The Coin Analyst: Central Bank Gold Holdings Believed To Be Smaller Than Governments Claim
by Louis Golino for CoinWeek ……
An important development about gold is not receiving the attention it deserves in the mainstream, non-specialized media.
In particular, several reports have surfaced that the gold reserves of several Western countries are believed to be much smaller than previously estimated. That is a result of the fact that much of the gold is on lease to other countries, has been swapped, or in other cases, simply may not exist at all.
On October 29, John Embry, chief investment strategist of Sprott Asset Management, told King World News that “I firmly believe that if you look at all of the Western central banks, and the gold they allegedly own, I believe a significant portion of that is not in their vaults.” Embry also stated, “So they can say all they want, but in the end the truth will be revealed by the lack of physical gold in the market as they run out of enough gold to keep the price under control.”
If these reports are accurate, they have important implications for the future price of gold, and therefore for precious metal investors.
First, they suggest that much less mined gold exists than previously believed. Second, this is especially significant to the so-called manipulation thesis, which holds that governments act to suppress the price of gold. If governments hold less gold than we thought they did, then their ability to affect the price will also be greatly diminished.
The gold that was previously stored in central banks has in many cases, as Mr. Embry argues, been swapped or leased to parties which have sold that gold.
This is not a new story, but it is one that is now receiving more attention. GATA, or the Gold Anti-Trust Action Committee, has maintained for years that central banks do not have a lot of the gold they say they have.
Since last year many news accounts have been published about Germany’s gold reserves, most of which has been stored at the Federal Reserve Bank of New York for years. Germany, at least in theory, has the second largest gold reserves in the world, 3,395 tons to be specific, with the U.S. being the only country with more.
In Germany many people have questioned whether that gold is really in New York, and many Germans have been calling for an audit of the gold in New York for a while.
In fact, earlier this month it was reported that the German Court of Auditors has requested an audit of the gold Germany has stored overseas. And according to news accounts, including a report from October 24 in the Daily Telegraph , Germany has voluntarily withdrawn some of the gold it has stored in London with the Bank of England. It plans to repatriate 150 tons from England over the next three years to check the quality and weight of the gold.
Germany has a history storing its gold reserve overseas in London, Paris, and New York. The reason, according to German officials at Germany’s central bank, the Bundesbank, is that gold stored in one’s home country is not immediately available as collateral to purchase foreign currency, whereas gold stored overseas is available for that purpose.
According to the Daily Telegraph, 66% of Germany’s gold is in New York, 21% is in London, and 8% is in Paris. Presumably the other 5% is stored in Germany.
German gold was moved overseas during the 1950’s to make it safe in the event of a Soviet attack on Germany, which was considered to be a real possibility during the Cold War.
Bundesbank officials have released statements stressing that they do not doubt the existence or quality of the gold Germany has stored in New York and stressing the positive experience it has had storing its gold overseas with other central banks. These issues have been covered at length on the web site, Zero Hedge .
Other central banks in non-Western countries have clearly taken notice of these developments and are adding to their gold reserves, especially now that gold is in the middle of a short-term correction that may not last much longer. Countries like Brazil, Russia, and Turkey have all purchased substantial amounts of gold in the past year, as revealed in recent reports from the IMF.
The bottom line is that central banks probably have a lot less gold than they say they do, especially as a result of IMF rules which allow them to count gold that has been leased or swapped as still being part of their reserves. So there really is no way to know for sure exactly how much they actually have in their possession.
Yet many mainstream analysts continue to downplay the significance of this matter. For example, John Carney of CNBC said when reporting on the German gold audit request that it does not matter whether the gold actually exists or not. He maintained that if the Federal Reserve says it is there, that is all that counts: “In reality, it does not matter one bit whether the Federal Reserve Bank of New York actually has the German central bank’s gold or whether the gold is pure. As long as the Fed says it is there, it is as good as there for all practical purposes to which it might be put. It can be sold, leased out, used as collateral, employed to extinguish liabilities and counted as bank capital just the same whether it exists or not.”
As the information about central bank gold reserves is disseminated more widely, it will surely play a major role in propelling gold prices to new heights.
Finally, the outcome of the upcoming presidential election is also likely to be bullish for gold. As Chris Marcus explains , whether President Obama is reelected, or if Mitt Romney becomes president, deficit spending designed to stimulate demand, or neo-Keynesianism, will likely continue since the alternative is severe budget cuts that would contract the economy and cause a serious economic depression, as is happening in Greece now. That is, unless political leaders in Washington somehow manage to come up with a budget plan that reduces the deficit substantially but does so gradually.
Louis Golino is a coin collector and numismatic writer, whose articles on coins have appeared in Coin World, Numismatic News, and a number of different coin web sites. His column for CoinWeek, “The Coin Analyst,” covers U.S. and world coins and precious metals. He collects U.S. and European coins and is a member of the ANA, PCGS, NGC, and CAC. He has also worked for the U.S. Library of Congress and has been a syndicated columnist and news analyst on international affairs for a wide variety of newspapers and web sites.