Sprott Update: Do Western Central Banks Have Any Gold Left?

In their latest newsletter, Eric Sprott and David Baker explore this very important question.

It's even more important in the context of the eventual re-imposition of a "gold standard" upon The West by the creditor nations.

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Do Western Central Banks Have Any Gold Left???
By: Eric Sprott & David Baker

Somewhere deep in the bowels of the world’s Western central banks lie vaults holding gargantuan piles of physical gold bars… or at least that’s what they all claim. The gold bars are part of their respective foreign currency reserves, which include all the usual fiat currencies like the dollar, the pound, the yen and the euro.

Collectively, the governments/central banks of the United States, United Kingdom, Japan, Switzerland, Eurozone and the International Monetary Fund (IMF) are believed to hold an impressive 23,349 tonnes of gold in their respective reserves, representing more than $1.3 trillion at today’s gold price. Beyond the suggested tonnage, however, very little is actually known about the gold that makes up this massive stockpile. Western central banks disclose next to nothing about where it’s stored, in what form, or how much of the gold reserves are utilized for other purposes. We are assured that it’s all there, of course, but little effort has ever been made by the central banks to provide any details beyond the arbitrary references in their various financial reserve reports.

Twelve years ago, few would have cared what central banks did with their gold. Gold had suffered a twenty year bear cycle and didn’t engender much excitement at $255 per ounce. It made perfect sense for Western governments to lend out (or in the case of Canada – outright sell) their gold reserves in order to generate some interest income from their holdings. And that’s exactly what many central banks did from the late 1980’s through to the late 2000’s. The times have changed however, and today it absolutely does matter what they’re doing with their reserves, and where the reserves are actually held. Why? Because the countries in question are now all grossly over-indebted and printing their respective currencies with reckless abandon. It would be reassuring to know that they still have some of the ‘barbarous relic’ kicking around, collecting dust, just in case their experiment with collusive monetary accommodation doesn’t work out as planned.

You may be interested to know that central bank gold sales were actually the crux of the original investment thesis that first got us interested in the gold space back in 2000. We were introduced to it through the work of Frank Veneroso, who published an outstanding report on the gold market in 1998 aptly titled, “The 1998 Gold Book Annual”. In it, Mr. Veneroso inferred that central bank gold sales had artificially suppressed the full extent of gold demand to the tune of approximately 1,600 tonnes per year (in an approximately 4,000 tonne market of annual supply). Of the 35,000 tonnes that the central banks were officially stated to own at the time, Mr. Veneroso estimated that they were already down to 18,000 tonnes of actual physical. Once the central banks ran out of gold to sell, he surmised, the gold market would be poised for a powerful bull market… and he turned out to be completely right – although central banks did continue to be net sellers of gold for many years to come.

As the gold bull market developed throughout the 2000’s, central banks didn’t become net buyers of physical gold until 2009, which coincided with gold’s final break-out above US$1,000 per ounce. The entirety of this buying was performed by central banks in the non-Western world, however, by countries like Russia, Turkey, Kazakhstan, Ukraine and the Philippines… and they have continued buying gold ever since. According to Thomson Reuters GFMS, a precious metals research agency, non-Western central banks purchased 457 tonnes of gold in 2011, and are expected to purchase another 493 tonnes of gold this year as they expand their reserves.1 Our estimates suggest they will likely purchase even more than that.2 The Western central banks, meanwhile, have essentially remained silent on the topic of gold, and have not publicly disclosed any sales or purchases of gold at all over the past three years. Although there is a “Central Bank Gold Agreement” currently in place that covers the gold sales of the Eurosystem central banks, Sweden and Switzerland, there has been no mention of gold sales by the very entities that are purported to own the largest stockpiles of the precious metal.3 The silence is telling.

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.

To give you a sense of how much the demand for physical gold has increased over the past decade, we’ve listed a select number of physical gold buyers and calculated their net change in annual demand in tonnes from 2000 to 2012 (see Chart A).

