During the calendar year to December 2015, the Bundesbank claims to have transported 210 tonnes of gold back to Frankfurt, moving circa 110 tonnes from Paris to Frankfurt, and just under 100 tonnes from New York to Frankfurt.
As a reminder, the Bundesbank is engaged in an unusual multi-year repatriation programme to transport 300 tonnes of gold back to Frankfurt from the vaults of the Federal Reserve Bank of New York (FRBNY), and simultaneously to bring 374 tonnes of gold back to Frankfurt from the vaults of the Banque de France in Paris. This programme began in 2013 and is scheduled to complete by 2020. I use the word ‘unusual’ because the Bundesbank could technically transport all 674 tonnes of this gold back to Frankfurt in a few weeks or less if it really wanted to, so there are undoubtedly some unpublished limitations as to why the German central bank has not yet done so.
Given the latest update from the German central bank today, the geographic distribution of the Bundesbank gold reserves is now as follows, with the largest share of the German gold now being stored domestically:
1,402.5 tonnes, or 41.5% now stored domestically by the Bundesbank at its storage vaults in Frankfurt, Germany
1,347.4 tonnes, or 39.9%, stored at the Federal Reserve Bank in New York
434.7 tonnes or 12.9% stored at the Bank of England vaults in London
196.4 tonnes, or 5.8%, stored at the Banque de France in Paris
In January 2013, prior to the commencement of the programme, the geographical distribution of the Bundesbank gold reserves was 1,536 tonnes or 45% at the FRBNY, 374 tonnes or 11%, at the Banque de France, 445 tonnes or 13% at the Bank of England, and 1036 tonnes or 31% in Frankfurt.
The latest moves now mean that over 3 years from January 2013 to December 2015, the Bundesbank has retrieved 366 tonnes of gold back to home soil (189 tonnes from New York (5 tonnes in 2013, 85 tonnes in 2014, and between 99-100 tonnes in 2015), as well as 177 tonnes from Paris (32 tonnes in 2013, 35 tonnes in 2014, and 110 tonnes in 2015)). The latest transfers still leave 110 tonnes of gold to shift out of New York in the future and 196.4 tonnes to move the short distance from Paris to Frankfurt.
In the first year of operation of the repatriation scheme during 2013, the Bundesbank transferred a meagre 37 tonnes of gold in total to Frankfurt, of which a tiny 5 tonnes came from the FRBNY, and only 32 tonnes from Paris. Whatever those excessive limitations were in 2013, they don’t appear to be so constraining now. In 2014, 85 tonnes were let out of the FRBNY and 35 tonnes made the trip from Paris. See Koos Jansen’s January 2015 blog titled “Germany Repatriated 120 Tonnes Of Gold In 2014” for more details on the 2014 repatriation.
Those who track the “Federal Reserve Board Foreign Official Assets Held at Federal Reserve Banks” foreign earmarked gold table may notice that between January 2015 and November 2015 , circa 4 million ounces, or 124 tonnes of gold, were withdrawn from FRB gold vaults. Given that the Bundesbank claims to have moved 110 tonnes from New York during 2015, this implies that there were also at least 14 tonnes of other non-Bundesbank withdrawals from the FRB during 2015. Unless of course the other gold was withdrawn from the FRB, shipped to Paris, and then became part of the Paris withdrawals for the account of the Bundesbank. The FRB will again update its foreign earmarked gold holdings table this week with December 2015 withdrawals (if any), which may show an even larger non-Bundesbank gold delta for year-end 2015.
Notably, the latest press release today does not mention whether any of the gold withdrawn from the FRBNY was melted down / recast into Good Delivery bars. Some readers will recall that the Bundesbank’s updates for 2013 and 2014 did refer to such bar remelting/recasting events.
Today’s press release does however include some ‘assurances’ from the Bundesbank about the authenticity and quality of the returned bars:
“The Bundesbank assures the identity and authenticity of German gold reserves throughout the transfer process – from when they are removed from the storage locations abroad until they are stored in Frankfurt am Main. Once they arrive in Frankfurt am Main, all the transferred gold bars are thoroughly and exhaustively inspected and verified by the Bundesbank. When all the inspections of transfers to date had been concluded, no irregularities came to light with regard to the authenticity, fineness and weight of the bars.”
This above paragraph in today’s press release was actually lifted wholesale from the Bundesbank’s gold repatriation press release dated 19 January 2015 , minus one key sentence:
“The Bundesbank assures the identity and authenticity of German gold reserves throughout the transfer process – from when they are removed from warehouses abroad until they are stored in Frankfurt am Main. As soon as the gold was removed from the warehouse locations abroad, Bundesbank employees cross-checked the lists of bars belonging to the Bundesbank against the information on the bars removed. Finally, once they arrived in Frankfurt am Main, all the transferred gold bars were thoroughly and exhaustively inspected and verified by the Bundesbank. When all the inspections had been concluded, no irregularities came to light with regard to the authenticity, fineness and weight of the bars.”
