Is There
A Supply Deficit?
If you
ask the World Gold Council or their “official numbers keeper” -
GFMS – they’ll say there is no persistent gold supply
deficit. If you ask the folks at GATA – they’ll claim there
is an annual 1,000 – 1,500 tonne gold supply deficit.
So
who’s telling the truth?
What’s
interesting to note in this regard – the World Gold Council and GFMS
haven’t always shared the same view regarding gold supply / demand
aggregates. Empirically their positions, at times, have been
ambiguously at odds with each other and have lacked continuity.
Here’s how GATA consultant Frank Veneroso explained the disparity back in 2005;
“As I
explained in the Gold Book, gold demand had been understated for years by
GFMS, the ‘official’ keeper of the global gold statistics, as has
been the flow of official sector gold. Official stocks were falling faster
than the GFMS data would suggest. I presented abundant statistical
information to make that case. We believe that the trend in the official data
since then simply flies in the face of obvious facts and this discredits it
further.
People ask us where we think supply and demand are now. Our standard
response is that we don’t know, because the data available to us has
become ever less reliable. In the old days, the World Gold Council produced a
data series on gold demand for most (but not all) of the world. It was based
on extensive survey data and it had no reason to be biased. It clearly showed
a stronger trend in the growth of gold demand (excluding Western investment)
than did the GFMS supply/demand statistics. For us it was an anchor that
allowed us to see a growing error in the GFMS data
(see the Gold Book).
In the 1990s GFMS was faced with a problem. From the late-1980s to
the late-1990s, there was a growing flow of borrowed gold associated with
speculative short sales, the hedging of central bank options and commercial
inventory hedging, in addition to the well recognized producer forward
selling. There were also some official sector liquidations that were not
reported. These totaled to extremely large official
supplies. For some strange reason GFMS refused to acknowledge most of these
official supplies, particularly those associated with speculator short sales.
This resulted in a gross understatement of annual supplies.
Unlike the World Gold Council, which tried to only come up with an
estimate of demand, GFMS estimated both supply and demand. In the end GMS had
to make their estimates of demand and supply balance. Because they were
underestimating supplies to an increasing degree, they had to underestimate
demand to an increasing degree to make these accounts balance. That is why
the World Gold Council survey showed a stronger gold demand trend in the
1990s than the GFMS statistics.
Several years ago the World Gold Council decided to merge its
statistical efforts with GFMS leaving us, in effect, with only the GFMS
supply/demand estimates. It has been my opinion that the GFMS balances became
so flawed by the end of the 1990s that they had become virtually worthless.
Therefore, I’ve regarded the new World Gold Council/GFMS statistics in
recent years as basically useless. We no longer have any anchor for
estimating gold demand and supply.”
That
Central Banks “swap” and “lease” gold is an
undeniable matter of public record. The extent of this activity is not
acknowledged by GFMS or the World Gold Council. We do know that it
necessarily has been responsible for filling any and all recurring
gold bullion supply deficits.
The
bottom line is that Central Banks claim to “officially” have
somewhere in the neighborhood of 30,000 metric
tonnes of gold bullion in their vaults. However, the reality is that
Central Banks possess LESS physical gold than they officially report
– how much less is a matter of speculation and a closely guarded
secret.
The
following formula explains the mechanics of the Gold Carry [lease] Trade:
![](http://www.24hgold.com/24hpmdata/articles/2009/05/img/20090514PL11101.jpg)
** Do
not confuse the Gold Forward Rate [GOFO] with the Gold futures price –
they are not related.
Now, we
shall apply our lease rate formula to a “real world” case study
where there is plenty of irrefutable evidence that gold leasing occurred;
namely, in the aftermath of the Sept. 26, 1999 announcement of the first
Washington Agreement on Gold – which was “sold” [as in a
bill of goods, perhaps?] to the world as being ‘gold friendly’.
In the
aftermath of the announcement of original Washington Agreement [WAG], announced Sept. 26, 1999, the World Gold Council reported;
“Lease
rates jumped to 10% in the first few days after the agreement, and though
they have fallen back, they remain at a still high level of 4-5%, more than
two times the rate the 1-2% the market is historically used to. The market
remains tight, with very little gold coming onto it.”
What
Happens When Gold Is Leased?
When
Central Banks lease gold, it PHYSICALLY leaves the vault and the
recipient / borrower sells the physical metal into the marketplace to raise
cash – to invest or to finance capital expenditures. In this regard, we
can say that “GOLD LEASING” is a means by which physical
bullion is made available in the market place – thereby lowering the
gold price. After the gold physically leaves the vault of the
Central Bank, it is replaced with an I. O. U. and the Central Bank, for
accounting purposes, “double counts” by continuing to claim that
they still possess the same amount of physical bullion in the vault. It
is notable that fraudulent accounting practices relating to gold is promoted
by lawmakers the world over. This is contrary to generally accepted
accounting practices and promotes market opacity instead of the much talked
about need for transparency. Explicitly, it serves to promote the
supremacy of the fiat U.S. Dollar as the world’s reserve currency.
