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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francis_sawyer's picture

If it's still actually there in the first place... They'd put 'em in a fucking toaster oven and say "oops"! before it ever went that far...

matrix2012's picture

i guess the gold bar owners also need to check that the bars are 100% tungsten free, having nothing less than 99.9% in purity :-)

here's a ZH's popular file at Scribd: "The Genesis of the Gold-Tungsten: The Rest of the Story"

one may read it at Charleston Voice as well. Or at InvestmentWatch.

Victor The Cleaner's picture

Look. The U.S. import 5% of GDP worth of goods and services from the rest of the world. The rest of the world delivers all this stuff and accepts US dollars as payment. You better be  very very careful with your credibility if you want to continue like this. That's the reason why the U.S. gold and also the foreign gold stored in NY is all there, fully allocated, in physical form, and free of any third party claims.

Everyone knows that gold will be the basis of the next financial system, and this is what the gold is being held for. It would be foolish to waste the gold in order to defend the (old) dollar. A futile attempt. The dollar will fail. This has been inevitable at least for two decades now. It is just that the U.S. government is trying to pocket all possible benefits from the international role of the (old) dollar for as long as possible.

Victor

 

moonstears's picture

Victor, it's interesting you say this, I too believe there are boat-fuckin'-loads of gold at Knox, NY, etc. WHO owns it? Who owns the dollar note? Deduct fifty points, per question,  if you said "The US govt". Now you're asking the right questions

wee-weed up's picture

Seems to me, if all the foreign gold stored in NY is all there, fully allocated, in physical form, and free of any third party claims, it would not be unreasonable to allow thorough bar-by-bar serial number inspections with the owners present. Makes one wonder... what are they trying to hide?

They are certainly NOT being very very careful with their credibility!

Victor The Cleaner's picture

Why don't the US have a public audit of their gold? Here is how FOA explained it in 1999 - I don't think the argument has changed:

FOA (5/8/1999; 20:16:12MDT – Msg ID:5772)
BOE!

[...]
The US treasury cannot use gold as a backing reserve as the ECB does, because the BIS would claim it at $41 to settle trade imbalances. They have that authority and as such it leaves the US the only option of outright gold sales. However, with the dollar as “the” reserve currency, we can expect many nations to bid “aggressively” for any US gold. China, among others comes to mind! That is what America found when they tried to auction it’s gold in 1978. The Euro carries no such baggage.
[...]

FOA (5/21/1999; 11:27:15MDT – Msg ID:6570)
Reply

[...]
Just because the US said, in 71 that it would not ship gold any more does not mean the dollar isn’t still a contract to represent it’s old international obligations. Every analysts makes comments like, “let them sent their army if they want it”, but that is simply not the way the world works. It’s cheating, fair and simple! Why didn’t the US send out all of it’s gold at $41 to the ounce, then go off the system? As Another say’s, “think long and hard on that one”!

The entire international financial structure is based on procedure protocols that are not binding, repeat, not binding, but without them, the system will not work. If the BIS did not coordinate inter bank (CBs) transfers the whole system would stop. Using the same “line of reasoning”, the US cannot just back it’s currency with gold at say, $10,000 and start all over again. What manner of “rules of engagement” would prevent them from halting gold shipments again? “Come on”, people of the world are not that stupid!

No, the dollar would have to be totally destroyed, and a new currency, sanctioned by the BIS, and most likely controlled by them, would have to be created. The US will go down to the wire before that happens, therefore, the Euro was created!
[...]

FOA (12/19/1999 18:59:35MDT – Msg ID:21368)
Reply

[...]
I think just about every other major country (outside the IMF / dollar faction) has private audits of their gold. Too date, it’s mainly been the US gold stocks that have worried people because the dollar is so leveraged over this holding. I understand that the gold is intact, but they don’t want to draw attention to it. Any audit only highlights how little gold is backing the trillions of dollar assets. That’s the reason for the stonewall.

Too a lesser extent, any audit carries overtones of eventual dollar backing. Something the BIS would have a major say in as they could attach it at the old $42 rate. Let’s be serious here, if current international law demands the compensation of German slave labour and Swiss Gold value reparations, all hell would break lose for the payment of dollar backed gold confiscated in 71. Both the official and private levels would be after any gold backing our present dollar. The only way the US gold could come into play would be with a new currency. And any whiff of that process (an audit is the beginning) would literally tank the dollar big! Well before the fact. So, good luck to GATA and MR. Turk!

