” that could be “reviewed monthly”, which underlines the fact that overall, this could be viewed as a BIS led scheme, controlled and operated out of Basle.
A BIS scheme would also allow the Gold Pool to operate in secrecy, out of public view. In the words of McMahon “if the scheme were to be simply a BIS one, publicity would not necessarily, or perhaps desirably, arise“.
Following this 10 December meeting, the governors returned to their respective banks and recessed for Christmas and New Year, returning to Basle in early January where the next Gold Pool meeting took place on 7 January 1980, in a historic month in which the gold price rocket from $515 to $850 in a matter of weeks.
This concludes Part 1 of the series. There is a lot to digest in the above. Part 2 will continue where we left off, and will cover discussions of this new BIS Gold Pool during the period from January 1980 onwards. For now, some quotes from Part 2:
“This is not to advocate gold for oil directly; the price haggling would be too acrimonious. Market intermediation should allow the G10 to move with the price while attempting to control its pace as well as break off the experiment when possible or necessary.”
– John Sangster to Gordon Richardson, Anthony Loenhis & Kit McMahon, Bank of England, 17 September 1980
“I feel that it is necessary for us, within the Group of Ten and Switzerland, to consider ways to regulate the price of gold, admittedly within fairly broad limits”
– Jelle Zjilstra, BIS Chairman and President and Dutch central bank President, 27 September 1981
“First, there is the meeting on the Gold Pool, then, after lunch, the same faces show up at the G-10″
– Bundesbank President Karl Otto Pohl (who only began working at the Bundesbank in 1977) to journalist Edward Jay Epstein, in a conversation at the Bundesbank in 1983
It’s a common misconception that the world’s major central banks and monetary authorities own large quantities of gold bars. Most of them do not. Instead, this gold is owned by the sovereign states that have entrusted it to the respective nation’s central bank, and the central banks are merely acting as guardians of the gold. Tracing the ownership question a step further, what are sovereign states? A sovereign state is an entity with legal personality that is represented by one government. And with each government representing the people of that sovereign state, in essence, the large gold hordes managed by the central banks are in fact pools of gold owned by the state for the benefit of its citizens.
Owned by the State
When ownership of gold reserves resides with the associated sovereign state, the central bank or monetary authority is officially appointed to act on behalf of the state in holding and managing that state’s gold reserves.
For example, the Deutsche Bundesbank has stated that:
“The Deutsche Bundesbank holds and manages the national foreign reserves of the Federal Republic of Germany”
“shall hold and manage theState’s gold and currency reserves and shall enter them on the asset side of its balance sheet pursuant to the terms and conditions of an agreement it enters into with the State.”
The United Kingdom’s gold reserves are held in the Exchange Equalisation Account (EEA). The EEA is a “government account administered by Her Majesty’s Treasury (HMT)” which holds UK Government’s official international reserves, including its gold.
HMT is the UK government’s economic and finance ministry. According to the Bank of England, the Bank “acts as HMT’s Agent in the day-to-day management of the EEA” under an annual Service Level Agreement between HMT and the Bank.
China’s official gold reserves are owned by the Chinese State and managed by the Chinese central bank, the People’s Bank of China (PBoC). One of the PBoC’s stated functions is:
“Holding and managing the state foreign exchange and gold reserves“
The Russian Federation’s central bank, the Bank of Russia, manages the official Russian gold reserves, however the Bank of Russia is under ownership of the Russian Federation:
“The authorised capital and other property of the Bank of Russia shall be in federal ownership. In pursuance of its purposes and in accordance with the procedure established by this Federal Law, the Bank of Russia shall exercise its powers to own, use and manage its property, including the gold and currency (international) reserves of the Bank of Russia”
The Russian State Fund of Precious Metals and Precious Stones, a.k.a The Gokhran, may also hold Russian gold reserves. However, it doesn’t report its investments to the public. The Gokhran too is under Russian state control, since the Gokhran reports to the Russian Ministry of Finance.
The official gold reserves of the Netherlands are owned by the Netherlands state, not by the De Nederlandsche Bank (DNB). The DNB merely manages these gold reserves:
“The Dutch central Bank manages more than 600 tonnes of gold. That gold is of the State and is in essence our national nest egg.”[De Nederlandsche Bank beheert ruim 600 ton goud. Dat goud is van de staat en is in wezen ons nationale appeltje voor de dorst.]
Austria’s central Bank, Oesterreichische Nationalbank (OeNB) states that it “invests and manage the national monetary and gold reserves” of Austria in accordance with the bank’s “stability mandate”. This mandate is derived from Austria’s NationalBank Act and various EU and ECB statutes. The (OeNB) is itself, fully owned by the central government of Austria.
Switzerland’s national gold reserve policy, through which the Swiss National Bank (SNB) holds Switzerland’s gold reserves, is derived from the Swiss Federal Constitution. The Constitution grants the SNB its independence and mandate, and Article 99 of the Constitution requires that the SNB hold sufficient currency reserves / foreign exchange reserves, part of which must be in the form of gold.
Banca d’Italia and ECB
One notable exception to the above ownership pattern is Italy. Ownership of Italy’s gold reserves resides directly with the country’s central bank, the Banca d’Italia (Bank of Italy). According to the Bank:
“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)
Another exception is the European Central Bank (ECB). In January 1999, when the Euro was first introduced and the then newly established ECB became responsible for a common monetary policy in the Euro area, each national central bank (NCB) participating in the Euro was required to transfer foreign reserves to the ECB so as to populate the ECB’s balance sheet with foreign reserves. Each NCB transfer was required to be in the form of 15% gold, and 85% in a combination of US dollars and Japanese yen. The initial NCB transfers in 1999 provided the ECB with 750 tonnes of gold, but left the combined gold holdings of participating NCBs and the ECB unchanged. These ECB’s foreign reserves, including gold, which now total 5050 tonnes, are managed on a decentralised basis by the NCBs. See BullionStar blog “European Central Bank gold reserves held across 5 locations. ECB will not disclose Gold Bar List” for full details.
Since the ECB is owned by its member NCBs, the ECB gold is therefore not owned by any particular state. However, it could be argued that since most of the ECB member central banks are owned by European states, then the ECB gold is collectively owned mostly by European states.
With the majority of central banks also fully owned by the state, overall this means that even in cases where a central bank ‘owns‘ the gold that it holds, that central bank will likely be under state ownership, which essentially means that the gold it controls is ultimately owned by the state.
Friction between State and Central Bank
Although central banks are usually independent from their respective country’s governments, a relationship status which provides them with a degree of day-to-day control over the management of official gold reserves, the States’ finance ministries, government auditors and government legislation will, to various extents, require input into major decisions about a country’s gold reserves, such as gold sales, gold storage location plans, and the auditing of the nation’s gold reserves.
This can sometimes cause tension between the central bank and the government, as was the case between the Deutsche Bundesbank and the German Federal court of auditors, and also seen in the case of the Austrian central bank and the Austrian Court of Auditors.
In 2011, the German Federal Court of Auditors, the Bundesrechnungshof, wrote a highly critical report concerning the Bundesbank’s lack of oversight of German gold stored at the Federal Reserve Bank of New York, the Bank of England and at Banque de France. The Federal Auditors specifically took exception to the lack of physical audits by the Bundesbank of its foreign held gold. This report, which was initially confidential but which became public in October 2012, led to the Bundesbank announcing a gold repatriation program that same month, a program which was subsequently expanded in scope in January 2013.
In February 2015, the Austrian Court of Auditors issued a report addressing the Austrian central bank’s (OeNB’s) gold reserves. That report was critical of the ‘high concentration risk’ of storing over 80% of Austria’s gold at the Bank of England vaults in London. The Court of Auditors also asserted that the gold storage contract with the Bank of England was deficient and that the OeNB’s internal auditing for the gold was also deficient. Three months later the OeNB announced a program to repatriate 140 tonnes of its gold from the Bank of England back to storage sites in Austria and Switzerland.
Conclusion: Central Bank Secrecy and Arrogance
It’s well documented on this website and others that central banks are non-cooperative in disclosing important details about gold reserves which they hold and manage, details such as weight lists and auditing details. It has now been demonstrated that the majority of these central banks only ‘manage’ this gold on behalf of their respective sovereign states. The most common excuse of the central banks in their non-cooperation is confidentially, with a close second being deflecting the question, and a common third being to ignore the question.
But given that the sovereign states own the gold and that the sovereign states are represented by governments which claim to represent the citizens of those states, this secrecy and arrogance from a bunch of aloof unelected central bank bureaucrats is misplaced, unacceptable and needs to be highlighted, called out and challenged. Likewise for the elected bureaucrat finance ministers who connive and endorse this central banker behaviour or are merely ignorant and uninterested in how the central bankers conduct themselves in the gold market and towards the public who have legitimate questions about this market.
For full details of gold related policies of most of the central banks mentioned in this article, please see the following BullionStar Gold University profiles of Central Bank Gold Policies:
The European Central Bank (ECB), creator of the Euro, currently claims to hold 504.8 tonnes of gold reserves. These gold holdings are reflected on the ECB balance sheet and arose from transfers made to the ECB by Euro member national central banks, mainly in January 1999 at the birth of the Euro. As of the end of December 2015, these ECB gold reserves were valued on the ECB balance sheet at market prices and amounted to €15.79 billion.
The ECB very recently confirmed to BullionStar that its gold reserves are stored across 5 international locations. However, the ECB also confirmed that it does not physically audit its gold, nor will it divulge a bar list / weight list of these gold bar holdings.
Questions and Answers
BullionStar recently put a number of questions to the European Central Bank about the ECB’s gold holdings. The ECB Communications Directorate replied to these questions with answers that appear to include a number of facts about the ECB gold reserves which have not previously been published. The questions put to the ECB and its responses are listed below (underlining added):
Question 1: “The 2015 ECB Annual Report states that as at 31 December 2015, the ECB held 16,229,522 ounces of fine gold equivalent to 504.8 tonnes of gold. Given that the ECB gold holdings arose from transfers by the respective member central banks, could you confirm the storage locations in which this ECB gold is currently held (for example at the Bank of England etc), and the percentage breakdown of amount stored per storage location.”
ECB Response: “The gold of the ECB is located in London, Paris, Lisbon, New York and Rome. The ECB does not disclose its distribution over these places. The gold of the ECB is stored there because it was already stored there before ownership was transferred to the ECB and moving it was seen and is seen as too costly.“
Question 2: “Could you clarify as to how, if at all, this gold is audited, and whether it physical audited by the ECB or by a 3rd party?”
ECB Response: “The ECB has no physical audit of its gold bars. The gold bars that the ECB owns are individually identified and each year the ECB receives a detailed statement of these gold deposits. The central banks where the gold is stored are totally reliable.“
Question 3:“Finally, can the ECB supply a full weight list of the gold bars that comprise the 504.8 tonnes of gold referred to above?”
