It's Not A "Conspiracy Theory": Here's How Central Banks Actively Suppress The Price Of Gold

Alhambra Investment Partners CIO Jeffrey Snider returned to Erik Townsend's MacroVoices podcast this week to discuss one of his favorite topics: How central banks' use gold lending to manipulate their balance sheets, and also to manipulate the broader market for precious metals by sheer dint of their size, and willingness to buy and sell without any consideration for the price.

Their conversation begins with Snider explaining the history of "gold swaps" between central banks that helped birth the concept of fractional reserve lending.


The first "gold swap" conducted between the Federal Reserve and the Bank of England: The Fed handed the BOE $200 million in bullion through the New York Fed; in exchange, the BOE gave the Fed a "gold receivables" in the same amount. This is essentially an IOU that could (in theory, at least) be cashed in for gold, but allowed the Fed to keep the gold deep in its vaults. As Townsend explains, the gold is being taken out of the accounting for the balance sheet, but it's not being removed from the accounting.

Again, in theory, one could argue that these gold receivables were, in fact, "as good as gold" because the default risk from a counter party central bank is, effectively, zero.

Essentially, what happened was the Federal Reserve Bank of New York on behalf of the Federal Reserve system made $200 million of gold bullion available to the Bank of England for its disposal in whatever transactions it might take in defending sterling at that pre-war parity price. What’s important about that is that it aids both sides of the equation.

Because the way a gold swap works is that, essentially, the central bank agent that is providing the gold exchanges it for what’s called a gold receivable.

If you look at Slide 5, for example, I’ve sketched out roughly what this gold swap meant. $200 million in gold was made available to the Bank of England, which it would then sell in the market for sterling at the price that it wished to defend. They put the sterling currency into an account in London on behalf of the Federal Reserve Bank of New York.

So what really happened was gold disappeared from New York and ended up as cash in the UK denomination in London. But, for accounting purposes, the Federal Reserve Bank of New York showed a gold receivable where gold used to be.


Because if (for whatever reason) the Federal Reserve Bank of New York needed its gold back, there was sterling in an account where it could theoretically buy it back. So the gold receivable was taken as equivalent to actually having bullion on hand in a vault in New York City.

So both parties were satisfied. The Federal Reserve Bank of New York got to continue reporting the same amount in its possession, while the Bank of England was supplied additional metal in order to help defend the sterling at pre-war parity.

As anybody who lived through the financial crisis would remember sometimes credit-risk analysts ignore have a tendency to ignore black-swan tail risks like the prospect of a central bank default. We delved into this topic in greater detail about a year-and-a-half ago when Carmot Capital's George Sokoloff explained why even the most sophisticated hedge funds tend to get slaughtered during market shocks.

The way that the accounting works in the gold swap scenario outlined above is the central banks are basically pretending the Fed didn't give its gold to the BOE...yet, there is still only the one $200 million slug of didn't just magically double. In a way, this feat of financial engineering echoes China's massive "rehypothecation" fraud which we've critiqued time  and time again...


It's also important to remember, too, that all of this was done for political purposes: In the aftermath of World War II, Winston Churchill briefly brought the UK back to the gold standard. But to prevent a destabilizing spike in volatility, the central bank needed the gold reserves to defend the peg in the open market.

Knowing the roots of fractional reserve lending will help reframe like our stories about the missing gold at the Fed. Even Snider admits there's ample room for these so-called "conspiracies" to flourish...

...Because, as he admits, we don't know the difference between gold and gold receivables - though that is something that could be determined via a simple audit..

That’s the way this works. And of course it opens the door to all sorts of conspiracy theories. Because, obviously, people have argued, and do argue still, that if there’s more receivables than gold, then there’s no gold left. And how would anybody know the difference?

And the point of fact is we don’t know the difference. We don’t know how much gold has ever been swapped out. And how much gold remains. Because nobody has ever been required to make a distinction there.