Victor

Al Huxley's picture

Sure, I get your argument, but again, if they have the gold, why 7 years to return it?  You say because it doesn't matter? Then why 7 years, why not tomorrow?  If anything, better if Germany takes it back, then there's no risk of the US losing the German gold accidentally, right?  Because that for sure would piss off the Europeans - 'Sorry, somebody stole your gold from under our noses, but we're doing our best to get it back for you'...

Victor The Cleaner's picture

NY will continue to be a financial centre. And the gold is safe there. So why not leave it there?

Al Huxley's picture

Because it belongs to Germany, and the citizens want it back.  So if it's not a big deal, why not just give it back?  Screwing around makes the 'its not a big deal' line seem suspect.

francis_sawyer's picture

 ...and the gold is safe there

~~~

& besides ~ The Germans aren't very good as 'mechanical engineers'... Shoddy craftsmanship in things like cars & such [/sarc]... How could you ever expect them to build a secure safe?... Much better to bury it underground in a city that gets direct hits from hurricanes & [towelheads ~ COUGH COUGH VOMIT] who fly airplanes into buildings... Not to mention 'donut eating' rent-a-cops who pick off 14 innocent bystanders trying to shoot one perp...

"We're NY's Finest & We're here to help [take away your Big Gulps]"... TRUST US!

DosZap's picture

Victor,

If foreigners stop accepting dollars, the jig is up.

Well one scenario playing out right before our eyes is China,as soon as they have amassed enough Au to back their Yaun the jig is UP.

By default they will become the Reserve Currency,plus a good sign that your scenario has already happened.

With Bernie throwing down 85 Billion a month (because there are no real buyers left), should be the sign we are already there.And CB's laoding up all the Au they can get, plus all the nations wanting repatriation of their stashes from US,pretty much tell me that the goose is cooked, and already on the table.

Victor The Cleaner's picture

You wrote:

China,as soon as they have amassed enough Au to back their Yaun the jig is UP.

This argument falls flat on its face at least for two reasons:

1) In order to issue a reserve currency, China would need to run a perpetual trade deficit. They don't and there is no reason why they would in the future let alone why they would want this.

2) Nobody will be so stupid as to back their currency with gold. That would be a dead sure way of either losing your gold or your credibility or both. The U.S. have experienced all these difficulties, and the present shape of the dollar is the result. The Chinese are not that stupid. They understand enough history in order not to copy this stupidity.

Victor

BlackVoid's picture

1.) This makes absolutely no sense. The US had a reserve currency with a surplus for a long time.

2.) Actually that system worked quite well for more than 100 years in the current era and much more in history.

 

Your argument falls flat on its face.

AE911Truth's picture

With reference to: "This, of course, means that there is less gold in the world than has been claimed. How much less? That’s anyone’s guess."

What is the Fed trying to hide?

http://www.scribd.com/Free_Nations/documents

Yen Cross's picture

 My metal is stored right next to my "Peace Keeper"...

   That asshole "Mario Draghi", is about to get his rectum torn out/(e/u 1.37) He is going to print and lower rates, but wants a higher base before he does.

   Central banks are a joke. That joke of a nationalist leader of Japan "Abe", want's the BoJ under his thumb. I have to give the BoJ some credit.( for resisting) They are 10-15 years ahead of what is going to happen with the Fed. The Fed. shouldn't even exist.

   The flows of money moving from Asia back into Europe are astounding! China is F..ked and even the credit ratings agencies are warning. Europe is F..ked, and in a recession, yet the DAX is ramped to all time highs. The sterling is tanking from outflows back into Mainland Europe. Fools/  ( time will tell)

Manipuflation's picture

Just wanted to correct your interminably fucked up mess of a statement that you made above.

"Central banks are a joke."

They own our ass.  Some more than other's.

 

Yen Cross's picture

 I stand corrected. : ed

 I should have included Names and Addresses of said Central Banksters.

Manipuflation's picture

Aww shit; the sun is going down.

Danielvr's picture

Are there any credible sources for the alleged facts that a) the FED refused an audit of the German gold that it's storing and b) that the FED has leased out (some or all of) this German gold? I don't believe there are..

Bluntly Put's picture

I'm sort of split on this issue. I think demands from other central banks (other than Germany) are credible. However, Germany may in fact be acting on behalf of the Fed in this instance. The gold basis is decling and hovering near zero as gold has been flirting with backwardation for a while now. Before, to manfacture the appearance of plentiful gold, the fed conned other central banks into selling tons onto the market. This may be the feds final desparate attempt to keep gold in contango in defense of the dollar as the world's reserve currency. Thus, the seven year delay which of course may be shortened as gold nears permanent backwardation. I suspect that gold will be delivered in the next few years or by the end of Obama's current term.

