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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donsluck's picture

Per your last paragraph, this includes every monotheist religion in the world.

francis_sawyer's picture

Aha! ~ There's that word 'religion' again...

Room 101's picture

-1

I had hoped that you were going to stay on the wagon and give the JOOOOOOs thing a rest for awhile.  And you were actually doing pretty good there for about a week. You're intelligent, and I enjoy your posts when they aren't about the evil and wicked JOOOOOOOs

Too bad. I guess a dog always returns to it's vomit, no?

Volaille de Bresse's picture

"If I was Germany, as soon as the US said it would take seven years I would have:

 

1. Told the US that 20% just increased to 50%

2. Told the US an auditor was on a plane the next day to audit EVERYTHING"

 

This would have happened when Germany had balls... Fortunately we French ppl got our gold back in 1965, thanks to De Gaulle... that is when we still had balls!

 

http://www.youtube.com/watch?v=i-g2iGskFPE

 

FeralSerf's picture

You had to send the French Navy to NY to get it though.  The American Navy has been reinforced since then.  You won't get away with that again.

" Starting in 1958, he ordered the Banque de France to increase the rate at which it converted new Dollar reserves into bullion; in 1965 alone, he sent the French navy across the Atlantic to pick up $150-million worth of gold; come 1967 the proportion of French national reserves held in gold had risen from 71.4% to 91.9%. "

http://goldnews.bullionvault.com/gold_dollar_France_Sarkozy_de_Gaulle_cr... 

booboo's picture

The Arsonist (and of course the building owner) usually are the only ones that make it out alive, the rest? they will all be found piled up at the inswinging doors. There is a reason fire exit swing out and there are no fire exits in this world financial building. Jewish Lighting, go ask your Fire Marshall what it is.

Victor The Cleaner's picture

If you'd like to know where the German gold was and is, why don't you look it up:

www.bundesbank.de/Redaktion/DE/Downloads/Bundesbank/Wissenswert/gold_ent...

This shows the location of the allocated gold, i.e. ownership of specific bars of physical gold ("Lagerstellen"), as well as the unallocated, i.e. gold claims ("Sichtkonten"), gold on lease ("Goldleihe") and gold swapped out ("Swaps").

Here are their transactions:

http://www.bundesbank.de/Redaktion/DE/Downloads/Bundesbank/Wissenswert/g...

Any questions? Well, finally here is my summary on gold leasing:

http://victorthecleaner.wordpress.com/2012/11/26/central-bank-gold-leasing/

Victor

francis_sawyer's picture

Since it's all so cut & dried... Please follow up by going about explaining why it's going to take 7 YEARS to give it all back...

Victor The Cleaner's picture

Merkel: Timmy, please ship us the gold.

Timmy: Well, ehm, you need to understand,....

Merkel: Ship it now, please. If not, we'll dump our dollar reserve and buy twice the amount in the market.

You know what? Timmy will call FedEx before you can say GLD Puke. This is why.

Although some sources always claim the Fed could "confiscate" the European gold, this is a non-threat, simply because the US dollar has its international position only thanks to massive European goodwill. They can sink the dollar at any time.

Victor

 

Börjesson's picture

All well and good, but that doesn't really answer the question. Why the seven years? Presumably, since the Germans have such leverage, they're only letting it take so long because they want to. But why? If the gold is really there, then why not just ship it over and have done with it?

Victor The Cleaner's picture

Cause it doesn't matter. The US government cannot afford to cheat, and so why care?

Recall that the Bundesbank shipped some 930 tonnes from London to Frankfurt in 2000 and 2001, and they didn't tell anyone for a decade (it came out last fall when they published where their gold is stored).

So if they now make a fuss about 50 tonnes, then the point is the fuss rather than the 50 tonnes, no?

1993-1999 Europeans support the dollar gold market in order to preserve the international role of the dollar (lowers the oil price, too, making them less dependent on said dollar)

2000-2012 Europeans wind down their support of the paper gold market. Open leases are closed.

2012/13 Signal: central banks now only interested in physical gold. London paper gold market told to f*** off.

(this is one possible guess)

Paper gold was nicely supported during 2000-2011. The rising price made sure there is enough physical gold to go around. Why? The flow of physical from mining and scrap is roughly constant in terms of weight per time. The demand for gold as a store of value is roughly constant in terms of dollars per time (up to the slow increase of world GDP in dollars). So the higher the London price, the longer the available physical lasts.

