Two exceeding important pieces - the first from Eric Spott " Do Western Central Banks Have Any Gold Left ? " Seconf piece from Mark Grant " The ECB - EUR 22 Trillion Ms Missing " ..... Additional posts , gold and silver data from Harvey's blogspot , a Turd Ferguson missive to ponder and other items of note

http://www.silverdoctors.com/cartels-3-week-effort-to-cap-gold-silver-prices-is-about-to-blow-up-in-their-faces/#more-14815

CARTEL’S 3 WEEK EFFORT TO CAP GOLD & SILVER PRICES ‘IS ABOUT TO BLOW UP IN THEIR FACES’

OCTOBER 2, 2012 BY THE DOC 5 COMMENTS

Our friend TF from TFMetalsReport.com has released an excellent update this afternoon regarding the persistent cartel capping we have been seeing near $1780 in gold, and $$34.50-$35 in silver over the past 3 weeks.
TF states the cartel’s effort to keep gold under $1800 (and subsequently preventing a gap up to the nominal high near $1915) and silver under $35 (and subsequently preventing a gap up in silver to $37.50) is ‘about to blow up in their faces‘.

TF states the price capping of gold and silver has become desperate as once $1800 is taken out in gold, Paper price is extremely vulnerable to a quick, $100+ move but the banks can’t jack the price lower because of the continuing, robust demand for physical in London

TF absolutely nails the current gold and silver price action, as both metals are getting ready to explode once the cartel caps are breached.

From TF:

What The Cartel doesn’t seem to grasp is this basic rule: “When you find yourself in a hole, the first thing you do is stop digging“. The stupid, arrogant jerks just won’t give up. QE∞ has long been predicted by The Turd, Santa et al, it was formally announced by The Bernank three weeks ago and it was confirmed beyond a shadow of a doubt just yesterday by Fed Goon Evans. Nevertheless, they just keep issuing paper metal at a frantic pace in a desperate attempt to cap price and contain it below $1780 and, ultimately, $1800. Why are these levels worth defending, you ask? Here’s a reminder:

And so, for the third consecutive day, we have seen aggressive capping of price at, or just above, $1780. Again I’ll use the word “desperate“. No doubt about it. There is some serious panic setting in. Paper price is extremely vulnerable to a quick, $100+ move but the banks can’t jack the price lower because of the continuing, robust demand for physical in London. What to do, what to do? Desperation, indeed.

And so then you get a day like today. The metals were unusually strong in the pre-open and looked poised to catapult higher once the Comex was up and running. Paper metal was thus gathered and dumped right at the 8:25 silver Comex open. Note all of the big, blue candles on the charts below indicative of direct attempts to keep the pressure on and rein in price.

But here’s the thing: They are almost of of time. The window is closing. You can clearly see it in the charts below. The trend is higher and once their little defense line runs into it (by Friday?), price will almost assuredly burst higher. Perhaps the BLSBS data on Friday will provide the impetus? Who knows? All I know is that this 3-week effort to cap price is about to blow up in their faces.

and from Harvey's blogspot.......

TUESDAY, OCTOBER 2, 2012

Spain ready to ask for bailout/Spain will need greater than 60 billion euros/Bankers hold silver and gold in check/

Good evening Ladies and Gentlemen:

Gold closed down today to the tune of $6.80 finishing the comex session at $1772.50.  The price of silver ended the day down 28 cents at $34.60.  The bankers seem to wish to defend with their last breath, 1775.00 dollar gold and 35.00 dollar silver.  Today Europe opened in the green and gold and silver took off only to be repelled by the bankers.  The problem to the bankers of course is the huge demand for physical which weighs on their decision to increase their supply of non backed precious metals paper.  You will see below that the open interest in silver continues to ramp up and as such this is a real problem for the bankers. Either they force the liquidation of these silver longs or a commercial failure will eventually be upon us.As for the trading of gold and silver today, Dave from Denver at his GoldenTruth website does a good job describing the crooked action by the bankers:

(courtesy Dave from Denver)




Clearly JPM is defending $35. Every time silver approaches or punches through $35, sell volume goes through the roof. As of yesterday, silver o/i is up 7k from the COT cut-off last Tuesday. Our records show that on a weekly basis, the highest silver o/i has been is 158k on 11/2/2010. I think it may have been a little over 160k intra-week.