Fekete has a very good article on this topic released last week.

http://www.professorfekete.com/articles%5CAEFAmericanBasesGermanyGoldBas...

 

Danielvr's picture

Prof. Fekete has taught me a lot about gold in the past, but the man sees the entire financial economy from a gold perspective. Unfortunately for him and his vision, the 7 billion other economic actors in the world think differently, and it will be a while before these twain shall meet.
 
I'm a goldbug -I prefer 'bullionair'- myself, but the frequent (and very modest) gold backwardation of the past few years is not caused by scarcity of gold; it's a simple consequence of zero and negative interest rates in treasuries. There used to be an opportunity cost associated with holding gold, to wit, the income that you would otherwise have received from investing your money in treasuries. And so, gold that was to be supplied 'later' would be more expensive than gold that is to supplied 'now'. With ZIRP, that opportunity cost has disappeared, and so the gap between spot and forward rates of gold has decreased and almost closed. If treasury rates should remain in negative territory for long, contango will be the new normal for gold!

Victor The Cleaner's picture

I guess you wanted to say that backwardation will be the new normal, simply because nominal interest rates will be less than the negative of the storage expenses.

Yes, I agree. But the effect that Fekete describes will be the same, regardless of the reason for backwardation. Physical will be withdrawn from the exchanges and disappear ino private hands. The (paper) gold futures and forward market will automatically have to develop into a pure spot market. But the spot market cannot support the dollar. Only the swaps can.

Victor

 

Danielvr's picture

Oops yes - backwardation! Well, it was the right word to get backwards :-)

I agree that without government intervention, Fekete will be proved right in the end. I wouldn't worry about the USD and other irredeemable currencies.. at that point, they would be far beyond rescue. That's effectively why the futures trade would have come to a standstill.

Danielvr's picture

Oh, and Fekete's assumption that Germany's gold repatriation was instigated by the FED rings about as truthful to me as the allegation that the FED refused an audit. Central banks know better than to f_ck with other nation's souvereign gold.

Pure Evil's picture

Dude, you have to know when you're being brainwashed, which is practically 98% of the time, and when you're not. Never take anything at face value. This little screed is for the dolts out there in never never land that believe anything they hear on TV or read in Time/Newsweek.

Danielvr's picture

"Never take anything at face value."

You're barking up the wrong tree. As you could have read from my message, I don't buy into unsubstantiated allegations, whether they are from a government, from ZeroHedge or from you. I simply want the facts. 

SeventhCereal's picture

It's very obvious that the world is in a very precarious equilibrium where huge derivatives are cancelling each other.  Anyone who has both the intent and capability to destablize this equilibrium will likely be viewed as a trouble-maker and dealt with accordingly.

Sudden Debt's picture

IT'S A BIT LIKE THIS:

You go on vacation and hire a housesitter.
when you're gone he sells your house, and rents it back.
You come back, and he keeps paying the rent.
you know shit but why would you? you still get to live in your house right!

and suddenly the new owner come knocking on your door to evict you because he wants to rent the house to his own kids....

now... who's house it it?

Well the law says it's still yours.
the one who bought is doesn't and loses also it's rent.

SO

Not everybody wants to expose the scam because if they know, they'll know their claim doesn't really exist and their rent income is in danger.

SO THEY SHUT UP AND KEEP COLLECTING THE RENT!!

Untill the one who sold the house runs out of money to pay the rent... and then the game is up....

Now you translate that to the gold market.
And you'll understand why nobody really slams on the table to get their gold or money back...

Northern Lights's picture

In simple terms, more countries will have to come calling for their gold before this gets out of hand.  As it stands now, you have Germany getting their's, Venezuela got their's in 2011, and the Netherlands and Austria are considering asking for theirs.

It'll take a few more big players to ask for their's before the ponzi scheme falls.

 

Börjesson's picture

Switzerland is coming very close to asking for theirs, as well. And they have plenty.

http://seekingalpha.com/instablog/839735-katchum/1490361-swiss-gold-repa...

