Gold Leasing: The Case Of The Disappearing Gold

Tyler Durden's picture

From Jeff Thomas Of International Man

The Disappearing Gold

During the Cold War, Germany moved much of its gold to New York in case the USSR invaded Germany. It was assumed at that time that the US would be a safer storage location, and of course, they could always ask to have it returned if they wished.

But German citizens have become increasingly worried about the security of the 1,536 tonnes of German gold reputedly held at the Federal Reserve in New York. This has resulted in the Bundesbank pursuing repatriation of the gold, beginning with a request to view it in the basement of the Federal Reserve Building, where it is claimed to reside.

Of course, the German government had received periodic assurances from the Fed that the gold is there; however, the issue began to get a bit sticky recently, when the Fed refused a request for inspection.

The world then raised a collective eyebrow, and, whilst not panicking over this development just yet, closer attention has come to bear, not only on the Fed, but on any institution that is entrusted with the storage of gold for other parties.

Concern spread to Austria, where a question arose in Parliament as to where Austria’s gold is stored. The answer provided was that 80% of it (224.4 tonnes) is in the UK. (It was claimed that the reason for this is that, if a crisis of some kind were to occur, it could be more easily traded from London than from Vienna.)

Seems reasonable enough, except that the return of the gold to Austria, if it were requested, may be a bit difficult, as the gold seems to have been leased out by the UK.

To many, a second eyebrow might go up at this point. Lease out the wealth of another nation? Isn’t this a bit… irresponsible?

The New Gold Shuffle

Not to worry, it’s done all the time. In fact, the practice has been endorsed by none other than Alan Greenspan, former Chairman of the Fed. The gold is leased to a bullion bank, which typically pays one percent interest to the Fed, with a promise to return it on a specified date. The bullion bank then sells the gold on the open market and uses the proceeds to buy Treasury bonds, which will net a three to four percent return.

The nicest thing about such an arrangement is that the lessor continues to claim it on his balance sheet as a line item: “gold and gold receivables.” After all, an asset that we have leased out is still an asset, even if it has now been sold by the lessee.

In effect, this means that, if you bought a gold bar today, it is possible that it is a bar that was shipped from the Bundesbank to the Federal Reserve decades ago and is presently listed by the Fed on its balance sheet as “gold and gold receivables.”

Both you and the Fed are claiming to possess the same gold bar. The fly in the ointment, of course, is that only one bar can be the actual bar. The other is a receivable and therefore is an asset on paper only. This, of course, means that there is less gold in the world than has been claimed. How much less? That’s anyone’s guess.

The New Risks

But even if it became generally known that the Fed (and others) are holding paper, rather than physical gold, couldn’t we carry on as before? What could go wrong? Here are some immediate possibilities:

  • If there were a dramatic rise in the price of gold and the lessor were to call in the return of the gold by the bullion bank, the bullion bank could easily lose far more than the small two to three percent margin it had been enjoying.
  • If there were a crash in the bond market and hyperinflation set in, the bonds that the bullion bank had purchased could become worthless.
  • If the nations who shipped their gold to London and New York for safekeeping were to request their return, the storage banks could only deliver if they were to purchase gold at the current rate. If that rate were significantly above the rate at which the gold had been leased to the bullion banks, the storage banks would sustain a significant, possibly unsustainable, loss.

That’s quite a bit of risk.

In the present market, there are any number of possible triggers that could cause the people of Germany, Austria, or a host of other nations to demand that their gold be returned home. Indeed, pressure is on the increase. The governments who have shipped out their gold for “safekeeping” would have a lot of explaining to do to their constituents, if the storage banks are not forthcoming.

So, is it time for the odiferous effluvium to hit the fan? Not quite yet. Before that occurs, there will still be some dancing around by the Fed and others.

The Fed has already stated, in so many words, “We’re sorry, but we can’t let you have all your gold at one time, but we’d be prepared to send it to you over a period of years.”

For many observers, the present situation should be well beyond the point of the raised eyebrow. It should be glaringly apparent that the amount of gold presently claimed to be in storage in the world’s banks is, to a greater or lesser extent, overstated.