Our interest here is defining why that would be. Why are central banks interested in doing this kind of transaction? Other than the fact that they are intentionally trying to mislead the public, which I don’t think is the case.

Again, there are legitimate reasons for all of these things to happen. You may not agree with why they’re being done, or the times of when they’re being done, but there are legitimate reasons for this.

Snider goes on to explain how these gold swaps led to the creation of the gold forward rate, a strategy that many smaller central banks employ to turn their gold reserves into a profit engine. Essentially, central banks allow gold miners to hedge their exposure by fronting them the gold to sell short before they ever pull the metal out of the ground.

The central bank receives a small interest rate, the miners are hedged and capitalized - everybody is happy - or at least that's what one might suspect at first brush.

In reality, the central banks' involvement in the gold market is considerably more fraught - in ways that many mainstream analysts aren't yet ready to consider.

For instance, as Townsend points out, gold bugs have for years expounded to anybody who would listen their theory about how central banks surreptitiously intervene in the gold market to suppress the price of the precious metal. As anybody who trades gold has also undoubtedly noticed that often we get what traders call "gold pukes" - sudden, sharp declines in the price of gold - often around 8 am.

Because central banks are the largest logical price-insensitive participants, many have blamed them for this phenomenon.

Snider said that, while he agrees that central banks are, in effect, manipulating the price of gold when they intervene in the market, there are more plausible explanations for why central banks might do this - aside from being motivated to manipulate the price of gold.

And there’s no legitimate reason for them to actually take an interest in price, because the gold leasing arrangement is, by its very nature, negative in price. For reasons that have nothing to do with monetary policy of any central bank around the world. Because it’s dislodging previously off-market stored gold onto the marketplace. That’s a key point to remember moving forward.

When this stuff happens, when there’s an uptick in lending and leasing for whatever reason, it is price negative. It has nothing to do with manipulation. It’s just the natural supply and demand mechanics of the way these things are set up.

In short, central banks are doing this not because they're intentionally manipulating the price of gold. Rather, the manipulation is an unavoidable side effect of their gold leasing arrangements...


Finally, Townsend and Snider discuss the latter's theory about how major turning points in gold's long-term price trajectory have been influenced by anomalies in the eurodollar market, as depicted in the chart above...

There are a couple of anomalies – or aberrations, whatever you want to call them – in
the gold market that popped up in especially 2010. Remember, 2010 is supposed to be a year of recovery. Not just in the economy, but in the financial markets. We had ZIRP (zero interest rate policy) in the US, we had ZIRP in Europe. We had QE in the US. We had all of these positive monetary factors.

And yet, in the middle of 2017, it came to light that the Bank For International Settlement, which is the central bankers’ central bank, had swapped 346 tons of gold with ten European banks in December of 2009 and January of 2010. And people couldn’t figure out why that was.

Because, again, things are supposed to be recovering. Why the hell are they taking gold out of the hands of European banks? And the reason was, of course, continued funding anomalies in dollar markets. What was reported along the way, as these things became more and more investigated, was: What had happened during the bull market in the 2000s was that people – European customers in particular – who were interested in buying gold because gold was in a bull market, may not have intentionally been buying gold for gold property. They had been buying gold – physical metal – and depositing it with their local bank for custody.


But an unallocated account was a very big difference in terms of legalities and who actually owns the metal. An unallocated account means that you’re just depositing the gold with the bank. The gold then becomes a liability with the bank. And what they give you back in return is essentially a warehouse receipt. Not actual title to the metal.

All the bank is saying is that if you ever ask for your metal, we’ll give you metal back. Not necessarily the specific bars or the specific whatever that you deposited.

And what that allowed was, in times of stress and strain, because that metal became a liability at the bank and not a separate constructive bailment as an allocated account would be, these European banks, including Swiss banks, found that they had a deep pool of unallocated gold that was their own liability that they couldn’t realize.