One might think the support (=someone pushed it up) of the London gold price ended in fall 2011. If they now leave the market alone, the price of paper gold might drop quite a bit, perhaps under $1000 per ounce, but at some point something will break as the market runs out of (physical) reserves.

Let's wait and see.

Victor

 

Al Huxley's picture

So again, if it doesn't matter, why not just say 'send a couple of trucks and take it tomorrow'?   Why the 7 year delivery?  It's in the vault, just sitting there, right?

moonstears's picture

Mr Huxley, the game is still in play, note the Euro/Dollar war(plus Yuan/CAD/+...?) (someone mentioned this here, earlier). No need to repatriate all, maybe darned ole' US neo dollar may be the winner, who can know? Leave the gold there(in the USA), though it's a relic, you're told, to them it's money, a reserve asset . p.s. Remember, some say(see Creature from Jeckyll Island) it's a cartel, and FED is the biggest dick in the room, for now... Bunds, schmunds, do as you're told.

Börjesson's picture

Thanks for the answer! I don't understand it, but thanks all the same. I will think about it for a bit, and maybe something will click. :)

Just one thing: It's 300 tonnes they want to bring home from NY, not just 50.

Motley Fool's picture

If you haven't noticed, the euro and dollar are at war, and gold is one of the main weapons.

 

What possible action could the bundesbank have taken that would invite more notice and speculation. The only other is asking for everything immediately...but that would crash the gold market immediately and they would be blamed. This is a nice strategic move.

Germany : We only asked for a little gold, you can't blame us.

ROW : Wth..hyperventilating.

Germany #winning

Börjesson's picture

Why would asking for immediate delivery of all the gold crash the gold market, assuming that it's actually there in the NY vaults and not leased to anyone? The Germans already own the gold, so nothing changes ownership, it's just a matter of transport logistics. Right?

Now if the gold WASN'T there anymore, if asking for it all back would force the US to go buy some in the open market, or else mine it pdq, THEN I can see why it might have an effect on the markets. Is that your position?

Motley Fool's picture

Because of the panic it would create. It would show an extreme lack of trust at international level between some of teh most powerful entities that exist.

To others it would imply that the Bundesbank knows something they dont ( true most of the time anyways) and perhaps expect imminent collapse. That will send others scrambling for gold, even if there was no reason for panic (and the huge paper gold versus rela gold ratio is reason enough for panic NOW).

That would break the market. Even though the Bundesbank would get every ounce from the Fed, just this action of asking will break things.

Börjesson's picture

Now that's the first good answer in this whole thread to the question of "why seven years". This I can understand. Thank you!

Victor The Cleaner's picture

MF, very nice!

Asking for 50 tonnes per year is the worst the Germans could do to the dollar without getting into the line of fire themselves.

Because it invites all sorts of speculation (without being diplomatically rude).

Victor

 

FeralSerf's picture

It may have something to do with the gold the CIA has "on deposit" in european banks, including DB, that has also been leased to keep the gold price depressed.   Neither side wants to push it.

Harbanger's picture

"Merkel: Ship it now, please. If not, we'll dump our dollar reserve and buy twice the amount in the market."

I think the US dollar will stop being the reserve currency before 7 yrs.  It won't last that long at the rate they're destroying the dollar. 

Victor The Cleaner's picture

The dollar was destroyed in the 1970s when the US asked the Shah to hike the oil price.

It got so far (until today) only because the rest of the world decided (around 1978-1980) to support the dollar even though they hated it, simply because they didn't hve any other international currency to settle international trade and nobody could afford to have the dollar fail.

This changed with the birth of the Euro around 1999-2002, and you can see from the dollar gold price that the world doesn't need the dollar any longer. Well China decided that they did, and they supported the dollar for another decade, roughly 2002-2011.

As far as I understand it, the dollar has been in limbo since the fall 2011, just stabilized by hot money investment flow.

Victor

Harbanger's picture

You see it limbo, I see it in free fall since 2002.  The dollar is being sold off, euro is being bought but it's in equally terrible shape.  Recently all the central banks have been racing to print fiat while also buying universal money, gold and silver.  That's a fact.  There is a global debt crisis.  Maybe the entire debt based model is flawed.  I'm not sure we even need a world international currency at all. 

