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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)
Eric
de Carbonnel
Market Skeptics
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