Continuing the Charade

The Bundesbank should, of course, now say, “I’m afraid that’s not good enough. It’s our gold. We’ve advised you how much of it we want back now, and we must insist that you produce it immediately.”

If they were to take this perfectly logical step and the Fed refused, there could be a run on the banks, and, very possibly, within as short a period as twenty-four hours, a worldwide bank holiday might be declared with regard to gold.

However, this is not what will transpire. Neither logic nor sound banking practices are the object here. The object is to maintain the charade that exists within the banking community. The Bundesbank is just as fearful of a run as the Fed and will be only too willing to accept the Fed’s terms.

What must be borne in mind is the root cause of the request. It was not the Bundesbank itself that originally wanted the transfer to take place; it was the German people who, quite rightly, have become distrustful of the fact that their gold has been in New York for so long and want to see it repatriated. It is not the banks who wish to correct the situation. Not one bank wishes to expose the inappropriate practices of any other bank. Their loyalty is to each other and not to their depositors.

So, is that it? Have we heard the last of this issue? I think not. The cat is out of the bag at this point, and the depositors’ distrust and uncertainty will not be quelled by the counter-offer. Tension will continue to mount amongst depositors, and, at some point, the situation will reach an impasse.

All those who presently have gold in a banking institution would be prudent to keep an eye on the present situation. We might consider taking delivery of any gold we have in a bank, wherever it may be. Regardless of what form it is in, from ETFs to allocated gold, we would do well to assess the degree to which we feel our gold is at risk. In doing so, we may determine that a gold account is more at risk in, say, a New York or London bank than a Swiss bank. (Not all banks will be equal in terms of risk.)

If we do resolve to divest ourselves of bank-related precious metal holdings, it would be prudent to take action soon. (Clearly, those who attempt to remove their wealth the day after a run has occurred tend to do less well than those who attempt to remove their wealth the day before the run.)

We might also consider whether a possible run may become systemic, causing a bank holiday on all the bank’s activities, thus freezing any currency that we may have on deposit. We may conclude that it is prudent to only retain in our bank enough money to allow cheques to clear – an amount sufficient to cover a few months’ expenses.

In the near future, we may well find that a significant amount of gold that is claimed to exist in the world will “disappear.” Whilst we cannot control this eventuality, we may be able to save the gold that is being held in our names from disappearing.

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Manthong's picture

I’ll take “Sustain the Unsustainable Loss” for 200, Alex.

dereksatkinson's picture

Harvey Organ's comments...

"Today we had first day notice and what a surprise. We had a massive 1,391,000 million oz of gold stand or 43.26 tonnes of gold. I have been following the gold and silver comex data from the mid 1970's and I have never seen anything like this before. You will recall that this past December we had only 10 tonnes of gold delivered upon. Generally December is the biggest delivery month of the year. The comex is not a physical market. If one needs physical they generally head over to London at the LBMA and purchase the metal over there. The high amounts standing may mean that our gentlemen from Eastern persuasion are having difficulty finding metal and thus they are heading over to our neck of the woods to obtain this very valuable commodity.

The total number of contracts standing for gold is a whopping 13,910 contracts or 1,310,900 oz of gold which translates to 43.26 tonnes of gold I am sure that Blythe will be one busy girl these next few weeks as she tries to entice some longs standing to accept paper instead of metal."

Muppet Pimp's picture

Who was it that reccomended repatriation of the University of Texas gold a year or two back.....hmmmmm....Kyle Bass was the one who made that reccomendation if memory serves me right.  Texas people are an awfully loyal bunch, and something tells me ol' Kyle may become something of a folk hero down there in due time.  Seems like a certain central banker down there in the Lone Star state has a pretty impressive holding of gold in his own portfolio for one reason or another.  Ahhh, tradition.  Indeed Mr. Bernanke, tradition indeed.

Anybody remember this?

Seeing the Bernanke bent over the table getting the high hard one is going to be a hoot.

On a side note, didn't Gordon Brown sell all the UK's gold (at 250 oz no less) to protect the bullion banks the last time a run occurred?  History will reflect poorly on Gordon I suspect.  Sold out his people for the pigmen.  Such a shame.



kaiserhoff's picture

Great article.

