Guest Post: There Is Too Little Gold In The West

Tyler Durden's picture

Submitted by Alasdair Macleod via Peak Prosperity blog,

Western central banks have tried to shake off the constraints of gold for a long time, which have created enormous difficulties for them. They have generally succeeded in managing opinion in the developed nations but been demonstrably unsuccessful in the lesser-developed world, particularly in Asia. It is the growing wealth earned by these nations that has fuelled demand for gold since the late 1960s. There is precious little bullion left in the West today to supply rapidly increasing Asian demand, and it is important to understand how little there is and the dangers this poses for financial stability.

An examination of the facts shows central banks have been on the back foot with respect to Asian gold demand since the emergence of the petrodollar. In the late 1960s, demand for oil began to expand rapidly, with oil pegged at $1.80 per barrel. By 1971 the average price had increased to $2.24, and there is little doubt that the appetite for gold from Middle-Eastern oil exporters was growing; and it should have been clear to President Nixon’s advisers in 1971 that this was a developing problem when he decided to halt the run on the US’s gold reserves by suspending the last vestiges of gold convertibility.

After all, the new arrangement was: America issued the petrodollars to pay for the oil, which were then recycled to Latin America and other countries in the West’s sphere of influence through the American banks. The Arabs knew exactly what was happening and gold was simply their escape route from this dodgy deal.

The run on US gold reserves leading up to the Nixon Shock in August 1971 is blamed by monetary historians on France. But note this important passage from Ferdinand Lips’s book GoldWars:

“Because Arabs did not understand bonds and stocks they invested their surplus funds in either real estate and/or gold. Since Biblical times, gold has been the best means to keep wealth and to transfer it from generation to generation. Gold therefore was the ideal vehicle for them. Furthermore after their oil reserves are exhausted in the distant future, they would still own gold. And gold, contrary to oil, could never be wasted.”

According to Lips, Swiss private bankers to whom many of the newly-enriched Arabs turned recommended a minimum of 10% and even as much as 40% should be held in gold bullion. This advice was wholly in tune with Arab thinking, creating extra demand for America’s gold reserves, some of which was auctioned off in the following years. Furthermore, Arab investors were unlikely to have been deterred by high dollar interest rates in the early eighties, because high interest rates simply compounded their rapidly-growing exposure to dollars.

Using numbers from BP’s Statistical Review and contemporary US Treasury 10-year bond yields to gauge dollar returns, we can estimate gross Arab petrodollar income including interest from 1965 to 2000 to total about $4.5 trillion. Taking average annual gold prices over that period, ten per cent of this would equate to about 50,500 tonnes, which compares with total mine production during those years of 62,750 tonnes, over 90% of which went into jewellery.

This is not to say that 50,000 tonnes were bought by the Arabs: it could only be partly accommodated even if the central banks supplied them gold in very large quantities, of which there is some evidence they did. Instead, it is to ram the point home that the Arabs, awash with printed-for-export petrodollars had good reason to buy all available gold. And importantly it also gives substance to Frank Veneroso’s conclusion in 2002 that official intervention, i.e. undeclared sales of significant quantities of government-owned gold, was effectively being used to manage the price in the face of persistent demand for physical gold as late as the 1990s.

Transition from Arab demand

Arabs trying to invest a portion of their petrodollars would have left for the advanced economies very little investment gold. As it happened, US citizens had been banned from holding bullion until 1974 and British citizens were banned until 1971. Instead they invested mainly in mining shares and Krugerrands, continuing this tradition by using derivatives and unbacked unallocated accounts with bullion banks in preference to bullion itself. This meant that, until the mid-seventies, investment in physical gold in the West was minimal, almost all gold being held in illiquid jewellery form. Western bullion investors were restricted to mainly German, French and Italians, mostly through Swiss banks. The 1970s bull market was therefore an Arab affair, and they will have continued to absorb gold through the subsequent bear market.

By the late-nineties a new generation of Swiss investment managers schooled in modern portfolio theory and less keen on gold, persuaded many of their European clients to reduce and even eliminate bullion holdings. At the same time, a younger generation of Western-educated Arabs began to replace more conservative patriarchs so it is reasonable to assume that Arab demand for gold waned somewhat, as infrastructure spending and investment in equity markets began to provide portfolio diversification. This was therefore a period of transition for bullion, driven by declining western investment sentiment and changing social structures in the Arab world.

It also marked the beginning of accelerating demand in emerging economies, notably India, but also in other countries such as Turkey and those in South-East Asia which were rapidly industrialising. In 1990 the Indian Government freed up the gold market by abolishing the Gold Control Act of 1968, paving the way for Indians to become the largest officially-recognised importers of gold until overtaken by China last year.

