One of the most notable developments accompanying the gold price rally of
2016 has been the very large additions to the gold bar holdings of the
major physically backed gold Exchange Traded Funds (ETFs). This is especially
true of the SPDR Gold Trust (ticker GLD).
The gold bar holdings of the SPDR Gold Trust peaked at 1353 tonnes on
7 December 2012 before experiencing a precipitous fall in 2013, and
additional and continued shrinkage throughout 2014 and 2015. On 17 December
2015, the gold holdings of the SPDR Gold Trust hit a multi-year low of 630
tonnes, a holdings level that had not been seen since September
2008.
By 31 December 2015, GLD ‘only’ held 642 tonnes of gold bars.
See above chart. Then as the New Year kicked off in January 2016, something
dramatic happened. The SPDR Gold Trust began expanding its gold holdings
again, and noticeably so. By 31 March 2016, the Trust held 819
tonnes of gold bars, and by 30 June 2016, it held 950
tonnes of gold bars. The latest figure at time of writing
is 981 tonnes of gold bars as of 8 July 2016. (Source: GLD
Gold holdings spreadsheet).
This is a year-to-date net change of 338.89 extra tonnes of gold
bars being held within the SPDR Gold Trust. See chart below. That’s
a 52.8% increase compared to the quantity of gold bars the Trust held at the
end of 2015, and a phenomenal amount of gold by any means, since it’s over
10% of annual new mine supply, and also a larger quantity of gold than all
but the world’s largest central banks hold in their official gold reserves.
Where is all of this gold being sourced from? That is the billion dollar
question. Some is obviously being imported from Swiss refineries, but perhaps
not all of it.
In January 2016, 26.8 tonnes of gold bars were added to the SPDR Gold
Trust, while a massive 108 tonnes of gold bars were
added in February 2016. The first quarter was rounded off
with an additional 42 tonnes of gold bars added in March, bringing the
Q1 additions held by GLD’s gold custodian HSBC London to 176.91 tonnes
of gold bars. Noticeably, some large 1-day increases in GLD’s gold bar holdings
occurred on 1 February (over 12 tonnes), 11 February (over 14 tonnes), 19 and
22 February (over 19 tonnes each day), and 29th February (nearly 15 tonnes),
and also on 17 and 18 March (11.9 tonnes of gold bars added each day).
The second quarter saw a 15 tonne shrinkage of GLD’s gold holdings in
April, but a very large 64.5 tonne increase in May, and a 81.4
tonne increase in June, making for a Q2 increase in GLD’s gold bar holdings
of 130.77 tonnes. Very large 1-day gold bar additions occurred on 24 and 27
June (18.4 tonnes and 13 tonnes respectively). Overall, that’s 307 tonnes
added to GLD in the first half of 2016.
Adding the 31.2 tonne addition for July to date gives the 338.89
tonnes addition figure quoted above. Most of this was due to a large 1-day
inflow of 28.81 tonnes of gold bars reported on 5 July.
SEC – Reveal the subcustodians
I have detailed the above GLD gold bar holding changes to provide some
background and put more color on the important discussion which follows.
While looking through SEC filings of the SPDR Gold Trust last month, I
came across some interesting correspondence between the SEC and the sponsor
of the SPDR Gold Trust, World Gold Trust Services. World Gold Trust Services
is a fully owned subsidiary of the World Gold Council (WGC).
On 29 March 2016, the US Securities and Exchange Commission (SEC) sent a letter
to the SPDR Gold Trust (c/o World Gold Trust Services, LLC) essentially telling
the SPDR Gold Trust to in future specify in its SEC filings the identities of
the sub-custodians that are storing any of the Trust’s gold bar holdings
during each reporting period. The SEC’s letter stated:
“We understand that the Custodian may appoint one or more
subcustodians to hold the Trust’s gold and that the Custodian currently uses
a number of subcustodians, identified on page 18. You also outline risks that
may arise in connection with the use of subcustodians. In future Exchange Act
periodic reports, to the extent material, please disclose the amount of the
Trust’s assets that are held by subcustodians.”