Great reason to read ZH.

BaBaBouy's picture

Like Sending Your Chickens For Safekeeping, To The Foxes' Den.

Hahaha, Fecking Joke.


But the FED's do know exacly what they are doing.

So Who has the actual GOLD right now?

Who Has de ACTUAL GOLD ???

One Thing Is For Sure, Those Who Know Will NOT TELL.


Headed For $50K, My Little Piggies...

Kitler's picture

The Golden Rule:

"He who holds the gold makes the rules."  (As opposed to > He who has the paper makes the rules)

Here's another one:

"He who panics first panics best."

Let's find out what gold is really worth. Repatriate into physical possession today.

trav777's picture

let's calm everyone down here.

The Fed held the gold.  The Fed leased the gold to Bullion Bank.  Bullion bank sold the gold to someone else and bought USTs. 

The reality is that the gold most likely NEVER MOVED AN INCH.  It's still at the Fed, albeit with a cloudier claim chain atop it.  And the chain of title has a *cash settled provision at every turn.

If the Fed actually forklifted that gold out and it moved, then it's in someone else's warehouse.  There may be multiple claimants to beneficial ownership of the stuff but only one entity holds it.  And if you're a claimant, GFL getting the actual stuff out of there.

The Bullion banks will merely BORROW money from the Fed at 0% to pay the Fed for the gold that they sold and now must buy back but which never actually moved.  In fact, paper gold permits them to buy gold that might never actually ever be mined.  It's just record ownership.  Until/unless actual claimaints stand for delivery and TAKE delivery of physical metal, it's all just a set of promises settleable by cash.

A bunch of stackers won't force this; only sovereigns trying to bust the USD system could. Trying to use this to trade against other physical stuff as Iran and Turkey have been doing.

Is this a price suppression?  Who knows?   Until people actually want to PONY UP the money to see if there is physical supply to move at a particular price, there's no point in arguing it.  This isn't the oil market where you need real barrels to burn.  Gold and cash are, at present, interchangeable as assets.  The eventual "owner" of this gold which is still parked in the Fed's vault, has a claim against the bullion bank which is a lessee of the Fed.  If you were a size buyer like the bullion banks would be moving against, you would NOT want the hassle of trying to find a vault to store this stuff in.  The Fed's vault is arguably the most secure on the planet.  To the extent that you can continue to write checks against what's there and people accept those (FRNs), the system is sound.

kaiserhoff's picture

Remember La France, circa 1971?

There's always a turd in the punch bowl;)

Muppet Pimp's picture

Couple things.  One, regarding Gordon Brown, I should have prefaced that statement with an If (hmmm...). 

Second, with regard to Trav's statement, it certainly seems to ring true, as Germany has found out.  It appears buying the gold on the open market is going to take 7 years to get them what they are owed. 


With a crazed leftist in the whitehouse arming wal mart greeter snitches with assualt weapons, and seeing as there have been six flags over Texas thus far, it is not so far fetched to see how if O continues pushing and running roughshod over the constitution as he has a habit of doing, well, they have what it takes to secede whether DC likes it or not (hence O's insistence on banning assault weapons).  Assault weapons are the type needed to defend territory against tyrannical dictators, aka BO's.  Texas at present has sufficient gold and sufficient talent to start their own credible central bank, enough good ol boys and transplants with a common vision of freedom and liberty, and lots of territory to mass defenses.  Something tells me, the neighbors to the south would gladly join an effort to prevent tyranny.  Mexicans constitute a big portion of the population in Texas and are well accepted in that society.  They are proud Tejano's and harder workers than you have ever come across.  So basically, yeah, if Obama pushes his luck he is about to find out what Texans are made of.  Will it become 7 flags over Texas is the question and Obama holds the answer.  Exciting times.

We are at the point where DC is getting close to a situation where half of the free world and half of the US see them as nothing more than bullies with guns.  Expect massive amounts of 'free shit' to be given out ad nauseum to keep what allies O has loyal.  We might see things like O giving fighter jets to tryannical muslim brotherhood guys for instance.  Good thing our military is pretty far right on the spectrum and doesn't support O's policies.