Victor The Cleaner's picture

The Euro is in good shape. This is because no government can force the ECB to print. And they won't print more than what's necessary to meet their inflation target of just below 2%. It is true that a number of governments have incurred too much debt, but hey, governments can be bankrupt (Greece), but why wouldn't people still accept the Euro? What matters for accepting Euros is that its real value doesn't decline too rapidly and that the small decline from inflation is predictable.

Internationally, the Euro won't decline too much either because the Euro zone has a structurally balanced trade account. Yes, the hot money flow does affect the Euro +/- some 10 cents, but there is no structural pressure on the Euro exchange rate.

The situation of the dollar is totally different. There is a net foreign dollar position of some $8000bn. If they start selling, it is over. In addition, the U.S. run a trade deficit of about 5% GDP. Unless foreigners accumulate additional dollars at that rate, there will be downward pressure on the dollar.

You can watch all the desperate attempts of the US government to prop up the dollar in the Middle East. They are doing almost everything now in order to raise the international oil price (Brent) although a high oil price hurts their economy as well. But at least it guarantees some demand for dollars.

Victor

 

Harbanger's picture

You make a good point.  Lets see how long they can keep proping up the dollar thru Brent.  Outside the ECB though, the Germans are still monetizing their banks by buying bonds however, because they need to.  Maybe your right, lets see, there's still too many variables for me to make a decision.

Poor Grogman's picture

.
"They are doing almost everything now in order to raise the international oil price"

This is one of the most disingenuous statements heard on ZH for some time, and that's saying something...

Does the words "tar sands" "fracking" or "SPR" mean anything to you?

Victor The Cleaner's picture

Mr Groogman,

Does the words "tar sands" "fracking" or "SPR" mean anything to you?

Try a guess at what dollar price of oil the new resources are viable? $60/bbl? $70/bbl. The Canadian stuff is cheaper (and also a bit worse). So without the high dollar price of oil, there would simply be no expanded production in North America.

Same story as in the 1970s. The U.S. wanted to become independent of the Middle Eastern oil. With a free market price of oil, this would have been impossible, simply because the Middle East was able to pump at $1.50/bbl at that time and also able to vastly increase production at that price.

So the U.S. needed a higher oil price in order to allow non-Middle East production to become viable. At that time Prudhoe Bay, Mexico, and the British/Dutch/Norwegian parts of the North Sea. Kissinger asked the Shah to help him get the oil price up. Never heard this story?

Here is Sheikh Ahmed Zaki Yamani on CBB (Jan 2011). The video clip is a short version of the interview:

http://video.tvguide.com/Facetime+with+Sheikh+Ahmed+Zaki+Yamani/7259684

The transcript of the full interview is here:

http://www.bi-me.com/main.php?c=3&cg=4&t=1&id=48966

This "Kissinger Plan" is being repeated. It started around 2000/2001. You just need to make sure that no possible other producer (Iraq) can challenge Saudi Arabia's role as the swing producer that has the price setting capability. And then, if there is still too much oil coming from Libya, Egypt, Iran, Algeria, you know what to do.

Victor

 

Poor Grogman's picture

"So the U.S. needed a higher oil price in order to allow non-Middle East production to become viable"

This is circular reasoning

If as you say the intention was for higher oil prices, then bringing extra production to market makes no sense whatsoever.

As for your other point about why the other oil producers were "freedomised". Consider this, how many of them were close to changing from net exporters to net importers?

Look at the charts of rising domestic demand in some of those countries and ask yourself how much longer they were going to be putting all that oil into the world market?

Your theory places too much emphasis on scheming by the PTB and not enough emphasis on supply demand realities IMHO.

FeralSerf's picture

". . . they won't print more than what's necessary to meet their inflation target of just below 2%."

I have a really nice bridge that I think you may be interested in.  Cash only.

The ECB is going to print all the euros it needs to to keep up with the Fed's printing.  Otherwise, Germans don't get to sell their stuff and they become unemployed and restless.  Remember what happened in Munich when they became unemployed and restless?

 

Victor The Cleaner's picture

The cool thing is that the Euro zone has a balanced trade account. They just stopped playing this game in 1999, and this was one of the major reasons for introducing the Euro. They'll take out their popcorn and watch the currency war on telly.

If you take a look at China's international accounts, they are trying the same, i.e. buying so much real stuff from abroad (not only gold, but even copper) that their trade surplus is reduced.

Eventually it will be (effectively) the U.S. importing oil and the oil exporters receiving dollars with the rest of the world out of the game (as their exports of goods into the U.S. and their imports of energy net out). Then someone will probably pull the plug.

