GATA takes a look at Central Bank Gold Reserves.
(emphasis mine) [my comment]
A Look at Central Bank Gold Reserves
Submitted by cpowell on Mon, 2005-05-16 07:00.
By Ed Wener
Last week in a Midas commentary we saw a brief paragraph with a quote from the CPM group. I have not seen any reaction to this news. I believe the message from the CPM Group is important to Gold investors so I decided to do a little research into the opaque world of Central Bank Gold and share it with you. Here is the CPM quote. To maintain consistency throughout this article I’ve added (in brackets) the Gold equivalents in tonnes:
“The likelihood of lower central bank gold sales could keep prices firm. These banks sold an average of 14-mil oz/year (435 tonnes) since 1989. For 2005, net central bank sales may be 6-mil to 8-mil oz (186 to 248 tonnes), about half of the 12.5-mil oz (388 tonnes) sold last year and less than half of what has been coming into the market on average over the past 15 years. "This reduction in physical gold sales by central banks should contribute to tighter physical markets, and exert some upward pressure on prices," said CPM. " While central banks still own more than 1-bil oz of gold (31,100 tonnes), most appear content to hold on to most of what they have. There are a few small sales from smaller European national banks, and the French commitment to sell, announced last April. Other than that, however, there is no clear source for massive gold sales from official inventories this year, or in the near future." Also, the potential sale of IMF gold has been bogged down in international politics and is unlikely to occur any time soon.”
What is the CPM group telling us? Well, implicit in the first sentence is the fact that Gold was NOT FIRM because of previous Gold sales. In other words, it was these Central Banks that kept the Gold price from rising. Average sales of 435 tonnes per year totals 6500 tonnes over the period. According to the World Gold Council Central Banks had 35,582 tonnes in 1990 and 31,423 as of March 2005. They are only admitting to sales of 4159 tonnes, not 6500 tonnes. The difference is 2300 tonnes.
Then the CPM estimates 2005 Gold sales of less than 250 tonnes which is half the amount allocated under the 2nd Washington Agreement. This is VERY bullish for Gold. Gold investors have long waited for the end of Central Bank dishoarding. Is this really it? Can we learn something from past behavior of the Central Banks? The CPM group, like many others, likes to lump all Central Banks together and scare us with their Billion ounces of Gold. Gold just waiting to be sold to snuff out any rally.
What I’ve done is check the historical record over the past 25 years and prepared a series of Tables. I’ve divided the World into a series of Blocs with some loose parameters such as geography or political allegiance. Each table shows Central Bank Gold Reserves in Tonnes for 1980, 1990 and March 2005. At the bottom of each table are the Bloc Totals in Tonnes and then in US Dollars converted at $420 per oz.
All the numbers come from Tables found at the World Gold Council Website. The numbers are derived from Official Central Bank releases that may or may not be accurate. I doubt all of them are accurate. For example, we know a lot of Gold leasing has taken place yet leased Gold can be included in the Reserve reports according to IMF rules. Gata has circumstantial evidence that many thousands of tonnes have been leased but we do not known by whom.
Let’s begin with the Muslim nations. 
The most striking thing about these numbers is the lack of change. Many of the holdings have not changed in 25 years. But neither have their rulers. In many traditional societies, and this includes nations in the Middle East, the Indian subcontinent and South East Asia, Gold has never lost its lustre. Their Central Bank Gold Reserves are untouchable precisely because Gold is a proven store of Value.
Although many of the Nations listed above are now (or soon will be) members of the European Union I listed them with Russia because I believe their Gold reserves are not in play for similar reasons. Unlike many Western European countries, these ex Soviet nations have minimal Gold Reserves. Compare France with 51% of its Reserves in Gold with Poland (only 3.9% ) or Russia (with 4.1%). In fact, one could argue that as these nations prosper they will become Gold buyers as Russia certainly is.