So, was there no list of bars this time around?
But why the need at all for such a general comment on the quality of the bars while not providing any real details of the bars transferred, their serial numbers, their refiner brands, or their years of manufacture? Perhaps remelting/recasting of bars was undertaken during 2015 and the Bundesbank is now opting for the cautious approach after getting some awkward questions last year about these topics – i.e. the Bundesbank’s approach may well be “don’t mention recasting / remelting and maybe no one will ask“.
This bring us to an important point. Beyond the Bundesbank’s hype, its important to note that the repatriation information in all of the press releases and updates from the Bundesbank since 2013 has excluded most of the critical information about the actual gold bars being moved. So, for example, in this latest update concerning the 2015 transport operations, there is no complete bar list (weight list) of the bars repatriated, no explanation of the quality of gold transferred and whether bars of various purities were involved, no comment on whether any bars had to be re-melted and recast, no indication of which refineries, if any, were used, and no explanation of why it takes a projected 7 years to bring back 300 tonnes of gold that could be flown from New York to Frankfurt in a week using a few C-130 US transporter carriers.
There is also no explanation from the Bundesbank as to why these 100 tonnes of gold were available from New York in 2015 but not available during 2014 or 2013, nor why 110 tonnes of gold somehow became available in Paris during 2015 when these bars were not available in 2014 or 2013, nor why all 374 tonnes to be brought back from Paris can’t make it back on the 1 hour 15 minute air-route between Paris and Frankfurt between which multiple aircraft fly each and every day.
The crucial questions to ask in my view are where was the repatriated gold sourced from that has so far been supplied to the Bundesbank from New York and Paris, what were the refiner brands and years of manufacture for the bars, what are the details of the quality (fineness) of the gold trasnferred, and are these bars the same bars that the Bundesbank purchased when it accumulated its large stock of gold bars during the 1950s and especially the 1960s.
In essence, all of these updates from Frankfurt could be termed ‘limited hangouts’, a term used in the intelligence community, whereby the real behind the scenes details are left unmentioned, only hanging out snippets of information, and questions about the real information are invariably left unasked by the subservient mainstream media. Overall, it’s important to realise that the Bundesbank’s repatriation updates, press releases, and interviews since 2013 are carefully stage-managed, and that the German central bank continually uses weasel words to dodge genuine but simple questions about its gold reserves and the physical gold that is being transported back to Frankfurt.
For example, in October 2015, the Bundesbank released a partial inventory bar list/weight list of it gold holdings. At that time, on 8 October 2015, I asked the Bundesbank:
Hello Bundesbank Press Office,
Regarding the gold bar list published by the Bundesbank yesterday (07 October https://www.bundesbank.de/Redaktion/EN/Topics/2015/2015_10_07_gold.html), could the Bundesbank clarify why the published bar list does not include,for each bar, the refiner brand, the bar refinery serial number, and the year of manufacture, as per the normal convention for gold bar weight lists, and as per the requirements of London Good Delivery (LGD) gold bars?
Serial number (see additional comments in section 7 of the GDL Rules)
Assay stamp of refiner
Fineness (to four significant figures)
Year of manufacture (see additional comments in section 7 of the GDL Rules)”
“The marks should include the stamp of the refiner (which, if necessary for clear identification, should include its location), the assay mark (where used), the fineness, the serial number (which must not comprise of more than eleven digits or characters) and the year of manufacture as a four digit number unless incorporated as the first four digits in the bar number. If bar numbers are to be reused each year, then it is strongly recommended that the year of production is shown as the first four digits of the bar number although a separate four digit year stamp may be used in addition. If bar numbers are not to be recycled each year then the year of production must be shown as a separate four digit number.
Best Regards, Ronan Manly
The Bundesbank actually sent back two similar replies t the above email:
“Dear Mr Manly,
Thank you for your query. Information on the refiner and year of production are not relevant for storage or accounting purposes, which require the weight data, the fineness and a unique number identifying each bar or melt. The Bundesbank has all of this information for each of its gold bars. By contrast, particulars relating to the refiner and year of production merely provide supplementary information. They tell us part of the gold bar’s history but do not describe its entire ‘life cycle’.”
