Wednesday, February 6, 2013

Where Is The Gold?

Zerohedge reminds readers that some officials in Germany and Austria have raised questions as to whether foreign national banks, including the U.S. Federal Reserve Bank of New York, actually still have those nations' gold reserves that had been banked there. Although the NY Fed has insisted that the gold was still present and accounted for, it recently refused an inspection by a group of elected German officials. Zerohedge writes:
Concern spread to Austria, where a question arose in Parliament as to where Austria’s gold is stored. The answer provided was that 80% of it (224.4 tonnes) is in the UK. (It was claimed that the reason for this is that, if a crisis of some kind were to occur, it could be more easily traded from London than from Vienna.)

Seems reasonable enough, except that the return of the gold to Austria, if it were requested, may be a bit difficult, as the gold seems to have been leased out by the UK.

To many, a second eyebrow might go up at this point. Lease out the wealth of another nation? Isn’t this a bit… irresponsible?

The New Gold Shuffle

Not to worry, it’s done all the time. In fact, the practice has been endorsed by none other than Alan Greenspan, former Chairman of the Fed. The gold is leased to a bullion bank, which typically pays one percent interest to the Fed, with a promise to return it on a specified date. The bullion bank then sells the gold on the open market and uses the proceeds to buy Treasury bonds, which will net a three to four percent return.

The nicest thing about such an arrangement is that the lessor continues to claim it on his balance sheet as a line item: “gold and gold receivables.” After all, an asset that we have leased out is still an asset, even if it has now been sold by the lessee.

In effect, this means that, if you bought a gold bar today, it is possible that it is a bar that was shipped from the Bundesbank to the Federal Reserve decades ago and is presently listed by the Fed on its balance sheet as “gold and gold receivables.”

Both you and the Fed are claiming to possess the same gold bar. The fly in the ointment, of course, is that only one bar can be the actual bar. The other is a receivable and therefore is an asset on paper only. This, of course, means that there is less gold in the world than has been claimed. How much less? That’s anyone’s guess.
 Among other concerns is that "[i]f the nations who shipped their gold to London and New York for safekeeping were to request their return, the storage banks could only deliver if they were to purchase gold at the current rate. If that rate were significantly above the rate at which the gold had been leased to the bullion banks, the storage banks would sustain a significant, possibly unsustainable, loss."

The Zerohedge article goes on to note that if you are invested in gold, it may be prudent to take physical possession or divest yourself of certificates should this issue continue to heat up.

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