Blano's picture

I'm one of those transplants and proud of it.  I came here understanding that the US has already become a 3rd world craphole and hoping that Texans might someday say enough is enough.  Still, I'm shocked at how far things have deteriorated the last several years.

strannick's picture

GLD and SLV have JPM and HSBC as their custodians, whose latest manifestations of black corruption include interest rate rigging and laundering drug money. Ridiculously, these supposedly allocated ETFs can be shorted, and their shares can be used to satisfy COMEX contracts if you can believe it. Central Bank gold leasing/rehypothecation/stealing is old news. GLD and SLV are where the real paper to gold alchemy is now. The battle of Helm's Deep is overthe battle for Middle Earth is about to begin

In happier gold news, longtime anti-gold pundit John Nadler, -widely quoted in every banal article on gold for the past 5 years and chronically wrong price predictor on the down low side- finally got fired.

jeff montanye's picture

quote i liked from the bloomberg article cited above:

“The call to take delivery is more of a challenge to the system and it borders on the anarchistic,” said Ralph Preston, a principal at Heritage West Financial Inc., a San Diego company that specializes in futures trading. “It’s like the Republicans trying to overturn President Obama over the birth certificate issue. It’s poor sportsmanship.”

apparently assassination of citizens and imprisonment without trial (yes i'm talking about you bradley manning, american hero), not to mention ex post facto laws (telecoms illegal wiretapping, banks mers fraud, mek terror group, etc.) are considered cricket though.

Volaille de Bresse's picture

"Remember La France, circa 1971?


There's always a turd in the punch bowl;)"



It was 1965 but you're right!


Who'll be the 21th century turd? Chavez & Merkel... for a start!!!

lewy14's picture

So, no, stackers can't force the issue.

A massive popular movement in Europe might.

Specifically, if "show be the gold NOW" becomes a demonstrated path to elective power in Europe, then the cascade will run.

Therefore revolutionaries might consider funding campaigns and candidates and parties in Europe.

Even a credible threat that O(thousands) of tons of metal will be demanded prompt - that will set things off.

Badabing's picture

320,000,000 people in the us alone. if each person held 1/2 oz of gold thats $24,000,000,000 thats like 5406 tonn's,

 thats just the U.S.. Now lets consider the world.


"So, no, stackers can't force the issue."

 This statement is the biggest piece of propaganda shit in the article!

Bendromeda Strain's picture

That wasn't from the article, that was Trav punching above his weight class again. He apparently had another petit mal and didn't read the Harvey Organ quote above. Stackers can't force the issue? Sure they can - when the stack is on a pallet, and the stacker is a sovereign (which he admits). "The issue" is being subtly forced every day right before your eyes. LBMA under pressure to deliver? Put the screws to the CRIMEX. There is not a mandatory out for paper pushers there. Again, failure to deliver is a queston of time. How much time do they get? Force majeure, anyone?

trav777's picture

shut the fuck up; sovereigns are not stackers and I SPECIFICALLY said sovereigns could force the issue, you fuckin jackass.

dirtbagger's picture

Now that we all know how the banks operate with derivatives, don't be suprised if each ounce is leverage out 30 to 1

Bendromeda Strain's picture

Jeff Christian from the CME is on the record saying 100-1 was possible, and he is on their side...

Eally Ucked's picture

That's interesting point of view maybe right. To me if somebody wants to play price of gold paper is much more convinient instrument, faster and more efficient. In case of bullion banks selling physical leased from Fed is a different story - somebody wants physical gold (not paper) and for sure would not leave it in care of anybody. So I asume that all that leased gold is gone somewhere, of course they're still buying some new production so probably they are not zero in their vaults.

e_goldstein's picture

At least 10x paper claims on the phyz. 

Don't want to be anywhere near that melee when the lights come on and we all see Warren swimming naked.


mrgneiss's picture

Ya, the bullion banks sold the gold to jeweller's/Indians/Chinese and it didn't move an inch.  Brilliant analysis.

trav777's picture

JFC, why are you idiots so dense?