The page 18 referred to by the SEC is page 18 of the annual 10-K
filing of the SPDR Gold Trust for the year ended 30 September 2015, which
includes the following paragraph:
“The Custodian is authorized to appoint from time to time one or more
subcustodians to hold the Trust’s gold until it can be transported to the
Custodian’s vault. The subcustodians that the Custodian
currently uses are the Bank of England, The Bank of Nova
Scotia-ScotiaMocatta, Barclays Bank PLC, JPMorgan Chase Bank and UBS AG.
In accordance with LBMA practices and customs, the Custodian does not
have written custody agreements with the subcustodians it selects. The
Custodian’s selected subcustodians may appoint further subcustodians. These
further subcustodians are not expected to have written custody agreements
with the Custodian’s subcustodians that selected them. The lack of such
written contracts could affect the recourse of the Trust and the Custodian
against any subcustodian in the event a subcustodian does not use due care in
the safekeeping of the Trust’s gold. See “Risk Factors—The ability of
the Trustee and the Custodian to take legal action against subcustodians may
be limited.”
LBMA above refers to London Bullion Market Association. Note that the SPDR
Gold Trust prospectus defines subcustodian as:
“SUB-CUSTODIAN means a sub-custodian, agent or depository (including
an entity within our corporate group) selected by us to perform any of our
duties under this agreement including the custody and
safekeeping of Bullion.”
The SEC letter was addressed to William Rhind who was CEO of World Gold
Trust Services, but who actually had
resigned as CEO on 9 February 2016, something the SEC should have known
since the resignation statement was also filed with the SEC. After
receiving the SEC’s correspondence, Samantha McDonald, CFO of World Gold
Trust Services, responded
by letter to the SEC the next day, 30 March 2016, confirming that:
“We will, to the extent material, disclose in future periodic reports
the amount of the Trust’s assets that are held by subcustodians. Please
be advised that during fiscal 2015, no gold was held by subcustodians on
behalf of Trust.
Note that filings with the US SEC use the naming convention 10-K for an
annual filing, and 10-Q for a quarterly filing.
Following the stipulation from the SEC to World Gold Trust Services
telling it to reveal its subcustodian holdings, its intriguing to note that
when SPDR Gold Trust filed its next 10-Q
on 29 April 2016 for the quarter ended 31 March 2016, page 15 of this
filing revealed that the Bank of England, as subcustodian, had,
during Q1 2016, held up to 29 tonnes of gold on behalf of the SPDR Gold
Trust. The relevant section of page 15 stated the following:
“As at March 31, 2016, the Custodian held 26,484,117 ounces of gold on
behalf of the Trust in its vault, 100% of which is allocated gold in the form
of London Good Delivery gold bars including gold payable, with a market value
of $32,760,852,177 (cost — $32,291,685,964) based on the LBMA Gold Price PM
on March 31, 2016. Subcustodians held no gold on behalf of
the Trust as of March 31, 2016.
During the quarter ended March 31, 2016, the greatest amount of
gold held by subcustodians was approximately 29 tonnes or approximately 3.8%
of the Trust’s gold at such date. The Bank of England held that gold as
subcustodian.
As at September 30, 2015, the Custodian held 21,995,797 ounces of
gold in its vault 100% of which is allocated gold in the form of London Good
Delivery gold bars including gold payable, with a market value of $24,503,317,923
(cost — $27,103,546,125). Subcustodians held nil ounces of gold in their
vaults on behalf of the Trust.”
Some Facts
From the above revelations, some facts can be stated:
- The Bank of England held a maximum of 29 tonnes
of gold on behalf of the SPDR Gold Trust on some date during Q1 2016.