Lower prices in the 1990s stimulated demand for jewellery in the advanced economies, with Italy becoming the largest European manufacturing centre. At the same time gold leasing by central banks increased substantially, as bullion banks exploited the differential between gold lease rates and the yield on short-term government debt. This leased gold satisfied jewellery demand as well continuing Asian demand for gold bars.

So, despite the fall in prices between 1997-2000, all supply was absorbed into firm hands. When gold prices bottomed out, Western central banks almost certainly had less gold than publicly stated, the result of managing the price until 1985, and through leasing thereafter. This was the background to the London Bullion Market Association which was founded in 1987.


In 1987 the unallocated account system became formalized under LBMA rules, allowing the bullion banks to issue gold IOUs to their customers, making efficient use of the bullion available. The ability to expand customer business in the gold market without having to acquire physical bullion is the chief characteristic of the LBMA to this day. Futures markets in the US also expanded, and so derivatives and unallocated accounts became central to Western investment in gold. Today the only significant bullion held by Western investors is likely to be a small European residual plus ETF holdings. In total (including ETFs) this probably amounts to no more than a few thousand tonnes.

The LBMA was established in 1987 in the wake of the Financial Services Act in 1986. Prior to that date, the twice-daily gold fix had become the standard pricing mechanism for international dealers, whose ranks grew on the back of the 1970s bull market. This meant that international banks established their bullion dealing activities in London in preference to Zurich which was the investment centre for physical bullion. The establishment of the LBMA was the formalization of an existing gold market, based on the 400 ounce good delivery standard and the operation of both allocated and unallocated accounts.

During the twenty-year bear market attitudes to gold diverged, with capital markets increasingly taking the view that the inflation dragon had been slain and gold’s bull market with it. At the same time Asian demand, initially from the Arab oil exporters, but increasingly from other nations led by Turkey, India and Iran ensured there were buyers for all the physical gold available. Mine supply, which benefited from the introduction of heap-leaching techniques, had increased from 1,314 tonnes in 1980 to 2,137 tonnes in 1990, and 2,625 tonnes by 2000. Together with scrap supply London was in a strong position to intermediate between a substantial increase in gold flows to Asian buyers, and it was from this that central bank leasing naturally developed.

Gold backed by these physical flows was the ideal asset for the carry trade. A bullion bank would lease gold from a central bank, sell the gold and invest the proceeds in short-term government debt. It was profitable for the bullion bank, governments were happy to have the finance, and the lessor was happy to see an idle asset work up some extra income. However, leasing only works so long as the bullion bank can hedge by accessing future supply, so that the lease can eventually be terminated.

Before 2000 this was a growing activity, fuelled further by Swiss portfolio disinvestment in the late 1990s. As is usual in markets with a long-term behavioral trend, competition for this business extended the risks beyond being dangerous. This culminated in a crisis in September 1999, when a 30% jump in the price threatened to bankrupt some of the bullion banks who were in the habit of running short positions.


Bull markets always start with very little mainstream and public involvement, and so it has proved with gold since the start of this century. So let us recap where all the gold was at that time.

  • Total above-ground gold stocks were about 129,000 tonnes, of which 31,800 tonnes were officially monetary gold. Of the balance, approximately 85-90% was turned into jewellery or other wrought forms, leaving only 10-15,000 tonnes invested in bar and coins and allocated for industrial use.
  • Out of a maximum of 15,000 tonnes, coins (mostly krugerrands) accounted for about 1,500 tonnes and other uses (non-recovered industrial and dental) say 1,000 tonnes. This leaves a maximum of 12,500 tonnes and possibly as little as 7,500 tonnes of investment gold worldwide at that time.
  • After Swiss fund managers disposed of most of the bullion held in portfolios for their clients in the late 1990s, there was very little investment gold left in European and American ownership.
  • Frank Veneroso in 2002 concluded after diligent research that central banks had by then supplied between 10-15,000 tonnes of monetary gold into the market. Much of this would have gone into jewellery particularly in Asia but some would have gone to the Middle East. This explains how extra investment gold may have been supplied to satisfy Middle-East demand.
  • Middle-Eastern countries must have been the largest holders of non-monetary gold in bar form at this time. We can see that 10% of petrodollars invested in gold would have totalled over 50,000 tonnes, yet there can only have been between 7,500-12,500 tonnes available in bar form for all investor categories world-wide. This may have been increased somewhat by the addition of monetary gold leased by central banks and acquired through the market.

