We have recently had some significant news about the sovereign gold market
that makes the unclarity even more unclear. Central banks and the BIS in
Basel go to great length to tell the world absolutely nothing about their
gold dealings. All transactions are carried out covertly and no central bank
ever has an official audit of their gold holdings. The last US audit was
during Eisenhower’s days in the 1950’s. Ron Paul has been pushing for an
audit but to no avail. Will Trump instigate an audit? Well, he might have the
intention but when he finds out that a major part of the US 8,000 tons of
gold is not there, it will all go quiet. There have been pressures for audits
in France and Germany in later years but this has had no effect. No country
wants to reveal that the gold isn’t there.
Germany takes 5 years to repatriate 647 tons of gold
Germany has recently pretended that they are totally open about their gold
dealings, but what have they actually told the world?
In 2013 Germany announced a plan to repatriate 674 tons of gold from the
US and France. In the first year, they only received 37 tons back and were
told that they would have the rest in 2020. We have now been informed that
the programme has been accelerated. Out of the 3,381 tons that Germany owns,
51% or 1,713 tons will be in Germany by the end of 2017. Over 49% of the
German gold will remain abroad with 1,236 tons still in New York and 432 tons
in London.
You wonder why it needs to take five years to repatriate 674 tons.
Listening to interviews with the chiefs of the Deutsche Bundesbank, they
explained what a major logistical exercise it has been. According to the
Bundesbank, they have had major problems with transport, insurance, security
etc. If we take Switzerland as an example, we both receive and export over
2,000 tons of gold annually. And that excludes major transfers between banks
and to private vaults. The same happens in countries like the UK, China,
India and the US. So around the world, many 1,000s of tons of gold are
shipped annually without any logistical problem. You wonder then why the
normally very efficient Germans have problems to ship 674 tons over five
years?
The reason is of course that the gold wasn’t available because it had been
leased or maybe even sold. This is confirmed by comments that the bars
received in return were not the same as the original ones.
But the big question is now if the 1,668 tons that remain in the US and
France actually exist? If they do, why not bring them back to Germany?
Originally the reason for holding gold outside of Germany was the cold war.
But it would be hard to explain how gold in the UK and France avoided the
cold war. Currently there is no cold war so that is not a valid reason. We
know of course why the gold originally was held in New York and London
because that is where the majority of the gold trading takes place.
But major central banks like the Bundesbank don’t need to move the gold if
they lease it. Anyone trading with these Central Banks believes they are
creditworthy. Our view is of course different. Central banks hold
toxic debt that will never be repaid and therefore they are not safe.
Bullion Banks will hypothecate the same gold many times
So why is the gold not in Germany? Initially it was used for leasing and
trading. In the past when gold was leased, it was kept within the London or
New York bank pools and just shuffled between the banks. But now it is very
different because the buyers are mainly China, India and Russia. And these
countries are not interested in paper trading. They want the physical bars
delivered. The effect of this is that when a Central Bank leases the gold to
a bullion bank, the bank then sells the gold to China and China will of
course take delivery. All Central Banks now have is an IOU from the trading
bank. When the Central Bank asks for its gold back, it won’t be there and the
trading bank will need to borrow gold from someone else like a client. So the
bullion banks will hypothecate the same gold many times. That is why
investors must never store gold in a bank.
Central Banks don’t just lease their gold to the market. They most
probably also sell gold covertly. Total Central Bank holdings are 33,000
tons. Of that Western Central Banks hold around 23,000 tons of gold including
the IMF holding. No one knows how much of that gold actually remains in the
West.
Is half Germany’s gold in China?
If we take the example of Germany which by the end of 2017 officially will
have 50% of its gold or 1,668 tons abroad. If that has been leased and then
sold on to China, those 1,668 tons are permanently gone from the West. But
they are still counted as Western Central Bank gold. All Germany has
is a paper claim that will never be settled in physical gold. The
sathem solfme is probably the case for other Western Central Bank gold. Just
like with Germany, up to 50% of Western Central Bank gold has probably been
leased. That would amount to 12,000 tons. Most of those 12,000 tons have
probably been bought by the Silk Road countries as I discuss in the next
section. That leaves Western Central Banks with a potential paper
claim of 1/2 Trillion Dollars of gold. They will of course never see
that gold again.