Note that the wording of the 10-Q is such that it does not preclude the
possibility that the Bank of England also held GLD gold at other times during
Q1 2016, since it states “the greatest amount of gold” that the Bank of
England held for the Trust was 29 tonnes. This implies that the Bank
of England vaults could, at other times during Q1, have held less than 29
tonnes of gold on behalf of GLD.
- As per the initial WGTS response to the SEC dated 30
March 2016, no gold was held by HSBC’s subcustodians on behalf of GLD throughout
fiscal 2015 (1st October 2014 – 30 September 2015).
Furthermore, GLD’s 10-Q to 31 December 2015 states that
To this can be added that according to the SPDR Gold Trust’s 10-Q
for Q4 2015, “as at December 31, 2015…Subcustodians held nil
ounces of gold in their vaults on behalf of the Trust”
The GLD
10K (annual) for the year to 30 September 2015, filed on 24 November
2015, also contains a few statements addressing whether gold was held by
subcustodians on year-end dates in 2014 and 2013. However, it states that
subcustodians did not hold gold on behalf of the SPDR Gold Trust on these two
dates. Page 44 states:
“As at September 30, 2014, the
Custodian held 24,867,158 ounces of gold in its vault 100% of which is
allocated gold in the form of London Good Delivery gold bars including gold
payable, with a market value of $30,250,898,159 (cost — $30,728,152,437). Subcustodians
did not hold any gold in their vaults on behalf of the Trust.”
As at September 30, 2013,the Custodian held 29,244,351
ounces in its vault 100% of which is allocated gold in the form of London
Good Delivery gold bars including gold payable, with a market value of
$38,792,631,793 (cost — $35,812,777,235). Subcustodians
did not hold any gold in their vaults on behalf of the Trust.”
How did Bank of England suddenly become a GLD subcustodian in Q1 2016?
As a member of London Precious Metals
Clearing Limited (LPMCL), HSBC maintains gold bullion account facilities
at the Bank of England which can be used within its LPMCL gold clearing role.
All 6 LPMCL bullion bank members hold gold accounts at the Bank of England.
The 6 LPMCL members can also all call on each other for physical delivery of
gold and allocation of gold. All of these bullion banks except ICBC
Standard are also Authorized Participants (APs) of GLD, i.e. Barclays, HSBC,
JP Morgan, Scotia, and UBS. Other AP’s of GLD include entities of Credit
Suisse, Goldman Sachs, Merrill Lynch and Morgan Stanley. Many of these
bullion banks are also LBMA market makers in gold.
My view is that quite a number of other bullion banks that are members of
the LBMA also hold gold accounts at the Bank of England, such as BNP Paribas,
Natixis, SocGen and Standard Chartered, otherwise they would not be able to
engage in the gold borrowing activities that they are on record of engaging
in. If this is the case, then gold bars can easily be moved from central bank
accounts at the Bank of England to bullion bank gold accounts at the Bank of
England and vice-versa Only APs of GLD are allowed to create baskets of
GLD securities. This creation process requires that when GLD baskets created,
APs have to deliver physical gold bars to HSBC.
There are therefore a number of possibilities to explain how the
Bank of England ended up being a sub-custodian for GLD in Q1 2016.
- An AP(s) had gold bars stored at the Bank of England,
and delivered these gold bars to HSBC at the Bank of England in
fulfillment of the GLD share creation process
- An AP(s) had an unallocated credit balance of gold with
a LPMCL clearer or other entity which had gold stored at Bank of England
or access to gold at the Bank of England, and as part of the clearing
process the AP converted unallocated credit balances into allocated gold
bars held at the Bank of England and delivered these gold bars to HSBC.
- An AP(s) borrowed gold from a central bank which had
gold bars stored at the Bank of England and delivered these gold bars to
HSBC as part of the GLD basket creation process.
The quantity of 29 tonnes is a lot of gold for an Authorized Participant
or group of APs to have un-utilised in a vault at the Bank of England. It’s
about 2320 large Good Delivery gold bars. Likewise, 29 tonnes is a lot of
gold bars for LPMCL members to have as a clearing float at the Bank of
England.
