Western central banks don’t have the 23,000 tons of gold they say they have. Eric Sprott has done great work in this area. But this week we had more proof that the 23,000 tons of gold the West claims to possess is vastly overstated.
Sweden has 125 tons of gold, but of that only 12% is held in Sweden. 61% of Sweden’s gold is held by the Bank of England, 33% by the Bank of Canada, and 13% by the Fed. So, why is 88% of Swedish gold held abroad? For the simple reason that they are trading their gold within the LBMA market, and trading can mean anything from selling to leasing.
Then, on Wednesday of this week Finland announced that 96% of its gold is held outside of the country — half in the UK, and the rest in Sweden, New York, and Switzerland. The Bank of Finland also admitted that half of the gold held in the UK is ‘invested.’ One can probably assume that half of the gold held in the other countries is also ‘invested,’ which means that 50% of Finland’s gold is either sold, or leased to the market. Either way it’s gone.
Even if it’s only leased, let’s understand what that means. To lend or lease to the market means that an LBMA bullion bank uses that gold, and lends it or sells it on to another party. It could be to an ETF such as GLD. That would be convenient because it stays in London with HSBC, where GLD holds its gold.
In that example, Finland’s gold would be owned by GLD. It could also be sold to a private entity, and if that entity holds it in the banking system, that gold is encumbered. But Finland also has a claim on this gold, which means it’s double-counted. So, that kind of transaction is convenient for the bullion banks because the gold stays within the LBMA system.
The fact that at least two parties own the same gold doesn’t seem to be a concern to people that speak on behalf of the LBMA system. But the gold that Finland or any other central bank has leased out could also have been sold directly to China, or indirectly to China via Swiss refineries. In that example, gold owned by Finland would now be in China.
But as long as the gold is held by a bullion bank within the LBMA system, they can sell it many times since they have possession of the physical gold. But when it’s taken out of the system, this creates a problem because the London bullion bank cannot ask for the gold to be returned from China. So, they will have to borrow it from someone else.
As more and more gold is taken out of the LBMA system, the bigger the shortage of physical gold becomes. We know that in 2013 we’ve seen very big shortages of physical gold as China, India, and Russia continued to accumulate. This is why more and more gold has been taken out of the bullion banks and stored in private vaults.
Since virtually no central bank ever has a public physical audit of its gold, it’s impossible to know how much gold they actually hold free-and-clear. I’ve talked about Sweden and Finland, but we know the situation is the same in most Western countries. As an example, of Germany’s roughly 3,400 tons of gold, 2/3 is held abroad in the US, UK, and France.
It will take Germany until 2020 just to get a small part of that gold back to Germany. Why that long? Because it isn’t in those vaults any longer. Recently, France and Austria have also admitted they also ‘trade’ their gold. The IMF is supposed to hold 2,800 tons of gold, but I’m convinced that this gold is double-counted and lent to them by the IMF member states.
So the question is, how much of the West’s supposed 23,000 tons of gold is still in the vaults? Nobody knows, but I would be surprised if it’s more than half. The reality is that we have a system where physical gold is owned many times over, and we also have a system where the paper gold market is 100 times the size of the physical gold market, with absolutely no chance whatsoever for people who hold paper gold to receive physical delivery.
With this extremely fragile and precarious situation you wonder why anybody with a sound mind would hold paper gold or physical gold in a bank? The bottom line here is there is only one way for investors to hold gold, which is in physical form, and outside of the banking system.