Anyone who hasn't read the Andrew Maguire response posted on LeMet yesterday to the report last week that JP Morgan's futures activity is fully hedged with physical silver should read Andrew's writing and then they'll understand the paper vs. physical game being played by JPM. That report last week about JPM being hedged was entirely misleading and it was recklessly published.

Having said that, it is clear that JP Morgan is working hard to try and keep a lid on the price of silver here and I would suspect it is because they are getting squeezed by demands for physical delivery against their short position in futures and LBMA forwards. The Maguire commentary addresses this point with a very specific example. We have also seen specific references to delays in physical delivery of silver from Sprott/Embry, Jame Turk and Ben Davies. Finally, the unusually large movement of silver in and out of the Comex silver depositories, which has been occurring for a few months now, is more evidence that the demand for the delivery of physical silver is putting stress on the paper market. You can print as much paper as you want which is supposed to represent the promise of ownership in physical silver, but the ability to delivery against those paper promises is limited to the amount of above-ground silver available for delivery and by the amount of silver that is mined in a given year. Right now the paper promises exceed the amount of deliverable silver by an absurdly large multiple (see the Maguire piece).end

The big story of today is the Mark Grant dissection of the balance sheet of the ECB.  It is a must read
and once you understand its significance you will be glad you purchased gold and silver.  Reuters released an exclusive story showing that Spain is ready to receive a bailout but Germany asked for an extension of time.
Also, it seems that Spain needs much more than the announced 60 billion euros.

We will go into all of these stories and others but first..........................

Let us now head over to the comex and assess trading today.



The total gold comex open interest dropped by a tiny 187 contracts to 486,334.  The October active gold month saw its OI fall by 1667 contracts.  We had 1549 delivery notices yesterday so we lost 118 contracts or 11800 oz of gold, probably due to some cash settlements.  The non active November month saw its OI rise by 20 contracts to 1367.  Everybody will be waiting with bated breath for the December contract to roll around.  Today the December OI rose by 1332 contracts and that level is a multi year high. The estimated volume today was very weak at 109,920.  The confirmed volume yesterday came in at 198,444.The total silver comex OI is now becoming a major concern for our bankers as it rose to 140,237 again a multi year high.  The gain in OI amounts to 2835 as yesterday's OI resulted in a reading of 137,402. The non active October contract saw its OI fall by 73 contracts.  However we had 84 notices filed yesterday so in essence we gained 11 contracts or an additional 55,000 oz of silver standing.  The non active November contract saw its OI fall by 18 contracts down to 39.  The all important December contract saw its OI advance by 2585 contracts up to 88,678 from yesterday's level of 86,092.  The December OI is a multi year high.  The estimated volume at the silver comex was a very anemic 31,424.  The confirmed volume yesterday was much better at 61,190

****

Today, we had a major activity inside the gold vaults today with respect to a
customer withdrawal of a massive 58,349.974 oz from JPMorgan.

 we had no   dealer deposit and no dealer withdrawal.  The customer also had no deposit.
There were no adjustments.
Thus the dealer or registered gold inventory rests tonight at 2.56 million oz or  79.6 tonnes of gold.



The CME notified us that we had a rather large 2,696 notices served upon our longs for a total of 269,600 oz of gold.  The total number of notices filed so far this month total 6,225 for 622,500 oz.  To obtain what is left to be served upon,
I take the OI standing for October (3511) and subtract out today's deliveries (2,696) which leaves us with 815 notices or 81,500 oz left to be served upon our longs.

Thus the total number of gold ounces standing in this active month of October is as follows:

622,500 oz (served)  +  81,500 oz (to be served upon) =  704,000 oz or 21.8 tonnes of gold.

This is extremely high for what is generally a poor delivery month.

***

Silver:

Oct 2.2012:

Again, we had tiny activity inside the silver vaults today.