ECB Response: “The ECB does not disclose this information.“
London, New York, Paris, Rome, Lisbon
Given that some of the information shared by the ECB has arguably not been in the public record before, each of the 3 ECB answers above is worth further exploration.
In January 1999, when the Euro currency was created (Stage 3 of Economic and Monetary Union), each founding member national central bank (NCB) of the Euro transferred a quantity of foreign reserve assets to the ECB. Of these transfers, 85% was paid to the ECB in the form of US dollars and Japanese Yen, and 15% was paid to the ECB in the form of physical gold.
Initially in January 1999, central banks of 11 countries that joined the Euro made these transfers to the ECB, and subsequently the central banks of a further 8 countries that later joined the Euro also executed similar transfers to the ECB.
All of the foreign exchange and gold reserves that were transferred to and are owned by the ECB are managed in a decentralised manner by the national central banks that initiated the transfers. Essentially, each national central bank acts as an agent for the ECB and each NCB still manages that portion of reserves that it transferred to the ECB. This also applies to the transferred gold and means that the gold transferred to the ECB never physically moved anywhere, it just stayed where it had been when the transfers of ownership were made.
That is why, as the ECB response to Question 1 states: “The gold of the ECB is stored there because it was already stored there before ownership was transferred to the ECB”.
What is probably most interesting about the latest ECB statement is that it names 5 city locations over which the ECB’s gold is stored. The 5 gold storage locations stated by the ECB are London, New York, Paris, Rome and Lisbon. Since the gold transferred to the ECB in 1999 by the national central banks would have already been stored in central banks gold vaults, these 5 city locations undoubtedly refer to the gold vaults of:
the Bank of England
the Federal Reserve Bank of New York
the Banque de France
the Banca d’Italia
Banco de Portugal
The fact the ECB’s gold holdings are supposedly stored at these 5 locations can be explained as follows:
Between 4th and 7th January 1999, 11 central banks transferred a total of €39.469 billion in reserve assets to the ECB (in the form of gold, cash and securities). Of this total, 15% was in the form of gold, amounting to 24 million ounces of gold (747 tonnes of gold) which was valued at that time at €246.368 per fine ounce of gold, or €5.92 billion. The 85% transferred in the form of currencies comprised 90% US Dollars and 10% Japanese Yen. See pages 152 and 153 of ECB annual report 1999 for more details.
The 11 central banks that made the transfers to the ECB in January 1999 were the central banks of Belgium, Netherlands, Germany, France, Luxembourg, Italy, Ireland, Austria, Finland, Spain and Portugal. See Table 1 for details of these gold transfers, and the amount of gold transferred to ECB ownership by each central bank.
The value of reserves transferred to the ECB by each national central bank were based on a percentage formula called a ‘capital key’ which also determined how much each central bank subscribed to the founding capital of the ECB. This capital key was based on equally weighting the percentage of population and GDP each Euro founding member economy represented, therefore central banks such as Deutsche Bundesbank, Banque de France, and Banca d’Italia comprised the largest transfers, as can be see in Table 1. It also meant that these 3 central banks transferred the largest amounts of gold to the ECB, with the Bundesbank for example transferring 232 tonnes of gold to the ECB.
The Bundesbank gold transfer to the ECB in January 1999 took place at the Bank of England. The Bundesbank actually confirmed in its own published gold holdings spreadsheet that this transfer took place at the Bank of England. See spreadsheet Column 5 (BoE tonnes), Rows 1998 and 1999, where the Bundesbank gold holdings fell by 332 tonnes between 1998 and 1999 from 1,521 tonnes to 1,189 tonnes and also see Column 20 where gold lending rose from 149 tonnes to 249 tonnes. Therefore, between 1998 and 1999, 232 tonnes of gold was transferred from the Bundesbank gold account at the bank of England to the ECB account at the Bank of England, and 100 tonnes was added to the Bundesbank’s gold loans.
Paris and Rome
The Banque de France currently stores the majority (over 90%) of its gold reserves in its own vaults in Paris, so it it realistic to assume that when the Banque de France transferred 159 tonnes of gold to the ECB in January 1999, it did so using gold stored in the Banque de France vaults in Paris. Likewise, it is realistic to assume that the Banca d’Italia, which currently stores half of its gold reserves at its own vaults in Rome, transferred 141 gold stored in its Rome vaults to the ECB in 1999. This would explain the Paris and Rome gold holdings of the ECB. While a few ex French colony central banks are known to have historically stored gold with the Banque de France in Paris, none of the founding members of the Euro (apart from the Bundesbank) are on the record as having stored gold in Paris, at least not for a long time. The Banca d’Italia is not known for storing gold on behalf of other national central banks.
Lisbon and New York
The Banco de Portugal currently holds its gold reserves in Lisbon and also at the Bank of England, the Federal Reserve Bank of New York (FRBNY), and with the BIS. The ECB gold stored in Lisbon, Portugal most likely refers to the 18.2 tonnes of gold transferred by the Banco de Portugal to the ECB in January 1999, because a) that makes most sense, and b) the Banco de Portugal is not known as a contemporary gold custodian for other central banks.
Of the other 7 central banks that transferred gold to the ECB in January 1999, the central banks of Austria, Belgium and Ireland store most of their gold at the Bank of England so are the most likely candidates to have made gold transfers to the ECB at the Bank of England. See BullionStar blog “Central bank gold at the Bank of England” for more details of where central banks are known to store gold.
The Netherlands and Finland currently store some of their gold reserves at the Bank of England and at the Federal Reserve Bank of New York and probably also did so in 1998/99, so one or both of these banks could have made transfers to the ECB at the FRBNY. Another contender for transferring gold held at the FRBNY is the Spanish central bank since it historically was a holder of gold at the NYFED. It’s not clear where the central bank of Luxembourg held or holds gold but it’s not material since Luxembourg only transferred just over 1 tonne to the ECB in January 1999.
Greece and Later Euro members
Greece joined the Euro in January 2001 and upon joining it transferred 19.5 tonnes of gold to the ECB. Greece is known for storing some of its gold at the FRBNY and some at the Bank of England, so Greece too is a candidate for possibly transferring New York held gold to the ECB. In theory, the ECB’s New York held gold may not have even arisen from direct transfers from Euro member central banks but could be the result of a location swap. Without the national central banks or the ECB providing this information, we just don’t know for sure how the ECB’s New York gold holdings arose.
Another 7 countries joined the Euro after Greece. These countries were Slovenia on 1st January 2007, Malta and Cyprus 1st January 2008, Slovakia 1st January 2009, Estonia 1st January 2011, Latvia 1st January 2014, and Lithuania 1st January 2015. The majority of these central banks made gold transfers to the ECB at the Bank of England. In total these 7 central banks only transferred 9.4 tonnes of gold to the ECB, so their transfers are not really material to the ECB’s gold holdings.
These sales explain why the ECB currently only holds 504.8 tonnes of gold:
i.e. 766.9 t (including Greece) – 271.5 t sales + 9.4 t smaller member transfers = 504.8 t
The ECB does not provide, nor has ever provided, any information as to where the 271.5 tonnes of gold involved in these 2005-2009 sales was stored when it was sold. The fact that the ECB still claims to hold gold in Paris, Rome and Lisbon, as well as London and New York, suggests that at least some of the gold transferred by the Banque de France, Banca d’Italia and Banco de Portugal in 1999 is still held by the ECB.
If the ECB had sold all the gold originally transferred to it by all central banks other than France, Italy, Portugal and Germany, this would only amount to 197 tonnes, so another 74 tonnes would have been needed to make up the shortfall, which would probably have come from the ECB holdings at the Bank of England since that is where most potential central bank and bullion bank buyers hold gold accounts and where most gold is traded on the international market.
Even taking into account Greece’s 19.4 tonne gold transfer to the ECB in January 2001, and excluding the French, Italian, German and Portuguese transfers in 1999, the ECB’s 271.5 tonnes of gold sales would still have burned through all the smaller transfers and left a shortfall. So the ECB gold sales may have come from gold sourced from all of its 5 storage loacations.
It’s also possible that one or more of the original 11 central banks transferred gold to the ECB that was stored at a location entirely distinct from the 5 currently named locations, for example gold stored at the Swiss National Bank. If that particular gold was then sold over the 2005-2009 period, it would not get picked up in the current locations. It’s also possible that some or all of the 271.5 tonnes of gold sold by the ECB over 2005-2009 had been loaned out, and that the ‘sales’ were just a book squaring exercise in ‘selling’ gold which the lenders failed to return, with the loan transactions being cash-settled.
No Physical Audit of ECB Gold
Given that the Euro is the 2nd largest reserve currency in the world and the 2nd most traded currency in the world, the ECB’s gold and how that gold is accounted for is certainly a topic of interest. Although the ECB’s gold doesn’t directly back the Euro, it backs the balance sheet of the central bank that manages and administers the Euro, i.e. the ECB.
The valuation of gold on the ECB’s annual balance sheet also adds to unrecognised gains on gold in the ECB’s revaluation account. Given gold’s substantial price appreciation between 1999 and 2015, the ECB’s unrecognised gains on gold amount to €11.9 billion as of 31 December 2015.
It is therefore shocking, but not entirely surprising, that the ECB doesn’t perform a physical audit of its gold bars and has never done so since initiating ownership of this gold in 1999. Shocking because this lack of physical audit goes against even the most basic accounting conventions and fails to independently prove that the gold is where its claimed to be, but not surprising because the world of central banking and gold arrogantly ignores and bulldozes through all generally accepted accounting conventions. Geographically, 2 of the locations where the ECB claims to store a percentage of its gold are not even in the Eurozone (London and New York), and infamously, the Bundesbank is taking 7 years to repatriate a large portion of its gold from New York, so the New York storage location of ECB gold holdings should immediately raise a red flag. Furthermore, the UK is moving (slowly) towards Brexit and away from the EU.
Recall the response above from the ECB:
“The ECB has no physical audit of its gold bars. The gold bars that the ECB owns are individually identified and each year the ECB receives a detailed statement of these gold deposits. The central banks where the gold is stored are totally reliable.“
Imagine a physical-gold backed Exchange Traded Fund (ETF) such as the SPDR Gold Trust or iShares Gold Trust coming out with such a statement. They would be run out of town. References to ‘totally reliable’ are all very fine, but ‘totally reliable’ wouldn’t stand up in court during an ownership claim case, and assurances of ‘totally reliable’ are not enough, especially in the gold storage and auditing businesses.
The ECB is essentially saying that these ‘statements’ of its gold deposits that it receives from its storage custodians are all that is needed to for an “audit” since the custodians are ‘totally reliable‘.
