The uncertainty which affected the financial world during the last four years has led to gold becoming a refuge of the last resort. However, the finnancial innovations, practiced on a large scale by the major global financial institutions and by the central banks is raising some question marks over the asuredness of the security which is based on the precious metal, and is bringing back into spotlight the metal itself.
The difference in value between the financial gold derivatives’ market and the gold market itself represents a sign that the banking system and, especially, the central banks, can artificially increase the supply of gold on the market (through the use of such financial derivatives) in the same way in which commercial banks exploit the credit market.
GOLD AND THE FRACTIONAL RESERVE
A central bank can, for example, loan away its gold (through a leasing, forward or swap contract) to another central bank or even to another type of financial institution, which can, then, use that gold either to sell it on the spot market (hoping to force the price down in order to then buy back that quantity at a smaller price), or as an active support for a series of securities which can also be sold; in 2010, for example, through a swap contract (a contract through which the parts agree that the object of the trade will be returned to the initial owner at an arranged date and for an arranged price), the BIS offered 380 tons of gold to a number of private entities. This quantity could have easily become the active support for a new series of derivatives which could have been put into circulation, so that the gold could have been sold without it even leaving its deposit vault.
This way, a large part of the gold which constitutes the foundation of these titles and, which, from a technical point of view, it’s still located in the vaults of BIS, IMF and of the various central national banks, could have been sold already, a long time ago.
Even more, a private player which uses this mechanism to loan gold from a central bank or from a global financial institution (such as BIS or IMF) could sell this precious metal even on the spot market without even having to physically „move” it, only the virtual owner of the metal being changed. BIS, which is an institution which ensures the clearing of gold transactions made by the central banks, is currently operating two types of accounts in order to highlight their ownership: “sight accounts” and “earmarked accounts”.
PHYSICAL GOLD – VIRTUAL GOLD
With regard to the first type of account (“sight”), the bars, the ingots and the coins are not strictly allotted to one entity; the gold belonging to different owners is held jointly, BIS having only to give back an equal quantity of gold, and of the same quality, to the quantity which was originally deposited. These types of accounts are used to facilitate the buying-selling transactions. Following such a transaction, only the virtual owner is changing, while the gold stays in the same account. This way, by avoiding physical transportation from one owner to another and the change of the location of the deposit, the costs related to such a transaction are virtually eliminated. Moreover, the buy – sell transactions can be resolved and cleared rapidly so that the gold and the money involved in such an exchange switches hands instantaneously. Consequently, these types of accounts are useful because they answer to the need of the commercial banks to have a market where they can liquidate their gold reserves rapidly.
With regard to the second type of accounts, the “earmarked” ones, gold is strictly allotted to a specific entity; at this entity’s request, the BIS has to be able to present, at any moment, in physical form, exactly the same ingots which had been deposited initially in that account. The gold transactions from these accounts involve the physical relocation of the precious metal from the seller’s account to the buyer’s account.
In other words, the “earmarked” accounts are of a custodian type – the gold holdings are clearly individualized, while in the “sight” accounts the gold is just marked out separately, but, from a physical point of view, it is held in common.
BIS is not the only institution which follows this model. Other important institutions of the global financial system, such as the US Federal Reserve, the Bank of England or the International Monetary Fund use it as well. Part of the gold held in the reserves of these institutions is held in “sight” accounts, while the places where these institutions hold their reserves are pretty much the same: London, Zurich or New York (in the vaults and safes owned by Bullion Vault –a society part of the group of firms held by the Rothschild Family) or at Fort Knox, Denver or West Point, also in the United States. A large part of the IMF gold reserves and of the US gold reserves is held at Fort Knox.