Victor

 

A Nanny Moose's picture

Diversification. Putting it all on one boat risks losing it all in a tragic boating accident. Duh!

Pure Evil's picture

Nothin' like gold ballast to help the ship get to the bottom faster!

Bob's picture

Damn, that's some serious work there, Victor!

Babushka's picture

Thanks, Victor!

I must agree, lately some of the ZeroHedge articles were extremly poor researched. Missing good crowd from 2010-11.

However scanning ZH for links and accasional deep thought through opinions is still paying off.

matrix2012's picture

Here's a reference about the Dimitri Speck’s “Geheime Goldpolitik” (“Secret Gold Policy”)

"Gold and Bubbles

Figures About the Managed Gold Price and About Bubbles

As a safe investment, one could rely on a good performance of gold in times of financial crises and imminent sovereign defaults. But often the price suddenly drops. It does so without visible reason and even when the panic reaches its peak. But why? Dimitri Speck knows the answer. He has examined in detail how central banks secretly manage the gold price with the intention to calm the markets and to control inflation.

There is an even bigger issue behind this manipulating: Since the abolition of the gold standard in 1971 the indebtedness of the global economy is increasing. It has now reached a level which is way beyond comprehension. What are the mechanisms that have led us to this mega bubble? Is it possible to avoid a catastrophic outcome like deflation or strong inflation?

Dimitri Speck’s book “Geheime Goldpolitik” (“Secret Gold Policy”) is about the managed gold price and about bubbles. It is currently only available in German, a Chinese edition will follow. Following the intensive research, the book contains over one hundred mainly unique figures. For the English speaking world, we present here some of the figures together with a short description. The figures depict gold intraday patterns, the amount of worldwide leased central bank gold or the ratio of worldwide total debt to global gdp. The first group of figures is about the gold interventions, the second group is about credit bubbles."

 

 

Victor The Cleaner's picture

You write:

During the Cold War, Germany moved much of its gold to New York in case the USSR invaded Germany.

This is quite obviously nonsense. Take a look at the Bundesbank PDFs above and see that the gold is in NY because they redeemed dollars from their trade surplus under the Bretton Woods system before 1971. The gold is in NY because this is where it was when they bought it.

Victor

francis_sawyer's picture

But it'll take 7 years to give it all back... [Nothing to see here folks]...

Bay of Pigs's picture

Victor is a well known paper humping PM pusher who wants us all to believe the gold and silver markets are transparent and are not rigged.

Yen Cross's picture

 XAU was in the $700's in 2008. XAU is at 1660 in 2013. Personally I have been buying Silver and Platinum like a meth addict looking for his/her next fix. (golds' good as well)

  The bond market is going to face some serious "tests" this year.  I suspect Q-1 end of March will be the first.

 

Downtoolong's picture

Sounds reasonable to me. I have this really nice appartment I'm renting that I'd be willing to sell you for half the market price too. Sorry I don't take credit cards, but, Angelo Mozilo has agreed to write you a mortgage if you need it.

 

Victor The Cleaner's picture

You write

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.

Why don't you book a guided tour:

http://www.newyorkfed.org/aboutthefed/goldvault.html

As far as I understand, the tour is free, but you need to book in advance. The gold is there. Looks impressive.

And you write

however, the issue began to get a bit sticky recently, when the Fed refused a request for inspection.

which is false. Every other year (if I remember correctly) some Bundesbank people are in NY, and you bet that they get to see a little more than the tourist guided tour.

Victor

 

 

wee-weed up's picture

Ah, but do the Bundesbank people get to do a bar-by-bar serial number verification with the list of their issued serial numbers?

Victor The Cleaner's picture

If you own allocated gold, then, yes, you get a list of manufacturer, year, serial number, purity and fine weight, for every bar.

As I said, the US needs a lot of goodwill from the rest of the world, and they will not piss off the Europeans. If they did, the dollar would be finished as an international currency. This is what the US cannot afford to, simply becaue they import some 5% of their GDP worth of goods. If foreigners stop accepting dollars, the jig is up.

Victor

 

wee-weed up's picture

Also, I wonder...

If any of the owners of gold held by the Fed have ever compared their list of bar serial numbers with OTHER owner's bar serial number lists? Of course there would not be any duplicates...

wee-weed up's picture

And the Fed would never stoop so low as to issue ficticious bar serial numbers... no way!

That's why they allow bar-by-bar serial number checks... oh wait...