DEUTSCHE BUNDESBANK Communication
“Dear Mr Manly,
The crucial data for storage and accounting purposes are the weight, the fineness and a unique number identifying each bar or melt. The Bundesbank has all of this information for each of its gold bars, which it records electronically and also makes available to the public. In addition to the data on weight and fineness, the Bundesbank, the Bank of England and the Banque de France identify gold bars exclusively on the basis of internally assigned inventory numbers and not using the serial numbers provided by the refiners. These custodians do not classify the bar numbers stamped onto the gold bars by the refiner as individual inventory criteria. They do not use the refiner’s bar numbers as these are not based on a unique numbering system that can be used for identification purposes. Stating the refiner and the year of production is not required for storage or accounting purposes.”
DEUTSCHE BUNDESBANK Communication
Even the large gold ETFs produce detailed weight lists of their bar holdings, so you can see from the above answers that the Bundesbank is resorting to flimsy excuses in its inability to explain why it is not following standard practice across the gold industry.
Each year in June, the Bank of England publishes its annual report which quotes financial data up to the end of February (its financial year-end). The Bank’s annual report also states the amount of gold, valued at a market price in Pounds sterling, that it holds under custody for its customers, which comprise central banks, international financial institutions, and LBMA member banks.
The Bank of England as gold Custodian
In 2014, the Bank of England stated that, as at 28th February 2014, it held gold assets in custody worth £140 billion for its gold account customers, while in 2013, the corresponding figure was £210 billion. In June 2014, Koos Jansen of Bullionstar calculated that the Bank of England therefore held 5,485 tonnes of customer gold at the end of February 2014, and 6,240 tonnes of customer gold at the end of February 2013. This meant that between the two year end dates, end of February 2013 to end of February 2014, the amount of gold in custody at the Bank of England fell by 755 tonnes.
In his personal blog in June 2014, Bron Suchecki of the Perth Mint, also discussed the 2013 and 2014 Bank of England gold custody tonnage numbers, and derived the same 755 tonne drop between February 2013 and February 2014, and he also went back all the way to 2005 and calculated yearly figures for each February year-end from 2005 to 2014. (See table in Bron Suchecki’s blog).
Bank of England gold in custody down another 350 tonnes during 2014
“As of 28 February 2015, total assets held by the Bank as custodian were £514 billion (28 February 2014: £594 billion), of which £130 billion (28 February 2014: £140 billion) were holdings of gold.”
Since 28th February 2015 was a Saturday, the afternoon London Gold Fixing price in GBP on Friday 27th February 2015 was £787.545 per ounce.
£130 billion @ £787.545 per ounce = 5134.37 tonnes = ~ 410,720 Good Delivery bars
This means that between 28th February 2014 and 28th February 2015, the amount of gold stored in custody at the Bank of England fell by another 350 tonnes, from 5,485 tonnes in February 2014, to 5,134 tonnes on 28th February 2015.
Now only 500,000 bars in the entire London vaults system
“In total there is approximately 9,000 tonnes of gold held in London vaults, of which about two-thirds is stored in the Bank of England.”
So that earlier reference would have been (9000 * 0.66) or 6,000 tonnes in the Bank of England and 3,000 tonnes in the other vaults. To summarise:
9,000 tonnes in all London vaults = 720,000 bars
6,000 tonnes in Bank of England (BoE) = about 482,000 bars
3,000 tonnes in London ex BoE vaults = 238,000 bars
7,500 tonnes in all London vaults = ~600,000 bars => lost 120,000 bars (1500 tonnes)
5,625 tonnes in Bank of England = ~ 450,000 bars => lost 32,000 bars (375tonnes)
1,875 tonnes in Ldn ex BoE vaults = ~150,000 bars => lost 88,000 bars (1125tonnes)
Third quotation: June 2015
“There are ~500,000 bars in the London vaults, worth a total of ~US$237 billion”
The London vaults refer to at least the LBMA London vaults, and may include other non-LBMA gold vaults in London, depending on how the LBMA collected these figures from the vault operators. Apart from the Bank of England gold vaults, the LBMA ‘London’ vaults, are the vaults of JP Morgan and HSBC Bank in the City of London, the vaults of Brinks, Malca Amit and Via Mat (Loomis) out near Heathrow, and the vault of G4S in Park Royal, and not to forget the Barclays vault which is run by Brinks.
In the cases of the 9,000 tonnes and 7,500 tonnes quotations, the tonnage figures and the fractions are probably rounded to an extent for simplicity, so are ballpark figures, but a comparison between the two earlier quotations indicates that the Bank of England lost 375 tonnes, and the rest of the London vaults lost 1,125 tonnes. In total that’s 1,500 tonnes less gold in London between the time the first figure was complied and the time the updated (second) figure was published.