helping_friendly_book's picture

Have you seen this?

http://www.youtube.com/watch?v=hS89vNH-eeY

Israeli Spies Caught Celebrating 9-11

Fox news.

W74's picture

This is old-hat and anyone who has any critical thinking skills left in the country already knows the deal.  It's a shame that there are tens of millions on both sides of the aisle (as if they were different) who blindly support the bastards without even knowing why.

helping_friendly_book's picture

I will keep trying to get this through to anyone who will watch. I had never seen this clip. Fox news gives it legitamacy.

W74's picture

So glad I bought my 5th round from AMPEX a couple weeks ago, even if the price has gone down a few fiat dollars I'm still happy.  Not like I was using those BernankeBux anyway.

Anybody interested in starting an Ex-Pat colony in Paraguay with me?  Maybe we can all take Spanish classes together. Land is cheaper down there than in Tennessee or Missouri and the best part is they still respect a man's freedom and privacy.

 

IridiumRebel's picture

Yo quiero a tener Tierra en America Central. Hablo espaniol mas o menos. La Sur de America tiene Tierra barato ahora. Pero en la futura no.
Cuando dolares Americanos muerten, hay dios mio. Llevar!

Yen Cross's picture

I speak Spanish fluently.  America has no future, if it keeps killing the dollar. I love ya [IridiumRebel].

DoChenRollingBearing's picture

^---- gmail me at my name W74.

q99x2's picture

Colleges and students are buying gold and silver and bullets.

There is no proof that the US Gov't owns any physical gold. That has mostly been swapped out to private banksters in exchange for worthless paper.

MrBoompi's picture

The price of gold is the paper price. The same physical ounce is sold 100 times. This is how they control the price through derivatives and the futures market. Please tell me how the price could ever escalate to the point it would cause a serious problem for the bullion banks/cartel? When will the price manipulation stop? There's the answer.

Bluntly Put's picture

Don't you think that large holders of physical know this? The danger lies in countries that produce gold, and large warehoused quantities like sovereigns. The price manipulation is to influence the small investors, should they hold paper or physical, not for producing mines, countries that could confiscate mines or large holders of physical.

 

 

The Duke of New York A No.1's picture

The really big money is in leasing Tungsten - priced in Gold.

Yen Cross's picture

 The Saturday post on Z/H is where it's at. Smart posters with good ideas.

  When Asia opens tomorow, I'll have some good ideas to expliot. (Super Bowl) Sunday/ Super (¥ ) retrace next week?

Motley Fool's picture

"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."

 

Can anyone provide a link that verifies this. Please and thanks.

Victor The Cleaner's picture

Google translate of some Austrian newspaper articles:

http://translate.google.com/translate?sl=auto&tl=en&u=http%3A//m.diepres...

http://translate.google.ca/translate?sl=auto&tl=en&js=n&prev=_t&hl=en&ie...

According to this, Austria has 224.4 tonnes in London, 6.9 tonnes in Switzerland and 48.7 tonnes in Austria. About 45 tonnes of this (probably loco London) leased out as of 21 November 2012.

Victor

Motley Fool's picture

I was looking for confirmation that the UK leased out Austria's gold for their own (the UK's) benefit as claimed by the article, while they were only supposed to be holding it for safe keeping. I do not see such in the links you gave.

Victor The Cleaner's picture

No, of course not. For the same reason the Americans are not leasing gold that belong to the Europeans.

Victor

 

Motley Fool's picture

So the only two interesting claims in this whole article is both bullshit. This one, and that the Germans have not been allowed to see their gold.

 

I suppose I should not be expecting anything other than sensationalist bullshit from here. My mistake.

mrdenis's picture

PSLV ..........

Bansters-in-my- feces's picture

Always good to expose the criminal bankers criminal book keeping on their gold they don't have.

 

The USA Treasury has a fund called the Exchange Stabilization Fund (ESF)

THIS FUND HAS HUNDREDS OF BILLIONS OF DOLLARS .

And is used to support the gold price suppression game.

Cause in their own description of what this fund can and does do with gold is make you puke sickening.

So also it seems the negative lease rates like -0.50% on gold and silver lately as usual also supports the treasury bonds.

Actcually the centrasl banks are PAYING the bullion banks (JPM) to lease gold,and sell it into the market and use the proceeds to buy treasury bonds.

And the Central Banks don't wan't the gold back,they just keep PAYING the bullion Banks (HSBC) and continuallly roll the lease over instead of ever wanting said leased gold back.

Unbelievable I know.....

But facts are facts ,Jack.

Learn up that USA,ESF ....Knowledge is good for ya.

Handful of Dust's picture

"Possession is 10/10ths of the law."

 

Best comment on ZH this week.