Thursday, February 14, 2013

The Mystery of 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 the time 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 their Gold reputedly held at the Federal Reserve in New York City. This has resulted in the Bundesbank pursuing repatriation of the Gold, beginning with a request to view it in the basement vault 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 an 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 the Gold for other parties.

Concern spread to Austria, where a question arose in Parliament as to where Austria's Gold is stored. The answer was that 80% of of it (224.4 tonnes) is in the UK. (It was claimed that the reason for this is that, if a crisis were to occur, it could be more easily traded from London than from New York City.) 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? 

Welcome to the New Gold Shuffle.  I found that it's done all the time. The Gold is leased to a Bullion Bank, which typically pays 1% 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 3-4% 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 assest that we have leased out is still an asset, even if it has now been sold by the lessee. This of course means that there i less Gold in the world than has been claimed. How much less? That's anyone's guess.

But even if it became generally known that the Fed and other banks are holding paper, rather than physical Gold, couldn't we carry on regardless?  Sure, but there's quite a bit of risk. Like...(1) If there were a dramatic rise in the price of Gold and the lessor were to call in the return of the Gold. the Bullion Bank could easily lose far more than its 2-3% margin it was enjoying. (2) Then if there were a crash in the bond market and hyperinflation set in, the bonds that the Bullion Bank purchased could become worthless. So, with 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 their Gold be returned.

However, 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." The Bundesbank should say to that, I'm afraid that's not good enough. It's our Gold and we 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 24 hours, a world-wide 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.

The Way I See 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. We haven't heard the last of this issue. The cat is out of the bag at this point and the depositers' distrust and uncertainty will not be quelled by any counter-offers. Tension will continue to mount amongst depositors, and, at some point, the situation will reach an impasse.

We might 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, I predict 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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