However we had no dealer deposit and no dealer withdrawal:

We had the following customer deposit:

i) Into Brinks:  300,707.76 oz

we had no customer withdrawal and no adjustments.

Thus the total registered or dealer silver inventory rests at 41.426 million oz
The total of all silver rests at 142.844 million oz.


The CME notified us that we had only 15 notices served for 75,000 oz of silver.
The total number of notices served thus far is represented by 148 contracts or 740,000 oz of silver.  To obtain what is left to be served upon, I take the OI standing for October (320) and subtract out today's delivery notices (15) which leaves us with 305 notices or 1,525,000 oz left to be served upon our longs.

Thus the total number of silver ounces standing in this non active month of October is as follows;

740,000 oz (served) +  1,525,000 oz (to be served upon) =  2,265,000 oz

****

selected items of interest.....

The legendary Jim Sinclair on the significance of 1775.00 dollar gold and 1800.00 dollar gold;

(courtesy Jim Sinclair)


   Jim Sinclair’s Commentary

Here is today’s story in gold. The cash number for the boys is $1775. This would represent the 10th major operation by gold banks to keep CASH gold below that $1775. It has much more to do with $1775 than this morning’s challenge of $1800.

Someday, sooner than expected, both $1775 and $1800 will behind us with the manipulators pushing gold higher, not lower. Behind us is not one or two dollars.

All this talk in the community of cycles and one more decline before a bonanza rise strikes me as disinformation and meaningless when $3500 is pulling gold up. As soon as the big boys have all your gold and gold shares you are willing to give them of the good gold companies, the manipulators will be on the long side just like in 1979-1980.

There is no way that the present giant shorts in the good gold shares can cover. The only reason they are not yet in panic is their long period of winning has made even the smartest of them stupid.

If you did not need to cover for a long time you dream that you will never have to. If today was not an experience of "Shaking the Tree to Pick Up the Fruit" in both shares as well as gold, I have not been watching gold and currency for more than 50 years.

The manipulators take their lead from the euro these days and push gold hard in the same direction. Watch the euro to define the direction of gold on the day. Good charts are available to you on INO.com.

****

 Last week it was announced that the Spanish banks needed 60 billion euros to shore up their banking holes. Now Moody's suggests that the shortfall is 105 billion euros and maybe more. Before they are finished, you can bet the farm that Spain will need 1/2 trillion euros to: 

i) buy sovereign debt

ii) buy regional debt
iii) shore up insolvent Spanish banks
iv) cover guarantees by the sovereign Spain on certain government corporate entities like the railroad  etc.

(courtesy Bloomberg)

Spanish Banks Need More Capital Than Tests Find, Moody’s Says

By Dakin Campbell - Oct 1, 2012 6:46 PM ET

Spain’s banks face a capital shortfall that could climb to 105 billion euros ($135 billion), almost double the estimate the government provided last week, according to Moody’s Investors Service.

The nation’s lenders may need infusions of 70 billion euros to 105 billion euros to absorb losses and still keep capital ratios above thresholds outlined in legislation last year, Moody’s analysts wrote yesterday in a report. That compares with the 53.7 billion euro shortfall found last week after officials commissioned a stress test designed to lift doubts about the financial industry’s ability to withstand losses.

Enlarge image

Customers gather around a broken automated teller machine (ATM), outside at a BBVA bank branch in Madrid. Photographer: Angel Navarrete/Bloomberg

4:07

Oct. 2 (Bloomberg) -- Bill Blain, a strategist at Mint Partners, talks about the outlook for Spain's banks and bond markets, and the political impact of a bailout request. He speaks with Mark Barton on Bloomberg Television's "On the Move." (Source: Bloomberg)

Audio Download: Egan Says Growth in Spain Is Five to Ten Years Away, 10/1

Enlarge image

A customer waits for a bus at a bus stop outside a Banco Santander SA branch in Madrid, Spain. Photograph: Angel Navarrete

“The recapitalization amounts published by Spain are below what we estimate are needed for Spanish banks to maintain stability in our adverse and highly adverse scenarios,” the analysts, Maria Jose Mori and Alberto Postigo, said in the report. “If market participants are skeptical about the stress test, negative sentiment could undercut the government’s efforts to fully restore confidence in the solvency of Spanish banks.”

