The Great Gold Scam

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October 29, 2012 1:44pm NYSE:GLD NYSE:SLV

Jeff Nielson: A recent question from an inquisitive reader on gold “leasing” got my mind focused upon that topic again, as the question involved the actual mechanics of these transactions, and my answer dealt with issues of legal title to that gold. This, in turn, led me to consider

to what purpose/use all of this leased gold has been dedicated.

Many commentators (including myself) have generally assumed that the gold being leased by undisclosed entities was being funneled to traders to be shorted onto the market – as part of the general manipulation operations of the bullion banks. We know that vast amounts of gold are being ‘leaked’ out of gold stockpiles in this manner, since lease rates are always near-zero, and frequently negative. This encourages those desiring legal possession (but not title) of gold to lease heavily.

But what if all this leased gold is not being used as simple collateral to back trading positions? Could there be another (nefarious) purpose in these gold-leasing operations?

We know there isn’t any other legitimate purpose for all this leasing, since (apart from using it in trading) there are no legitimate business reasons for wanting mere temporary possession of gold bullion. As the gold-bashers themselves frequently observe, gold “generates no income” itself; so this leased gold must be used (for something) or there would be no purpose at all to these transactions.

Until recently, it would have been hard to conceive of even any other nefarious uses for all this leased gold, since there simply are not a lot of ways to capitalize on mere temporary possession of gold bullion. This all changed , however, in 2009. That was the year that the world’s central banks flip-flopped from being (massive) net-sellers of gold to net-buyers.

As of 2012, the world’s central banks are now massive, net buyers of gold; on pace to add more gold to their reserves than any other year in history. GFMS Ltd (formerly Gold Fields Mineral Services), the quasi-official record-keeper for the gold industry estimates that total purchases will approach 500 tons this year alone.

This begs an obvious question. Where is all this gold coming from?

It’s not coming from the gold miners. Currently, global mine supply is roughly 2,800 tonnes of gold per year. However, of that annual total 2,000 tonnes is already committed to the wholesalers who supply the global jewelry industry. With demand for gold by investors surging; more than 1,500 tonnes per year is siphoned out of the gold market by investors.

Note that by itself this already creates a large supply-deficit in the gold market, one which can only be addressed by (supposed) “recycling”. The mainstream media would have us believe that there is virtually an inexhaustible supply of gold waiting to be recycled each year. This myth is fueled by the record-keeping of GFMS, itself.

In the fantasy-world in which GFMS operates, supply perfectly matches demand every year – right down to the ounce. Gold inventories never change. If there is a supply-deficit of 1,700 tonnes in 2011, presto!, 1,700 tonnes of “recycled gold” appears in the marketplace to balance all the ledgers. You don’t have to be a cynic (like myself) to note that the only “gold” which can be instantly/magically conjured up to meet any level of demand is the “paper gold” which banks like Morgan Stanley have been known to sell to their Chumps.

In actual fact, the mainstream media itself is acknowledging that the supply of recycled gold for the market is already drying-up, just as the world’s central banks begin their own buying-binge.

With roughly 3,500 tonnes of gold per year committed to investors and jewelers, this puts current gold demand by central banks in approximately a tie for 3rd place, with annual industrial demand for gold. Thus even though central banks are the largest individual buyers of gold; collectively they are still merely a small niche of the overall market.

This leads us to refine our earlier question. If more than 100% of annual gold supply is already committed to other (established) users; where are central banks able to purchase gold by the10’s of tonnes? The only known/official stockpiles of gold in such quantities are held by the central banks themselves – and they aren’t selling.

The one exception to this is the gold hoard of the IMF. However, apart from its one ultra-hyped sale of 400 tons of gold (half of which was gobbled-up in a single purchase), it has sold no gold, and is not legally allowed to sell a single ounce without overall approval of the IMF membership. This is a process which (as we have recently seen) takes years to complete.

In short, there are no apparent (visible) stockpiles/inventories of gold anywhere in the world to meet the large, incremental demand of the world’s central banks. Of interest, when these central banks announce their large purchases, they themselves never identify the source of all this “gold”.

Putting aside the issue of legal title to such quantities of gold, the only entities who (plausibly) might be in possession of such quantities of gold are (surprise! surprise!) the very same bullion banks at the root of all shorting/manipulation in the gold market.

We know these bullion banks are not owners of the near-500 tons of gold which the central banks needed (this year alone) to satisfy their suddenly insatiable appetite for the world’s premier financial asset. It would take years for the bullion banks to accumulate enough gold to meet demand for this year alone. And as previously stated, gold generates no income – meaning it would be absurd for the bullion banks to accumulate such vast quantities of gold hoping that a buyer might show up, and then selling that gold (apparently) at close to “spot” price.

Simply put, there are no visible owners – anywhere on the planet – for all the “gold” which the world’s central banks now claim to be buying. The only places where such large quantities of gold might be possessed could not possibly be the owners of all that gold. This brings us back to “gold leasing”, and (suddenly) a whole new purpose (i.e. scam) for this activity.

We have the West’s central banks claiming to be the holders of vast quantities of gold (but not sellers), and we have the East’s central banks claiming to be large buyers of gold – but with no visible supply of gold available anywhere on the planet to meet that annual demand. Enter gold leasing.

The West’s central banks “lease” vast quantities of gold to the bullion banks (at zero cost to those banks), who then “sell” that gold to the seemingly naïve buyers from the East. And (very possibly) “lease” the same ounces of gold again and again and again. “Leveraging” assets is as natural to bankers as breathing is to mammals.

This brings us to a final, recent item making its way into the news. Apparently many European governments (starting with Germany and the Netherlands) are getting very nervous about all the tons of gold they believe is stored on their behalf in the United States.

There is now serious political pressure for this gold to at least be audited (for the first time in decades), if not immediately repossessed/repatriated to these nations. The only entities in Germany and the Netherlands who (strangely) are not worried or even interested in proving the existence of this gold are – you guessed it – the central bankers of Germany and the Netherlands.

With vast amounts of gold being leased each year from undisclosed entities, and vast amounts of gold being sold each year from undisclosed entities; it’s no surprise that people in Germany, the Netherlands, and other European nations are (belatedly) wondering how many other nations may now be claiming title to the gold they “own”.

Written By Jeff Nielson From Bullion Bulls Canada

Jeff Nielson is from Canada and is a writer/editor for Bullion Bulls Canada He has a personal background in law and economics. Bullion Bulls  Canada provides general macro-economic and political commentary,  since the precious metals markets are among the most complex (and  misunderstood) in the world.

Bullion Bulls Canada also provides basic coverage of Canadian precious metals mining companies. Canada is the global leader in mining exploration, and Canadian-listed mining companies (on the Toronto Stock Exchange and Venture Exchange) are responsible for the majority of the world’s most-promising discoveries.

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