CHART A

Numbers quoted in metric tonnes.
† Source: CBGA1, CBGA2, CBGA3, International Monetary Fund Statistics, Sprott Estimates.
†† Source: Royal Canadian Mint and United States Mint.
††† Includes closed-end funds such as Sprott Physical Gold Trust and Central Fund of Canada.
^ Source: World Gold Council, Sprott Estimates.
^^ Source: World Gold Council, Sprott Estimates.
^^^ Refers to annualized increase over the past eight years.

As can be seen, the mere combination of only five separate sources of demand results in a 2,268 tonne net change in physical demand for gold over the past twelve years – meaning that there is roughly 2,268 tonnes of new annual demand today that didn’t exist 12 years ago. According to the CPM Group, one of the main purveyors of gold statistics, the total annual gold supply is estimated to be roughly 3,700 tonnes of gold this year. Of that, the World Gold Council estimates that only 2,687 tonnes are expected to come from actual mine production, while the rest is attributed to recycled scrap gold, mainly from old jewelry.5 (See footnote 5). The reporting agencies have a tendency to insist that total physical demand perfectly matches physical supply every year, and use the “Net Private Investment” as a plug to shore up the difference between the demand they attribute to industry, jewelry and ‘official transactions’ by central banks versus their annual supply estimate (which is relatively verifiable). Their “Net Private Investment” figures are implied, however, and do not measure the actual investment demand purchases that take place every year. If more accurate data was ever incorporated into their market summary for demand, it would reveal a huge discrepancy, with the demand side vastly exceeding their estimation of annual supply. In fact, we know it would exceed it based purely on China’s Hong Kong gold imports, which are now up to 458 tonnes year-to-date as of July, representing a 367% increase over its purchases during the same period last year. If the imports continue at their current rate, China will reach 785 tonnes of gold imports by year-end. That’s 785 tonnes in a market that’s only expected to produce roughly 2,700 tonnes of mine supply, and that’s just one buyer.

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?

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.

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.

CHART B

Sources:
1) http://www.bankofengland.co.uk/statistics/Documents/reserves/2012/Aug/tempoutput.pdf
2) http://www.treasury.gov/resource-center/data-chart-center/IR-Position/Pages/08312012.aspx
3) http://www.ecb.int/stats/external/reserves/html/assets_8.812.E.en.html
4) http://www.boj.or.jp/en/about/account/zai1205a.pdf
5) http://www.imf.org/external/np/exr/facts/gold.htm
6) http://www.snb.ch/en/mmr/reference/annrep_2011_komplett/source

Notes:
ECB Data as of July 2012. Bank of Japan data as of March 31, 2012.

* European Central Bank reserves is composed of reserves held by the ECB, Belgium, Germany, Estonia, Ireland, Greece, Spain, France, Italy, Cyprus, Luxembourg, Malta, The Netherlands, Austria, Portugal, Slovenia, Slovakia and Finland.
** Bank of Japan only lists its gold reserves in Yen at book value.

Our analysis of the physical gold market shows that central banks have most likely been a massive unreported supplier of physical gold, and strongly implies that their gold reserves are negligible today. If Frank Veneroso’s conclusions were even close to accurate back in 1998 (and we believe they were), when coupled with the 2,300 tonne net change in annual demand we can easily identify above, it can only lead to the conclusion that a large portion of the Western central banks’ stated 23,000 tonnes of gold reserves are merely a paper entry on their balance sheets – completely un-backed by anything tangible other than an IOU from whatever counterparty leased it from them in years past. At this stage of the game, we don’t believe these central banks will be able to get their gold back without extreme difficulty, especially if it turns out the gold has left their countries entirely. We can also only wonder how much gold within the central bank system has been ‘rehypothecated’ in the process, since the central banks in question seem so reluctant to divulge any meaningful details on their reserves in a way that would shed light on the various “swaps” and “loans” they imply to be participating in. We might also suggest that if a proper audit of Western central bank gold reserves was ever launched, as per Ron Paul’s recent proposal to audit the US Federal Reserve, the proverbial cat would be let out of the bag – with explosive implications for the gold price.