This bloc is mainly the story of Venezuela and Argentina. Brazil, Chile, Columbia and Uruguay are in the USA bloc (see below). Until 2003 Argentina would have been in the USA bloc as its Gold reserves had dropped to less than a tonne. But now it is buying Gold and its currency no longer is tied to the US Dollar. Venezuela has had such turmoil over the years one wonders whether or not those 357 tonnes are really there. If not, they cannot be sold twice. If they are there, given the current government, I do not think they are in play.
This Table does not include Indonesia and Malaysia which are in the Muslim Bloc. Like the peoples of the Middle East, Asians place great trust in Gold. Their cities have thriving Gold Markets. China now dominates Asia with India growing quickly. Both nations are adding to their Gold reserves and will continue to do so. Japan, which has the largest Asian economy, has been in and out of recession for 15 years now. Given this and especially their ultra low interest rates, I find it hard to believe Japan has retained all the Gold it had in 1980 but that’s what they claim. Taiwan added Gold until 1990 and then stopped. We know that thousands of tonnes of Gold have been leased but we do not know by whom. Japan and Taiwan would be good candidates.
Here we have the Challenger. The Europeans wants the Euro to be a Reserve Currency. The Euro has some Gold backing. Europeans own half the Official Gold in the whole world. To the 13,650 tonnes listed above we must add their portion of IMF (3217 tonnes) and BIS (206 tonnes) Gold. During the past 15 years, while the Euro project was in its formative stage this Bloc sold over 3800 tonnes of Gold. This stabilized the US dominated system. However, the Europeans are now claiming they will sell very little Gold going forward.
Finally we come to the USA Bloc. This is an amazing Table. All of America’s closest allies are SOLD OUT. Australia claims to have 80 tonnes but it is probably encumbered. The UK may still have 312 tonnes but, assuming it isn’t already encumbered, this Gold may be required to obtain currency union with the Euro zone.
The key figure of course is the American Deep Storage Gold. If that Gold does not exist or is encumbered then the USA bloc is broke! [based on what I have read, I believe this to be the case.]
Conclusion:
We can summarize Global Central Bank reserves by Bloc
How much of this Gold is available to prevent the Gold Price from rising? I do not know. But quite a bit of it seems off limits. I think we can safely say that if Japanese and Taiwanese Gold has escaped leasing thus far then it will continue to do so. The IMF Gold is potentially saleable but as the CPM report states it is currently bogged down as it has been for a decade.
Assuming most of the American Deep Storage Gold is no longer available the only real source of future Gold is Europe. But Europe has a tricky role to play. They want to be part of a dual currency Reserve System but they mustn’t destroy the Dollar and bring down the whole thing. European respect for Gold is deep rooted. The key nations are France and Germany. The French regard financial instruments with great suspicion. They all know the story about someone’s great uncle who papered the water closest with Imperial Russian bonds. Further back there is the cultural memory of John Law and the Mississippi Bubble and then the Revolutionary Assignats. In Germany too this feeling runs deep for the country was ruined by fiat paper only 80 years ago. Over the past few months we have seen a pitched battle in the German Press with one side advocating further Gold sales and the other saying no. The need for fresh Gold supply must be acute. The CPM report seems to indicate that the pro Gold crowd now have the upper hand.
The United States is desperate to maintain the privileges associated with the global Reserve currency but has recklessly disregarded the responsibility of guarding the Dollar’s purchasing power. It has called upon allies to support the Dollar either by selling their Gold Reserves as shown in the USA table or by buying US Debt paper as the Asian Central banks have done. They have now reached a dead end. Those who once had Gold Reserves now have empty vaults and the Asians now realize their vaults are full of irredeemable debt.
My reaction: Great article about world gold reserves. The main points to take way from this are:
1) All of America's closest allies are SOLD OUT of gold.
2) If the US’s “Deep Storage Gold” does not exist or is encumbered, then the USA bloc is broke.
3) Europe holds a lot of gold reserves: 13682 tonnes of it!
4) Europe’s deep respect for Gold means that most European gold is probably unencumbered (hasn’t been sold/leased off like in the US). This is especially true for Germans who went through hyperinflation 80 years ago and probably don’t want to repeat the process.