Spain announced the results of the test, conducted by management consulting firm Oliver Wyman, after commissioning the review of 14 lenders as part of terms to win a European bailout of as much as 100 billion euros for its banks. Lenders suffered more than 180 billion euros of losses linked to souring real estate loans. The government ordered banks in February and May to recognize 84 billion euros of losses on real estate assets.

EXTREME SCENARIO

The 53.7-billion-euro figure takes into account mergers under way and deferred tax assets, the Bank of Spain and Economy Ministry said in a Sept. 28 statement. Without those effects, the shortfall climbs to 59.3 billion euros, according to the statement. The estimate is less than the 62-billion-euro shortfall found by Oliver Wyman in June.

Demonstrating lenders’ ability to withstand an extreme scenario -- a three-year economic contraction -- is part of the government’s drive to show it’s fixing the economy while debating whether to seek another rescue package.

While many assumptions in the stress test were conservative, some may be questioned, Moody’s said. The test used a 6 percent core capital ratio under a stressed scenario, while the ratings firm assumed capital ratios of 8 percent to 10 percent, according to the report. The rate used by Ireland for its test, including a buffer, was 9 percent.

BANCO POPULAR

The review showed no deficit for seven Spanish lenders, including Banco Santander SA (SAN),Banco Bilbao Vizcaya Argentaria SA (BBVA) and Banco Sabadell SA. The Bankia group, a nationalized lender, had a 24.7 billion-euro deficit and Banco Popular Espanol SA (POP) had a 3.22 billion-euro shortfall. Banco Popular slid more than 6 percent yesterday after the firm said it will seek to raise as much as 2.5 billion euros from a stock sale and suspend its October dividend.

The stress tests analyzed 36 million loans and 8 million guarantees using information from the databases of lenders and the Bank of Spain, according to the statement. A team of more than 400 auditors verified the quality of loans by examining 115,000 loan operations.

Even as Moody’s expressed concerns that the government underestimated the banks’ capital needs, a recapitalization is still “intrinsically credit positive” for all of the nation’s lenders since it would involve more capital and more banks than earlier efforts, the ratings firm said.

****

Mark Grants blows the doors off the ECB .....

The following Mark Grant commentary is your most important read for the day. 

The ECB lists its total assets at 16.3 trillion euros.  Surprisingly it lists its liabilities at 17.334 trillion euros.  Thus by these figures itself it is bust.  However on a consolidated basis they show 3.24 trillion euros( or 4 trillion USA).  The variance is so high it is totally incomprehensible.  These numbers are not Dr Grant's but the ECB's own numbers.  Why the variance?

Obviously there are huge number of assets (and liabilities) not counted in the consolidated balance sheet.

From the ECB's web page:

“Recognition of assets and liabilities

An asset or liability is only recognized in the Balance Sheet when it is probable that any associated future economic benefit will flow to or from the ECB, substantially all of the associated risks and rewards have been transferred to the ECB, and the cost or value of the asset or the amount of the obligation can be measured reliably.”

These assets and liabilities are almost 1.3 times the GDP of all of Europe  (approximately 12.6 trillion euros).

What is not counted:

i) loans and securitizations which served as collateral by a bank and guaranteed by a sovereign.

These loans and securitization s belong to a sovereign nation or to a major bank and thus not counted on the ECB balance sheet.  It is rather interesting that the sovereign does not include it as well on their balance sheet.  Thus when a nation reports its debt to GDP these figures are not included!!!!

What shocks Dr Grant:

he knows that:

i). they do not include contingent liabilities

ii) he knows that government backed bank bonds are not included

iii) he knows that regional debt guaranteed by the government is not included.

but the sheer size of the total assets and liabilities not included  are lying underneath everybody's radar.

