Is your gold really there?

Continuing doubts are being expressed that all the gold claimed to be held by Central Banks and others may not be there, or title is being held by several parties as the statistics just don't appear to add up.

LONDON - 

It doesn't just seem to be GATA which nowadays is questioning whether the volume of gold held in ETFs and in official reserves is really there - or perhaps there is more than one title to what is actually in the world's gold vaults?  Would a run on gold bullion thus create panic among the Bankers?

Banking has run for centuries with the banks themselves only keeping on hand a fraction of the money owed to depositors with the balances loaned out and not always immediately available, if indeed it is even there at all, so when there is a run - like that on Britain's Northern Rock last year - the bank  concerned can find it tough to keep its head above water.  Northern Rock, in the event, needed to be bailed out by the U.K. government.

There are plenty of theories that the gold markets also operate on a similar principle - or perhaps worse.  Not only may the banks not hold the amounts of physical gold they say they do, say the doubters, having loaned much of this to third parties, but there are now analysts and observers expressing doubts over the actual title to the gold that is still seen to be in the vaults, feeling that perhaps some of it has been sold several times over.  Central Banks, for example, seem to hate being questioned over gold loans preferring to duck the question and keep any such arrangements under wraps, although most will admit to gold swaps and loans being made - but little or no detail.

It may be no coincidence that the recent surge in the gold price which burst it through the $1,000 barrier followed shortly after Hong Kong demanded repatriation of its gold held in London banks and reports suggest that Germany is also looking for its foreign-held physical gold to be returned from overseas repositories.  Has this created shortages of physical gold which holders are now trying to cover?

The latest commentator to express doubts is Paul Mylchreest in his Thunder Road Report.  Mylchreest has calculated that, using GFMS figures, that data on the volume of gold traded on the London market (about 90% of gold traded worldwide), if put in its proper context, does not tally with his estimate of the amount of gold that is held in the form of bars which conform to "London Good Delivery" standard.  He has thus come up with two alternative possible reasons for the anomaly:

"Alternative 1:"

On average there is more than one ownership claim on each gold bar conforming to London Good Delivery (LGD)  standard  on  the  "pool"  of  gold which  acts  as  liquidity  for  the massive OTC  gold  trade  based  in London. Essentially, the market operates on a fractional reserve basis, but if a sufficient number of market participants become concerned about this and there is a stampede to take delivery of physical bullion, there is a risk of market failure. Such a process could be delayed by central banks lending gold to the market, although this would likely be obvious by a spike in gold lease rates, or by a much higher gold price in order to encourage holders to sell bullion. In this scenario, the gold price could SOAR at any time and the gold market, which is subject to little regulation, is basically an accident waiting to happen; "

Or:

"Alternative 2:

"There is FAR more gold bullion held in private hands than is acknowledged by current industry estimates. It is the large amount of additional gold on top of known gold stocks which provides sufficient liquidity to support the high volumes traded through London. The most likely source for this gold dates back to the Japanese conquest of Asia from 1894-1945 when Japan is alleged to have looted the gold and valuables of 12 nations - it is best known as the story of Yamashita's Gold. If true, my[Mylchreest's] analysis shows that particularly heavy volumes of this gold may have been laundered into the London market during 1986-90 and the mid/late 1990s. In this scenario, the continued evolution of the gold bull market could be more protracted, if supplies of this gold continue to enter the market periodically."

Under either scenario Mylchreest remains positive on the future of the gold price with the proviso that if the Yamashita's Gold theory proves to be in any way correct there could be occasional pullbacks in price as further amounts of clandestine gold are released onto the markets.

[Yamashita's gold is a fascinating story and does appear to have some historic backing, but volumes, and who may control it, are shrouded in mystery

Subsequent to our commencing this article, Adrian Douglas - a member of GATA's Board of Directors and publisher of the Market Force Analysis letter - has also commented on Mylchreest's analysis.  He has largely concentrated on Alternative 1 and concludes that the global gold market is in a precarious position.  He reckons that the panic at the end of September, which drove the price rapidly up through the $1,000 psychological barrier, suggests that liquidity is very tight, in which case only a small percentage of investors asking for their gold to be delivered or placed in an allocated account could blow up the gold market and expose what he describes as a ‘scam' and one that has been repeated time and time again throughout history. "Why should this time be any different?" he asks.