I’ve
circled the 10 % spike in lease rates on the chart below:
![](http://www.24hgold.com/24hpmdata/articles/2009/05/img/20090514PL11102.jpg)
Ladies
and gentlemen, what the spike in lease rates above depicts is the INDUCEMENT
that was required to get BULLION BANKS to accept the “ELEVATED
COUNTERPARTY RISK” inherent in arranging further bullion loans
since, in the days following the Washington Agreement, the subsequent rise in
the price of gold weakened existing bullion borrower’s financial
position and made repayment of their physical bullion loans a trickier
proposition:
![](http://www.24hgold.com/24hpmdata/articles/2009/05/img/20090514PL11103.jpg) ![](../style/all/img/bouton/Zoom_in_6.png)
The
borrowers of bullion pay LIBOR – but in bullion [the relevant month is highlighted in RED]:
1-Month
|
3-Month
|
6-Month
|
12-Month
|
|
January
of 1999
|
4.946
|
5.032
|
5.036
|
5.108
|
February
of 1999
|
5.003
|
5.065
|
5.168
|
5.405
|
March
of 1999
|
4.94
|
5.009
|
5.083
|
5.307
|
April
of 1999
|
4.902
|
4.993
|
5.075
|
5.303
|
May of
1999
|
4.93
|
5.053
|
5.193
|
5.503
|
June
of 1999
|
5.223
|
5.355
|
5.633
|
5.803
|
July
of 1999
|
5.178
|
5.32
|
5.68
|
5.836
|
August
of 1999
|
5.370
|
5.505
|
5.913
|
6.023
|
September of 1999
|
5.396
|
6.083
|
5.974
|
6.053
|
October
of 1999
|
5.41
|
6.218
|
6.144
|
6.313
|
November
of 1999
|
6.503
|
6.122
|
6.063
|
6.261
|
December
of 1999
|
5.832
|
6.005
|
6.136
|
6.508
|
Now,
let’s stop and consider WHO did the lending of metal in Sept.
1999 – expelling physical precious metal, intentionally at a loss, in
the face of a RISING PRICE of GOLD. Remember folks, 3 month GOFO
[the gold forward rate] is the return “earned” by the lender of
bullion:
![](http://www.24hgold.com/24hpmdata/articles/2009/05/img/20090514PL11104.jpg) ![](../style/all/img/bouton/Zoom_in_6.png)
So ask
yourself WHO would lend physical gold bullion to ANYONE with a
guarantee that you would get LESS bullion back in 3 months????????????
Sir Alan
of “I-looted-the-free-world” Greenspan gave us a good hint as to
who might do such a thing when he twice testified before Congress in 1998
that "central banks stand ready to lease gold in increasing quantities
[read: lose money] should the price rise."
Coincidentally,
it is the lack of transparency concerning Central Bank gold leasing and the
existence of double counting of gold stocks that, in Dec. 2007, prompted GATA
to launch a freedom of information request campaign to wrest all documents
from the Fed and U.S. Treasury in their possession that have been generated
since 1990 and mention swaps of gold involving the U.S. government.
Heck, even the I.M.F. admits that Central Banks double count gold, excerpted
from I.M.F. issues paper # 11, April, 2006;
7. The current statistical treatment of gold swaps should be
consistent with that of repos. The guidance of paragraph 85 (iii) of the Guidelines,
which is applied to gold swaps by paragraph 101, results in overstating
reserve assets because both the funds received from the gold swap and the
gold are included in reserve assets. While the gold is swapped, it cannot be
the case that both the claims and the gold are simultaneously liquid and
readily available to the monetary authority.
The United States of America
claims to possess a little more than 8,100 metric tonnes of sovereign gold
stored principally at Fort Knox,
Kentucky, West Point, N.Y. and The New
York Fed. The sovereign U.S.
gold reserve has not been independently audited since the 1950’s during
the Eisenhower Administration. GATA’s
freedom of information requests are all about ensuring that the 8,100 metric
tonnes of U.S. sovereign gold is still owned the U.S. and is where it is
purported to be.
In April,
2008 the Federal
Reserve responded to GATA’s
request, releasing part or all of hundreds of pages of worthless information,
but also claiming that it was withholding all or part of the information of
about 400 pages of documents. The status of the withheld documents is
currently under appeal.
These
stonewalling tactics – with holding details - are eerily similar to
those employed by Messer’s Bernanke, Paulson and Geithner
refusing to divulge frank details as to “who” the beneficial
recipients were of TARP and TALF funds.
Got
physical precious metal yet?
Rob Kirby
KirbyAnalytics.com
All
articles by Rob Kirby
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