Factoring in the “There are ~500,000 bars in the London vaults, worth a total of ~US$237 billion“ quotation, which equates to 6,250 tonnes, this means that another 1,250 tonnes of gold (approximately 100,000 Good Delivery bars) has now gone from the London gold vaults compared to when there was 7,500 tonnes of gold in the London vaults, as quoted on the vaulting page of the LBMA’s web site as recently as earlier this year.
A total of 6,250 tonnes is also 2,750 tonnes (about 220,000 Good Delivery bars) less than the 9,000 tonnes quoted on the LBMA web site in April 2014, which may have referred to a period earlier than 2014.
All of the gold in the Bank of England would be London Good Delivery bars (i.e. variable weight bars each weighing about 400 oz or 12.5kgs), and most, if not all, of the gold in the other London vaults would also be London Good Delivery bars, because importantly, all the gold held by the ETFs in London, primarily the SPDR Gold Trust at the HSBC vault in London, is required by the ETF prospectuses to be in the form of London Good Delivery gold bars.
In fact, Stewart Murray, the then CEO of the LBMA stated at a presentation held in Paris in November 2011 that the gold in the London vaults was “Virtually all in the form of Good Delivery bars”, although by August 2015, a very recent presentation (slow file to load) by current LBMA CEO Ruth Crowell in Goa India, stated that, in the London gold market, “Almost all gold is held in the form of Good Delivery bars“.
Symantics maybe between ‘virtually‘ and ‘almost all‘, but there are probably some kilobars held in the London gold vaults now that might not have been as common in 2011. Note that the LBMA and the Shanghai Gold Exchange recently executed a mutual recognition agreement for a 9999 gold kilobar standard, so each body now recognises the kg bars manufactured by all of the gold refiners that each body has accredited.
The LBMA has also recently made reference to a potential 995 gold kilobar standard which it has referred to as a ‘draft for discussion and possible endorsement”. See the Goa presentation from Ruth Crowell, above.
What time period did 9,000 tonnes refer to?
LBMA launched a new version of its website in approximately March 2014. It’s not clear what exact month this 9,000 tonnes of gold in the London vaults figure refers to, but a lot of the text on the new LBMA website in 2014 was already on the previous version of the website prior to the revamp, so the tonnages specified on the new website in April 2014 could have been on the previous version of the website before April 2014 and merely been copied across to the new website. However, there is a way to infer the latest date at which the 9,000 tonne figure could have been referring to.
“At our premises at Threadneedle Street, London, we have approximately £200 billion worth of gold stored over 10 vaults.”
On 11th March 2013, the GBP price for an ounce of gold was £1059 (average of AM and PM fixes in Sterling). At £1059 per oz, $200 billion of gold is 188,857,412 ounces, or 5,874 tonnes, or about 469,940 Good Delivery bars.
Recalling the two totals discussed above at the Bank of England of 6,000 tonnes and 5,625 tonnes, this 5,874 tonnes figure is quite close to being halfway between 6000 and 5625 (i.e. 6000 + 5625 / 2 = 5812.5 tonnes). So its realistic to assume that Luke Thorn’s number lay somewhee in time between the two LBMA quotations, and that therefore, the 6,000 tonnes total at the Bank of England, and by extension the 9,000 tonne total in all London vaults, most likely referred to the state of the London gold market before 11 March 2013.
In other words, the 9,000 tonnes in the London vaults, and the 6,000 tonnes in the Bank of England, were referring to the amount of gold in the London vaults before the major drop in the gold price in April 2013 and June 2013, and before the huge 2013 withdrawals of gold from the gold ETFs which store their gold in London, and before most of the 755 tonnes of gold was withdrawn from the Bank of England (BoE) between 28th February 2013 and 28th February 2014.
Only 90,000 Good Delivery bars outside BoE vaults – this includes all London ETF gold
If there are now only 500,000 Good Delivery bars in the London vaults, as LBMA CEO Ruth Crowell’s presentation of June 2015 states, then with 410,000 Good Delivery gold bars in the Bank of England vaults (5,134 tonnes from 28th February 2015), then there are only 90,000 Good Delivery gold bars in the other London gold vaults, which is 1,125 tonnes.
Not only that, but nearly all of this 1,125 tonnes in the other London vaults is gold belonging to the physical gold-backed ETFs which store their gold in London. The ETFs that store their gold bars in London are as follows:
(Note: PHAU and PHGP are the same ETF. They are just two ISINs of the same underlying ETF. PHAU is in USD, PHGP is in GBP. The same structure applies to the other ETF Securities ETF known as GBS. GBS and GBSS are the same ETF. GBS is the USD ISIN and GBSS is the GBP ISIN).
The SPDR Gold Trust (GLD) currently holds 682 tonnes of gold in the vault of HSBC in London. That leaves only 443 tonnes of gold from the 1,125 tonnes above that is not in the GLD.