Conclusions:
1) If most of the US’s allies are out of gold for leasing/sale, then the US is probably too.
2) In addition to having leased/sold most if not all its 8,133 tonnes, the US has sold substantial amounts of “paper gold” via two commercial banks. Based on the 124 billion short position seen in the charts below, the US is probably short around 4,400 tonnes of gold.
3) Based on the size of the gold reserves backing them, the Swiss Franc and the Euro are two of the most attractive currencies:
*** Euro zone holds 10,413 tonnes of gold reserves
*** Switzerland holds 1,064 tonnes of gold reserves
*** China only holds 600 tonnes of gold reserves (though if it converted its 2 trillion dollar reserves into gold, China would probably be able to build up a substancial hoard.)
*** US is net short around 4,400 tonnes of gold
(Note: a nation’s foreign reserves, economic growth rate, and trade balance are the three most important factors that determine a currency’s value)
email
Euro zone holds 10 thousands tonnes of gold reserves.
1 tonne is approx. 30000 oz.
So, if i am correct, euro zone holds 300 millions ounces, which is worth approx. 0,3 trillions US$ today.
I do not believe it can has major impact on currency, since debts are being counted in trillions or even tens of trillions US$.
I would agree with the rationale above, as long as the gold-to-USD value ratio remains relatively constant. However, if/when values for each change substantially, ie. gold up, USD down, than gold may very well in fact impact currency value to a very high degree. Especially if faith in the USD declines dramatically or were to lose its reserve currency status.
We're not there - yet.
With regards to gold reserves and the leasing/selling thereof, what are readers thoughts regarding investing in either gold &/or silver via 'paper' investments such as GLD and SLV ETFs? Too much risk involved due to possible manipulation or governmental decrees vs. holding physcial bullion?
Eric,
Could you please comment on the paper about hidden gold reserves of USA looted from Philipines in 1986?
http://www.scribd.com/doc/9421535/Collateral-Damage-Part-2-The-Subprime-Crisis-and-the-Terrorist-Attacks-on-September-11-200126122008
If the facts from the above article are true, US Government-trusted banks (JPM/GS/HSBC) could now manage the price of gold and thus maintain unbelievably large short positions because they simple have that much gold.
Hi Eric, these Eastern Europe articles really got my attention this week. Probably explains why gold price is at all time highs in Euro and British Pound...
buy gold...
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By Ambrose Evans-Pritchard
The Telegraph, London
Saturday, February 14, 2009
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/462352...
The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached an acute danger point.
If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off Round 2 of our financial Gotterdammerung.
Austria's finance minister Josef Proll made frantic efforts last week to put together a E150 billion rescue for the ex-Soviet bloc. Well he might. His banks have lent E230 billion to the region, equal to 70 percent of Austria's GDP.
"A failure rate of 10 percent would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen.
The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10 percent and may reach 20 percent. The Vienna press said Bank Austria and its Italian owner Unicredit face a "monetary Stalingrad" in the East.
Mr Proll tried to drum up support for his rescue package from EU finance ministers in Brussels last week. The idea was scotched by Germany's Peer Steinbruck. Not our problem, he said. We'll see about that.
Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay -- or roll over -รข€“ $400 billion this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut.
Not even Russia can easily cover the $500 billion dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36 percent of its foreign reserves since August defending the rouble.
"This is the largest run on a currency in history," said Mr Jen.
In Poland 60 percent of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly -- by lenders and borrowers -- it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.
Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74 percent of the entire $4.9 trillion portfolio of loans to emerging markets.
They are five times more exposed to this latest bust than American or Japanese banks, and they are 50 percent more leveraged (IMF data).
Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51 percent in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia.
Whether it takes months, or just weeks, the world is going to discover that Europe's financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.
Under a "Taylor Rule" analysis, the European Central Bank already needs to cut rates to zero and then purchase bonds and Pfandbriefe on a huge scale. It is constrained by geopolitics -- a German-Dutch veto -- and the Maastricht Treaty.
