Banks and the Gold Price

It is claimed that somewhere deep in the vaults of western central banks are huge stacks of physical Gold bars.

This Gold bullion are deemed to be part of their respective foreign currency reserves, which include all the usual fiat (paper) currencies like the USD the GBP, the JPY and the EUR.

The Western governments central banks; United States, United Kingdom, Japan, Switzerland, Eurozone and the International Monetary Fund (IMF) are believed to hold an 23,349 tons of physical Gold in their respective reserves, representing more than $1.3-T at today’s Gold price.

Other than the suggested tonnage (held therein) little is actually known about the Gold that makes up the stockpiles.

Western central banks disclose very little about where the Gold is stored, in what form, or how much of the Gold reserves are used for other purposes. The public is continuously assured that it is all there, again there are no real details beyond the references in various financial reserve reports about the bank’s Gold holdings.

A decade ago, likely very few people cared what central banks did with their Gold, as Gold suffered a 20 yr Bear cycle and did not create excitement at 255 oz.

So, then it made sense for Western governments to lend (lease) out, or in the case of Canada to just sell it, their Gold reserves in order to generate some interest income from their holdings.

That is what many central banks did from the late 1980’s through to the late 2000’s. Now, the times have changed, and it does matter what the banks are doing with their reserves, and where the reserves are held.

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This is because the major Western countries are now all very much over indebted and printing their respective currencies without reserves.

Certainly it would be comforting to know that these nations have some of the Gold they claim in case their experiment with collusive monetary accommodation does not work out.

You may be interested to know that central bank Gold sales were actually the center core of the original investment theory that me interested in Gold space 15 yrs ago.

Then I learned that the Western central banks Gold sales had been used to suppressed the full extent of Gold demand. Of the 35,000 odd tons of Gold that the Western central banks stated they held, that the actual tonnage was really 50% or 18,000 tons.

That meant that when the central banks ran out of Gold to sell the Gold market would be set up for a powerful Bull Run, and I was correct even though the Western central banks kept being net sellers of Gold for many more years.

The Gold Bull market developed throughout the 2000’s, and central banks did not become net buyers of physical Gold until Y 2009, which coincided with Gold’s final break-out above 1,000 oz.

But, all of this central bank buying came from the non-Western world; Russia, Turkey, Kazakhstan, Ukraine and the Philippines and they continue buying Gold.

The data compiled says that non-Western central banks purchased 457 tons of Gold in Y 2011, and are expected to purchase another 493 tons of Gold in Y 2012, as they expand their reserves. And it is likely that they will extend those numbers.

The Western central banks are silent on Gold, they have not publicly disclosed any sales or purchases of Gold at all over the past 3 yrs that I have seen.

There is a “Central Bank Gold Agreement” in place that covers the Gold sales of the EuroSystem central banks, Sweden and Switzerland, but there is no mention of Gold sales by the very entities that are purported to own the largest stockpiles of the precious metal, The silence is an indication of what has happened.

Over the past several many years physical demand for Gold has developed. The annual growth in demand for Gold bullion is not aligning with the physical supply.

Global annual Gold mine supply ex-Russia and China, they do not export domestic production, is actually lower than it was in Y 2000, and ever since the IMF announced the completion of its sale of 403 tons of Gold in December 2010, there has not been any large, publicly-disclosed seller of physical Gold for 2 yrs.

Considering the huge increase in physical demand that has occurred in the last 10 yrs, particularly from Asian buyers, suffice it to say that I cannot tell where all the Gold is coming from to supply it, but it has to be coming from somewhere.

There is just one source: the Western central banks. It may be that a large portion of physical Gold currently flowing to new buyers is actually coming from the Western central banks themselves, as are the only holders of physical Gold who are capable of supplying Gold in a quantity and manner that cannot be easily tracked.

They are also the entities whose actions are driving investors back to Gold. Gold is a hedge against their collective irresponsibility, and they are showing that especially since Y 2008.

If the Western central banks are leasing out their physical Gold reserves, they would not have to disclose the specific amounts of Gold that leave their vaults.

According to a document on the European Central Bank’s (ECB) website regarding the statistical treatment of the EuroSystem’s International Reserves, current reporting guidelines do not require central banks to differentiate between Gold owned outright vs. Gold lent out or swapped with another party.

The document says: “reversible transactions in gold do not have any effect on the level of monetary gold regardless of the type of transaction (i.e. gold swaps, repos, deposits or loans), in line with the recommendations contained in the IMF guidelines.”

So, under current reporting guidelines central banks are permitted to continue carrying the entry of physical Gold on their balance sheet even if they have swapped it or lent it out. This is the manner in which Western central banks refer to their Gold reserves.

The UK Government refers to its Gold allocation as, “Gold (including Gold swapped or on loan)”. That’s the verbatim phrase they use in their official statement.

Same goes for the US Treasury and the ECB, which report their gold holdings as “Gold (including gold deposits and, if appropriate, gold swapped)” and “Gold (including gold deposits and gold swapped)”, respectively.

And that is as far as their description goes, as each institution does not break down what percentage of their stated Gold reserves are held in physical, vs what percentage has been lent out or swapped for something else.

The fact that they do not differentiate is quaint but at the same time not surprising. It would not lend much credibility to central banks if they admitted they were leasing their Gold reserves to ‘Bullion Bank’ intermediaries who were then turning around and selling their Gold to China.

But the numbers strongly suggest that is exactly what has happened. The central banks’ Gold is likely gone, and the Bullion Banks that sold it have no realistic chance of getting it back.

Paul A. Ebeling, Jnr.Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster’s Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels.

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