The iShares Gold Trust (IAU) gold is held in 3 vaults in 3 countries, namely the JP Morgan vault in London, the JP Morgan vault in New York, and the Scotia vault in Toronto. On the surface, this is an unusual vaulting arrangement for IAU. This arrangement just arose due to the way the IAU prospectus was worded in 2004, and the way the original iShares Gold Trust custodian, Scotia Mocatta, stored the gold in London, New York and Canada. JP Morgan took over as custodian for IAU in the second half of 2010, and just maintained this 3 vaults in 3 countries arrangement for whatever reason. Some of the Authorised Participants of IAU include Barclays, Citibank, Credit Suisse, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley, Scotia, and UBS.
In the JP Morgan vault in London, IAU currently holds 7,265 Good Delivery gold bars (2.907 million ounces), which is 90 tonnes. That leave only 353 tonnes in the London vaults, that is not at the Bank of England, not in the SPDR Gold Trust, and not in the iShares Gold Trust.
As of 3rd September 2015, the ETFS Physical Gold ETF (PHAU)held 3,271,164 troy oz of gold in London at HSBC’s vault. That’s 101.7 tonnes in PHAU, which leaves only 251 tonnes unaccountedfor in the London vaults.
There is also another ETFS physical gold ETF called Gold Bullion Securities (GBS) which also holds its gold in the HSBC London vault. As of 3rd September 2015, GBS held 2,233,662 troy oz of gold. That’s 69 tonnes. Subtracting this 69 tonnes from the residual 251 tonnes above, leaves only 182 tonnes of unaccounted for gold in the London vaults.
Some of the Authorised Participants of the ETFS ETFs are Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Merrill Lynch, Morgan Stanley, Scotia, and UBS.
The ‘Source Physical Gold ETC (P-ETC)‘ also stores its allocated gold in the JP Morgan vault in London. This gold is held for the trustee Deutsche Bank by the custodian JP Morgan Chase. The Authorised Participants for this Source ETC are Goldman Sachs, JP Morgan, Bank of America, Morgan Stanley, Nomura and Virtu Financial. According to a Source gold bar list dated 28th August 2015, the Source Physical gold ETC held 1.571 million fine ozs of gold in bars that weighed 1.574 million gross ozs, so that’s about 3,925 Good Delivery bars, which is about 49 tonnes.
Subtracting this 49 tonnes from the remaining 182 tonnes above, which are not held within the Bank of England, and which are not held by the other physically backed gold ETFs described above, leaves only 133 tonnes of unaccouted for gold in the London vaults.
Other companies store some of their customer gold in the London vaults, such as GoldMoney and BullionVault. Based on its daily update, BullionVault had 6709 kgs of gold, or 6.7 tonnes, stored in London, while GoldMoney, based on an audit from 1st December 2014, had 410 Good Delivery bars, or about 5.14 tonnes, stored in Via Mat’s (Loomis) London vault. Combined, that’s another ~14 tonnes of gold which can be substracted from the 133 tonnes above, leaving only 119 tonnes that is not accounted for.
To put a figure such as 119 tonnes of gold into perspective, this is about the same amount as 1-2 weeks worth of gold withdrawals from the Shanghai Gold Exchange, or about 1 month’s worth of official gold imports into India.
Unallocated Musical Chairs, without any chairs
In a May 2011 presentation at the LBMA Bullion Market Forum in Shanghai, while discussing London gold vaults, former LBMA CEO Stewart Murray had a slide which read:
Investment – more than ETFs
Gold Holdings have increased by ~1,800 tonnes in past 5 years, almost all held in London vaults
Many thousands of tonnes of ETF silver are held in London
Central banks hold large amounts of allocated gold at the Bank of England
Various investors hold very substantial amounts unallocated gold and silver in the London vaults
There are 2 interesting things about the above slide. If central banks ‘hold largeamounts of allocated gold at the Bank of England”, which totalled 6,000 tonnes and then 5,625 tonnes, and more recently 5,134 tonnes, and if this is a proxy for an amount being ‘large’, then the 2nd statement with the quantum “very substantial amounts’ and especially the qualifier ‘very’, implies that the unallocated amounts represent larger amounts than the ‘allocated’ amounts, perhaps ‘very’ much larger amounts.
That 2nd statement is also a contradiction in terms. Unallocated gold is not necessarily held in vaults or held anywhere. Unallocated is just a claim against the bank that the investor holds an unallocated gold account with. There are no storage fees on an unallocated gold account in the London Gold Market precisely because one cannot charge a storage fee when there is not necessarily anything being stored.