And as Grant so eloquently states:

"These are real assets and real liabilities that have been turned into cash by the ECB and it causes me to wonder just how accurate the Money Supply numbers are for Europe "

No doubt many of these assets and liabilities are buried in swaps with the USA.   The USA swaps trillions with the Euro folk.  The USA dollars in Europe no doubt buys the treasury bonds issued by government.  And the Euros issued on this side of the pond buys this junk to hide.  I believe Grant stumbled on what is happening behind the scenes.  That is why the audit of the Fed and the ECB will be essential.

your important read for today:

(Mark Grant/Out of the Box and onto Wall Street)

The ECB - EUR22 Trillion Is Missing

Submitted by Tyler Durden on 10/02/2012 09:02 -0400

• European Central Bank
   
• Gross Domestic Product
   
• Money Supply
 
• Reality

Via Mark J. Grant, author of Out of the Box,

The ECB: The Missing Assets/Liabilities

“To treat your facts with imagination is one thing, but to imagine your facts is another.”

                        -John Burroughs

Yesterday I published the assets/liabilities of the European Central Bank as provided by them. I provided some analysis that I thought was relevant as I also asked all of you to look at the numbers yourself. To be quite open; I was stunned by the data they provided and shocked by the implications. I had not seen the data in any other source or commented about by anyone and the subject, while admittedly complex, and perhaps made more complex by design, is a huge wake-up call for anyone investing in Europe.

The ECB lists, as of the end of the 1st quarter of 2012, 16.304 trillion Euros ($ 21.032 trillion) in assets and 17.334 trillion Euros ($22.631 trillion) in liabilities. It is right there in black and white as I showed in the ECB provided data that I presented yesterday. However when you get to their consolidated balance sheet you find the numbers they bandy about in public to be a ledger of 3.240 trillion Euros ($4.00 trillion) and you catch your breath and pause. Utilizing normal American accounting practices this variance would be impossible and yet here it is; staring us all right in the face.

“Europe has put a ‘stop payment’ on our reality check!”

                       -The Wizard

I can report that I did hear from a number of large institutions yesterday that also looked at the numbers themselves and were stunned. Conversations were held, questions were asked and I think an accurate summation of the conversations was that everyone was in some state or another of astonishment. The numbers were not my numbers after all and while many good issues were raised in terms of how to properly analyze the data that was presented there was a clear sense that we were being duped by the European Central Bank and played for suckers.

“Reality is the leading cause of stress amongst those in touch with it.”

                     -Jane Wagner

Forget that the liabilities are greater than the assets and forget that that both have increased rather appreciably in the last several years and just concentrate on the size of the numbers presented and then ask the central questions; who is responsible for these assets and liabilities and where are they counted? We know that they are not counted at the ECB as they are not a part of their consolidated balance sheet. You may ask how this is possible and I re-print, once again, the applicable note from the ECB:

“Recognition of assets and liabilities

An asset or liability is only recognized in the Balance Sheet when it is probable that any associated future economic benefit will flow to or from the ECB, substantially all of the associated risks and rewards have been transferred to the ECB, and the cost or value of the asset or the amount of the obligation can be measured reliably.”

So there is the rationale, like it or not, but then where are these assets/liabilities counted? We are talking about $21.032 trillion in assets here and $22.631 trillion in liabilities which are larger numbers that all of the GDP of Europe. We can surmise that the ECB does not count these loans, securitizations and collateral as they belong to a given nation or a bank guaranteed by the nation or the securitization is guaranteed by some country but the rub is the country doesn’t count them either. When a European nation reports out its debt to GDP ratio I knew that they did not count contingent liabilities and I knew that government backed bank bonds were not included and I knew that regional debt guaranteed by the government was not included but this, and the sheer size of it, had lain underneath everyone’s radar.

Think of it; twenty-two trillion dollars worth of assets and liabilities and accounted for nowhere. No need to worry anymore about Target2; a mere tuppence at one trillion dollars, a decimal point. Just exactly what these assets and liabilities might be is anyone’s guess. Just which nations generated them is also anyone’s guess as no data or explanation is provided. Just what any country’s real debt to GDP ratio might be if these assets/liabilities were included in the equation is also anyone’s guess but I think it is safe to assume that the numbers would be off the charts; far off the charts.

“Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead. We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces.”                         -Sigmund Freud

You know, these are not blue fairies or gnomes or elves that have gone missing. These are twenty-two trillion dollars ($22 trillion) of loans and securitizations and mortgages that are found and accountable for by no one. These are real assets and real liabilities that have been turned into cash by the ECB and it causes me to wonder just how accurate the Money Supply numbers are for Europe with this amount of cash being pumped into the system. I also wonder what anyone’s real balance sheet looks like and I wonder what kinds of losses are being incurred and by whom. To be quite forthright, and in my opinion, this seems to me not just the rigging of the game or the gaming of the system but something far past that; something out beyond the realm of the credible and of real world experiences.

This is what we are investing in when we buy European bonds? This is where we are putting our client’s money? I don’t know; they may have gone mad but I have not.

Have you?

“An error does not become truth by reason of multiplied propagation, nor does truth become error because nobody sees it.” 

                    -Mahatma Gandhi

*****

If any of you think that China will bail out Europe guess again:

(courtesy zero hedge)  

China Just Killed All "China Bails Out Europe" Rumors For Good

Submitted by Tyler Durden on 10/02/2012 11:04 -0400

• Bond
   
• Central Banks
   
• China
   
• None
   
• Reuters

Just in case there are still any hopes that the FT, or any othercredible media outlet, may come up with a story, like it used to do almost daily back in 2011 and early 2012, that China, whose stock market continues to plumb 3 year lows, has some capacity to inject cash (that it doesn't have) into a broke continent (which would never repay said cash even if it existed), here comes none other than China's Sovereign Wealth Fund to make sure there is never again a rumor that China will bail out Europe. From Reuters: "China would be interested in buying into a Eurobond backed by core euro zone countries andconsiders investment in bonds issued by heavily indebted European countries unrealistic, a senior official with China's $480 billion sovereign wealth fund said. Jin Liqun, chairman of the supervisory board of the China Investment
Corporation (CIC), said until fundamental problems of fiscal, social and
monetary policies in euro zone countries burdened by debt are solved,
there could be no investment." They never will be so scratch that possibility out. Now we can limit the universe of idiotic Europe is saved (it isn't - it is only a matter of time now before the ship sinks) rumors to at least one less.

And some more:

"It's not realistic to expect any Chinese investor,CIC included, to buy the bonds, which are not safe," Jin, a former vice finance minister of China, told Reuters on the sidelines of VTB Capital investment conference in Moscow on Tuesday.

"If the euro zone would issue a Eurobond backed by all of the (core) countries - it is more attractive to international investors."

It is, however, realistic to expect entities which are also "unsafe" to dodecatuple down on said "unsafe" bond purchases. Such as all Italian and Spanish banks, as well as all central banks, which have now become toxic bond hazard repositories of only resort.

That said, thank you China for your honesty.

http://www.zerohedge.com/news/2012-10-02/eric-sprott-do-western-central-banks-have-any-gold-left

Eric Sprott: Do Western Central Banks Have Any Gold Left?

Submitted by Tyler Durden on 10/02/2012 18:49 -0400

• Bank of Japan
 
• Belgium
 
• Bill Gross
 
• Book Value
 
• Central Banks
 
• China
 
• David Einhorn
 
• Eric Sprott
 
• Estonia
 
• ETC
 
• European Central Bank
 
• Eurozone
 
• Exchange Traded Fund
 
• Federal Reserve
 
• Finland
 
• France
 
• Germany
 
• Greece
 
• Greenlight
• Hong Kong
 
• Institutional Investors
 
• International Monetary Fund
 
• Ireland
 
• Italy
• Japan
 
• Kazakhstan
 
• Netherlands
 
• None
 
• PIMCO
 
• Portugal
 
• Precious Metals
• Quantitative Easing
 
• Ray Dalio
 
• Reuters
 
• Ron Paul
 
• Slovakia
 
• Switzerland
• Turkey
 
• Ukraine
 
• United Kingdom
 
• World Gold Council
 
• Yen

From Eric Sprott and David Baker of Sprott Asset Management

Do Western Central Banks Have Any Gold Left???