But I digress. It is East Europe that is blowing up right now. Erik Berglof, EBRD's chief economist, told me the region may need E400 billion in help to cover loans and prop up the credit system.
Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.
The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan -- and Turkey next -- and is fast exhausting its own $200 billion (E155 billion) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights.
Its $16 billion rescue of Ukraine has unravelled. The country -- facing a 12 percent contraction in GDP after the collapse of steel prices -- is hurtling toward default, leaving Unicredit, Raffeisen, and ING in the lurch. Pakistan wants another $7.6 billion. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5 percent in the fourth quarter. Protesters have smashed the treasury and stormed parliament.
"This is much worse than the East Asia crisis in the 1990s," said Lars Christensen, at Danske Bank.
"There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU."
Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4 percent in the fourth quarter.
If Deutsche Bank is correct, the economy will have shrunk by nearly 9 percent before the end of this year. This is the sort of level that stokes popular revolt.
The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece, and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112 percent of GDP next year, just revised up from 101 percent -- big change), or rescue Austria from its Habsburg adventurism.
So we watch and wait as the lethal brush fires move closer.
If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?
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I repeat, BUY GOLD, BUY SILVER. If this is even half true, buy GUNS & STORE FOOD...
Eastern Europe has borrowed $1.7 trillion @ 10x Leverage = $17 Trillion
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European Bank Losses Dwarf Those in the US
In a few paragraphs I am going to put up a chart from Nouriel Roubini's RGE Monitor on the size of US bank losses, and in a few pages I'll comment on the Geithner "plan" for rescuing US banks. We have indeed dug ourselves a very deep hole here in the US.
But European banks may be in far worse shape. Bruno Waterfield of the London Daily Telegraph reports to have seen an eyes-only document prepared by the European Commission for the finance ministers of the various EU member countries. The problem revealed in the report is an estimated write-down by European banks in the range of 16 trillion pounds, or about $25 trillion dollars! The concern is that bailing out the various national banks for such an unbelievable amount would push the cost of government borrowing to much higher levels than we see today.
As my kids would say, "Really, Dad, you think so?" Europe is somewhat larger than the US, so think what my gold-bug friends would say if the US decided to borrow $25 trillion to bail out US banks. The dollar would be crucified! The euro is going to get a lot weaker if bank problems are even half of what the report says they are. The British pound sterling is already off almost 30% and, depending on what the real damage is to their banking system, it could get worse.
Waterfield reports, "National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors -- particularly those who lend money to European governments -- have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.
"The Commission figure is significant because of the role EU officials will play in devising rules to evaluate 'toxic' bank assets later this month. New moves to bail out banks will be discussed at an emergency EU summit at the end of February. The EU is deeply worried at widening spreads on bonds sold by different European countries."
Part of the problem is that European banks were far more highly leveraged than US banks. Some banks were reportedly leveraged 50:1. And they lent money to Eastern European projects and businesses which are now facing severe financial strain and plummeting local currencies.
Let that number rattle around in your head for a moment: $25 trillion. Even $5 trillion would be daunting. But the problem is that Europe does not have a central bank that can step in and selectively save banks from one country without taking on all euro zone member-country banks. Yet, as noted above, some countries may not have the wherewithal to save their own banks. It is reported that some Austrian banks are hoping that Germany will step in and help them. Given Germany's problems, they may have a long wait.
Eric, I'd like to join poster above and ask you if can have a look at http://www.scribd.com/doc/9421535/Collateral-Damage-Part-2-The-Subprime-Crisis-and-the-Terrorist-Attacks-on-September-11-200126122008 article.
pleu said...
Could you please comment on the paper about hidden gold reserves of USA looted from Philipines in 1986?
I had a look at the paper and it was interesting. However, it doesn't really change anything.
If the facts from the above article are true, US Government-trusted banks (JPM/GS/HSBC) could now manage the price of gold and thus maintain unbelievably large short positions because they simple have that much gold.
Even if this secret gold did exist, which is possible, it is now long gone. Rising gold prices are proof that the US is running low/empty on gold to sell.
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