Furthermore, if an AP had acquired newly refined gold from a refinery with
the intention of delivering it to HSBC as part of the GLD security creation
process, why would this gold be delivered to the Bank of England vaults, and
not directly to the HSBC vault? It would be more practical to have delivered
that gold straight to the HSBC vault.
Therefore, its plausible that at least some of the gold being held by the
Bank of England as sub-custodian on behalf of the SPDR Gold Trust was sourced
from gold borrowed from central bank gold holdings at the Bank of England.
Bullion Bars Database
There is further support for borrowed gold bars being held by the SPDR
Gold Trust during Q1 2016.
Warren James maintains a database of the identities of the gold bars held
in the GLD over time which allows comparisons between the gold bullion coming
in and out of the GLD. Each bar has a unique signature based on its brand,
serial number, and weight. Gold bars coming into the SPDR Gold Trust can be
tracked based on whether these bars were previously held in the Trust or
whether they are bars coming in that have never been held by the Trust
before. When a bar returns to the list after it was previously held but
disappeared from the holdings, it’s called dark bullion since its identity is
familiar but it’s not known where the bar has been since it left the GLD and
re-entered.
Up until 10 February 2016, the percentage of dark bullion bars
re-entering GLD that had previously been held by the Trust was about 30% of
the inflows. As the inflows into GLD rose sharply from the second half of
February, dark bullion entering GLD essentially stopped and nearly all of the
bars being added to GLD were bars that had never been held by GLD before.
These inflows were a combination of newly refined gold and older bars which
are no longer produced.
For example, gold bars coming into GLD in February 2016 have included
hundreds of bars from the US Assay Offices and Mints, AGR Matthey, Johnson
Matthey Plc (Royston), the Australian Branch Royal Mint – Perth,
Engelhard, Kazzinc etc, all of which are no longer produced.
The fact that a large amount of older gold bars arrived into GLD from the
second half of February onwards would suggest that these bars came long-held
holdings in the vaults of the Bank of England, and consisted of borrowed
central bank gold.
Some Questions
All of the above poses a number of questions:
- If this known 29 tonnes of gold was held by the Bank of
England as subcustodian for GLD during Q1 2016 but not held by the Bank
of England as subcustodian at the end of March 2016, did it physically
leave the Bank of England vaults, or was it just transferred to HSBC’s
account at the Bank of England?
Note that nothing in the SEC filing rules or directives compels WGTS to
specify if the GLD custodian HSBC is holding gold outside its own vaults, so
in my view its possible that gold is held by HSBC on behalf of the SPDR Gold
Trust at the Bank of England. Indeed, its possible that HSBC even leases
vault space in the Bank of England vaults, a sub-leased vault facility. If
the HSBC London gold vault is indeed in the location that’s documented here (HSBC’s
London Gold Vault: Is this Gold’s Secret Hiding Place?), then it
would appear that it’s not big enough to accommodate the entire gold bar
holdings of GLD and all other HSBC customers’ gold, especially when GLD
holding are and were over 900 tonnes.
- Since the Bank of England didn’t hold any gold as
subcustodian for GLD in fiscal 2015, but did in Q1 2016, how much of
these large inflows of gold into GLD in Q1 and Q2 and July this year
(documented above) involved metal stored in vaults at the Bank of
England? And why changed in the London Gold Market to require gold held
at the Bank of England to suddenly be needed to fulfill GLD gold
delivery obligations?
- Why are LBMA practices and customs so lax that it
allows HSBC the custodian, not to have written custody agreements with
the subcustodians. Surely the US SEC should have picked up on this?
- Why did the SEC not ask iShares (IAU (which has 3
custodians) and ETF Securities to also alter their SEC filings to reveal
subcustodians holdings. And for that matter why did the SEC not ask
iShares to amend its disclosures to specify subcustodians in the
Silver ETF – SLV.