Notwithstanding the recent conversions of PIMCO’s Bill Gross, Bridegwater’s Ray Dalio and Ned Davis Research to gold, we realize that many mainstream institutional investors still continue to struggle with the topic. We also realize that some readers may scoff at any analysis of the gold market that hints at “conspiracy”. We’re not talking about conspiracy here however, we’re talking about stupidity. After all, Western central banks are probably under the impression that the gold they’ve swapped and/or lent out is still legally theirs, which technically it may be. But if what we are proposing turns out to be true, and those reserves are not physically theirs; not physically in their possession… then all bets are off regarding the future of our monetary system. As a general rule of common sense, when one embarks on an unlimited quantitative easing program targeted at the employment rate (see QE3), one had better make sure to have something in the vault as backup in case the ‘unlimited’ part actually ends up really meaning unlimited. We hope that it does not, for the sake of our monetary system, but given our analysis of the physical gold market, we’ll stick with our gold bars and take comfort as they collect more dust in our vaults, untouched.

p.s. Now that you've read this excellent summary from Sprott, please go back and review this post from June of this year. Ponder the implications and plan accordingly.

http://www.tfmetalsreport.com/blog/3924/gonefor-good

TF

86 Comments

Mr. Fix's picture

First Again!!!!!!!!!!!!!!!!!!!!!!!!!

Time to celebrate!!!

@  watchingdogma

Some guys have all the luck!

thisismynewname's picture

@Mr Fix

Thanks for saving me from trying for first again today.

Mr. Fix's picture

Thurd!!!!!!!!!

Darned, missed second.

@  watchingdogma

I was going for a perfect royal flush!

Thought I could get all 5!

Mr. Fix's picture

Fourth

NOW IT CAN SAID,

I LOVE 

ERIC SPROTT !!!!!

He is the the best friend this stacker could ever have!

(next to Turd of course!)

Mr. Fix's picture

NOW I CAN HAVE THAT FIFTH!!!!!!!

I apologize for not posting anything of value whatsoever on this thread so far.

I'm just having too much fun to think clearly.

Edit:

Back to some serious lurking.wink

I will now take the time to see what my good buddy Eric is up to now.........

yes

Strongsidejedi's picture

We don't take no stinkin fifth

Eric Sprott - double daring the Central Bankers.

Good call when you know what's in your own vault.

Missiondweller's picture

Wow!

But would anyone here be surprised?Not likely

TreeTop Dweller's picture

Short the Paper, Go Long the Real

This train is gaining momentum!

Au/Ag are the best choices but like David Stockman says...Take your monopoly money and buy ABCD... Anything Bernanke Cannot Destroy...

The world is waking up an soon it will reach terminal velocity!

beinki's picture

fifth

Which brings to mind that I would rather have a full bottle in front of me than a full frontal lobotomy.

dropout's picture

The German Writing on the Wall

Back in late 2011 'Fortress Paper' announced the signing of new bank note paper orders at it's Landqart mill in Landqart, Switzerland. Chad Wasilenkoff, CEO of Fortress Paper commented; "Bidding on this volume would not have been possible at our Lanqart mill, prior to our recent PM1 bank note machine upgrade, which increased our overall annual production capacity from 2,500 to 10,000 tonnes."

In other words, in order to successfully bid on that particular contract, Fortress Paper had to increase their bank note production 75% in order to secure this contract! 10,000 tonnes of bank notes is a lot of currency! Which country has ordered such a vast amount of new bank notes? Why? For what purpose?

