We’ve been writing since early 2011 about central banks the world over shifting from being long-time net sellers of gold to becoming net buyers. In one recent post we informed readers that Ecuador had joined a growing number of nations who initiated programs to repatriate gold bullion held in foreign vaults. Taken altogether, the pattern seems to indicate that there is a lot of gold being purchased by sovereign nations. As Mike Maloney said in 2011, “That means that governments around the world are starting to distrust the dollar; they are starting to panic.”
Last year Mexico’s central bank, Banco de Mexico (Banxico), sparked renewed interest as it began purchasing significant amounts of gold.
Mexico’s jumping on the gold ownership bandwagon with Brazil, China, Turkey, Venezuela, Ecuador and others begged the question: why have central banks suddenly begun increasing their gold reserves. The obvious answer is FUD: fear, uncertainty and doubt. As concern grows about the viability of the global fiat currency system, which is leaking value as faster than central banks can pump out new cash, many nations are trying to hedge against the currency crisis that lies ahead. In a prudent bid to preserve their wealth against the massive ongoing currency devaluation countries are buying up as much gold as possible and repatriating, or bringing back in-country, the gold stores they have abroad. As noted in a previous report, these activities represent
Mexico is particularly interesting because of its initial unwillingness to reveal where its alleged gold was stored. After months of stonewalling, Banxico was finally forced to reveal its position in gold.
The key phrase in this statement is the word supposedly. What Banxico revealed was equal parts shocking and expected. When pressed for specifics about its gold holdings they answered, “it is not possible to specify with certainty the number of bars purchased” (sic).
In August we reported on an audit that the U.S. Treasury was conducting on the purity of the bullion stored in the New York branch of the Fed. Unfortunately, purity of the gold supply is not really the issue. What is of paramount concern is the amount of gold stored and most of all, how many entities can lay claim to the metal. As Germany found out when its representatives tried to visit its gold deposits, it is not possible to physically inspect one’s supposed deposits held in the vault(s) in New York. Could this be why Banxico says it cannot definitely specify the number of bars it owns?
Interestingly, most of Mexico’s gold is not held in New York but rather by the venerable Bank of England.
Still, Mexico (Banxico) cannot verify the number of bars it has purchased, whether in the U.S., England or Mexico. The fact is that auditing gold deposits in England is even more difficult than doing so in the U.S., as Germany found out.
The most logical explanation for the lack of auditability of gold deposits is repledging or rehypothecation:
What this means is that banks who store gold are using their clients’ gold as collateral on other obligations. As reported by GoldSilver.com, the explanation for Banxico’s claim not to know the number of gold bars it owns could be that it is transacting with the so-called “Bullion Banks” of the London Bullion Marketing Association. Customers who buy gold products from the Bullion Banks are purchasing unallocated gold, which means that their gold and that of other owners are held together in one mingled lot. Owners of unallocated gold do not own specific, individual bars of gold marked with unique serial numbers. Rather they own a “general right” to a certain quantity of the metal. If it is true that Banxico is a Bullion Bank customer, its position is even more precarious: Bullion banks, under the fractional reserve banking system, are allowed to loan out (on paper) many times the amount of metal they hold in reserve, just as traditional banks are allowed to loan out 10 or more dollars for each dollar they hold in reserve. Thus, on paper, the gold supply is expanded exponentially beyond the amount of physical gold actually held by the Bullion Banks (who use Bank of England as the custodian of the physical gold).
Just as with the traditional banking system, as long as only a few depositors withdraw their gold or default on their loans at one time, the Bullion Banks will have enough physical gold in reserve to back up the claims. But if large numbers of withdrawals or defaults occur in a short time, there would not be enough physical gold in reserve to meet all claims. In such an unallocated system, one gold bullion bar could actually be “owned” by more than one entity.
One data point reaffirming this fact happened on live television, when Bob Pisani of CNBC, seeking to prove the SPDR GLD Exchange Traded Fund (ETF) owned actual gold, held up a bar with serial number ZJ6752, which was actually owned by a ETFSecurities gold fund.
In such a situation, with multiple claims against the same pledged and repledged lot of gold, would Mexico, merely one more purchaser in line, end up with any real gold at all?
When we see central banks buying up gold, after decades of selling into the market in an effort to keep gold prices down and dollar-based currencies strong, it’s a good bet central banks have seen the handwriting on the wall—regardless of what their leaders are telling the public. What is less easy to fathom is why central banks would invest in gold that may not really be there when all the chips are down. We urge WealthCycles readers not to put their faith in paper, whether it be paper banknotes or paper gold. Real money that you can touch and hold is the path to future security.