Again, their only liability was that they would have to put the same kind of metal or the same amount of metal back if their customers ever asked for it back.

What happened in 2010, as the European crisis wore on and got worse, was that these
European banks started to appeal to those stores of unallocated gold. They started to motivate them into the lending and leasing arrangements, which tended to be negative in price the more that happened.

Where that really broke out was in later 2011 as the dollar crisis worsened that year.
September 6, 2011, the Swiss National Bank shocked the markets by pegging the franc to the Euro, essentially trying to get away from the dollar balance. Which triggered all sorts of responses across US dollar funding markets.

And you could see, once again, another big, massive gold puke.

In summary, once again, bank's forward-lending agreements had a massive impact on the gold market because of the price insensitive nature of the transactions...

...But, of course, that's totally different from banks "intentionally" dumping on the price of gold.

Listen to the whole interview below:



IH8OBAMA runswithscissors Sun, 03/04/2018 - 22:18 Permalink

I didn't read the last third of this article because the first two thirds didn't make much sense.  For instance, when the writer talks about defending the price of Sterling with gold it isn't mentioned by which measure Sterling is being defended against.  Against the Dollar, against a basket of currencies, against the price of gold, etc?  That needs to be explained before you can even start to make sense of this 'gold swap' theory.

The claim that by not accounting for both sides of a gold swap can double the apparent amount of gold existing is suspect at best.

The writer also talks about central banks loaning miners gold so they can sell short to hedge their gold in the ground.  Miners don't need gold in hand to be able to hedge their un-mined gold.  They can easily do that in the futures markets or with forward contracts.  The writer doesn't understand how hedging operations work.

It seems to me that the entire premise of this article is non-sense.

In reply to by runswithscissors

BigJim MANvsMACHINE Mon, 03/05/2018 - 11:34 Permalink

The CBs and their proxies can destroy investors' faith that PMs are "safe haven" assets by inducing huge volatility in the price by buying and selling huge tranches of paper to each other. That will "suppress" price in the long run because fewer investors will want to buy them.

They won... at least, until Russia or China break the COMEX with physical demand, and I've been hearing about how "imminent" that is for the last ten years.

In reply to by MANvsMACHINE

All Risk No Reward OverTheHedge Mon, 03/05/2018 - 00:00 Permalink

The 1,000,000x more important issue, which never gets mentioned in the articles, and almost never gets mentioned in the comments section, is how the central banks are used to fraudulently set up a zero-sum debt-money system that systematically enslaves the entire society...

"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

“When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.”
~Napoleon Bonaparte

"Let the American people go into their debt-funding schemes and banking systems, and from that hour their boasted independence will be a mere phantom."
~William Pitt, (referring to the inauguration of the first National Bank in the United States under Alexander Hamilton).

How To Be a Crook

Poverty - Debt Is Not a Choice

Renaissance 2.0 The Rise of [Debt-Money Monopolist] Financial Empire

Debunking Money

Krugman (and each MIT economist professor - THEY KNOW AND THEY OCCULT!) is a Goebbelsian propagandist as he covers the crimes of wolves with his fake sheep suit and lisp.

Krugman to Lietaer: "Never touch the money system!"

And It's Gone

People with good intentions but limited understanding are more dangerous than people with total ill will.
~Martin Luther King, Jr.

"Although the so-called "moral issues" were raised, in view of the law of natural selection it was agreed that a nation or world of people who will not use their intelligence are no better than animals who do not have intelligence. Such people are beasts of burden and steaks on the table by choice and consent."
~Silent Weapons for Quiet Wars

"Our minds are the first bastion against such foreign ‘attacks’ and once the offenders have breached that they have unfettered access to the Heart and finally the Soul. Tragic situation for humanity.
~Jamie, Comment…

In reply to by OverTheHedge

bobsmith5 Liberal Mon, 03/05/2018 - 11:48 Permalink

I don't think the Semitic people in the middle east descended from the tribe of Judah have very much gold to buy and sell, they are too busy practicing the religion of the Torah or old testament.  Now, there are bunch of people descended from the Khazar's of Eastern Europe who are atheist and Satanist who hide behind the name Jew, who do buy and sell gold.  They hide behind this name so you will become a racist and distracted, meanwhile they are really Satanist and atheist and you in your blindness and ignorance will never identify their true evil nature.