There is this article to contemplate;

http://www.zerohedge.com/news/referendum-germany-preparing-nuclear-option

How about this 'hot of the press' article;

http://www.dailyreckoning.com/germany-tip-toes-toward-a-euro-exit/

Could it be that the 10,000 tonnes of new bank notes are "new" Deutsche Marks? Is Germany about to cut it's losses under the Euro system and return to it's own currency? Will it be gold backed? And if that's the case, will it request the return of it's gold bullion from the US, currently sitting in a vault under the Fed on Wall street? Is the gold still there? This is where Turd's published link above comes in. So many questions. So few answers.

R man J's picture

Maund: Gold Brutal Correction, Go Short

Given the once-in-a-lifetime, wildly bullish fundamentals, I think we should frame this one so we can look at it next month. 

http://www.marketoracle.co.uk/Article36825.html

atadheavy's picture

Sprott's analysis

The Sprott analysis is made all the more convincing by its even-handed, step by step, void of all hyperbole - style. When you're done reading, his conclusions just make sense. Very compelling!

Mr. Fix's picture

Fix on Sprott:

I have been closely watching Eric Sprott for several years now.

In more often than not he is talking about how silver is massively underpriced right now, and I think he calls it “the trade of the decade”.

It is not often that I read an article by him making such an incredibly bullish case for gold.

From my perspective, Eric is not talking his book,
he is a true believer in the value of precious metals,
and most certainly puts his money where his mouth is.

Eric does not usually venture into the area of conspiracies,
and seemed to be notably absent in the discussion of worldwide global economic calamity.

That seems to have changed.

What Eric is now saying, is that the Western powers have given away any possibility of underpinning a new financial system,
while simultaneously destroying the current one.

Keep stacking!

Patrancus's picture

Seems it is long past

Seems it is long past the time to find out, Fort Knox gold has not seen an independent audit since the 1950's, I remain confident that their is none to audit. It is how absolutely F up goob operates everything that does not lock, load and fire. 

LongGoldLongSilver's picture

Interesting Question

A friend asked me why it would be so bullish if Fort Knox was half empty, since the price of gold is underpinned by e.g. PBOC loading up on the yellow metal. Everyone is expecting the next report out of China to show gold in the 2,000-3,000 tonnes range. What if the Chinese showed a decrease and actually started selling? That would remove what many consider the greatest upward force in the gold market. Wouldn't it be a bad thing for gold if it became official to everyone that the US is actually unloading big quantities of it? And what would happen if an audit were to show that the US has 12,000 tonnes and have actually been secretly stacking it?

I think both scenarios would be extremely bullish for gold and the only thing that would have a slightly negative impact on the market is if there are 8,000 tonnes of shiny bars in the vaults. It would (for a while) give some credibility to the system, which is the antidote to rising gold prices. On the other hand more gold than expected would simply reflect the importance of it in the eyes of the very people claiming they're only holding it as a tradition. Half empty vaults would offer thoughts similar to "Gold would've been +$5000/oz in a free market" and really highlight how important gold is for wealth preservation in the endgame of a monetary system as not even TPTB can keep it down for long.

I, myself, am a believer in that the central banks in the West are selling and leasing a lot of gold into the market to suppress the price. I am not a believer of a future honest audit. The game is most likely a lot more rigged than any of us can imagine.

________________________________________________________

https://miningstockvaluator.com -the new hub for gold & silver stock investors

usk's picture

Clive Maund is right sometimes

and wrong other times.

Check this last year post from the doc: http://silverdoctors.blogspot.fr/2011/09/clive-maund-silver-has-topped-preparing.html

The doc was arguing at this time that Clive's call should not worry silver investors, he was right because 4 precedent calls were wrong... but this time (remember last year...) Clive was right and after painting a nice B up leg the cartel created  in a few HOURS one of the most massive C wave decline. Just days after this post from Clive Maund we experienced a religious experience with Silver price tumbling from 40 to 30 in a matter of hours. I remember this time. I am not saying that this will be the case this time. But I am sure that the battle we are going to join will be more intense that last year. 80k+ contracts to flush in 2 months. The holders of these contracts are not the same than last year.

shutter's picture

Thanks for all you do TF.

