Skepticism About Gold Reserves Is Spreading

Mineweb reports that the gold market is an accident waiting to happen.

(emphasis mine) [my comment]

GOLD ANALYSIS
WEEKEND COMMENT
Is your gold really there?

Continuing doubts are being expressed that all the gold claimed to be held by Central Banks and others may not be there, or title is being held by several parties as the statistics just don't appear to add up.

Author: Lawrence Williams
Posted: Monday , 19 Oct 2009


LONDON -

It doesn't just seem to be GATA which nowadays is questioning whether the volume of gold held in ETFs and in official reserves is really there - or perhaps there is more than one title to what is actually in the world's gold vaults? Would a run on gold bullion thus create panic among the Bankers? [hell yes]

Banking has run for centuries with the banks themselves only keeping on hand a fraction of the money owed to depositors with the balances loaned out and not always immediately available, if indeed it is even there at all, so when there is a run - like that on Britain's Northern Rock last year - the bank concerned can find it tough to keep its head above water. Northern Rock, in the event, needed to be bailed out by the U.K. government.

There are plenty of theories that the gold markets also operate on a similar principle - or perhaps worse. Not only may the banks not hold the amounts of physical gold they say they do, say the doubters, having loaned much of this to third parties, but there are now analysts and observers expressing doubts over the actual title to the gold that is still seen to be in the vaults, feeling that perhaps some of it has been sold several times over. Central Banks, for example, seem to hate being questioned over gold loans preferring to duck the question and keep any such arrangements under wraps, although most will admit to gold swaps and loans being made - but little or no detail.

It may be no coincidence that the recent surge in the gold price which burst it through the $1,000 barrier followed shortly after Hong Kong demanded repatriation of its gold held in London banks and reports suggest that Germany is also looking for its foreign-held physical gold to be returned from overseas repositories. Has this created shortages of physical gold which holders are now trying to cover?

The latest commentator to express doubts is Paul Mylchreest in his Thunder Road Report. Mylchreest has calculated that, using GFMS figures, that data on the volume of gold traded on the London market (about 90% of gold traded worldwide), if put in its proper context, does not tally with his estimate of the amount of gold that is held in the form of bars which conform to "London Good Delivery" standard. He has thus come up with two alternative possible reasons for the anomaly:

"Alternative 1:"

On average there is more than one ownership claim on each gold bar conforming to London Good Delivery (LGD) standard on the "pool" of gold which acts as liquidity for the massive OTC gold trade based in London. Essentially, the market operates on a fractional reserve basis, but if a sufficient number of market participants become concerned about this and there is a stampede to take delivery of physical bullion, there is a risk of market failure. Such a process could be delayed by central banks lending gold to the market, although this would likely be obvious by a spike in gold lease rates, or by a much higher gold price in order to encourage holders to sell bullion. In this scenario, the gold price could SOAR at any time and the gold market, which is subject to little regulation, is basically an accident waiting to happen; " [Great way to put it]


Or:

"Alternative 2:

"There is FAR more gold bullion held in private hands than is acknowledged by current industry estimates. It is the large amount of additional gold on top of known gold stocks which provides sufficient liquidity to support the high volumes traded through London. The most likely source for this gold dates back to the Japanese conquest of Asia from 1894-1945 when Japan is alleged to have looted the gold and valuables of 12 nations - it is best known as the story of Yamashita's Gold. If true, my[Mylchreest's] analysis shows that particularly heavy volumes of this gold may have been laundered into the London market during 1986-90 and the mid/late 1990s. In this scenario, the continued evolution of the gold bull market could be more protracted, if supplies of this gold continue to enter the market periodically."

Under either scenario Mylchreest remains positive on the future of the gold price with the proviso that if the Yamashita's Gold theory proves to be in any way correct there could be occasional pullbacks in price as further amounts of clandestine gold are released onto the markets.

[Yamashita's gold is a fascinating story and does appear to have some historic backing, but volumes, and who may control it, are shrouded in mystery

[if Alternative 2 was true, gold would never have broken through $1,000]

Subsequent to our commencing this article, Adrian Douglas - a member of GATA's Board of Directors and publisher of the Market Force Analysis letter - has also commented on Mylchreest's analysis. He has largely concentrated on Alternative 1 and concludes that the global gold market is in a precarious position [Agreed]. He reckons that the panic at the end of September, which drove the price rapidly up through the $1,000 psychological barrier, suggests that liquidity is very tight, in which case only a small percentage of investors asking for their gold to be delivered or placed in an allocated account could blow up the gold market and expose what he describes as a 'scam' and one that has been repeated time and time again throughout history. "Why should this time be any different?" he asks.

