Recently by Charles Goyette: Behind the Curtain
Is it possible that the vaults of the world's central banks, believed to be stacked with gold bullion, are really empty? Is all the gold actually there?
Something about the numbers doesn't seem to add up.
The importance of the question accelerates in the face of global money-printing, which is also accelerating. Since the start of the economic meltdown five years ago, the balance sheets of the world's central banks have been growing at a frantic pace.
The U.K. has led the pack, up 362%, followed by the United States, which is up 223% — even before QE III. China is printing money as well, up 151% during the period, the European Central Bank, 146%, and Japan, 83%.
That's a lot of money-printing.
But take heart, because while the currencies of all those countries are absolutely, 100% fiat — redeemable in nothing but more of the same paper — the world's central banks are said to have huge reserves of gold bullion. The U.S., U.K., the euro zone, Switzerland, Japan and the International Monetary Fund report having gold reserves of 23,349 tons among them.
Central banks of the world's terminally indebted countries prefer the fiction that paper money that's printed at little cost, or digital bookkeeping entries that are created at no cost, is money and therefore constitutes real wealth. However, there must be a reason that central banks universally hold gold reserves.
They don't hold pork bellies.
At this point, Eric Sprott, of the estimable Sprott Asset Management, enters the discussion, asking some inconvenient questions. Because something about the gold numbers — supply and demand — doesn't seem to add up.
Here's the mystery in brief, from the Sprott report called, "Do Western Central Banks Have Any Gold Left???"
New mine supply of gold this year is estimated to be just under 2,700 tons. But gold demand, growing rapidly over the last 12 years, amounts to an additional 2,268 tons of new gold demand a year today that didn't exist in 2000.
That number was derived from the buying of just five sources: non-western central banks (Russia, Turkey, Kazakhstan, Ukraine and the Philippines), the mints of the U.S. and Canada, ETFs, and Chinese and Indian consumption.
This increase in gold demand seems to actually understate the matter, since it doesn't include huge private investment purchases of physical gold from around the world. For example, Sprott cites China's Hong Kong gold imports, expected to reach 785 tons this year, as just one additional source of net investment that sees real total demand exceeding new mine supply.
But the private investment demand amounts to much more than the Hong Kong gold imports he cites.
Other substantial purchases of physical bullion include those by hedge funds and other institutions (the University of Texas endowment fund alone purchased and took delivery of $1 billion of physical gold in 2011), as well as purchases by Russian plutocrats and Persian Gulf petrocrats.
The bull market in gold has, after all, been a global event.
In short, Sprott concludes there is a big discrepancy between real physical gold demand (own any gold bars yourself? If so, they don't show up in the demand numbers!) and the purported supply.
Where Is All the Gold Coming from?
Who is selling the gold that fills the gap between supply and fast-growing demand? Who is releasing physical gold to the market without it being reported, Sprott asks?
"There is only one possible candidate: the Western central banks. It may very well be that a large portion of physical gold currently flowing to new buyers is actually coming from the Western central banks themselves. They are the only holders of physical gold who are capable of supplying gold in a quantity and manner that cannot be readily tracked …
"Under current reporting guidelines, therefore, central banks are permitted to continue carrying the entry of physical gold on their balance sheet even if they've swapped it or lent it out entirely. You can see this in the way Western central banks refer to their gold reserves.
"The UK government, for example, refers to its gold allocation as, u2018Gold (including gold swapped or on loan).' That's the verbatim phrase they use in their official statement.
"Same goes for the U.S. Treasury and the ECB, which report their gold holdings as u2018Gold (including gold deposits and, if appropriate, gold swapped)' and u2018Gold (including gold deposits and gold swapped),' respectively.
"Unfortunately, that's as far as their description goes, as each institution does not break down what percentage of their stated gold reserves are held in physical, versus what percentage has been loaned out or swapped for something else.
"The fact that they do not differentiate between the two is astounding."
Loans? Swaps? Repurchase agreements? A house of cards by any other name would topple as fast.
It is impossible to know exactly what shenanigans are afoot at the Federal Reserve. Have the gold reserves held by the Fed, the property of the American people, been loaned out? Have the banksters and other Fed cronies borrowed U.S. gold, sold it to China, and left an IOU in the Fed's vaults?
In an age rich with banking and other institutional, credit, and counterparty failures and frauds, such transactions are anything but prudent. Especially since whatever gold the Fed holds is not its property.
In a one-time partial audit that the Federal Reserve resisted mightily, the Government Accounting Office found that from Dec. 1, 2007, through July 21, 2010, the Federal Reserve provided more than $16 trillion — a sum equal to America's entire visible national debt — in secret loans to some of the world's most politically powerful banks and companies.
Among the major recipients of the windfall were Citigroup, Morgan Stanley, Merrill Lynch, Bank of America, Bear Stearns and Goldman Sachs. But the beneficiaries weren't just American financial institutions.
Central Banker to the World?
At one point (in October 2008), 70% of Fed loans were to foreign banks. Foreign recipients of the windfall included powerful European banks: Barclays, Royal Bank of Scotland, Deutsche Bank, UBS, Credit Suisse and others.
Among the disclosures the Fed was forced to make is that it extended 73 separate loans for an aggregate $35 billion to Arab Bank Corp., owned in substantial part by the Central Bank of Libya.
The Fed is a hot bed of cronyism: The discount window, bond purchasing, its primary dealer system and pricing structure, currency and gold swaps and repurchase agreements, Open Market Committee operations, and so on.
The light of a full and thorough audit is likely to find all kinds of cronies lurking in these dark corners of the Fed.
And with the new, third round of quantitative easing under way, it may not be long before the money-printing game collapses entirely. At that point the calamity will compound if Americans turn to the vaults where the gold was purported to be, and find that the gold has long since been loaned out or otherwise cleaned out.
Charles Goyette [send him mail] is the author of the New York Times bestseller The Dollar Meltdown. His new book is Red and Blue and Broke All Over: Restoring America's Free Economy. He is also editor of Freedom & Prosperity Letter, a monthly political and financial newsletter dedicated to revealing the truth about the U.S.’s political scene and economic climate. To learn more, go here.