- Why do central banks never publish gold bar lists
detailing the serial numbers of their bars, and why is the Bank of
England so against allowing central banks to do so. There are a number
of FOIA requests (including one I made) that providing evidence of the
Bank of England refuses to allow central banks to publish weight lists /
bar lists. Could it be that they do not want data on gold bar serial
numbers going into the public domain as it would show that leased and
swapped gold is being held by commercial gold ETFs?
Audits of the SPDR Gold Trust’s gold bars
The SPDR Gold Trust ‘s gold bar holdings are physically audited twice per
year. A partial physical audit is conducted in February/March of each year,
and a full physical audit of the bars is done in September of each year. The
current auditor is Inspectorate International Limited. In September 2015,
Inspectorate conducted the 2015
full count of the Trust’s gold bullion held by the custodian HSBC London.
That audit counted 54,807 London Good Delivery gold bars at the “London
Vaults of HSBC Bank USA National Association”. Note that the official
custodian of the SPDR Gold Trust changed from HSBC Bank USA to HSBC Bank Plc
in late 2014, so this audit should really state HSBC Bank Plc.
Inspectorate then conducted a random
sample count audit in early Mach 2016 at the “London Vaults of HSBC Bank
Plc” based on a date of 19 February 2016. As of that date, the “account
(GLD) held title to 56,913 London Good Delivery, large Gold Bars“. However,
this audit was “a statistically random count of 16,493 bars of gold”, based
upon the gold inventory as at 19 February 2016, and it was carried out
between 29 February and 11 March “at the Custodian’s premises”.
Given that the Bank of England acted as a subcustodian to the SPDR Gold
Trust during Q1 2016, the question arises as to whether all of
the other 40,420 (56,913 – 16,493) bars were at the “Custodian’s premises”
during the audit, or were some of these other bars being held in the
Bank of England vaults. It’s not clear why a random sample of 16,493 bars
(about 206 tonnes, and 29% of the total holding) was chosen, but it’s about
2/7ths of the gold bars held by GLD.
There is no mention of the Bank of England in Inspectorate’s latest audit
report. However, there is nothing to say that some of GLD’s bars were not in
the Bank of England at the time of the audit. The audit doesn’t say so one
way or the other, and the way its worded means that it doesn’t say all of the
inventory is at HSBC’s vault, just that the audit was conducted at HSBC’s
vault.
Conclusion
Central banks continue to report leased and swapped gold (gold
receivables) as an asset on their balance sheets. This accounting fiction,
which doesn’t follow any international accounting standards is a sleight of
hand that allows the same gold to appear to be in two places at once. If gold
bars that have been leased from central banks are being held in the SPDR Gold
Trust, then these gold bars are being double-counted, and GLD shareholders
should be made aware that the Trust is holding gold that has been ultimately
borrowed from central banks. Using borrowed central bank in an ETF doesn’t
put the ETF on the hook, since the ETF owns this gold. But it does mean that
the bullion banks will need to return the equivalent borrowed gold to the
lending central bank from other sources. Importantly though, this type of
activity will overstate the amount of gold held by the combined official
sector and ETF sector.
The SPDR Gold Trust 10-Q for the 2nd quarter of 2016 will be filed
with the SEC in about 3 weeks time, at the end of July. With the
continuing large inflows into GLD in Q2 2016 it will be interesting to see
whether the name of Bank of England as subcustodian of GLD reappears in the
Q2 filing?
And if gold bars held by GLD are actually stored at the Bank of England
vaults when the full physical gold bar audit is conducted next
September, surely the full audit report should require a passage to say
that some of the gold bars audited were held at the Bank of England, and not
just at the ‘London Vaults of HSBC Bank’? Since the SEC have opened this
issue, and created more questions than answers, perhaps it is now in the
SEC’s interests to go even further and ask World Gold Trust Services to fully
clarify the matters raised above. Otherwise, the GLD gold bar holdings will
continue to be a source of intrigue and debate in the gold world.
Ronan Manly
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