In reply to by Liberal

jaxville IH8OBAMA Mon, 03/05/2018 - 01:56 Permalink

  You seem to have an issue with distinguishing actual bullion with receivables. Giving you the benefit of the doubt, this article could have been better written.

  The best essay I have ever read on this subject is The Golden Pyramid by John Hathaway. This was written in 1999 and I have yet to read a better illustration of the manipulative effects of swaps and forward sales.

In reply to by IH8OBAMA

chubbar IH8OBAMA Mon, 03/05/2018 - 07:37 Permalink

Well, the author seems to be making up conclusions as he goes along.

1). Why the fuck should one assume this isn't done to affect the price of gold? When the author states that the CB's swapping gold is price negative, why doesn't he think this is the planned result and refers to it as just some unintended side affect? Why the fuck would CB's need to sell gold when they can just print fucking money? It's because the price of gold uncovers that scam, that's why. Christ, this guy is a fucking joke.

2). He's not saying that the amount of gold doubles, he's stating they are using accounting practices that treat gold receivables as being the same as physical gold. Gold receivables are nothing more than the same paper promises that they can print without limit, it's nothing but a fucking mirage and this fucking author KNOWS it. There is NO GOOD REASON, unlike what this author is implying, that the CB's need to sell gold (which is what a swap does) EXCEPT to keep the price of gold down, period. That's how they are defending their nothing backed currency's, playing fuck-fuck with the gold market to make it look like they aren't printing the shit out of their currency's, which is a necessary side affect of a debt based monetary system.

3). The fucking fairy tale this idiot is trying to sell about bank liabilities is also bullshit. Look, if a bank takes a tonne of gold and is storing it for someone, there is no risk to the bank other than theft. The price of gold is irrelevant because all the bank has to do is hand back the gold, that's it. The can collect the vaulting fee and go about their business. They are not guaranteeing a price. IF, however, the bank takes that gold, sells it into the market and then is stating they will return the gold to the owner, they ARE taking a price risk. Now, if they take all this gold, sell it into the market and drive the price down, they have a GAIN on paper assuming they can buy back this gold for the lower price. They also can take that capital and put it to work making interest for them. Of course the stupid fucking owner who didn't take the time to figure out he was doing nothing more than giving the bank an interest free loan because it was unallocated gold, is at risk. That's because if the price spikes it's likely the bank will not have to cover the gold WITH GOLD but just with more paper. To state that this was something other than an intended scam is completely ridiculous. Does he really think that all the banks just happened to simultaneously come to the same conclusion on how to treat their gold deposits? It was a defensive action by the banks, who are controlled by the CB's, to drive the price of gold down. Wait to see how much of that gold, that these fucking retards deposited with banks, is still available when this fraud gets uncovered.

In short, this article is stating there is gold price manipulation, but it's just the byproduct of a necessary intervention by CB's. What bullshit.

In reply to by IH8OBAMA

Lord Raglan IH8OBAMA Mon, 03/05/2018 - 10:05 Permalink

No one knows what is going on.  That's the reality.  That Andrew McGuire, the London gold guy everyone puts on a pedestal, he's always wrong.  He predicted the whole gold market would blow up months ago with the advent the Chinese gold exchanges.  Nothing happened.  Gold had more waterfall-formation monkey hammering than almost ever before.  Same BS with the US pundits, including Jim Rickards, who plays both sides of the fence.  Rickards trashes the Fed and then goes to their wine and brie parties.  I bought is book and had no idea what Rickards was talking about, just like this article.  If you can't explain something simply, you don't understand it yourself.