Somewhere deep in the bowels of the world’s Western central banks lie vaults holding gargantuan piles of physical gold bars… or at least that’s what they all claim. The gold bars are part of their respective foreign currency reserves, which include all the usual fiat currencies like the dollar, the pound, the yen and the euro.

Collectively, the governments/central banks of the United States, United Kingdom, Japan, Switzerland, Eurozone and the International Monetary Fund (IMF) are believed to hold an impressive 23,349 tonnes of gold in their respective reserves, representing more than $1.3 trillion at today’s gold price. Beyond the suggested tonnage, however, very little is actually known about the gold that makes up this massive stockpile. Western central banks disclose next to nothing about where it’s stored, in what form, or how much of the gold reserves are utilized for other purposes. We are assured that it’s all there, of course, but little effort has ever been made by the central banks to provide any details beyond the arbitrary references in their various financial reserve reports.

Twelve years ago, few would have cared what central banks did with their gold. Gold had suffered a twenty year bear cycle and didn’t engender much excitement at $255 per ounce. It made perfect sense for Western governments to lend out (or in the case of Canada – outright sell) their gold reserves in order to generate some interest income from their holdings. And that’s exactly what many central banks did from the late 1980’s through to the late 2000’s. The times have changed however, and today it absolutely does matter what they’re doing with their reserves, and where the reserves are actually held. Why? Because the countries in question are now all grossly over-indebted and printing their respective currencies with reckless abandon. It would be reassuring to know that they still have some of the ‘barbarous relic’ kicking around, collecting dust, just in case their experiment with collusive monetary accommodation doesn’t work out as planned.

You may be interested to know that central bank gold sales were actually the crux of the original investment thesis that first got us interested in the gold space back in 2000. We were introduced to it through the work of Frank Veneroso, who published an outstanding report on the gold market in 1998 aptly titled, “The 1998 Gold Book Annual”. In it, Mr. Veneroso inferred that central bank gold sales had artificially suppressed the full extent of gold demand to the tune of approximately 1,600 tonnes per year (in an approximately 4,000 tonne market of annual supply). Of the 35,000 tonnes that the central banks were officially stated to own at the time, Mr. Veneroso estimated that they were already down to 18,000 tonnes of actual physical. Once the central banks ran out of gold to sell, he surmised, the gold market would be poised for a powerful bull market… and he turned out to be completely right – although central banks did continue to be net sellers of gold for many years to come.

As the gold bull market developed throughout the 2000’s, central banks didn’t become net buyers of physical gold until 2009, which coincided with gold’s final break-out above US$1,000 per ounce. The entirety of this buying was performed by central banks in thenon-Western world, however, by countries like Russia, Turkey, Kazakhstan, Ukraine and the Philippines… and they have continued buying gold ever since. According to Thomson Reuters GFMS, a precious metals research agency, non-Western central banks purchased 457 tonnes of gold in 2011, and are expected to purchase another 493 tonnes of gold this year as they expand their reserves.¹ Our estimates suggest they will likely purchase even more than that.² The Western central banks, meanwhile, have essentially remained silent on the topic of gold, and have not publicly disclosed any sales or purchases of gold at all over the past three years. Although there is a “Central Bank Gold Agreement” currently in place that covers the gold sales of the Eurosystem central banks, Sweden and Switzerland, there has been no mention of gold sales by the very entities that are purported to own the largest stockpiles of the precious metal.³ The silence is telling.

Over the past several years, we’ve collected data on physical demand for gold as it has developed over time. The consistent annual growth in demand for physical gold bullion has increasingly puzzled us with regard to supply. Global annual gold mine supply ex Russia and China (who do not export domestic production) is actually lower than it was in year 2000, and ever since the IMF announced the completion of its sale of 403 tonnes of gold in December 2010, there hasn’t been any large, publicly-disclosed seller of physical gold in the market for almost two years.⁴ Given the significant increase in physical demand that we’ve seen over the past decade, particularly from buyers in Asia, it suffices to say that we cannot identify where all the gold is coming from to supply it… but it has to be coming from somewhere.