My reaction: Skepticism about gold reserves is spreading, and more people are noticing the increasingly obvious abnormalities in gold markets:

1) The recent surge in the gold price through the $1,000 barrier shortly after Hong Kong demanded repatriation of its gold held in London banks.

2) GFMS data on the volume of gold traded on the London market (about 90% of gold traded worldwide) which does not tally with the estimated amount of gold bars which con form to "London Good Delivery" standard.

3) See also two of my recent entries for more strange gold developments:

CME To Allow Gold As Collateral For All Exchange Products

*****Things Going Wrong In The Gold Market*****

Conclusion: As the article above suggests, "the gold market is an accident waiting to happen," and that accident gets likelier every passing day.

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10 Responses to Skepticism About Gold Reserves Is Spreading

  1. Anonymous says:

    Eric,

    How would a run on physical gold show up in the markets... bullion prices soaring and GLD prices cratering at the same time? Is this possible?

    Thanks

  2. Robert says:

    It might, but the price of GLD is controlled by the banks - they can make it go up or down as they see fit by buying or selling GLD in the market. I expect GLD will continue to track the other gold markets for now... earlier this year there were huge premiums for physical gold which seem to have disappeared.. this has been accomplished by raising the paper gold prices so that they are closer to the price of physical metal.

    I certainly wouldn't want to participate in the paper markets myself.. but if the government can bail out the banks I wouldn't be surprised if they bail out GLD - not with gold, but with more cash. Cash can still control the cash price of GLD and this will remain the case until the dollar collapses.

  3. Anonymous says:

    "Cash can still control the cash price of GLD and this will remain the case until the dollar collapses."

    Very good insight... thank you for the response!

  4. Tyrone says:

    Anon @ 3:42PM and 8:09PM,

    Is that you, Tim Geithner??
    .

  5. Anonymous says:

    "Cash can still control the cash price of GLD and this will remain the case until the dollar collapses."

    The problem with this, as far as I can see (because of the amount of dollars flooded into the system to keep GLD afloat), is that such action can only be seen as to hasten the dollar's demise...

    Thus, such a strategy would be very short lived...

    If anyone thinks otherwise, please by all means post why one would think it wouldn't?

  6. Robert says:

    Yea. It would contribute towards the demise of the dollar, but at least at the moment it's just a drop in the ocean.

    At current prices all the gold in the world (158000 tonnes) is worth about $6 trillion USD.

    In the last year the US defecit has been nearly $3 trillion USD.

    So there's obviously a lot of scope for the fed or treasury to buy GLD and keep the price up..

    That's not all they can do though - they can also buy physical gold at above market prices, or lease it for a very attractive yeild and sell it through the market to lower the price.

    As long as they can just print however much cash they need they can just pay out above market prices on the black market to keep the official prices down.

  7. Anonymous says:

    My personal wacky idea:
    The ultimate banksters (think Rothschild) think multi-generationally. Move to fiat; destroy fiat; move to gold-backed; undermine gold-backed; all along, transferring ownership of real assets (minerals, land, industries, people) to the Money Power.
    It is illuminating (!) to view history as the history of the money power. I suspect there'd be very few wars if every nation had privately controlled central banks operating a fractional reserve system/scam, and no religions objected to usury. (Think "Sharia Banking" when you think "War on Terror".)
    And so it goes.

  8. Anonymous says:

    Eric,

    I wonder why you dismiss so easily the Yamashita hypothesis. I know it does seem far-fetched, but the historical pieces of the puzzle are there, and I don't see how you can be so certain that gold would not have passed the $1000 mark if the Yamashita gold existed. You're always so analytical, that it surprises me your attitude towards this. Please clarify.

    Thanks.

  9. Anonymous said...
    I wonder why you dismiss so easily the Yamashita hypothesis.

    I don't dismiss it, but I believe it is irrelevent. Gold is over $1000, which means US/UK have virtually no gold left. So even if they did have Yamashita gold at some point in time, it is all gone now and is a non-factor.

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