This auditing of pieces of paper (statements) by the ECB also sounds very similar to how the Banca d’Italia and the Deutsche Bundesbank conduct their gold auditing on externally held gold i.e. they also merely read pieces of paper. Banca d’Italia audits “annual certificates issued by the central banks that act as the depositories” (the FRBNY, the Bank of England, and the SNB/BIS).
The Bundesbank does likewise for its externally held gold (it audits bits of paper), and solely relies on statements from custodians that hold its gold abroad. The Bundesbank actually got into a lot of heat over this procedure in 2012 from the German Federal Court of Auditors who criticised the Bundesbank’s blasé attitude and lack of physical auditing, criticism which the Bundesbank’s executive director Andreas Dombret hilariously and unsuccessfully tried to bury in a speech to the FRBNY in New York in November 2012 in which he called the controversy a “bizarre public discussion” and “a phantom debate on the safety of our gold reserves“, and ridiculously referred to the movies Die Hard with a Vengeance and Goldfinger, to wit:
“The days in which Hollywood Germans such as Gerd Fröbe, better known as Goldfinger, and East German terrorist Simon Gruber, masterminded gold heists in US vaults are long gone. Nobody can seriously imagine scenarios like these, which are reminiscent of a James Bond movie with Goldfinger playing the role of a US Fed accounting clerk.”
Where is the ECB Gold Bar Weight List?
Since, as the ECB states, it’s gold bars are “individually identified“, then gold bar weight lists of the ECB’s gold do indeed exist. This then begs the question, where are these weight lists, and why not release them if the ECB has nothing to hide?
Quickly, to define a weight list, a gold bar weight list is an itemised list of all the gold bars held within a holding which uniquely identifies each bar in the holding. In the wholesale gold market, such as the London Gold Market, the LBMA’s “Good Delivery Rules” address weight lists, and state that for each gold bar on a weight list, it must list the bar serial number, the refiner name, the gross weight of the bar, the gold purity of the bar and the fine weight of the bar. The LBMA also state that “year of manufacture is one of the required ‘marks’ on the bar”.
Recall from above that when the ECB was asked to provide a full weight list of its 504.8 tonnes of gold bars, it responded: “The ECB does not disclose this information.“
After receiving this response, BullionStar then asked in a followup question as to why the ECB doesn’t disclose a weight list of the gold bars. The ECB responded (underlining added):
“We would like to inform you that, while the total weight and value of the gold held by the European Central Bank (ECB) can be considered to be of interest to the public, the weight of each gold bar is a technicality that does not affect the economic characteristics of the ECB’s gold holdings. Therefore the latter does not warrant a publication.“
It is a very simple task to publish such a weight list in an automated fashion. The large gold backed ETFs publish such weight lists online each and every day, which run in to the hundreds of pages. Publication of a weight list by the ECB would be a very simple process and would prove that the claimed bars are actually allocated and audited.
The more evidence that is gathered about the refusal of central banks to issue industry standard gold bar weight lists, the more it becomes obvious that there is a coordinated understanding between central banks never to release this information into the public domain.
The most likely reason for this gold bar weight list secrecy is that knowledge of the contents of central bank gold bar weight lists could begin to provide some visibility into central bank gold operations such as gold lending, gold swaps, location swaps, undisclosed central bank gold sales, and importantly, foreign exchange and gold market interventions. This is because with weight list comparisons, gold bars from one central bank weight list could begin turning up in another central bank weight list or else turning up in the transparent gold holdings of vehicles such as gold-backed Exchange Traded Funds.
Instead of being fixated with the ECB’s continual disastrous and extended QE policy, perhaps some financial journalists could bring themselves to asking Mario Draghi some questions about the ECB gold reserves at the next ECB press briefing, questions such as the percentage split in storage distribution between the 5 ECB gold storage locations, why ECB gold is being held in New York, why is there no physical audit of the gold by the ECB, why does the ECB not publish a weight list of gold bar holdings, and do the ECB or its national central bank agents intervene into the gold market using ECB gold reserves.
The lackadaisical attitude of the ECB to its gold reserves by never physically auditing them is also a poor example to set for all 28 of the central bank members of the European System of Central Banks (ESCB), and doesn’t bode well for any ESCB member central bank in being any less secretive than the ECB headquarters mothership.
If gold does re-emerge at the core of a revitalised international monetary system and takes on a currency backing role in the future, the haphazard and non-disclosed distribution of the ECB’s current gold reserves over 5 locations, the lack of physical gold audits, and the lack of public details of any of the ECB gold holdings won’t really inspire market confidence, and is proving to be even less transparent than similar metrics from that other secretive large gold holding bloc, i.e the USA.
Anyone with even a passing interest in US official gold reserves will probably recall that the US Treasury claims to hold its gold (8,133.5 tonnes) over four locations in continental United States, namely at three US Mint facilities in Fort Knox (Kentucky), West Point (upstate New York), Denver (Colorado), and at the New York Fed (Manhattan, New York City).
This report states that 4,583 tonnes of US Treasury gold are stored in the US Mint’s bullion depository in Fort Knox, 1,682 tonnes at the West Point bullion storage facility, and 1,364 tonnes in the US Mint facility in Denver, for a total of 7,628 tonnes of gold. The US Treasury further claims that 418 additional tonnes of its official gold reserves are held at the Federal Reserve Bank vault in New York. An additional 87 tonnes, a working stock figure (which never changes), comprises the balance.
While Fort Knox and the NY Fed vaults regularly take the limelight in terms of volume of media coverage, and to a lesser extent the West Point vaults do so also, there is very little if anything devoted to coverage of the US Treasury gold supposedly held in Denver. It is therefore of interest that none other than the US Mint on its own website recently ceased claiming that it stores gold bullion at its Denver facility.
“Today, the United States Mint at Denver manufactures all denominations of circulating coins, coin dies, the Denver “D” portion of the annual uncirculated coin sets and commemorative coins authorized by the U. S. Congress. It also stores gold and silver bullion.”
“Today, the United States Mint at Denver manufactures all denominations of circulating coins, coin dies, the Denver “D” portion of the annual uncirculated coin sets and commemorative coins authorized by the U. S. Congress. It also stores silver bullion.”
At the very least this change in wording between August and September 2014 is very unusual. Why would the Mint have authorized and made such a wording change and deleted the reference to gold bullion? I asked the US Mint to clarify but the query went unanswered:
Given that the Denver Mint does not produce any gold or silver coins, the Mint does not have a need to store either gold or silver bullion working stock in Denver, so the above wording cannot be referring to metal being stored for fabrication supplies. The only commemorative coin produced in Denver is an uncirculated clad half dollar made of copper and nickel. While the above change of wording on the US Mint’s website could have an entirely different explanation, it does raise the possibility that there isn’t any US Treasury gold bullion stored in Denver. This possibility would also subscribe to a view that has been expressed for quite some time now by well-known gold author and commentator James Rickards. Since at least 2010, and probably prior to that, Rickards seems to think that the US gold reserves are nearly exclusively stored at West Point and Fort Knox. Some tweets of his illustrate the point:
Almost all U.S. #gold is either in Ft. Knox or West Point, both Army bases. So U.S. gold is effectively controlled by the military. — Jim Rickards (@JamesGRickards) September 1, 2010
@cetarro Right, but to put a finer point on it, #gold is really controlled by the military because it’s all at Ft. Knox and West Point
This view, that the US gold is kept at West Point and Fort Knox, actually makes quite a lot of practical sense and is entirely logical. It also makes Denver look like the odd man out.
The US Mint facilities at Fort Knox and West Point are located adjacent to US military installations, namely the US Army base, Fort Knox, and the US Military Academy, West Point. The Fort Knox bullion depository, which opened in 1936, was actually built on land that was previously part of the Fort Knox military base, and that had been deeded to the Treasury Department. The West Point bullion facility, which opened two years later in 1938, was built on land formerly occupied by the West Point military facility, and that had also been deeded to the Treasury Department.
Having large quantities of gold stored in facilities next door to US military facilities is a natural security advantage for protection and also as a deterrent against any would be gold heists. In contrast, the US Mint facility in Denver is located on a city block at 320 West Colfax Avenue, between Delaware St and Cherokee St. It’s near a court-house and a police station but no sign of any US military facilities in the immediate vicinity.
The US Mint in Denver is also the odd one out (of the three) in that it offers public tours of the facility, something unheard of at Fort Knox and West Point. Arguably, the NYFed offers a gold vault tour, but out of US Mint facilities that the Treasury claims to store gold at, Denver is the only one with a public tour. The supposed location of the gold vaults in Denver is also a complete mystery with no photos or images of any vaults or contents of vaults (as far as I can see) ever on the web. A review of the Denver Mint tour (here) mentions supposed gold storage in the lower decks of the building but this seems to be merely supposition as it is inferring that 3 gold bars on display in Denver came from the building’s vaults. However, they did not. These three gold bars actually came from West Point, as CoinWeek stated in May 2012:
“Denver Mint plant manager David Croft pointed out that the three bars were shipped in from the U.S. Mint’s working gold supply at West Point and did not come from the gold that is in deep storage in Denver.“
Which begs the question, why? The US Mint would probably answer, so as not to ‘break the seals’ on the Denver vault doors, but this shipping of 3 gold bars from upstate New York to Denver would seem completely unnecessary if Denver was storing a couple of tonnes of gold, let alone 1,362 tonnes. The more accurate answer may be that the US gold, if it even exists to the extent to which the US Treasury claims, is held adjacent to US military bases at West Point and Fort Knox.
Within the world of central bank and government gold reserves, there is often an assumption that these gold holdings consist entirely of gold bullion bars. While this is true in some cases, it is not the fully story because many central banks and governments, such as the US, France, Italy, Switzerland, the UK and Venezuela, all hold an element of gold bullion coins as part of their official monetary gold reserves.
These gold coin holdings are a legitimate part of gold reserves since under International Monetary Fund (IMF) definitions, “monetary gold consists of gold coins, ingots, and bars”. In central banking parlance, monetary gold is simply gold that is held by a central bank or government as a reserve asset. Other central bank reserve assets include foreign exchange holdings and holdings of IMF Special Drawing rights.
Elsewhere in IMF definitions, it is stated that “monetary gold is generally construed to be at least 995/1000 pure.” Many government and central bank gold coin holdings consist of previously circulated gold coinage. Since gold coins often had – and still have – a purity of less than 99.5% gold due to the addition of other metals for added durability, this ‘generally construed’ leeway in the IMF definition is undoubtedly a practical consideration that allows gold coins to be classified as monetary gold.
Central banks and governments hold gold for the same reasons that private citizens hold gold. Gold is real money with no counterparty risk, gold is a store of value, and gold is a safe haven asset. In general, central banks and governments are as happy holding bullion in gold bar form as in gold coin form. This is because physical gold is physical gold, and a gold coin and a gold bar will both provide their holders with the same benefits and protections. Only the physical form differs. In practice, the types and quantities of gold coins held by central banks and governments are extensive and varied as a quick tour d’horizon reveals.
