ERIC SPROTT ON ALL THAT GOLD IN THE CENTRAL BANKS… ER… ...November 26, 2012
The past couple of days I've been blogging about our old friend, the Bearer Bonds scandals, and yesterday I happened to mention once again the curious amount of gold in the world, or rather, the curious fact that no one seems to know an exact figure. Well, I ran across this article and a few of you here found it as well, and I find it curious for any number of reasons, not the least of which is the amount of gold it mentions, which is yet another new figure. What made me sit up and take notice however, is that its author, Eric Sprott, is the manager of a ten billion dollar fund... so when someone like that writes an article saying the central banks have no gold, I tend to sit up and take notice:
Now, in this article I intend on indulging in not only some high octane speculation, but perhaps even in tropospheric speculation, so before we get to that, I want to point out three paragraphs from this important article. First, there's this one:
"Over the past several years, we’ve collected data on physical demand for gold as it has developed over time. The consistent annual growth in demand for physical gold bullion has increasingly puzzled us with regard to supply. Global annual gold mine supply ex Russia and China (who do not export domestic production) is actually lower than it was in year 2000, and ever since the IMF announced the completion of its sale of 403 tonnes of gold in December 2010, there hasn’t been any large, publicly-disclosed seller of physical gold in the market for almost two years.4 Given the significant increase in physical demand that we’ve seen over the past decade, particularly from buyers in Asia, it suffices to say that we cannot identify where all the gold is coming from to supply it… but it has to be coming from somewhere."
Then there's this one:
"Then there are all the private buyers whose purchases go unreported and unacknowledged, like that of Greenlight Capital, the hedge fund managed by David Einhorn, that is reported to have purchased $500 million worth of physical gold starting in 2009. Or the $1 billion of physical gold purchased by the University of Texas Investment Management Co. in April 2011… or the myriad of other private investors (like Saudi Sheiks, Russian billionaires, this writer, probably many of our readers, etc.) who have purchased physical gold for their accounts over the past decade. None of these private purchases are ever considered in the research agencies’ summaries for investment demand, and yet these are real purchases of physical gold, not ETF’s or gold ‘certificates’. They require real, physical gold bars to be delivered to the buyer. So once we acknowledge how big the discrepancy is between the actual true level of physical gold demand versus the annual “supply”, the obvious questions present themselves: who are the sellers delivering the gold to match the enormous increase in physical demand? What entities are releasing physical gold onto the market without reporting it? Where is all the gold coming from?"
And finally this one, in which Mr. Sprott provides his answer to the question: where is all this gold coming from?
"There is only one possible candidate: the Western central banks. It may very well be that a large portion of physical gold currently flowing to new buyers is actually coming from the Western central banks themselves. They are the only holders of physical gold who are capable of supplying gold in a quantity and manner that cannot be readily tracked. They are also the very entities whose actions have driven investors back into gold in the first place. Gold is, after all, a hedge against their collective irresponsibility – and they have showcased their capacity in that regard quite enthusiastically over the past decade, especially since 2008."
And then, for those of you who have been following my hyopthesis of rehypothecated gold reserves - both hidden and "less hidden" - there's this mind-boggling paragraph:
"If the Western central banks are indeed leasing out their physical reserves, they would not actually have to disclose the specific amounts of gold that leave their respective vaults. According to a document on the European Central Bank’s (ECB) website regarding the statistical treatment of the Eurosystem’s International Reserves, current reporting guidelines do not require central banks to differentiate between gold owned outright versus gold lent out or swapped with another party. The document states that, “reversible transactions in gold do not have any effect on the level of monetary gold regardless of the type of transaction (i.e. gold swaps, repos, deposits or loans), in line with the recommendations contained in the IMF guidelines.”6 (Emphasis theirs). Under current reporting guidelines, therefore, central banks are permitted to continue carrying the entry of physical gold on their balance sheet even if they’ve swapped it or lent it out entirely. You can see this in the way Western central banks refer to their gold reserves. The UK Government, for example, refers to its gold allocation as, “Gold (incl. gold swapped or on loan)”. That’s the verbatim phrase they use in their official statement. Same goes for the US Treasury and the ECB, which report their gold holdings as “Gold (including gold deposits and, if appropriate, gold swapped)” and “Gold (including gold deposits and gold swapped)”, respectively (see Chart B). Unfortunately, that’s as far as their description goes, as each institution does not break down what percentage of their stated gold reserves are held in physical, versus what percentage has been loaned out or swapped for something else. The fact that they do not differentiate between the two is astounding, (Ed. As is the “including gold deposits” verbiage that they use – what else is “gold” supposed to refer to?) but at the same time not at all surprising. It would not lend much credence to central bank credibility if they admitted they were leasing their gold reserves to ‘bullion bank’ intermediaries who were then turning around and selling their gold to China, for example. But the numbers strongly suggest that that is exactly what has happened. The central banks’ gold is likely gone, and the bullion banks that sold it have no realistic chance of getting it back.(Boldface emphasis in the original article, bold and italicized emphasis added here)"
Now, reading between the lines a bit, I hope you caught the phrase "leasing out their physical reserves," for this implies that they remain the ultimate owners of said gold no matter how many times it is "sub-leased," i.e., re-sold. But that isn't what ultimately disturbs me.
What disturbs me is that, if Sprott is correct, then the "sell"-off of gold by these banks is, from one point of view, a seeming act of financial irrationality during a time of rapid currency devaluation through quantitative easing; not enough gold could be sold to keep the gold price down and thus keep the value of the currencies high, so form a certain point of view, the activity makes no sense.
But on to the high octane tropospheric speculation. In one sense, yes, the central banks are the likely sources of some of this gold, but that leaves the question of just how much gold there really is essentially unanswered; to this day, we know next to nothing of just how much gold, actually, was looted by the Axis powers nor, really, where it wound up and who really controls it. (And yes, before all of you write me about the Black Eagle Fund and Yamashita and all the rest, save yourself the time....I'm aware of it). So we have yet another possible source in that...
Still, that would seem to me to fall short of an explanation of what is possibly going on, with all due respect to Mr. Sprott... which leaves two explanations so outrageous, so ludicrous, that I hesitate to mention them, save for the fact I have mentioned one of them, the technological one, already: alchemy... the transformation of base metals into gold. In The Philosophers' Stone I noted that in both Germany and Japan there were discoveries of such transformations between the wars, precisely of mercury into gold. What if such technologies had been perfected, and were used on an industrial scale?
But there is yet another possibility.... also technological, and in part, paradigm changing: what if an entirely new energy technology were known and perfected, and what if this was known by the banks? controlling interest in such a technology would transform the nature of money itself, especially if somehow it could be collateralized, or better, made the backing of money.
Whatever one thinks of these high octane speculations, Sprott's basic thesis remains sound: the banks are selling off massive amounts of gold. And this explains why they do not want audits: either they do not want the empty cobwebbed spaces of their gold vaults discovered, or, they do not want all those piles of gold in them to be discovered, for either way, the alchemical transformation of the financial system is the result.
See you on the flip side.