It was at this point that the second gold bull market commenced against a background of very little liquidity. Investment bullion was tightly held, the central banks were badly short of their declared holdings of monetary gold, and from about 2004 onwards ETFs were to grow to over 1,500 tonnes. Asian demand continued to grow led by India, and China began actively promoting private ownership of gold at about the same time.

Other than through physically-backed ETFs Western investors were encouraged to satisfy their demand for bullion through derivatives and unallocated accounts at the bullion banks. There are no publicly available records detailing the extent of these unallocated accounts, but the point is Western demand has not resulted in increased holdings of bullion except through securitised ETFs. Instead the liabilities faced by the bullion banks on uncovered accounts will have increased to accommodate growth in demand. Therefore, the vested interests of the bullion banks and the central banks overseeing the gold market call for continued suppression of the gold price, so as to avoid a repeat of the crisis faced in September 1999 when the price increased by 30% in only two weeks.

Where are the sellers?

Price suppression can only be a temporary stop-gap, and there has never been sufficient supply to allow the central banks to retrieve their leased gold from the bullion banks. Therefore, Frank Veneroso’s conclusion in 2002 that there had to be existing leases totalling 10-15,000 tonnes is a starting point from which leases and loans have increased. There are two events which will almost certainly have increased this figure dramatically:

  1. When the price rose to $1900 in September 2011 there was a concerted attempt to suppress the price from further rises. The lesson from the 1999 crisis is that the bullion banks’ geared exposure to unallocated accounts was forcing a crisis upon them; and if they had been forced to cash-settle these accounts the gold price would almost certainly have risen further risking a widespread monetary crisis.
  2. Through 2012 Asian demand, particularly from China coinciding with continued investor demand for ETFs, was already proving impossible to contain. In February this year the Cyprus bail-in banking crisis warned depositors in the eurozone that all bank deposits over the insured limit risked being confiscated in the event of a wider eurozone banking crisis. This drove many unallocated account holders to seek delivery of physical gold from their banks, forcing ABN-AMRO and Rabobank to suspend all gold deliveries from their unallocated accounts. This was followed by a concerted central and bullion-bank bear raid on the market in early April, driving the price down to trigger stop-loss sales in derivative markets and subsequent liquidation of ETF holdings.

It is widely assumed that the unexpected rise in demand for bullion that resulted from the April take-down was satisfied through ETF sales; but an examination of the quantities involved shows they were insufficient. The table below includes officially reported demand for China and India alone, not taking into account escalating demand from the Chinese diaspora in the Far East, and from elsewhere in Asia.

These figures do not include Chinese and Indian purchases of gold in foreign markets and stored abroad, typically carried out by the rich and very rich. Nor do they include foreign purchases by the Chinese Government and its agencies. Despite these omissions, in 2012 recorded demand from these two countries left the world in a supply deficit of 131 tonnes. Furthermore, ahead of the April smash-down in the first quarter of this year the deficit had jumped to 88 tons or an annualised rate of 352 tonnes.

Demands for delivery by panicking Europeans in the wake of the Cyprus fiasco could only provoke one reaction. On Friday 12th April 400 tonnes of paper gold were dumped on the market in two orders, triggering stop-loss sales and turning market sentiment bearish in the extreme. Western investors started to think about cutting their losses, and they sold down ETF holdings to the tune of 325 tonnes in 2013 by the end of May. However, it triggered record demand among those who looked on gold as insurance against currency and systemic risks.

Later that year in July Ben Bernanke told the Senate Banking Committee he didn’t understand gold. That was probably a reference to the April gold price smash orchestrated by the central banks, and how it unleashed record levels of demand. It was an admission that he thought everyone would follow the new trend acting like portfolio investors, forgetting that if you lower the price of a commodity you merely unleash demand. It was also an important admission of policy failure.

Since those events in April, someone has been supplying the market with significant quantities of gold to keep the price down. We know it is not Arab gold, because I have discovered through interviewing a director of a major Swiss refiner that Arab gold is being recast from LBMA specification bars into one kilo 9999 bars, which has become the new Asian standard. Arab gold does not appear to be being sold, only recast, and anyway it is only a small part of their overall wealth. We also know from our long-term analysis that any European gold bullion is relatively small in quantity and tightly held. There can only be one source for this gold, and that is the central banks.

I discovered that there was a discrepancy in the Bank of England’s custodial gold of up to 1,300 tonnes between the date of its last Annual Report (28th February) and mid-June when a lower figure was given out to the public on the Bank’s website. This fits in well with the additional amount of gold needed to manage the price between those months. Furthermore, the Finnish Central Bank recently admitted that all its gold held at the Bank of England was “invested”, i.e. sold, and further added that the practice “was common for central banks”.