Starting with the largest official sector gold holders, 3 of the top 5 gold holding countries have substantial gold coin holdings in their claimed reserves. The Banque de France, the guardian of France’s gold reserves, holds 2435.4 tonnes of gold consisting of a massive 100 tonnes of gold coins, and 2,335 tonnes of gold bars. Of these gold coins, 45% are French gold coins (probably Napoleans) and 55% are foreign gold coins, some of which are from the US. In the past, the Banque de France had melted part of its gold coin holdings into gold bars without considering their potential numismatic value. But after finding some US 20 dollar gold coins were worth USD 20,000 a piece, the Bank’s current policy is to scrutinise every coin.
Banca d’Italia stores approximately half of Italy’s 2451.8 tonnes of gold under its headquarters in Rome, with most of the other half stored at the Federal Reserve in New York. Of the 1199.4 tonnes of Italian gold in Rome, Banca d’Italia states that it holds 4.1 tonnes of gold coins, in the form of 871,713 coins. This would give each gold coin an average gold content of 0.151 troy ounces. This hoard most likely includes historic gold Italian 10 Lira and 20 Lira coins.
The US Treasury, the official holder of the US gold reserves, claims to hold gold coins containing 73,829.5 fine ounces of gold (2.3 tonnes) in the custody of the Federal Reserve Bank of New York. While a small subset of these coins weighing 377.4 ounces is on display in New York, the remaining coins, containing 73,451 fine ounces of gold, are held in The New York Fed’s vault compartment K in 384 bags weighing a gross 80,855.70 ounces. These coins are all either 0.9 fine or 0.9167 fine gold. For details see page 132 here. These US Treasury held gold coins at the Fed are in addition to the 2,783,218.6 (86.5 tonnes) of gold coins that the US Treasury claims to hold within the US Mint’s working stock.
Venezuela’s gold holdings, which have practically all been sold off or swapped for foreign exchange recently, also contain gold coin holdings in the form of historic gold US Eagles, as well as gold US Liberty and ‘Indian Head’ coins (see page 17 here). Notably, the Venezuelan central bank says that these coins would have a numismatic premium valuation depending on their scarcity, design and condition. Given the ongoing and deteriorating economic situation in Venezeula, expect these gold coins to be either sold on the market or else melted down and shipped out of the country, probably to Switzerland.
Speaking of Switzerland, the Swiss National Bank (SNB) in its publications, says that its “gold holdings are mainly in the form of gold bars, with the remainder in gold coins“. The SNB doesn’t elaborate on what type of gold coins it holds, and when asked recently, in the spirit of central bank secrecy, it not surprisingly declined to elaborate. Most likely this Swiss hoard includes historic Swiss Franc gold coins, and even old Latin Monetary Union gold coins.
The United Kingdom, through HM Treasury’s Exchange Equalisation Account (EEA), claims to hold 310.3 tonnes of gold in its reserves, all of which is held in custody at the Bank of England. The EEA 2014/2015 accounts states that “The gold bars and gold coin in the reserves were stored physically at the Bank’s premises“. As to what type of gold coins the UK holds, HM Treasury didn’t repond to a recent query, but undoubtedly, the Treasury holds gold Sovereigns as HM Treasury archives reveal.
Among other central banks, Romania holds 14% of its monetary gold in the form of gold coins, amounting to approximately 14.43 tonnes. The Central Bank of Peru includes 552,191 troy ounces (17.7 tonnes) of gold coins in its monetary gold holdings. These coins are described as “commemorative coins” and are held domestically “in the vault of the Central Bank”. Interesting the Peruvians apply a small valuation provision for “for cost of converting gold coins to high purity or ‘good delivery’ gold bars” for potential use on the wholesale gold market. The Central Bank of Ireland is custodian for Ireland’s circa 6 tonnes of gold, 5.7 tonnes of which is supposedly stored in bar form at the Bank of England in London, while approximately 10,000 ozs are in gold coin form stored at the Central Bank’s currency centre facility in Dublin.
Even Canada made headlines with its gold coin holdings recently when the Bank of Canada sold off the last of that country’s eventually tiny gold holdings which had been exclusively in the form of gold coins since the early 2000s. These gold coins were King George $5 and $10 Canadian coins, the best examples of which were sold to collectors with the rest melted down into gold bars by the Royal Canadian Mint and sold on the wholesale gold market, yet again highlighting gold’s high liquidity.
Central banks will always downplay the existence of gold on their balance sheets since gold competes against national fiat paper currencies. However, the actual course of action of central banks and governments in holding vast amounts of gold bars, as well as substantial quantities of gold coins, demonstrates that central banks and sovereigns continue to view gold as a strategic reserve asset and as the ultimate money. Luckily, private individuals too can replicate the holdings of these giants by also acquiring and accumulating gold bars and gold coins for the same reasons as sovereign entities and monetary authorities do. Doing as central banks do, not as they say, is certainly a better strategy than blind faith in today’s distorting and reckless centrally planned monetary policies.
Part 1 of the IMF’s Gold Depositories series explained the legal background as to why the IMF originally made the decision to hold gold at the Federal Reserve Bank of New York, the Bank of England, the Banque de France and the Reserve Bank of India.
See Part 1 for details, but as a quick recap, although the current IMF Rule F-1 on the location of its gold depositories states that “Gold depositories of the Fund shall be established in the United States, the United Kingdom, France, and India”, the original 1946 version of the rule, then called Rule E-1, said that “Gold depositories of the Fund shall be established in New York, London, Shanghai, Paris, and Bombay.”
It is generally known that the central banks in some of these cities are indeed locations are IMF gold depositories, and the IMF will actually, on occasion, bring itself to confirm these facts.
What is less well understood however are the references to the cities in two of the word’s great gold markets, specifically, the reference to the Reserve Bank’s Bombay office, the transfer of IMF gold to another Indian city, Nagpur, and the fact that Shanghai was only removed “temporarily” and could, in theory, be reinstated as an IMF gold depository.
The Road to Nagpur
The original version of Rule E-1 was adopted on 25th September 1946, and then amended in 1956. This amendment in 1956 was triggered by the Reserve Bank of India (RBI), but it created some far-reaching implications for where the IMF’s gold can be stored.
The trigger for the amendment of Rule E-1 in 1956 was an initiative by the RBI to move their own gold from their Bombay office to a new office in Nagpur which they had just opened. Nagpur is a city in the very heart of India in the state of Maharashtra.
In moving their own gold, the RBI asked the IMF if it objected to the re-location of the IMF gold at the same time. There was actually not much IMF gold held in Bombay, the only gold held there being India’s initial gold subscription to the IMF that had been transferred at the Fund’s inception, worth $27.5 million at $35 an ounce, or just over 24 tonnes. No other founding nation of the IMF had supplied gold to Bombay at that time.
In a 1956 staff document to the IMF Executive Directors, “Gold Depositories of the Fund”, the IMF staff explained the RBI’s move and recommended that the wording of Rule E-1 should be made more flexible so as to take account of future situations where other gold depositories of the Fund might want, or need, to hold gold at alternative locations in their respective countries, other than those locations already specified.
The IMF staff also proposed to the IMF Executive Directors that they should agree to the RBI’s request:
“At the moment, the Fund holds the equivalent of US$27.5 million in gold with the Reserve Bank of India in Bombay. The Fund has received a letter from the Reserve Bank stating that it has recently opened an office at Nagpur, which is situated about 520 miles from Bombay in the interior of the country.
The office is in the Bank’s own building, and it contains a special vault for storing the Bank’s stock of gold. The special vault was constructed partly to enable gold to be stored at a comparatively safer place and partly to relieve the pressure on vault accommodation at the Bombay office. The Reserve Bank is transferring its own gold to Nagpur and inquires whether the Fund would object to the movement of the Fund’s gold.”
The staff document went on to explain the logistics of the move:
“The arrangements for transport would be made under the supervision of the military, and safe custody arrangements at Nagpur would be subject to the same security conditions as are observed at present in Bombay. The Fund’s gold would continue to be held under earmark, and the normal procedures which gold depositories follow in relation to the Fund would continue to be observed.”
A critical point in this IMF document, beyond the Indian gold transfer, is that the IMF staff viewed it as an opportunity to propose more general wording for Rule E-1 so as to allow IMF gold to be stored in any location within the designated countries. The Staff proposed to the Executive Directors.:
“Although Rule E-1 is not free from ambiguity, the more obvious reading of it requires that gold held in India shall be held in Bombay.
The question of the physical transfer of gold may be raised by other gold depositories of the Fund. For example, in the United States, there have been occasions when official stocks of gold have been held simultaneously in New York, Denver, San Francisco and Fort Knox.
The staff believes that it would be advisable to amend Rule E-1 so as to give the Fund more flexibility in dealing with a proposal of the kind made by the Reserve Bank of India. Accordingly, it recommends that Rule E-l should be amended…”
(Source: EBS/56/39, “Gold Depositories of the Fund”)
An IMF Executive Board meeting in November 1956 about the move of the Fund’s gold to Nagpur, approved on January 9th, 1957 (Meeting 57/1), deemed that “it is agreed that the Fund’s gold held with the Reserve Bank of India shall be held at Nagpur.”
The Executive Directors also used the opportunity of the 1956 amendment to Rule E-1 to delete the reference to Shanghai as an IMF gold depository (‘without prejudice’). This is explained below.
And so, in 1956 the Rule E-1 sentence
“Gold depositories of the Fund shall be established in New York, London, Shanghai, Paris, and Bombay”
“Gold depositories of the Fund shall be established in the United States, United Kingdom, France, and India”
and the phrase “at places agreed with the Fund” was added as follows:
“The gold of the Fund shall be held with the depositories designated by the members in whose territories they are located at places agreed with the Fund”.
IMF gold, anywhere
Since the 1956 Rule E-1 persists into the current Rule F-1 (see Part 1), it opens up the possibility that IMF gold could be stored in any central bank gold vault (or other outsourced vaults) in any of the four jurisdictions of the US, UK, France and India, and even in China in the future if China looked to use its “without prejudice” option to be re-listed in the current day F-1 Rule list.
For example, the wording of Rule F-1 suggests that IMF gold held at the FRB New York vaults could be transferred to another Federal Reserve Bank vault as long as the other Bank had secure storage facilities.
Whether, in terms of Rule F-1, this transferability extends to US Treasury storage locations such as Fort Knox is unclear; the IMF staff document from 1956 seemed to think that US Treasury locations were feasible storage locations since it mentions them as indirect justification for changing the Rule E-1 wording.