Thanks for all you do TF. Cheers.

Turd Ferguson's picture

Please go back up

MODERATOR

and re-consider this article now that I have attached a post script.

Thanks.

Turd Ferguson's picture

You should probably go back

MODERATOR

You should probably go back and review this, too:

http://www.tfmetalsreport.com/blog/3885/last-desperate-acts

Turd Ferguson's picture

And this...

MODERATOR
Mr. Fix's picture

Please go back up

Going............

(Thanks Turd)

Missiondweller's picture

Missing gold is already being uncovered

1) Morgan Stanley was sued for never buying or holding gold that clients paid for.

2) Sprott has stated before that clients had difficulty getting their "allocated gold".

3) Swiss banks are being sued for failing to deliver "allocated gold"

http://macrowealthpreservation.blogspot.com/2012/07/are-gold-vaults-empty.html

Be Prepared's picture

To Believe or Not to Believe...

Either, with all the empirical data available about the collapsing markets, you will trust the actions of what TPTB are doing or you will listen to what they are saying....  and those are seldom ever the same thing.  The Central Banks of the World have told us numerous times that they feel obligated to lie to us because their manipulations are too big for us to understand and we are merely the ants to build things for them.... 

The craziness you see around you with increasing velocity each day tells you a story and portrays the truth for those willing to let go of the idea that everything will stay on the same trajectory without deviation.  We all know, though, that the tides of this storm will be fantastically unpredictable and will require a steady hand and unwavering faith to stay a course that few will tell you is right or correct or the best path.  I would love for there to be a stampede by the masses abandoning this warped paradigm but they are inured to live in the comfort of believing that the food and gas trucks will flow without interruption forever.

Each day....   Each moment.....  you will have to choose whether To Believe or Not to Believe that a plan, including PMs, will help you to make it further into the next skewed framework with fewer dents than those that didn't want to take the time to put more faith in taking full responsibility for one's own life.

GoldFinch's picture

Clive Maund

Take his predictions with a grain of salt.

I am still waiting for silver to drop to 18$ as he told us earlier this year.

Be Prepared's picture

Mess, Distress, Regress, but Not Progress

¤'s picture

Patience Pining, patience...

...we're looking , we're looking. laugh

1.jpg

California Lawyer's picture

Drudge is On FIRE Now, Wow!

http://drudgereport.com/

This is PLANNED.  TPTB want him gone.  What has transpired behind the scenes?  Is Ulsterman really connected to an insider?

Damn . . .

Edit:  By the way, THANKS Turd for this great post.  Connecting the dots is becoming quite scary.

¤'s picture

Burning Symbolism: Burning Man - Burning Wall St. 2012

The Burn Wall Street Project at Burning Man 2012: Fertility 2.0 September 1st 2012. The names on the buildings are "Bank of Un-America", "Merrill Lynched", "Goldman Sucks" and "Chaos Manhattan".

You can't see it at the beginning but on the front of Bank of Un-America and Goldman Sucks, there are LED dollar signs that pop up.

Here's a shot before the Burn during the day. http://i.imgur.com/W7LH9.jpg

agrock's picture

@ CA Lawyer

Damn...

drudge was quick to de-link this stuff

Checked it 2min later and they axed the link to here

https://www.mittromney.com/donate/romney-ryan?sc=INTVP120&utm_medium=display&utm_source=drudgereport.com&utm_campaign=20120811_d_romney-ryan_intermarkets

SilverSurfers's picture

Mod Squad

He is a straight TA guy. Right more often than wrong. In the days of concentrated shorts, TA gets confused often. Dont view this for any more than what it is, good TA analysis, also, never underestimate the power of the EE. Though, he seems to have discounted the bullish crossings of the moving averages, and seems to have not taken that indicator into account, as a wash.

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