So the ‘very substantial amounts‘ being held really means that investors have very substantial amounts of claims against the banks which offer the unallocated gold accounts, or in other words, the banks have very substantial liabilities in the form of unallocated gold obligations to the gold account holders. As to how much physical gold is on the balance sheets of the banks to cover these liabilities, if the figure of 500,000 bars in the entire set of London vaults is accurate, then there is hardly any gold in London to cover the unallocated gold accounts.
LBMA Member gold accounts at the Bank of England
A 2014 quarterly report of the Bank of England said that 72 central bank customers (including a smaller number of official sector financial organisations) held gold accounts with the Bank of England. That reference is on page 134 of the report, however, a small subset of the report, including page 134 can be viewed here (and is not a large file to download).
“The Bank of England acts as gold custodian for about 100 customers, including central banks and international financial institutions, LBMA members and the UK government.”
If central bank customers with gold accounts, whose numbers would not change that much from 2011 to 2014, represented ~72 gold accounts, that would mean that up to 28 LBMA members could have gold accounts at the Bank of England.
Is that number of LBMA member bullion banks a feasible number for maintaining a gold account at the Bank of England? Yes it is, primarily because of the gold lending market, but also due to the way the London gold clearing market works.
Bolivia’s gold and the Bullion Banks
Just as an example, the Central Bank of Bolivia’s gold that it lent to bullion banks in 1997 and that has never been returned to the Central Bank of Bolivia, has gone through the hands of at least 28 bullion banks between 1997 and the present day. These entities, some of which have merged with each other (*), and a few of which imploded, include Swiss Bank Corp*, Republic National Bank of New York*, Midland Bank (Montagu)*, Credit Suisse, SocGen, Natixis, BNP Paribas, Standard Chartered, ANZ, Scotia Mocatta, Barclays, Morgan Stanley, HSBC, Macquarie, Deutsche, Dresdner*, Bayerische Landesbank, Westdeutsche Landesbank*, JP Morgan*, Commerzbank*, Citibank, Rabobank, Morgan Guaranty* and Bayerische Vereinsbank. The IBRD (World Bank) even took on to its books the borrowed gold positions of the bullion banks during the financial crisis in 2009 because it had a higher credit rating than the investment banks after the Lehman crisis.
The lent gold of Central American banks during the 2000s, such as the gold of Guatemala, El Salvador, Honduras and Nicaragua, had been on the books of additional banks Mitsui & Co, J Aron (Goldman), Mitsubishi, AIG, and N.M. Rothschild. Bullion banks ebb and flow as to their involvement in the gold market, and some merge and go bust or get forceably rescued and shoved together, but a lot of other banks are also LBMA members that are not in the aforementioned names, such as RBC, ICBC Standard Bank, Toronto Dominion Bank, Merrill Lynch and Zurcher Kantonalbank, not to mention the other Chinese and Russian bank members of the LBMA. So overall, it is quite conceivable that 28 LBMA member bullion banks each have a gold account at the Bank of England.
How much gold did the London-based gold ETFs lose in 2013
The year 2013 was a year of huge gold outflows from the gold backed ETFs. Of the ETFs based in London, or more correctly, the ETFs with gold stored in London, the gold outflows were as follows:
The SPDR Gold Trust had an outflow of 561 tonnes of gold in 2013. It started 2013 holding 1,349 tonnes of gold, and ended 2013 with 798 tonnes. At the end of March 2013, GLD held 1,221 tonnes, at the end of Q2 it held less than 1000 tonnes (passing through the 1000 tonne barrier on 18th June 2013. By the end of Q3 2013 (actually on 2nd October 2013) GLD held 900 tonnes. Then by the end of 2013 its gold holdings dipped below 800 tonnes. During 2014, GLD lost another 80 tonnes, taking it to 709 tonnes at December month-end 2014.
In Q2 2013, GLD was hammered. Its gold holdings went from 1,221 tonnes to 1078.5 tonnes in April, a loss of 143 tonnes, then down to 1,013.5 tonnes at the end of May, another 62 tonnes loss, and by the end of June it held 969.5 tonnes, a June loss of 43.5 tonnes. Overall in Q1 2013, GLD lost 128 tonnes, then 249 tonnes in Q2 (and 379 tonnes in H1), then 100 tonnes in Q3, and another 100 tonnes in Q4 2013 (200 tonnes in H2). The near rounded 100 tonne withdrawals from GLD in both Q3 and Q4 2013 are uncanny. As if someone said “let’s take another 100 tonnes out of GLD this quarter”.
The iShares Gold Trust (IAU) lost approximately 60 tonnes of gold in 2013. Assuming the mix of IAU gold holdings in 2013 across London, New York, and Toronto was the same as it is now (i.e with 56% of the gold in London, 41% in New York, and 3% in Toronto, then IAU would have lost about 34 tonnes from London. More of the IAU gold probably flowed out of the JP Morgan’s London vault in 2013 than the other IAU storage locations, because London is the world’s main gold market for Good Delivery bars, and furthermore, that is where the gold.