There appears to be legal authority for the US Treasury and Federal Reserve Bank to use the Treasury’s Mint institutions for storing foreign central bank gold. Such arrangements were even being discussed as early as the 1940s as the following ‘Treasury Department, Inter Office Communication’ letter from a Mr. Luxford to a Mr. Dietrich makes clear:
“The quantity of gold available in New York for sale to foreign governments for earmarking by the Federal Reserve Bank of New York has declined to such an extent that it will soon be necessary to ship gold from Fort Knox to New York, or make other arrangements for earmarking.
It has been suggested that, to avoid the tying up of transportation facilities and the high cost of shipping, arrangements be made whereby the Federal Reserve Bank can, with the consent of the governments concerned, earmark gold while it is still in the Mint institutions.”
The letter goes on to describe a proposal whereby the FRB could earmark foreign central bank gold in the vault of the Denver branch of the FRB of Kansas City, or even lease private bank vaults in Denver, but if this didn’t solve the space issue, then compartments in Fort Knox and the Denver Mint were available:
“Mr. Howard has contacted the superintendents at the Fort Knox and Denver institutions and I am informed that the following spaces are available:
1. Fort Knox – two compartments which, when filled completely, could hold approximately $1,000,000,000 in gold.
2. Denver – three compartments which, when filled completely, could hold approximately $450,000,000 in gold.”
Luxford concluded that:
“I believe that there is legal authority for the use of the mint institutions for the purpose outlined above.”
(Source: ‘Treasury Department, Inter Office Communication’, Sept 1943, Clinton Library, gold files)
So, there appears to be a legal precedent for foreign central banks, governments and international institutions to hold earmarked gold at US Treasury storage locations. These arrangements would be very useful if the US Treasury needed gold at the FRBNY and, for example, the Treasury conducted a gold location swap with the Bundesbank or IMF, swapping Treasury Fort Knox gold for Bundesbank or IMF gold.
The IMF is legally allowed to engage in location swaps for its gold and has done so numerous times in the past with entities such as the FRB and the BIS. Some of these IMF gold location swaps are covered in Part 3.
According to the current Rule F-1, IMF gold could also be stored, for example, in Bank of England provincial branch office vaults (assuming there are any of these vaults still operational). The Bank of England has in the past stored HM Treasury and other customer gold in its branch offices, for example in Liverpool, Birmingham and Southampton. Some of these branch offices have now closed but the Bank of England still maintains various agency offices across the UK.
In theory it’s possible that IMF gold could be transferred from the Bank of England’s London vaults to secure storage at one of the Bank’s provincial locations or even to emergency storage locations in England or Wales that have, at various times in the past, been considered by HM Treasury and the Ministry of Defence.
The IMF’s Article XIII, Section 2(b) also seems to open up the possibility that the IMF’s gold could be stored in other locations entirely, even in other countries. Remember that Article XIII, Section 2(b) states:
“(b) The Fund may hold other assets, including gold, in the depositories designated by the five members having the largest quotas and in such other designated depositories as the Fund may select”.
The IMF’s Articles will always have precedence over its Rules and Regulations, due to Rule A-1 which states
“A-1: These Rules and Regulations supplement the Articles of Agreement and the By-Laws adopted by the Board of Governors. They are not intended to replace any provision of either the Articles or the By-Laws.”
There is another clause in Article XIII, section 2(b) referring to an emergency, which is pretty self-explanatory:
“In an emergency the Executive Board may transfer all or any part of the Fund’s gold holdings to any place where they can be adequately protected.”
There is therefore plenty of legal scope for the IMF’s gold to be stored in locations that at first glance might not appear obvious.
The IMF Executive Board confirmed the five gold depositories of the Fund in November 1946, including the Central Bank of China, Shanghai. However, no IMF gold was ever held in Shanghai because no IMF member country (including China) ever deposited gold to the IMF at Shanghai.
The removal of the reference to Shanghai as an IMF gold depository during the 1956 amendment had its origins in 1949. In 1949 the IMF Executive Board discussed a proposal that Shanghai should be temporarily removed from the gold depositories list due to political instability in the country at that time.
The following Executive Board minutes illustrate the discussion of the proposal that was recommended by the Board Chairman Camille Gutt. The discussion involved Frank Southard (F A Southard), the US Executive Director to the Fund, who had helped plan the Bretton Woods conference in 1944, and Y C Koo, who was subsequently Treasurer of the IMF, and who was part of the nationalist Chinese delegation that attended Bretton Woods:
The Executive Board considered a recommendation by the Chairman that, in view of recent developments in China, the Fund should remove Shanghai from the list of gold depositories for the time being.”
“Mr. Southard said he assumed the action would be of a temporary character. Mr. Koo said his Government had no objection on the understanding that the action was temporary. However, the Government would wish to reserve the right to raise the matter again with the Fund at an opportune time.
The decision was: In view of recent developments in China and under the emergency provisions of Article XIII, Section 2(b), Shanghai is for the time being removed from the list of depositories in which the Fund may hold assets, including gold. Members shall be so informed. It is understood that China may, at an opportune time, raise the matter again.”
(Source: Executive Board Meeting 465, 21st July 1949)
While the decision to temporarily remove Shanghai as a gold depository had been taken in 1949, it re-emerged as an issue in 1956 when the amendment to Rule E-1 was being discussed at a meeting. This was because the Executive Board wanted to ensure that the changed wording to Rule E-1 did not prejudice the previous decision to temporarily remove Shanghai as a gold depository.
The Acting Chairman in the 1956 meeting was H. Merle Cochran, deputy Managing Director of the Fund. The Executive Director for China (representing the Taiwan based government) was Mr Tann:
“The Acting Chairman stated that, in order to make it clear that the proposed action would not prejudice a previous decision temporarily removing Shanghai from the list of depositories, the staff wished to recommend the addition of the following paragraph to the decision proposed:
(c) The amendment of Rule E-1 as set forth in paragraph (a) above is without prejudice to the decision of the Executive Board at Meeting 465 (July 21, 1949)”
“Mr. Tann said he had no objection to the staff’s proposals and particularly welcomed the additional paragraph put forward by the management since it would leave no doubt that the 1949 decision was not being nullified.”
(Source:Executive Board Meeting 56, 29th November 1956)
The 1956 amendment to Rule E-1 was adopted by the IMF Executive Board on 9th January 1957, and then reviewed and accepted by the Fund’s Board of Governors at the 12th IMF annual meeting 1957 where Per Jacobsson, Managing Director and Chairman of the Executive Board highlighted to the Governors that
“On November 29, 1956, Rule E-1 was amended to provide for greater flexibility in the location of the Fund’s gold held with designated depositories.”
(Source: Draft letter by Per Jacobsson to the Chairman of the Board of Governors, twelfth Annual Meeting of the IMF)
On paper, the reinstatement of China as a gold depository of the IMF looks possible, but in reality would be complicated by a number of issues, not least the unravelling of claims and representations that could arise from Taipei and Beijing over the 1949 agreement with the IMF.
With Shanghai now re-emerging as a dominant player in the global gold market, its fitting that the story of the IMF’s Shanghai depository should not be forgotten even though it never really existed.
The Nagpur gold vault, which does exist, is itself a relatively forgotten IMF outpost. But it still contains, or is said to contain, both IMF and Reserve Bank of India gold. For this reason, the Nagpur gold vault, and some of its details, will be the subject of a future post.
Part 1 of this series reviewed Federal Reserve Bank of New York (FRBNY) publications that cover the Fed’s gold storage vaults in Manhattan, and illustrated how the information in these publications has been watered down over time. Part 1 also showed that the number of foreign central bank customers storing gold with the FRBNY has fallen substantially since the late 1990s.
Part 2 covered the Fed’s rarely discussed ‘Auxiliary Vault’ and suggested that this auxiliary vault of the Fed is probably located in the neighbouring Chase Manhattan Plaza vault facility, now run by JP Morgan.
Part 3 now looks at ‘Coin Bars’, another rarely discussed topic which is relevant to the gold at the New York Fed and that may well explain why the Deutsche Bundesbank needed to melt down the majority of the gold that it has so far repatriated from New York.
‘Coin bars’ is a bullion industry term referring to bars that were made by melting gold coins in a process that did not refine the gold nor remove the other metals or metal alloys that were in the coins. The molten metal was just recast directly into bar form.
Because it’s a concept critical to the FRBNY stored gold, the concept of US Assay Office / Mint gold bar ‘Melts’ is also highlighted below. Melts are batches of gold bars, usually between 18 and 22 bars, that when produced, were stamped with a melt number and a fineness, but were weight-listed as one unit. The US Assay Office produced both 0.995 fine gold bars and coin bars as Melts. The gold bars in a Melt are usually stored together unless that melt has been ‘broken’.
New York Fed – Coin Bars ‘Я’ Us
I think it’s critical to note that a reference to low-grade ‘coin bars’ in the 1991 version of the Fed’s ‘Key to the Gold Vault’ (KTTGV) has been omitted in subsequent additions of KTTGV.
The text in this 1991 ‘Key to the Gold Vault’ is based on older versions of the same publication that go back to the original version written by Charles Parnow in 1973. See Part 1 for discussion of Charles Parnow and the editions of the KTTGV and the ‘A Day at the Fed‘ publications.
The reference to coin bars in the 1991 version of KTTGV is as follows:
“The butter yellow bars in the vault are nearly 100 percent pure and are usually made of newly mined gold.
Reddish bars contain copper and other impurities and generally consist of melted gold coins and jewellery containing alloys. Since 1968, a number of these “coin” bars, dating back to the early 1900s, have been stored in the Bank’s vault.
Silver and platinum impurities make gold white; iron produce shades of green.” (KTTGV 1991)
In comparison, the 1998 and later versions of KTTGV have omitted the reference to ‘coin bars’, and the discussion about gold bars and other metals has been shortened as follows:
“Traces of silver and platinum give the gold a whitish shade, copper is most often found in reddish bars, and iron produces a greenish hue.
The butter-yellow bars in the vault are made of newly mined gold.” (KTTGV 1991, 2004, 2008)
There is also no mention of coin bars on the current NY Fed gold information page here. This is despite the fact that there are still coin bars held in the Fed’s New York gold vaults, as illustrated by the US Treasury’s gold bar inventory weight lists at the FRBNY. See below.
What exactly are Coin Bars?
In the early 20th century, a lot of countries were on a gold standard and gold coins circulated as part of the money supply, for example in Germany, the US, France and Britain. When countries went off the gold standard (or went off a circulating gold standard), some of these gold coins were melted down into bars in the 1920s and early 1930s.
Historically, gold coins that circulated as money were not made of pure gold since other metals (about 10%) were added to the gold to improve the coin’s strength and durability. So if a batch of coins contained 90% gold and 10% of other metals, the bars made by melting these coins would contain 90% gold and 10% other metals, since no refining of the gold was undertaken after the coins were melted.