3,000 tons of gold go East annually
If we look at the purchases of the “Silk Road” (India, Turkey, Russia and
China), we see that since 2009 these countries have bought almost 20,000
tons. That is just under 3,000 tons annually which is more than mine production
during these years. So just four countries have absorbed annual mine
production in the last 7 years. In addition, there has been substantial
buying by other countries and by investors. It would not have been surprising
if a major part of the supply covertly has come from Central Bank activities.
Approximately 4,500 tons of gold is refined every year. Of that 3,000 tons
is mine production and 1,500 scrap gold. Since 2011 when gold made a peak of
$1,920, there seems to have been little interest and demand for physical
gold, especially judging from the price decline. But that is certainly not
the case. During the last 6 years, 4,000-4,500 tons have been refined
annually and all of that has been absorbed by the market. There are no stock
piles of gold anywhere.
Therefore, the price decline from the $1,920 top in 2011 to the
bottom $1,050 low in December 2015 has nothing to do with a
decline in physical demand. As most gold investors know, the gold
price is not determined in the physical market, the size of which dwarfs the
paper trading. And it is in the paper market where that sustained price manipulation
takes place. I have discussed many times that the gold paper market as it
exists today is unlikely to survive for very much longer. When the
holders of paper gold realise that there is no gold to settle their paper
claims, the gold price will go up not only by $100s but probably also $1,000s
in a very short time.
Until then investors are continuing to buy paper gold and also ETF gold.
Some ETFs are gold backed but the problem is that ETFs are within the
financial system and it is impossible to know how many times the same gold
has been used or counted. Gold that is bought for wealth preservation
purposes should not be held within the banking system.
Currently there are 2,670 tons or $106 billion in ETF gold.
As the fear within the financial system increases, a major part of the ETF
gold will be transferred to private ownership and vaults. A few companies,
like ours, who operate outside the banking system, can offer physical gold at
the same cost as an ETF with direct ownership of insured, individually owned,
bars and with instant liquidity.
Switzerland – a strategic hub for gold
It is of vital importance to store gold in a safe jurisdiction. There were
fears of Switzerland not being safe after the US authorities attack on UBS due
to undeclared US accounts. Many thought that a lot of the gold held in
Switzerland would move to Singapore. We offer vaulting in both places but
have seen very little migration from Switzerland to Singapore or other
places. Many investors are concerned about the risk of confiscation in
several countries. My personal view is that gold ownership today is so
widespread that confiscation is not practical. It is much easier to tax
assets like gold than to confiscate them. Generally, taxes are likely to increase
substantially in coming years, especially for the wealthy. Therefore, tax
planning is as important as investment planning.
It is imperative to store gold in a country that has a tradition in owning
gold. The Swiss have for a very long time saved money in gold. Every month
they would buy the Swiss 20Fr gold coin called ‘Vreneli‘.
Also,
the one factor that few people understand about Switzerland is the strategic
importance of the Swiss gold refiners. Switzerland refines more gold than any
country in the world and around 2/3rds of the global annual mine production.
Gold is also a very important export item for Switzerland. In 2016, gold
exports accounted for as much as 29% of the total Swiss exports or 86 billion
Swiss Francs (today US$ 86 billion). For this reason alone, Switzerland
will never kill the goose that lays the golden egg.
Thus, I can never see gold confiscation in Switzerland. Instead, I believe
that Switzerland will become an even more important gold hub than it is today
both for storing and trading gold. In addition to the bank vaults (where gold
should not be stored), there are now many private gold vaults in Switzerland
with considerable capacity. There are also very big mountain vaults in the
Swiss Alps. Some of these keep a very low profile and are not advertised.
Finally, the precious metals have now entered a very important phase in
this bull market. As paper money continues to be debased, gold and silver
will soon start reflecting all the risks in the world economy and the
financial system.
US chronic trade deficit will lead to dollar collapse
Looking
at the US dollar, the 41-year chronic trade deficit is sufficient to
take the dollar to zero. Once the dollar loses its reserve currency status,
there is nothing that can save it. This makes it critical to shift dollar
holdings into gold and silver.
Gold and silver shortages will create price squeeze
The tight supply situation for the precious metals, combined with the
paper market imploding, will lead to major price rises in coming years. We
are now at a point where investors can still acquire physical gold and silver
at extremely advantageous prices. As severe shortages occur, this will
no longer be possible. The ultimate wealth insurance against the
numerous global risks is physical gold and silver. An investor just
needs to store it safely and leave it there without ever looking at the price
movements. Then some day, a few years later, the investor will be astounded
at the exponential increase in value of his precious metals when valued in
fiat money.
Egon von Greyerz
