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That’s
the directive that came down from HSBC USA in late November.
It
seems that everyone these days wants gold. Real, physical gold coins that
they can hold in their hands, or bars that they’re assured are resting
safely in a well-guarded vault. HSBC’s New York vault, for example,
buried deep below its 5th Avenue tower, where it has stored
people’s gold since it inherited the facility from Republic Bank a
decade ago.
But
no more.
HSBC
has served notice to its retail customers – many of whom are simply
middle-men and custodial services which store gold with HSBC on behalf of
hundreds of their own account holders – that all their gold must be out
of its facility by July 2010. Otherwise, folks, prepare for an unwelcome
knock at your door. HSBC’s letter says that, in the absence of
directions to the contrary, clients’ metal “will be returned to
the address of record... at your expense.”
Picture,
if you will, what the Wall Street Journal reported: “fleets of
armoured cars laden with gold ferrying the precious metal out of New
York.”
Where
to? That’s a good question. One destination is a pair of warehouses
operated by FideliTrade, the parent company of Delaware Depository Service
Co. Its vaults in Wilmington have been filling up quickly, leading Jonathan
Potts, the managing director, to comment that, "I have never seen any
relocation like this.” Other depositories have seen a similar run.
The
logic behind HSBC’s decision, according to the Journal, is
simple. The vaults are being cleared of smaller clients in order to make more
room for institutional holdings, because “retail customers tend to be
more expensive [to service] in part because of their diverse holdings. They
usually buy American Eagle or Canadian Maple Leaf coins, and bars of various
weights and sizes, all of which need to be categorized and stored separately.
In contrast, institutions typically buy standardized bars of 100 or 400
ounces, making them easier to store. Institutions also tend to hold the metal
for long periods.”
HSBC
itself didn’t say why it’s doing this (in fact, its letter
wasn’t intended for public release). So, predictably, the Internet
exploded with rumors that its action had more sinister motives.
Chief
among them has been the tungsten story. That one, in case you haven’t
already heard it, maintains that a foreign gold buyer – some say
Indian, some say Chinese – found to its dismay that bars it recently
purchased were merely gold-plated tungsten. (Tungsten would be the metal of
choice for a counterfeiter because it’s the closest metal to gold in
specific gravity, and can fool the most basic test for purity.) Some go as
far as to claim that Fort Knox is full of fakes, deliberately placed there to
make our official stash appear bigger than it is. A suspicion that’s
easily stoked since no outside auditor has inspected U.S. gold holdings in
over 50 years.
Be
that as it may, the latest rumor claims that the appearance of tungsten bars
at this time is going to cause widespread chemical testing of gold bars, and
HSBC doesn’t want to be caught with anything bogus. Thus they’re
preemptively moving their gold out, protecting themselves and at the same
time laying off the need to do any testing onto someone else.
This
is a great tale, but it ignores the fact that it’s largely coins and
small bars that are being moved, and those are not cost effective to
counterfeit in tungsten. In addition, that the story is presently confined to
the Net means it’s fiction until proven otherwise. As Ed Steer –
GATA activist and author of Casey Research’s Gold and Silver Daily
– points out, “If it were true, Bloomberg would be all over it in
a heartbeat.”
Or
someone would. And even if the mainstream media failed to do their job,
there’s still the absence of a smoking gun. Who’s seen the
tungsten bars? What are the names of officials who can confirm the fraud? Why
aren’t the Indians who’ve been ripped off waving the phonies in
front of a TV camera? These questions don’t yet have satisfactory
answers. Thus the rumor will have to remain just that.
Rumor
#2: HSBC has less gold on deposit than it promises, and it’s doling out
what it does have to its best friends. This one might make some sense if HSBC
were getting out of the gold business entirely. But it isn’t. And if it
does have any physical shortages, it can cover them indefinitely with paper
“equivalents.”
Rumor
#3: HSBC is going under. Those storing large amounts of gold know it, and
they’re protecting their assets from future claims by creditors. HSBC
is hiding the mass exodus of gold by claiming to have ordered it. No way to
confirm this, of course, but the volume of gold that’s leaving means an
awful lot of people know what’s happening. Word of the bank’s
fragility would surely have leaked out by now. That it hasn’t makes
this one highly doubtful – not to mention that HSBC likely falls into
the “too big to fail” category and would be propped up if it
faced collapse.
Rumor
#4: The most outlandish of all. Under this scenario, Washington suspects an
attack in conjunction with the terrorist trials, and it’s ordered gold
moved out of New York so it isn’t contaminated in the event of a dirty
bomb. (Those with the deepest, darkest level of cynicism claim that this
would also provide the government with a handy excuse to default on foreign
claims to physical metal – as in, sorry, it’s gone, but
here’s what you’re owed in dollars.)
All
of these make for spicy Web chatter, but after checking with our own sources,
we believe that the truth is far more mundane, yet quite exciting in its own
right. In essence, we think the WSJ’s analysis is pretty close,
with a twist.
It
all has to do with the COMEX. That exchange, which handles futures activity
in gold, has to maintain a cache of metal with which to settle trades. As a
courtesy, it will also arrange to store gold for buyers who don’t want
to take physical delivery. But it has no vaults of its own. It contracts with
four banks to do the actual storage, though only two maintain significant
amounts: of the 9.73 million ounces of COMEX gold, Scotia Mocatta has the
most, nearly 5.1 million; HSBC USA is next, with over 4.1 million.
The
amount of gold warehoused by the COMEX has exploded since the metal’s
bull run began in 2001, as you can see from the following chart (where
“registered stocks” are sitting there with someone’s name
already on them, and “eligible stocks” are awaiting either
registration or delivery):
The
trend is obvious, and what it means is that HSBC needs an ever-increasing
amount of space for its COMEX gold. Provided, of course, that the
trend remains in place. Or accelerates.
HSBC
has cast its vote. It clearly believes that it’s going to be getting
more gold from the COMEX, maybe a lot more, and it’s making room
by giving the boot to other depositors. Perhaps the bank knows something we
don’t know, or perhaps it’s just acting out of reasonable
expectation.
Either
way, it’s telling us that the demand for gold is going to continue
rising. And coming from a major bullion bank, that’s about as bullish a
signal as anyone could want. If you don’t own any physical gold,
it’s time.
The
editors of The Casey Report have been alerting subscribers to this very
possible scenario for quite some time. If foreigners stop buying U.S.
government debt, the whole house of cards will come crashing down. But you
can do a lot to protect yourself financially – run with the trend
instead of swimming against it. Find out more about the accurate predictions
of trend hunter Doug Casey and his team, and how to profit from them… click here.
Doug Hornig
Senior
Editor, Casey Research
Also
by Doug Hornig
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