Because coin bars were being made in the early 1930s, the London Gold Market (a precursor of the London Bullion Market Association (LBMA)) included an exact definition for coin bars in its 1934 London Good Delivery List, in addition to gold bars of 995 (or above) fineness.
“1934 LONDON GOOD DELIVERY LIST
Specification of bars acceptable on the London Gold Market
1. Gold bars conforming to the following specification are Good Delivery in the London market:
(a) Fine bars, i.e. bars assaying 995 per mille or over and containing between 350 and 430 ounces of fine gold;
(b) Coin bars, i.e. bars assaying 899 to 901 per mille or 915 1/2 to 917 per mille and containing between 350 and 420 ounces of fine gold; provided that they bear the stamp of the following:”
(Source: The London Good Delivery List – Building a Global Brand 1750 – 2010)
The 1934 definition specified that if a coin bar was produced by one of nineteen European mints or the United States Assay Office, then it was considered a ‘good delivery’ gold bar at that time. The European mints spanned Britain, France, Germany, Belgium, Holland, Sweden and Switzerland.
The specification of coin bars with a gold content (or fineness) of between 899 to 901 in the definition allowed the inclusion of gold coins from Continental Europe such as French Napoleon coins which had this particular gold content. The gold content of some US gold coins also fell within this range since they were made of 0.899 or 0.9 gold.
The 915 ½ to 917 range was included in the definition since 22 carat gold is 22/24 or 0.91667. This 22 carat gold, known as crown gold, was used in various gold coins such as British Sovereigns, and also some US gold coins.
But coin bars were in some ways a historical anomaly or a product of their time. Even at launch in 1919, the London gold fixing was a price quotation for 400 oz bars of 995 fineness. As gold expert Timothy Green said in the book “The London Good Delivery List – Building a Global Brand 1750 – 2010” about the 1919 gold fixing launch:
“the (fixing) price was now quoted for 400-ounce / 995 Good Delivery bars, rather than the traditional 916 standard coin bars which rapidly became extinct as minting of coin virtually ceased.”
In the 19th century and very early 20th century, some refineries used to specifically produce ‘916 standard’ coin bars back that were used as a source to make gold coins. But the now famous 400 oz fine gold bars had been accepted by the Bank of England since 1871 when Sir Anthony de Rothschild convinced the Bank of England to accept them. The Bank of England had also begun to accept US Assay Office 400 oz bars of 995 fineness (fine bars) in 1919.
There do not appear to have been that many coin bars made in the early 1930s when mints melted down gold coins. In his book, Green cites a 1930 example of the Royal Mint in London embarking on a 2 year programme to melt down 90 million British Sovereigns (916.7 fine gold coins) into 52,000 bars each weighing 450 ozs. This is about 650 – 700 tonnes of gold. Each of these bars was stamped with the stamp of the Royal Mint as well as the fineness and a serial number on each bar.
Green also explains that although in 1936 the London Gold Market produced an updated good delivery list that added some additional refineries and mints to the 1934 list, there did not seem to be a lot of coin bars produced. Green says:
“The inclusion of mints (in the 1936 list) is interesting, suggesting that some like the Royal Mint in London, were melting coin, but there is little evidence of any producing significant quantities of bars.”
By the late 1920s, gold bar demand had shifted to central banks who wanted fine gold bars for their vaults. Green says that by 1929, 90 per cent of ‘monetary’ gold resided in these central bank vaults.
(Source: “The London Good Delivery List – Building a Global Brand 1750 – 2010. Authors: Timothy Green (Part I) and Stewart Murray (Part II). Published by the LBMA, 2010)
Roosevelt’s Coin Bars
Apart from melted coins from Europe, there is another significant source of coin bars, namely the coin bars produced from US gold coins that were melted down during the US gold confiscation period circa 1933-1934.
Some of the US Treasury’s coin bars originated from this gold coin confiscation and melting period, and these coin bars were then shipped to the US Mint’s Fort Knox facility in Kentucky when it opened in 1937.
The authoritative source for information on the different producers of gold bars worldwide is a company called Grendon International who have a web site called http://www.goldbarsworldwide.com. This web site produces guides explaining the whole spectrum of gold bar varieties. In its US Assay Office gold bar guide, Grendon states:
“It is understood that the bars (produced by the US Mint / AssayOffices) had a minimum purity of 995+ parts gold in 1,000 parts, with the exception of those 400 oz bars that contained “Coin Gold”.
“Coin Gold” 400 oz bars were manufactured by melting down and then casting into bars gold coins that had been withdrawn from public circulation, mainly as a result of the prohibition in 1933 of private gold ownership in the United States. The gold purity of these bars reflected the purity of U.S. gold coins, usually 900 or 916 parts gold in a 1,000 parts.
In an article about the US confiscation and the US coins that were actually melted, lawyer and coin expert David Ganz demonstrates that there were not a large amount of US gold coins melted by the US authorities in the 1930s.
In his article, Ganz has a table showing the total number of gold coins minted and melted over the 1930s, classified by coin denomination up to the $20 coin. Given that the $20 coin has 0.9675 ounces, and the $10 has 0.48375 ounces etc, you can work out the total number of millions of ounces that were produced from melted coins. Ganz says:
“Product of gold confiscation was gold melting; the coins were melted into bricks that ultimately found their way to Fort Knox. Although the Mint had a program from the mid-1860’s until about 1950 to melt or re-coin copper, silver and gold coinage, the majority of gold coins were taken in and destroyed in a Seven year period (1932-1939)“.
Ganz’ statistics come directly from the annual reports of the Treasury’s Director of the Mint. Ganz says “All told, over 124 million coins were melted through the years (102 million gold coins were melted as a result of government assistance from 1933- 1939).”
However when you calculate the amount of gold in these 124 million coins, it only works out at about 85.6 million fine ounces, which is 2,662 tonnes of gold.
Some of the European coin bars made it across the Atlantic circa 1934 when the US raised the price of gold to $35 per ounce and the US Treasury offered to buy all gold at this price, including coin bars from the London Gold Market.
All gold arriving into the US Treasury’s assay offices was apparently remelted into US Assay Office bars but statistics on how many European coin bars entered the US market at that time do not seem to be available.
Since there were not that many European coin bars made by European mints in the 1930s (for example, the Royal Mint 1930 programme made only 650-700 tonnes of coin bars), then there cannot have been more than a few thousand tonnes of European coin bars entering the US at that time.
Coin Bars ceased to be ‘Good Delivery’ bars in 1954
During World War II the London Gold Market essentially closed down and really only re-opened in March 1954 when the Gold Fixing restarted. When the London Gold Market re-opened, a new 1954 London Good Delivery List for gold was published. This list only included gold bars of 0.995 fineness or higher, and coin bars ceased to be London good delivery standard. As Stewart Murray, former LBMA CEO says: “The new List published in 1954 only allowed fine bars of 995+.” (page 40, “Good Delivery Accreditation – A Short History”).
It’s therefore very strange that the Fed’s 1991 ‘Key to the Gold Vault’ publication states that it was only “since 1968″ that “a number of these ‘coin bars’, dating back to the early 1900s, have been stored in the Bank’s vault.” This implies that coin bars were not at the New York Fed gold vaults immediately prior to 1968.
Why would these coin bars suddenly appear at the FRBNY vault in 1968? To answer this question, its important to recall that 1968 was the year in which the London Gold Pool collapsed (March 1968).
Since coin bars have not been good delivery bars since 1954, US Treasury coin bars appear to have begun to turn up in the New York gold vaults in 1968 because there was a shortage of good delivery US Assay Office gold bars to satisfy foreign central bank gold transaction settlements.
Scraping the barrel – March 1968
That the US Treasury and Federal Reserve had a major shortage of good delivery gold in March 1968 is illustrated by a Bank of England memo from 14th March 1968, which highlights that the London Gold Pool collapsed because the US monetary authorities were unable to find any good delivery gold in their own stocks, and were confronted with the prospect of having to supply their Fort Knox low-grade ‘coin bars’ to the market.
The Bank of England memo, titled ‘Gold Bars for Delivery in the London Market‘ was written by George Preston (LTGP) and addressed to the Deputy Governor Maurice Parsons and the Chief Cashier John Fforde. It discussed the ramifications of delivering coin bars to the London Gold Market. The memo is referenced as entry ’49’ from file C43/323 i.e. C43/323/49.
Points 1 and 2 in the memo described what was good delivery at that time in 1968, and are included here to illustrate that coin bars were not even being countenanced as good delivery back in 1968. No one had even thought about coin bars since the 1930s.
However, Point 3 is the critical point. A short quote from the memo:
“1. The current specification of bars which are good delivery in the London market requires that they shall be of a minimum fineness of .995 and shall have a minimum gold content of 350 fine ounces and a maximum of 430 fine ounces.”
“2. In the 1930s when the Bank were delivering bars to the market to satisfy French demands for gold, they had to deliver coin bars and the specification in the 1930’s included bars not only .995 fine but coin bars assaying between .899 and .901 and also .915 1/2 to .917. Bars of both varieties had to contain between 350 and 430 ounces of fine gold.”
“3. It has emerged in conversations with the Federal Reserve Bank that the majority of the gold held at Fort Knox is in the form of coin bars, and that in certain cases these bars have a gold content of less than 350 fine ounces.If the drain on U.S. stocks continues it is inevitable that the Federal Reserve Bank will be forced to deliver what bars they have.
Capacity to further refine coin bars to the current minimum fineness of .995 in the United States is entirely inadequate to cope with conversion on the scale that would be required if the Americans wished to continue to deliver bars assaying .995 or better. Equally the capacity in the U.K. is inadequate for this task.”
The Fed asked the Bank of England to discuss the situation with Rothschilds (the chair of the gold market) at partner level. The memo then covers some discussion with Mr Bucks and Mr Hawes of Rothschilds about the acceptability of delivering coin bars to the London Gold Market. Supplying the market with coin bars was thought by the Bank and Rothschilds to be problematic, and the memo concluded, somewhat ominously:
“it would appear that the circumstances might well be such that very few bars of the current acceptable fineness could be found” (by the Americans)
Ominously, because, as some readers will be aware, the London Gold Pool collapsed that evening, Thursday 14th March 1968. On the following day, 15th March 1968, an emergency bank holiday was called for British financial markets, the London gold market remained closed (and stayed close for the next two weeks), and the gold price began to float for non-official transactions.
Migration of Coin Bars from FRBNY to the Bank of England
That foreign central banks were provided with coin bars at the New York Fed is a fact, as illustrated by the following.
In 2004, speaking at a conference of the American Institute for Economic Research (AIER), (AIER Conference May 2004 Gold Standard), H. David Willey, formerly of the Federal Reserve Bank of New York,
“Gold held by foreign authorities under earmark at the Federal Reserve Bank of New York may be in the form of coin bars only approximating 400 ounces and with a much lesser purity.”