The big problem, though, with much of this kind of analysis is that the analysts and observers are working with a mixture of real and assumed figures.  It thus tends to rely on statistics being manipulated, perhaps subconsciously, to support pre-conceived theories.  It does not mean necessarily that the conclusions are incorrect, but they could be.  Whether they are or not there are some major anomalies in the gold marketplace out there that deserve better explanation from Central and bullion holding banks.  Impartial audits of global gold holdings may well be necessary to clear up these matters once and for all - although should such an audit, or series of audits, conclude that the gold is indeed there, will those who have set their hearts, and investment strategies, on the premise that it isn't, believe the auditors?  Conspiracy theories will likely continue to abound.

But what should the investor do? 

Given the state of the global economy, and the printing of money on a never-before seen scale, there does seem logic in maintaining a decent percentage of one's portfolio in gold (or perhaps in the more volatile silver).  If the price continues upwards, as many feel it will, gold stocks may be the best bet in that added leverage may boost returns.  Bullion, or coins like the Krugerrand, or the Maple Leaf represent possibly a safer answer and would also act as an insurance policy against the severe double dip economic scenario - although in such a case a decline in price could be on the cards, but not as sharp a one as would likely be seen in stock prices in general in a revisiting of what happened only a year ago.  Mylchreest is prepared to concede that the main ETFs may hold the gold they say they do - although others express doubts - but all the same perhaps physical gold is a safer bet although the safe storage costs of holding this in largish quantities may make it relatively expensive to do so.

There is obviously some good support coming in for the gold price at or around current levels.  Bouts of profit taking have been matched by support in the $1,040s and this could suggest that the price is going through yet another consolidation phase before moving up another step.  The dollar may still seem weak, but there are signs again that some gold strength may actually be there without the dollar declining further.  There are doubters out there who feel the current price scenario represents a ‘bubble' which could burst at any time, but gold tends to do better in times of economic uncertainty in its ‘safe haven' role and given that we do not appear to be out of the economic woods yet there may yet be some traction in the gold price.

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responses to this article

Stress Gold is not climbing because of inflation (money printing). We're still in global deflation. The contraction in credit far outweighs the worthless paper coming of the printing presses. We're thus still in global deflation. What's happening . .more is that the smart money is busy hedging against stress building up somewhere in the financial system like a boil. When the boil pops, there will be a massive rush to buy gold and a run on physical gold held in safekeeping. If you haven't got the physical, then you won't be holding anything but a promise on a worthless piece of paper. . .less by Freemarketman on October 19 2009, 04:45 Find this comment inappropriate? Report it

Like your thinking freemarketman Go Gold! Go Rand! by johngalt on October 19 2009, 05:43 Find this comment inappropriate? Report it

Is your gold really there? " Mylchreest is prepared to concede that the main ETFs may hold the gold they say they do - ... " With all due respect for the rest of the article, it appears Mylchreest has not read the prospectus for GLD. If he had, he would . .more have seen that the whole concept is constructed to be another vehicle to short gold in the market, thus taking the load off the bullion banks which have been carrying it for decades. He would also have noted that there is layer upon layer of custodians and sub-custodians that have absolutely NO duty to allow anyone to audit their vaults. Bernie Madoff should have taken lessons from GLD. "... perhaps physical gold is a safer bet although the safe storage costs of holding this in largish quantities may make it relatively expensive to do so." Why superior people insist on spreading such inferior fertilizer I will never understand. Probably because they are as lazy as they are intelligent, a not uncommon combination in my experience. They never took a thousand ounces of silver coins, split the stacks into four equal portions, and then put them into large-sized metal ammo boxes. If Mylchreest had done this, he would have found that each box contains 250 troy ounces and weighs in at about 24 lbs. or 11 kg, including the packing materials and the metal box itself. If you can't think of places to hide four objects, each the size of an adult's shoe box, then you shouldn't be owning anything of value (and probably won't for long) imo. Substitute gold coins for the silver ones and you have enough to live on for the rest of your life. I'll even do the math for you. At two gold ounces per month, 1000 ounces supports you for over 40 years. Do you think you're going to live past 90? No you won't. And if you do, you'll wish you hadn't. Worried about thieves? You have an infinitely greater risk trusting some one else to keep your gold safe than I have trusting that hollow stump and the abandoned well out back to do the job for me. You say you have many times more than a thousand ounces of gold? Why? . .less by Denarius on October 19 2009, 12:13 Find this comment inappropriate? Report it

For prudential...... I do not know if the market is manipulated and if there are all the gold and silver that papers say, so i will prefer have my physical gold and silver and not junk papers. by Germán H. on October 19 2009, 16:40 Find this comment inappropriate? Report it

Is the gold really there NO untill proved beyond a doubt otherwise. D*** by Dickmcdonald5000 on October 20 2009, 00:49 Find this comment inappropriate? Report it

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