ETF Securities’ PHAU lost 52 tonnes in 2013. ETS Securities GBS ETF lost 42 tonnes. The ‘Source’ Gold ETF lost 31 tonnes.
The above shows that (561 + 34 + 52 + 42 + 31) = 720 tonnes of gold was withdrawn from London gold vaults in 2013 via ETF gold redemptions. About 880 tonnes of gold in total was withdrawn from gold backed ETFs in 2013 but some of this was from ETF’s based in Switzerland and elsewhere.
Remember that the only entities which can usually redeem gold from gold backed ETFs are the Authorised Participants (APs), which in nearly all cases are the same banks as act as custodians or sub-custodians for those ETFs, and these are also the same banks that either have vaults in London or that have vaulting facilities in London, and these banks are also in a lot of cases members of the private gold clearing company London Precious Metals Clearing Limited (LPMCL) and lastly, these banks all hold gold accounts at the Bank of England.
Can ETF gold, such as GLD gold, be held in the Bank of England vaults?
Recalling that the amount of gold withdrawn from the Bank of England between 28th February 2013 and 28th February 2014 was 755 tonnes, can any of the gold that was withdrawn from the ETFs in 2013 have been the same gold that was in these the Bank of England withdrawals in 2013?
The answer is that technically, it can’t be the same gold because the ETFs are supposed to store their gold at the vault premises of the specified custodian. ETF gold can be stored at a vault of a sub-custodian, but has to be physically transferred to the vault of the custodian using “commercially reasonable efforts”.
“Custody of the gold bullion deposited with and held by the Trust is provided by the Custodian at its London, England vaults. The Custodian will hold all of the Trust’s gold in its own vault premises except when the gold has been allocated in the vault of a subcustodian, and in such cases the Custodian has agreed that it will use commercially reasonable efforts promptly to transport the gold from the subcustodian’s vault to the Custodian’s vault, at the Custodian’s cost and risk.”
The subcustodians that the SPDR Gold Trust currently uses (and that it used during 2013) are “the Bank of England, The Bank of Nova Scotia-ScotiaMocatta, Barclays Bank PLC, Deutsche Bank AG, JPMorgan Chase Bank and UBS AG.”
These banks, along with HSBC, but excluding Deutsche Bank, are the 5 members of London Precious Metals Clearing Limited (LPMCL). (Although the GLD Sponsor might want to think about deleting Deutsche Bank from the list).
Shockingly, the GLD Prospectus also says that:
“In accordance with LBMA practices and customs, the Custodian does not have written custody agreements with the subcustodians it selects.”
The GLD prospectus goes on to explain that LBMA custodians are obliged to provide gold holder entities with details (including locational details) of the gold that they or their subcustodians hold on behalf of a relevant entity gold holder that enquires, but this is just based on “LBMA practices and customs”. It also states:
” Under English law, unless otherwise provided in any applicable custody agreement, a custodian generally is liable to its customer for failing to take reasonable care of the customer’s gold and for failing to release the customer’s gold upon demand.”
Coming from a background of equity and bond portfolio management, I find the fact that there are no custody agreements with the GLD gold subcustodians very odd. Custodians of financial assets such as Citibank, PNC, Northern Trust, and State Street, would all insist on having custody agreements with each other when appointing sub-custodians. To organise it in any other way is crazy.
This is something that GLD institutional and hedge fund investors should enquire about with World Gold Trust Services (the SPDR Gold Trust Sponsor) when performing their next set of due diligence exercises on the GLD, just to make sure they understand how the sub-custodian arrangements work. It does look like the gold in the LBMA system is acting like one big happy pool of gold..like the 1960s London Gold Pool.
All of the GLD annual and quarterly filings for 2013 and every year state, in the ‘Results of Operations” section, that “As of [Date], Subcustodians held nil ounces of gold in their vaults on behalf of the Trust.” For example:
“As at September 30, 2013, subcustodians held nil ounces of gold in their vaults on behalf of the Trust.”