“In the last decades, there has been a gradual migration of central bank coin bars from the New York Federal Reserve vaults to the Bank of England. These bars have been first re-refined into London good delivery form. Once at the Bank of England, the bars can readily be used for gold loans or sales.”
H. David Willey was “formerly Vice President of the Federal Reserve Bank of New York in charge of the discount window, and later responsible for oversight of the Federal Reserve’s accounts (including gold) with foreign central banks (1964-82); advisor to Morgan Stanley’s gold and fixed-income business (1982-2000).”
A central bank would only be confronted with a need to convert its FRBNY coin bar holdings to good delivery gold and move them to London if it didn’t have any 995 fine gold at the FRBNY. As to how many banks engaged in this activity and sent their coin bars to the refineries is unclear.
US Treasury coin bars
While some foreign central banks seem to have tried to get rid of their non-good delivery coin bars over the years by having them melted down, there are still coin bars held in the New York Fed vault(s).
The US Treasury claims to hold gold at four locations, namely Fort Knox in Kentucky, Denver in Colorado, West Point in up-state New York, and at the Federal Reserve Bank of New York in Manhattan, NY.
According to the US Treasury’s own full gold inventory schedule (which have never been independently and physically audited), over 80% of the US Treasury gold bars listed are not good delivery bars and are in the form of coin bars and other low fineness gold bars. See pdf here for a detailed list of the gold the US Treasury claims to hold at Fort Knox, Denver and West Point. An excel version of the US Treasury list is here in xls.
There is a neat table summarising the weight and purity of the US Treasury’s gold bar ‘lists’ here, taken from the goldchat blog site.
There has been very little gold bar activity in or out of Fort Knox since 1968. If there was nothing, or next to nothing, except coin bars at Fort Knox in March 1968 (as the FRB told the Bank of England in March 1968), then how could there now be over 147 million ozs of gold (over 4,500 tonnes) at Fort Knox if its all or nearly all in the form of coin bars? The numbers don’t add up.
Said another way, if the US melted around 2,600 tonnes of US gold coins in the 1930s into coin bars, and if some European coin bars were converted into US Assay Office coin bars (also in the 1930s), how could this add up to even 4,500 tonnes, let alone add up to all the coin bar gold that the US Treasury claims to hold at Fort Knox, Denver and West Point combined, and all the coin bars held by foreign central banks at the FRBNY?
US Treasury coin bars at the FRBNY
Surprisingly, the US Treasury lists how many coins bars it holds at the FRBNY. According to its custodial inventory statement, about 5% of the US Treasury’s gold is held at the FRBNY in the form of 31,204 bars stored in 11 compartments (listed as compartments A – K).
The US Treasury gold claimed to be stored at the FRBNY is listed in weight lists here, starting on page 132 of the pdf (or page 128 of file).
Of the US Treasury’s eleven compartments listed at the FRBNY, coin bars are listed as being held in four of these compartments, namely compartments H, J, K and E.
Compartment H of the US Treasury’s gold at the FRBNY contains coin bars produced by the US Assay Office. These bars are listed in ‘melts’, with more than 60 melts listed, each with about 20+ bars. This would be in excess of 12-13 tonnes. See the following screenshots as examples.
All the bars listed in the Treasury’s Compartment J are US Assay Office coin bars, listed in melts. This amounts to 968,000 fine ounces, or about 30 tonnes. See the following two screenshots.
Compartment K also contains about 5 tonnes of coin bars belonging to the US Treasury. Screenshot not shown for brevity.
Additionally, Compartment E contains approximately 1 tonne of coin bars that are not US Assay Office coin bars. These coin bars are listed as being produced by refiners such as Marret-Bonnin, Rothschild, Comptoir-Lyon and the Royal Canadian Mint. All four of these refiners were listed on the 1934 Good Delivery List of refiners of coin bars.
Overall, a quick calculation of the above weight lists suggests that the US Treasury holds about 50 tonnes of coin bars at the New York Fed. Interestingly, this is roughly the same amount of gold that the Bundesbank says that it melted/smelted in 2014 after repatriating it from the New York Fed.
US Assay Office 0.995 fine bars vs US Assay Office coin bars
Its important to understand the difference between good delivery US Assay Office gold bars and US Assay Office coin bars (circa 0.90 fine). US Assay Office gold bars that have a gold content of 0.995 fine or higher are still good delivery in the London Gold Market and in international transactions because US Assay Office 0.995 bars are still on the ‘former’ London good delivery list.
The LBMA’s London Good Delivery List is a list of refineries worldwide whose gold bars are acceptable by the London Gold Market. This list contains two parts, a current list and a former list. The former list includes refineries whose gold bars are still accepted by the London Gold Market but who no longer produce these gold bars.
In September 1997, the LBMA transferred ‘US Assay Office’ gold bars to the former list because they were no longer produced by the US Assay Office after this date. These are bars that were produced by the New York Assay Office and the San Francisco and Denver Mints.
Gold bars that are on the former list are still accepted as London Good Delivery as long as they have been produced prior to the date of transfer to the former list, and as long as the bars meet the London Good Delivery standards.
Therefore, US Assay Office gold bars (995 fine) are still accepted as London good delivery bars. Just look at the bar list for the SPDR Gold Trust (GLD) and you will see plenty of US Assay Office gold bars listed. These bars have appeared at various times recently with a variety of descriptions such as ‘US ASSAY OFFICE NY’, ‘U.S Assay Office’, ‘United States Assay Offices & Mints’, ‘US ASSAY OFFICE NEW YORK’, ‘UNITED STATES ASSAY OFFICE’ etc etc.
US Assay Office gold bar MELTS
Its important to grasp what a MELT is as applied to US Assay Office Gold because it applies to a lot of the gold held at the FRBNY vaults. Non US refineries and mints also produced gold bars in batches but they didn’t make use of a melt numbering system in such an obvious way as the US Assay Office.
Here’s the Federal Reserve Board explaining 0.995 Melts:
“US Assay Office bars, like bars in other countries, are produced in melts or a series of bars, numbered in succession. For instance, melt No. I contains 20 bars. Hence, the bars are stamped 1-1, 1-2, etc… , 1-20.”
“US Assay Office bars are gold bars that are originally issued by the US Assay Office and that have not been mutilated and which, if originally issued in the form of a melt, are re-deposited as a complete melt. These bars are not melted and assayed. They weigh approximately 400 troy ounces, the fineness of their gold content is .995 (99.5% purity or better), and they come in complete melts.
“When an US Assay Office bar is removed from a melt, it is referred to as a mutilated US Assay Office bar.”
Source: ‘Final report of the gold team’, draft June 30th, 2000. Page 13 of document: (http://www.clintonlibrary.gov/assets/storage/Research-Digital-Library/holocaust/Holocaust-Theft/Box-227/6997222-final-report-of-gold-team.pdf)
Here’s a very good description of Melts from none other than the International Monetary Fund. This description comes from an IMF document in 1976 when they were preparing their gold auctions and restitutions:
“..most of the gold of the Fund (IMF) is not in the form of individually stamped and weighed bars but consists, with the exception of the gold held in depositories in the United Kingdom and India, ofmelts, comprising 18-22 individual bars, which will first need to be identified, weighed, and selected before they can be delivered. 1/ “
Footnote 1/ on the same IMF page describes ‘Melts’ as:
“1/ A melt is an original cast of a number of bars, usually between 18 and 22. The bars of an unbroken melt are stamped with the melt number and fineness but weight-listed as one unit; when a melt is broken, individual bars must be weighed and stamped for identification. It is the practice in New York and Paris to keep melts intact.”
Swiss National Bank refining operations
The Swiss National Bank (SNB) admits that it too has held non-good delivery gold, and has sought, over a 30 year period from 1977-2007, to get it refined to good delivery status:
“The National Bank has commissioned numerous refining operations during the last thirty years in order to obtain the ‘good delivery’ quality label for its entire gold holdings.
Swiss gold refining firms were prepared to undertake these operations free of charge, as the SNB provided them, in return, with a ‘working capital’ of several tonnes – more than was strictly necessary for their activity on behalf of the central bank.
This mutually profitable arrangement was challenged in 1982, when the SNB’s legal services concluded that it raised a number of problems, in particular that it effectively constituted an unsecured advance, similar to a gold loan. The National Bank’s deposits with refining firms were therefore liquidated in the same year, and subsequently, the cost of refining operations was invoiced directly to the SNB.“
The SNB had a lot of gold at the FRBNY up until at least the mid to late 1990s (since there are large FRBNY gold outflows during that period), and the Swiss gold sales appear to have targeted this New York gold, however, the Swiss gold sales settled out of London so it looks like Swiss gold may have been on the move in the late 1990s, even before the SNB had got the go-ahead to engage in gold sales over the 2000-2004 period. Perhaps the SNB’s Swiss refinery operations cited above involved some of the SNB’s New York gold as it stopped off in Switzerland on its way to London?
The Curious Case of the German Bundesbank
There has been widespread coverage of the Deutsche Bundesbank’s attempts to repatriate some of its gold reserves from New York and Paris back to Frankfurt. A lot of this coverage is, in my view, failing to ask the right questions about the fineness of the gold bars repatriated.
In January 2014, the Bundesbank announced that it had repatriated a paltry 5 tonnes of gold from the New York Federal Reserve Bank during 2013.
The Bundesbank press release from 20th January 2014, quoted Bundesbank Executive Board member Carl-Ludwig Thiele as follows:
‘”We had bars of gold which did not meet the ‘London Good Delivery’ general market standard melted down and recast. We are cooperating with gold smelters in Europe,” Thiele continued. The smelting process is being observed by independent experts. It is set up in such a manner that the Bundesbank’s gold cannot be commingled with foreign gold at any time.’
Since the Bundesbank is fond of using the term ‘smelting‘ and ‘smelters‘ in their gold bar discussions, what exactly does ‘smelting’ mean?
SMELT dictionary definition: Smelt (verb):
1. to fuse or melt (ore) in order to separate the metal contained
2. to obtain or refine (metal) in this way.
To me, it appears that the Bundesbank melted down and refined coin bars into London Good Delivery bars, otherwise why else would they need to bring gold up to good delivery standard? After all, normal US Assay Office gold bars of 0.995 fineness are already good delivery. So I emailed the Bundesbank at that time (January 2014) and asked them straight out:
“How many tonnes of coin bars does the Bundesbank hold at the Federal Reserve in New York in addition to the 5 tonnes of coin bar gold recently remelted? And will all the gold (circa 300 tonnes) that is planned to be brought back from New York be in the form of coin bars? Regards,“
The Bundesbank replied, directing me back to their press release:
“in the Link attached you will find more information about your matter. http://www.bundesbank.de/Redaktion/EN/Pressemitteilungen/BBK/2014/2014_01_21_gold_en.html Yours sincerely, DEUTSCHE BUNDESBANK“
Since I had asked about ‘coin bars’ and the Bundesbank had sent me a link to the press release about smelting, could the Bundesbank have been conceding that the smelting was of coin bars? Quite Possibly.