Gold consumers who want real gold buy the stuff from ACTUAL PRODUCERS, not fucking banks.

Beam Me Up Scotty's picture

I'll gladly sell them one ounce in exchange for clear title to my house.

Kitler's picture

In Detroit you would get substantial change back from that transaction.

Coming to America soon...


trav777's picture

so there's no worth in property in a 90% black jurisdiction?

I thought diversity was good?

Detroit was, no more than 60 years ago, called the Paris of the West and the Arsenal of Democracy.  It was one of the world's great cities.

Now, look at it. 

Kitler's picture

Arsehole of Democracy?

GetZeeGold's picture



Detroit heralds the world's future....because it's the same people running it.

Bendromeda Strain's picture

Better analogy? Sarajevo hosted the Winter Olympics, and the medals stand was later used for executions. Civil war, bitches.

trav777's picture

nah; black power is dependent upon belly crawling idiot white enablers.

Also, their reproductive rate is dependent upon others feeding their children

Tango in the Blight's picture

If you go black you won't come back.

OutLookingIn's picture

I wonder how much?

To sweeten the pie.

That the NY Fed offered

the Germans to postpone

thier gold request for 7 years?

Room 101's picture

While I like Kyle Bass a lot, keep in mind that he is a contrarian, not an advocate for systemic destruction. And he is well aware that he has a following.  He isn't going to scream "RUN FOR YOUR LIIIIIIVES!!" Nor is Bill Gross for that matter. 

Like all of them, watch what they do, not what they say. 

Daily Bail's picture

This is a great clip from Bob Rice at Tangent Capital Partners.

'How Central Banks Lease Their Gold'
matrix2012's picture


I luv the tagline of The Daily Bail "We watch CNBC so you don't have to..."


thanks for the great consideration, thanks for saving us from being the Les Misérables


EscapingProgress's picture

"There’s class warfare all right, but it’s my class, the rich class, that’s making war, and we’re winning." - Warren Buffet

"The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks." - Lord Acton

Boris Alatovkrap's picture

"Best defense is good offense" - Al, Cook on Alice

Victor The Cleaner's picture


I am not. One morning a bit more than a week ago, the future was in backwardation. This offers the obvious arbitrage opportunity to anyone who can trade both at the COMEX and OTC spot loco NY, namely to sell spot and buy the future. So it is no surprise if the arb is now taking delivery in order to close the trade.



francis_sawyer's picture

Same hands on BOTH sides of the trade...


This isn't a matter of 'Trader A' vs. 'Trader B'... It's the same goddamned entity [using paper markets to manipulate a favorable acquisition of PHYZZ ~ & hell, if it happens to BLOW UP, granny & her catfood get handed the bill]... All courtesy of Ben Shalom Bernanke...

kliguy38's picture

The only surprise will be when they pull the trap door. Right now its a balancing act for them and the "other" accumulators of physical...let's call it an "uneasy tango" with an Eastern twist. Bullion will remain the real game in the dark pool as the "Paper Game" gets the

Bay of Pigs's picture

In other news, Jon Nadler finally got canned at Kitco. Nice to see that smug little prick go...

Bastiat's picture

Awesome.  A friend who works for a Canadian miner recently told Kitner his company would never do business with Kitco as long as Nadler worked there.  Seems some miners object to having their product bashed.

Room 101's picture

I guess biting the hand that feeds isn't such a good strategy afterall.

Jam Akin's picture

That is great news.  He was right exactly once a month (around options last trade date) for years.  Surprised he lasted as long as he did.

vamoose1's picture

   agree on  nadless  bop      we  got  another    bought cftc   commissioner   last  week  too   sommers  i think   so   do  they   sense  a  sea  change.....  now  if  we  can  get   ferret  faced   christian    pls   jesus    and  the  charming   honest  faced  gensler .....

Al Huxley's picture

Good arbitrage trade, as long as the 'take delivery' part works out as expected.  We'll see - or maybe your trader will get a chance to go double-or-nothing if they roll forward.