The gold market is supposed to "get honest" when the CME runs out of physical gold.  They've been saying that since 2010.  But when they can settle in cash, that will never happen.  That's the whole problem with the futures market, letting people long settle in cash and not have to deliver.  

In reply to by IH8OBAMA

Bigly runswithscissors Sun, 03/04/2018 - 23:37 Permalink

How about one family? Central banks controlled by Rothschilds (sorry for the LONG post):

Per Q, list of Rothschild owned/ controlled banks

Afghanistan: Bank of Afghanistan Albania: Bank of Albania Algeria: Bank of Algeria Argentina: Central Bank of Argentina Armenia: Central Bank of Armenia Aruba: Central Bank of Aruba Australia: Reserve Bank of Australia Austria: Austrian National Bank Azerbaijan: Central Bank of Azerbaijan Republic Bahamas: Central Bank of The Bahamas Bahrain: Central Bank of Bahrain Bangladesh: Bangladesh Bank Barbados: Central Bank of Barbados Belarus: National Bank of the Republic of Belarus Belgium: National Bank of Belgium Belize: Central Bank of Belize Benin: Central Bank of West African States (BCEAO) Bermuda: Bermuda Monetary Authority Bhutan: Royal Monetary Authority of Bhutan Bolivia: Central Bank of Bolivia Bosnia: Central Bank of Bosnia and Herzegovina Botswana: Bank of Botswana Brazil: Central Bank of Brazil Bulgaria: Bulgarian National Bank Burkina Faso: Central Bank of West African States (BCEAO) Burundi: Bank of the Republic of Burundi Cambodia: National Bank of Cambodia Cameroon: Bank of Central African States Canada: Bank of Canada – Banque du Canada Cayman Islands: Cayman Islands Monetary Authority Central African Republic: Bank of Central African States Chad: Bank of Central African States Chile: Central Bank of Chile China: The People’s Bank of China Colombia: Bank of the Republic Comoros: Central Bank of Comoros Congo: Bank of Central African States Costa Rica: Central Bank of Costa Rica Côte d’Ivoire: Central Bank of West African States (BCEAO) Croatia: Croatian National Bank Cuba: Central Bank of Cuba Cyprus: Central Bank of Cyprus Czech Republic: Czech National Bank Denmark: National Bank of Denmark Dominican Republic: Central Bank of the Dominican Republic East Caribbean area: Eastern Caribbean Central Bank Ecuador: Central Bank of Ecuador Egypt: Central Bank of Egypt El Salvador: Central Reserve Bank of El Salvador Equatorial Guinea: Bank of Central African States Estonia: Bank of Estonia Ethiopia: National Bank of Ethiopia European Union: European Central Bank Fiji: Reserve Bank of Fiji Finland: Bank of Finland France: Bank of France Gabon: Bank of Central African States The Gambia: Central Bank of The Gambia Georgia: National Bank of Georgia Germany: Deutsche Bundesbank Ghana: Bank of Ghana Greece: Bank of Greece Guatemala: Bank of Guatemala Guinea Bissau: Central Bank of West African States (BCEAO) Guyana: Bank of Guyana Haiti: Central Bank of Haiti Honduras: Central Bank of Honduras Hong Kong: Hong Kong Monetary Authority Hungary: Magyar Nemzeti Bank Iceland: Central Bank of Iceland India: Reserve Bank of India Indonesia: Bank Indonesia Iran: The Central Bank of the Islamic Republic of Iran  Iraq: Central Bank of Iraq Ireland: Central Bank and Financial Services Authority of Ireland Israel: Bank of Israel Italy: Bank of Italy Jamaica: Bank of Jamaica Japan: Bank of Japan Jordan: Central Bank of Jordan Kazakhstan: National Bank of Kazakhstan Kenya: Central Bank of Kenya Korea: Bank of Korea Kuwait: Central Bank of Kuwait Kyrgyzstan: National Bank of the Kyrgyz Republic Latvia: Bank of Latvia Lebanon: Central Bank of Lebanon Lesotho: Central Bank of Lesotho Libya: Central Bank of Libya (Their most recent conquest) Uruguay: Central Bank of Uruguay Lithuania: Bank of Lithuania Luxembourg: Central Bank of Luxembourg Macao: Monetary Authority of Macao Macedonia: National Bank of the Republic of Macedonia Madagascar: Central Bank of Madagascar Malawi: Reserve Bank of Malawi Malaysia: Central Bank of Malaysia Mali: Central Bank of West African States (BCEAO) Malta: Central Bank of Malta Mauritius: Bank of Mauritius Mexico: Bank of Mexico Moldova: National Bank of Moldova Mongolia: Bank of Mongolia Montenegro: Central Bank of Montenegro Morocco: Bank of Morocco Mozambique: Bank of Mozambique Namibia: Bank of Namibia Nepal: Central Bank of Nepal Netherlands: Netherlands Bank Netherlands Antilles: Bank of the Netherlands Antilles New Zealand: Reserve Bank of New Zealand Nicaragua: Central Bank of Nicaragua Niger: Central Bank of West African States (BCEAO) Nigeria: Central Bank of Nigeria Norway: Central Bank of Norway Oman: Central Bank of Oman Pakistan: State Bank of Pakistan  Papua New Guinea: Bank of Papua New Guinea Paraguay: Central Bank of Paraguay Peru: Central Reserve Bank of Peru Philip Pines: Bangko Sentral ng Pilipinas Poland: National Bank of Poland Portugal: Bank of Portugal Qatar: Qatar Central Bank Romania: National Bank of Romania Russia: Central Bank of Russia Rwanda: National Bank of Rwanda San Marino: Central Bank of the Republic of San Marino Samoa: Central Bank of Samoa Saudi Arabia: Saudi Arabian Monetary Agency Senegal: Central Bank of West African States (BCEAO) Serbia: National Bank of Serbia Seychelles: Central Bank of Seychelles Sierra Leone: Bank of Sierra Leone Singapore: Monetary Authority of Singapore Slovakia: National Bank of Slovakia Slovenia: Bank of Slovenia Solomon Islands: Central Bank of Solomon Islands South Africa: South African Reserve Bank Spain: Bank of Spain Sri Lanka: Central Bank of Sri Lanka Sudan: Bank of Sudan Surinam: Central Bank of Suriname Swaziland: The Central Bank of Swaziland Sweden: Sveriges Riksbank Switzerland: Swiss National Bank Tajikistan: National Bank of Tajikistan Tanzania: Bank of Tanzania Thailand: Bank of Thailand Togo: Central Bank of West African States (BCEAO) Tonga: National Reserve Bank of Tonga Trinidad and Tobago: Central Bank of Trinidad and Tobago Tunisia: Central Bank of Tunisia Turkey: Central Bank of the Republic of Turkey Uganda: Bank of Uganda Ukraine: National Bank of Ukraine United Arab Emirates: Central Bank of United Arab Emirates United Kingdom: Bank of England United States: Federal Reserve, Federal Reserve Bank of New York Vanuatu: Reserve Bank of Vanuatu Venezuela: Central Bank of Venezuela Vietnam: The State Bank of Vietnam Yemen: Central Bank of Yemen Zambia: Bank of Zambia Zimbabwe: Reserve Bank of Zimbabwe

In reply to by runswithscissors

evokanivo Bigly Mon, 03/05/2018 - 03:11 Permalink

Any evidence of ownership of the US Fed? Everyone would love to know, but that's all kept secret as far as I know, because the Fed is "independent" or whatever. I call BS on your list being at all researched, though I expect you're right in broad strokes that there is self-dealing and undisclosed ownership by who-knows-who.

In reply to by Bigly