Bearing in mind Veneroso’s conclusion in 2002 that there must be 10,000-15,000 tonnes out on lease and loan from the central banks at that time, one could imagine that this figure has increased significantly. Officially, the signatories of the Central Bank Gold Agreement, plus the US and UK own 20,393 tonnes. A number of other central banks are likely to have been persuaded to “invest” their gold, but this is bound to exclude Russia, China, the Central Asian States, Iran, and Venezuela. Taking these holders out (amounting to about 3,000 tonnes) leaves a balance of 8,401 tonnes for all the rest. If we further assume that half of that has been deposited in London, New York or Zurich and leased out that means the total gold leased and available for leasing since 2002 is about 12,000 tonnes. And once that has gone there is no monetary gold left for the purpose of price suppression.

Could this have disappeared since 2002 at an average rate of 1,000 tonnes per annum? Quite possibly: in which case the central banks are very close to losing all control over the gold price.

In Part 2: The Very Real Danger of a Failure in the Gold Market, I discuss why the Chinese are buying so much gold, and why the Reserve Bank of India is trying to suppress gold demand. I show that gold is substantially undervalued, and why that undervaluation is likely to correct itself spectacularly, precipitating a financial crisis.

Click here to access Part II of this report (free executive summary; enrollment required for full access).


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fonestar's picture

The Indians are very tech saavy people, when they discover Gold 2.0 I would look for further corrections for Gold 1.0.

TeamDepends's picture

Don't tell him that bitcoin is going to zero, he is easily excitable.

fonestar's picture

It already did go to zero once.

NaiLib's picture

Its crashed 75+% several times. Might of course happen again.

EnslavethechildrenforBen's picture

Only a fool would believe that the grid is sustainable forever. Bit coin can only go to zero in the end . Between now and then, it can go to infinity as long as greater fools are waiting in the wings and the Federal Reserve is on a spending spree

Tippoo Sultan's picture

Why, the Hindi goddess used for this piece looks rather familiar.

Iam_Silverman's picture

"Why, the Hindi goddess used for this piece looks rather familiar."

She is rather attractive, I must say.  All of the women of Indian descent that I know tend to be a bit more rotund and far more swarthy.

DoChenRollingBearing's picture

When I was 18, my father took our family to South Africa for a vacation.  One of the larger communities there were people from India.  I saw some amazingly attractive young women!

But, they say to look at mama to see the future...

GetZeeGold's picture



It already did go to zero once.


Hasn't happened to gold in 5000 years.


Coincidence?  I think not.

scrappy's picture

Karma Sutra Coin?


Sex sells!

Mr. Magoo's picture

This is just history repeating itself, The same thing happened to Rome when they transferred all the wealth to the east in Constantinople and left the west to rot and be gutted by barbarians.

garypaul's picture

Oh but did it rot for long? What was the trajectory of Western civilization after that period?

DoChenRollingBearing's picture



The Central Bank of DoChenRollingBearing, perhaps in a vain effort to stem the eastward gold tide, just added a little Au and Pt to its reserves.


stacking12321's picture

no need to try to stem it, the trend is your friend!

gold does what it always does, like water flowing downhill, it goes from weaker hands to stronger ones, from indulgent consumer societies to industrious producers.

it leaves the west where it's disrespected and goes east where it's appreciated.

as per gresham's law, it is being chased away by phony iou notes of fiat currentcy from bankrupt nations.


Kirk2NCC1701's picture

There will never be a lack of gold in the USA, given that the US has more gold-diggers than the rest of the planet combined.

DoChenRollingBearing's picture

Good humor on a Friday evening brought me a smile, thanks.

What you talkin about Willis's picture

The American Vag, Most over valued commodity on the planet.

fonestar's picture

"Only a fool would believe that the grid is sustainable forever."


Look, in a post-dollar world while you are out happily SHTFing with your kinfolk, how realistic is it that you are going to run into pirates and cowboys to barter with?  You are far better off today stocking up on Bitcoin, iTunes credits, full season DVDs, XBox games, etc for the modern consumer to trade with.

akak's picture

It's got what NSA plants crave!

fonestar's picture

BTW, I am still waiting for someone to explain why the NSA would seek to destroy the dollar after spending fifty years trying to maintain dollar hegemony?  It's not that I don't like a good conspiracy but I find them easier to believe when you can at least establish motive.

akak's picture

BTW, I'm still waiting for you to stop bittrolling and shut the fuck up already.