On 19th February 2014, Carl-Ludwig Thiele popped up again referring to the ‘smelting’ operation in an interview conducted with German newspaper Handelsblatt:
“Some of the bars in our stocks in New York were produced before the Second World War.”
“Our internal audit team was present last year during the on-site removal of gold bars and closely monitored everything. The smelting process is also being monitored by independent experts.”
“The very same gold arrived at the European gold smelters that we had commissioned.”
“The gold was removed from the vault in the presence of the internal audit team and transported to Europe. Only once the gold had arrived in Europe was it melted down and brought to the current bar standard.”
The frequent use of the words ‘smelting’ and ‘smelters’, in my opinion, suggests that not only were the Bundesbank’s gold bars melted and reformed into fresh bars, but that the gold was smelted and refined from a lessor purity to a ‘good delivery’ purity. This is why the opaque manoeuvres of the Bundesbank suggest ‘coin bars’.
Thiele’s reference to “some of the bars in our stocks in New York were produced before the Second World War” is again hinting at the 1930s, and to me is clearly suggesting ‘Coin Bars’.
From 5 to 50 tonnes
The 2013 five tonne smelting mystery was merely a prelude to much more of the same in 2014, because in January 2015, the Bundesbank issued a press release in which it claimed to have repatriated 85 tonnes of gold from the FRB in New York, of which approximately 50 tonnes was melted and recast.
Smelting/Melting expert Carl-Ludwig Thiele was again on hand to explain:
“The Bundesbank took advantage of the transfer from New York to have roughly 50 tonnes of gold melted down and recast according to the London Good Delivery standard, today’s internationally recognised standard.”
I then emailed the Bundesbank and asked:
“The Bundesbank press release from yesterday (see link below) refers to the fact that 50 tonnes of gold that was repatriated from the Federal Reserve in New York was recast / remelted before being received by the Bundesbank.
Can you clarify what the gold fineness (parts per thousand of gold in the bars) of these 50 tonnes of bars was before they were recast / remelted?
“Please understand that we do not provide any information on the physical details of single gold bars owned by Deutsche Bundesbank. Nevertheless, we would like to draw your attention on the fact that no irregularities where found concerning the gold melted down and recast according to the London Good Delivery standard. Please take into account that this standard asks i.a. for a minimum fineness of 995 parts per thousand.“
(i.a.= inter alia = among other things)
Notwithstanding that I didn’t ask about single gold bars, its very interesting that the Bundesbank mentions 995. Why mention the fineness of 995? If the bars were already 995, why melt them down in the first place?
I then sent the Bundesbank a follow-up email:
“Thanks for the reply but I wasn’t asking about the details of single gold bars.
My question is what was the average fineness of the 50 tonnes of gold bars that the Bundesbank had remelted in 2014. That’s the average fineness on approximately 4,000 bars.
The Bundesbank replied:
“Please understand that we do not provide any further information on the details of specific gold bars or a specific amount of gold bars owned by Deutsche Bundesbank.”
In my view, the Bundesbank’s complete secrecy on this smelting issue speaks volumes. And you also see now that the Bundesbank cannot give a straight answer when asked simple questions about its gold.
In both January 2014 and January 2015, the Bundesbank claims that the Bank for International Settlements (BIS) was in some way involved in the Bundesbank’s gold smelting shenanigans. This makes little or no sense unless there was some type of location swap involved or the BIS has some deal with a refinery such as Metalor in Neuchâtel.
In January 2014 Thiele said:
“The Bundesbank has repatriated the gold from New York City in close cooperation with the Bank for International Settlements. “The Bank for International Settlements is a repository of expertise in the repatriation of gold. It is a very trustworthy institution.”
In January 2015 Thiele said:
“We also called on the expertise of the Bank for International Settlements for the spot checks that had to be carried out. As expected, there were no irregularities.”
The BIS trades gold ‘loco Berne’ using its account at the Swiss National bank (SNB) vaults, and the BIS maintains safekeeping and settlements facilities that are “available loco London, Berne or New York.”
Bundesbank gold looks like it left the FRBNY vaults during 2013 and 2014 in batches of 5.16 tonnes. See the Fed’s foreign earmarked gold statistics here. But on a net basis there is a shortfall of about 32 tonnes in 2014 between the amount of gold that left the FRBNY vaults and the amount of gold that the Bundesbank and De Nederlandsche Bank combined claim that they repatriated from the FRBNY during 2014.
Therefore, there may have been a gold location swap involved somewhere along the line. For some of the Bundesbank’s melting operations, gold may not have moved physically from the FRBNY at all. A gold location swap could have been done between a BIS FRBNY gold account and a BIS SNB gold account. Since the gold needed to be remelted / recast (to bring it to good delivery status), that would mean there were coin bars at the SNB.
The Metalor gold refinery (one of the 4 big gold refineries in Switzerland and one of the 6 biggest in the world) is very near the SNB’s Berne vault. Its located at Neuchâtel, about 50kms from Berne. The three other large Swiss gold refineries are all quite far from Berne as they are situated in southern Switzerland near the Italian border within a mile or two of each other, (Valcambi is in Balerna, Pamp in Castel San Pietro, and Argor-Heraeus is in Mendrisio).
If the BIS did some location swaps between the FRBNY and the SNB, it could get coin bars at the SNB vaults remelted at Metalor and then get the new gold bars flown to the Bundesbank in Frankfurt.
This would prevent the need to fly gold from New York City, and it would explain the “close cooperation” of the BIS in the operations.
In contrast, that other great gold repatriating nation of 2014, namely the Netherlands, did not see the need to melt any of the bars that it repatriated. In its press release in November 2014, the De Nederlandsche Bank simply said they had repatriated their gold to Amsterdam, apparently in quite a quick fashion.
And why would the Dutch need to melt anything, since after all, their gold in New York was in 995 Melts, as confirmed by Dutch Central Bank official Jan Lamers.
“The New York stock does not meet the standards prevailing on the international gold market, the so-called London “good delivery” standards. The biggest difference is that the bars in New York are not individualized, but are part of a package of about 20 bars, wherein the package as a whole has an overall weight and number.The bars in the package would need to be weighed and numbered individually to meet ‘good delivery’ standards.”
I translated the above, so here is the original Dutch from Lamers:
“De voorraad in New York voldoet echter niet aan de standaarden die gelden op de internationale goudmarkt, de zogenoemde Londense ‘good delivery’ standaard. Het grootste verschil is dat de baren in New York niet zijn geïndividualiseerd, maar onderdeel zijn van een pakket van circa 20 baren waarbij het pakket als geheel een gewicht en nummer heeft. Door de baren in het pakket individueel te wegen en te nummeren, konden deze op‘good delivery’ standaard worden gebracht.”
(Source: “Gold Management of the Bank” by Jan Lamers, Senior Policy, Financial Markets Division. http://web.archive.org/web/20081117183716/http://www.dnb.nl/binaries/goudbeheer%20van%20DNB_tcm46-146095.pdf pages 7-8 of the pdf.)
So, the fact that the Dutch didn’t need to smelt anything but the German’s did shows that the bars that the Germans sent to the European Smelters were not regular 995 fine US Assay Office bars. If the Germans had possessed 995 US Assay Office bars, they would just need to be weighed and individually stamped with their weights, not melted down and recast.
The fact that the Bundesbank will not publish any weight lists is very suspicious. Even the US Treasury published their weight lists of their bars held at the FRBNY (see above).
Peter Boehringer, of the German ‘Repatriate our Gold’ campaign, says that allegedly, the bar lists of the gold that the Bundesbank had melted have now been destroyed. If this has happened, then this is further bizarre behaviour from the Bundesbank.
There are various other theories apart from ‘coin bars’ as to why the Bundesbank may have wanted to melt down gold bars from New York but the other alternatives are also embarrassing to the bar holder.
The old bars may have had cracks or fissures in them. This has happened to some of the old gold that is stored in the Bank of England as this report from 2007 shows. The Bank of England spokesman at the time said:
“This is not about purity, this is about physical appearance.”
Speaking of Peter Boehringer, a recent Bloomberg article from February 2015 about Boehringer and the Bundesbank gold quoted a Bundesbank spokesman as telling Bloomberg, on the subject of gold melting, that:
‘meeting the London good delivery standard “cannot be reduced entirely to the weight of a gold bar but needs to take various other features into account, one criterion being the outer appearance.”‘
However, this Bloomberg article is the first time that the Bundesbank has mentioned ‘appearance’ of bars, and to me it looks like a story that keeps changing, possibly with some inspiration from the Bank of England 2007 story.
Cracks and fissures in 55 tonnes of gold would be quite alarming given that the LBMA said that ‘defects’ are ‘fortunately not typical!’ (see slide 13 here), and this would throw the quality of all the Fed’s New York held gold into doubt.
The quality of US Assay Office 995 fine bars was seen to be less than perfect by London refiners in 1968, as demonstrated by this 2012 article from Zerohedge, but if the Bundesbank was melting down US Assay Office 995 fine bars this would also be an alarm bell for all holders of similar gold. And why would the Dutch not think its necessary to melt down their repatriated US Assay Office bars if the Germans thought this was a problem?
The Bundesbank gives some details of a gold swap with the FRB back in 1968, and claim that a portion of the gold returned to the Bundesbank (the return leg of the gold swap) was gold of a lessor quality than good delivery. They say “the remaining bars with a countervalue of $750 million were of a different quality”. This is absolutely not correct. All of the gold bars returned to the Bundesbank in that potion of the swap were good delivery US Assay Office bars and a lot of it came from Ottawa where the Fed had sourced some bars from the Canadians.
I have the details on that swap from Bank of England gold ledgers and the 1,200 gold bars (sent to Johnson Matthey) out of over 50,000 bars shipped to London were merely being ‘adjusted’ into good delivery bars, and were supposed to be good delivery bars, hence the need to remelt and recast. I will cover this Bundesbank gold swap in a future article. The Bundesbank seems to be using this gold swap as as some sort of ambiguous evidence of why they are melting down 55 tonnes of gold but it is misleading to do so.
So, in conclusion, I would lean towards the probability that the Federal Reserve Bank of New York has given the Deutsche Bundesbank tonnes of coin bars and the smelting operations have been bringing this gold up to London Good delivery purity levels. This begs the question, where did all the other Bundesbank gold bars stored at the New York Fed disappear to?
The alternative to the coin bar thesis, that the Bundesbank does not trust the gold purity of supposedly 995 fine US Assay Office bars, is probably more concerning since it undermines confidence in the purity levels of all US Assay Office fine gold Melts.
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