Is 50% of Western Central Bank Gold gone? by Egon von Greyerz
| December 18, 2017
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
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
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
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
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
Currently there are 2,670 tons or $106 billion
in ETF gold.
As the fear within the financial system
increases, a major part of the ETF gold will be transferred
to private ownership and vaults. A few companies, like ours,
who operate outside the banking system, can offer physical
gold at the same cost as an ETF with direct ownership of
insured, individually owned, bars and with instant liquidity.
Switzerland – a strategic hub for
It is of vital importance to store gold
in a safe jurisdiction. There were fears of Switzerland
not being safe after the US authorities attack on UBS due
to undeclared US accounts. Many thought that a lot of the
gold held in Switzerland would move to Singapore. We offer
vaulting in both places but have seen very little migration
from Switzerland to Singapore or other places. Many investors
are concerned about the risk of confiscation in several
countries. My personal view is that gold ownership today
is so widespread that confiscation is not practical. It
is much easier to tax assets like gold than to confiscate
them. Generally, taxes are likely to increase substantially
in coming years, especially for the wealthy. Therefore,
tax planning is as important as investment planning.
It is imperative to store gold in a country
that has a tradition in owning gold. The Swiss have for
a very long time saved money in gold. Every month they would
buy the Swiss 20Fr gold coin called ‘Vreneli‘.
Also, the one factor that few people understand
about Switzerland is the strategic importance of the Swiss
gold refiners. Switzerland refines more gold than any country
in the world and around 2/3rds of the global annual mine
production. Gold is also a very important export item for
Switzerland. In 2016, gold exports accounted for as much
as 29% of the total Swiss exports or 86 billion Swiss Francs
(today US$ 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
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
US chronic trade deficit will lead
to dollar collapse
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
Gold and silver shortages will create
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.