Thus, the „sight” accounts enable the central banks to sell or loan their gold without the precious metal ever leaving its location. This allows the central banks and the BIS to increase the supply of gold on the market, using the fractional reserve model by which the commercial banks can expand the credit (the fractional reserve model, used by the banking system of the developed world, is mainly characterized by the fact that the commercial banks are permitted to hold only a part, a fraction, of their clients deposits. This means in the hypothetical possibility in which all deponents would want to withdraw their deposits all at the same time, that bank could only reimburse the percentage, the fraction of their deposits, which is held in the central bank). Consequently, the question marks with regard to the national gold deposits held in London or New York could be the reason why the German authorities are considering soliciting an audit to see what is the exact status of the national gold held in the transaction and clearing houses in Paris, London and New York. According to Fox News – which quoted the German paper „Bild”, at the beginning of March, the German Federal Audit Office warned the German citizens and officials about the superficial treatment of this issue by the Bundesbank. The German Federal Audit Office is the supreme judicial body with regard to financial audit cases in Germany, its rights and prerogatives being enshrined in the Constitution, and it is the German equivalent of the Court of Auditors which functions at European level.
GERMANY AND SWITZERLAND, FOLLOWING THE TRAIL OF STRAUSS-KAHN AND RON PAUL
Germany seems, thus, set to follow on the trail opened by Ron Paul, the candidate for the Republican Party nomination for president, who, for years now, has been soliciting an audit of the activity of the Federal Reserve, suspected that it does not really hold all the 8,300 tons which represent, on paper, the gold reserve of the United States. And the Germans are not the only ones who worry about the fate of the gold from their national reserve. By the middle of last year, one of the MPs of the Swiss Parliament proposed a bill which wanted to bring back the gold held by the Swiss National Bank from the bunkers of Europe and United States. This initiative also included the possibility of introducing a „Gold Swiss Franc” which would have been used in parallel with the Swiss paper currency. The same worries with regard to the gold reserves could explain the decision taken last year by Hugo Chaves to repatriate the Venezuelan national reserves held, at that time, in the vaults of the Bank of England and the Bank of Nova Scotia. This decision was taken shortly after the arrest of the ex-IMF chief, Dominique Strauss-Kahn by the American police, at New York. This arrest was quite controversial because, according to unofficial declarations attributed to the Russian secret service, behind the rape charges brought against DSK there was another reason. This might have been the fact that Strauss-Kahn could have come into possession of some compromising documents regarding the FED and the United States, documents which proved that at Fort Knox (the place where the IMF is keeping some its gold reserves – the reserves which represent the initial contribution of the founding members of IMF), there is no gold left.
HOW DOES THE GOLD PURCHASED BY INDIA REALLY LOOK LIKE?
In such a context, it would be interesting to find out, for example, if the purchase transaction of 200 gold tones by India from the IMF involved physical relocation, of an „earmarked account” kind, or was it a virtual transaction, of the „sight account” type? In other words, did the IMF deliver, or not, the physical gold purchased by India? More so since at the end of 2009, the Chinese officials discovered, among the gold ingots held in the vaults of Hong Kong, some ingots made from tungsten covered in gold (tungsten has the same density as gold, thus being very hard to detect during a superficial examination). Coincidence or not, the origin of those 400 ounces of fake gold ingots was the same Fort Knox. According to the Chinese officials, these ingots were the result of a gold delivery made 15 years before, during the Clinton administration.
Last, but not least, the question marks with regard to the actual existence of the physical gold in the vaults of the big western central banks and in the safes of the large global financial institutions, such as BIS or IMF, could be behind the feverish gold acquisitions made by China and Russia.
HOW TO MAKE GOLD OUT OF NOTHING
The possibility of effectively “creating” gold though the fractional mechanism of the sight accounts had become certain from the moment the Bank for International Settlements was founded. The temptation and the need to use such a mechanism in order to stop the surge in gold prices and, consequently, the depreciation of the main foreign currencies in relation with the precious metal, was never so great as it is now, when thousands of billions of dollars, Euros and British pounds are literally flooding the financial markets. Such information is still considered to be mere speculations, but the events unfolding might radically change the situation. What would happen if, for example, the suggestion made by some German officials, that Greece should issue gold denominated bonds would be taken up again, leading to the question: “How much gold does Greece have and where is the gold with which this country contributed to the founding of the European Central Bank?” Whether we talk about ETFs, ETNs, CFDs or “Gold Certificates”, all issued by private entities, or we talk about swap, forward and option contracts, which involve the central banks as counterparties, we could discover that a large portion of the gold which constitutes the backing of these securities (and which, technically, is held in the vaults of BIS, IMF and other central banks), could have, in reality, vanished completely.