TheFourthStooge-ing's picture

You're liable to be waiting quite awhile.

fonestar is a mission poster driven by religious fanaticism.

fonestar's picture

I started off just another regular troop in the SLA.  Went to a training camp with the Satoshis.  Never saw crazy shit like that before, I became radicalized and never looked back....

TheFourthStooge-ing's picture

Groovy, baby, but nobody cares. You're free to worship as you please.

Bear in mind, though, that proselytizing beyond a threshold of obnoxious righteousness leads to assholiness.

GetZeeGold's picture




You're free to worship as you please.


Welcome to the Koolaid cult....we'll take just about anyone.

SMG's picture

Simple, NSA is controlled by NWO Oligarchs who want a global currency.  The dollar paved the way for the a global currency, but its outlived it's usefulness.  The dollar's time as a reserve currency is running short.

fonestar's picture

It's nice to know these things are so simple.  You are my new hero.

Zero Point's picture

You asked for it.

You wanted a simple motive and got one.

One world governement and one global currency.

Of course, a lot of people will have to expire first.

But that's a stupid conspiracy theory.

fonestar's picture

I agree it is a stupid conspiracy, that they would willingly try and crash their own currency and believe they can maintain control of the situation?  Stupid.

fxrxexexdxoxmx's picture

The NSA is run by dedicated civil servants who only ever have your best interest in mind.

There are a buch of fags who kinda work there who only hire dicks but that too is in your best interest.

Drifter's picture

It was maintainable till Fed kicked presses into high gear in '08.  That's when the end game commenced.  It's just a matter of time now.

Citxmech's picture

Not much of a student of history are you?

fonestar's picture

Enough to know the items that retain value through the years.

Skateboarder's picture

Like... bitcoin? lolololo.

LetThemEatRand's picture

I've got some Atari 2600 games to sell you.

graspAU's picture

Still enjoying my Nintentdo and Super Nintendo to this day. I get what you are saying though, not stuff that is liquid and highly valuable to many others, but have some bases covered for that as well.

DirkDiggler11's picture

Uh, I'm thinking guns, ammo, whiskey, and food ( yes, in that order) will get you further than a pocket full of I-Tunes gift cards if SHTF.

They guy crushing around in ass-less chaps on a motorcycle is not going to stop from blowing your head off to take your last Pop-Tart because you barter with him offering up your flash-drive with Bit-Coins in it...

fonestar's picture

Charles Bronson goes to Somalia?  You guys really need to get some more civilized neighbours.

knukles's picture

Hey, he probably's still using mom's computer in the basement.  You know, the one she made $10,344 in her spare time on....

fonstar has never ever even been near a battle zone in a "civilized" country or he'd not make such fucking stupid prognostications

SHTF for him is not getting to level 7 in some video game and getting to start over with all limbs and sanity intact ....

Oh fuck man, I need another Rockstar colon blow caffine fix!

LetThemEatRand's picture

Cut the guy a break.  He's either very young and thus consumed in his own few year adult time-bubble which seems like an eternity to him, or he's NSA.  Either way, he believes what he's selling.

sixsigma cygnusatratus's picture

I'm going to agree on that one.  I think his thought process is the unfortunate product of life in a socialist utopia and therefore has no other reference point.

knukles's picture

You are correct, sir.
I shall endeavor to act in a more civilized manner.

LetThemEatRand's picture

I haven't told anyone here to go fuck themselves for several days, so we'll see who breaks first.

DoChenRollingBearing's picture

Ha ha ha, LTER!  Why that almost sounds Twelve Step like...


LetThemEatRand's picture

I just came back from a testicular cancer support group if that helps*

*fight club reference for those who haven't watched it in a while.

DoChenRollingBearing's picture

Why, I feel kind-of virgin-like, even married 28 years (although that may explain some of that too) that I have still not seen "Fight Club".

LetThemEatRand's picture

Tyler Durden: "Man, I see in fight club the strongest and smartest men who've ever lived. I see all this potential, and I see squandering. God damn it, an entire generation pumping gas, waiting tables; slaves with white collars. Advertising has us chasing cars and clothes, working jobs we hate so we can buy shit we don't need. We're the middle children of history, man. No purpose or place. We have no Great War. No Great Depression. Our Great War's a spiritual war... our Great Depression is our lives. We've all been raised on television to believe that one day we'd all be millionaires, and movie gods, and rock stars. But we won't. And we're slowly learning that fact. And we're very, very pissed off."

It's worth a watch.  The wife wil llike it.  Trust me.  And Meat Loaf is in it.  Worth a watch just for that.  I will do anything....