The same is true for December 31, June 30, 2013, and March 31, 2013. The annual full gold bar audit undertaken on the SPDR Gold Trust would also suggest that no GLD gold is stored at sub-custodians, including the Bank of England. For example in the full 2013 GLD gold bar audit (click the exact link here -> //www.spdrgoldshares.com/media/GLD/file/Inspectorate_Certificate_Aug30_2013.pdf), it states that the location of the audit was the “London Vaults of HSBC Bank USA National Association“:
“We performed a full count of 77,709 bars of gold, based upon the gold inventory as at 28th June 2013, between 8th July and 29th August 2013 at the Custodian’s premises”
The bars were described as “77,709 London Good Delivery, large Gold Bars”. There is also a separate partial audit on the GLD gold bars each year. The earlier partial audit of GLD in March 2013 stated that there was a random audit of the “105,840 London Good Delivery, large Gold Bars” held by the GLD “based upon the gold inventory as at 22nd February 2013, between the 4th March and 15th March“. This audit was also specified as occurring at the “London Vaults of HSBC Bank USA National Association”.
Although I don’t think the HSBC London vault was big enough to store all the GLD gold during 2013 when it held up to 1353 tonnes, as well as storing the ETFS Securities gold and other HSBC customer gold , the GLD audits and SEC filings seem to indicate that all the GLD gold was at the HSBC London vault.
Incidentally, the ETF Securities gold ETFs which also use HSBC as custodian, specify a list of subcustodians that includes the commercial security companies Brinks, Malca Amit and Via Mat (Loomis) in addition to the LPMCL members:
“The Bank of England, The Bank of Nova Scotia (ScotiaMocatta), Deutsche Bank AG, JPMorgan Chase Bank, N.A., UBS AG, Barclays Bank PLC, Brink’s Global Services Inc., ViaMat International and Malca-Amit Commodities Ltd.”
As the Perth Mint’s Bron Suchecki pointed out in his personal blog in June 2014, central banks were net buyers of gold during 2013, not net sellers, so it appears that it was LBMA member banks with gold accounts at the Bank of England that were withdrawing gold bars from the Bank of England during 2013. Even the gold repatriated by the Central Bank of Venezuela in late 2011 and early 2012 appears to have been flown to Caracas from France and not from the Bank of England.
From March 2006 until February 2011, the amount of gold stored in custody at the Bank of England’s gold vaults rose by 2,065 tonnes (See Bron Suchecki’s table at the previous link). It then dipped by 68 tonnes from March 2011 to February 2012 before rising by another 722 tonnes from March 2012 to February 2013. That was a net 2,719 tonnes increase from March 2006 to February 2013. What percentage of this increase in custody gold holdings at the Bank of England was delivered by central bank customers and what percentage was delivered by LBMA bullion bank customers is unclear.
Then, as mentioned above, 755 tonnes of gold was withdrawn from the Bank of England between March 2013 and February 2014, and 355 tonnes withdrawn from March 2014 to February 2015.
If the ~720 tonnes of gold withdrawn from the gold backed London-based ETFs is not the same gold as was withdrawn from the Bank of England, then this means that (720 tonnes + 755 tonnes) = 1475 tonnes of London Good Delivery bars came out of the London market in 2013.
Which is very interesting, because the UK exported approximately 1,400 tonnes of gold to Switzerland during 2013 (Eurostat – HS Code 7108.1200 “Unwrought Gold” – Source www.sharelynx.com).
“Australian bank Macquarie, citing trade data from EU statistics agency Eurostat, said the UK exported 1,739 tonnes of gold in 2013, with the vast majority sent to Switzerland.”
There is a possibility, as Bron Suchecki mentioned, that some of the Authorised Participants (APs) of the gold ETFs, which have gold accounts at the Bank of England, redeemed ETF shares for gold held at the London vaults of JP Morgan and HSBC, and that HSBC or JP Morgan transferred gold from their own accounts at the Bank of England to the gold accounts of the APs at the Bank of England, who then withdrew it.
But with over 1,400 tonnes of gold withdrawn from the London gold market in 2013 (since 1400 tonnes of gold was transported from the UK to Switzerland), this suggests that the gold that went to Switzerland in 2013 was in the form of Good Delivery bars from both the London based gold ETFs vaults (HSBC and JP Morgan), and from the Bank of England vaults.
If the calculations above are correct about the 500,000 Good Delivery bars in the London vaults whittling down to about 130 tonnes of gold that’s not accounted for by ETFs and other known gold holders, and that’s not accounted for by the Bank of England vault holdings, then there is surely very little available and unencumbered gold right now in the London Gold Market.
“The cost of borrowing physical gold in London has risen sharply in recent weeks. That has been driven by dealers needing gold to deliver to refineries in Switzerland before it is melted down and sent to places such as India, according to market participants.”
“‘[The rise] does indicate that there is physical tightness in the market for gold for immediate delivery’, said John Butler, analyst at Mitsubishi.”
And it begs the question, why do the dealers need to borrow, and who are they borrowing from. And if the gold is being borrowed and sent to Swiss refineries, and then shipped onward to India (and China), then when will the gold lenders get their gold back?
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