To give you a sense of how much the demand for physical gold has increased over the past decade, we’ve listed a select number of physical gold buyers and calculated their net change in annual demand in tonnes from 2000 to 2012 (see Chart A).

CHART A

Numbers quoted in metric tonnes.
† Source: CBGA1, CBGA2, CBGA3, International Monetary Fund Statistics, Sprott Estimates.
†† Source: Royal Canadian Mint and United States Mint.
††† Includes closed-end funds such as Sprott Physical Gold Trust and Central Fund of Canada.
^ Source: World Gold Council, Sprott Estimates.
^^ Source: World Gold Council, Sprott Estimates.
^^^ Refers to annualized increase over the past eight years.

As can be seen, the mere combination of only five separate sources of demand results in a 2,268 tonne net change in physical demand for gold over the past twelve years – meaning that there is roughly 2,268 tonnes of new annual demand today that didn’t exist 12 years ago. According to the CPM Group, one of the main purveyors of gold statistics, the total annual gold supply is estimated to be roughly 3,700 tonnes of gold this year. Of that, the World Gold Council estimates that only 2,687 tonnes are expected to come from actual mine production, while the rest is attributed to recycled scrap gold, mainly from old jewelry.⁵ (See footnote 5). The reporting agencies have a tendency to insist that total physical demand perfectly matches physical supply every year, and use the “Net Private Investment” as a plug to shore up the difference between the demand they attribute to industry, jewelry and ‘official transactions’ by central banks versus their annual supply estimate (which is relatively verifiable). Their “Net Private Investment” figures are implied, however, and do not measure the actual investment demand purchases that take place every year. If more accurate data was ever incorporated into their market summary for demand, it would reveal a huge discrepancy, with the demand side vastly exceeding their estimation of annual supply. In fact, we know it would exceed it based purely on China’s Hong Kong gold imports, which are now up to 458 tonnes year-to-date as of July, representing a 367% increase over its purchases during the same period last year. If the imports continue at their current rate, China will reach 785 tonnes of gold imports by year-end. That’s 785 tonnes in a market that’s only expected to produce roughly 2,700 tonnes of mine supply, and that’s just one buyer.

Then there are all the private buyers whose purchases go unreported and unacknowledged, like that of Greenlight Capital, the hedge fund managed by David Einhorn, that is reported to have purchased $500 million worth of physical gold starting in 2009. Or the $1 billion of physical gold purchased by the University of Texas Investment Management Co. in April 2011… or the myriad of other private investors (like Saudi Sheiks, Russian billionaires, this writer, probably many of our readers, etc.) who have purchased physical gold for their accounts over the past decade. None of these private purchases are ever considered in the research agencies’ summaries for investment demand, and yet these are real purchases of physical gold, not ETF’s or gold ‘certificates’. They require real, physical gold bars to be delivered to the buyer. So once we acknowledge how big the discrepancy is between the actual true level of physical gold demand versus the annual “supply”, the obvious questions present themselves: who are the sellers delivering the gold to match the enormous increase in physical demand? What entities are releasing physical gold onto the market without reporting it? Where is all the gold coming from?

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. They are also the very entities whose actions have driven investors back into gold in the first place. Gold is, after all, a hedge against their collective irresponsibility – and they have showcased their capacity in that regard quite enthusiastically over the past decade, especially since 2008.

If the Western central banks are indeed leasing out their physical reserves, they would not actually have to disclose the specific amounts of gold that leave their respective vaults. According to a document on the European Central Bank’s (ECB) website regarding the statistical treatment of the Eurosystem’s International Reserves, current reporting guidelines do not require central banks to differentiate between gold owned outright versus gold lent out or swapped with another party. The document states that, “reversible transactions in gold do not have any effect on the level of monetary gold regardless of the type of transaction(i.e. gold swaps, repos, deposits or loans), in line with the recommendations contained in the IMF guidelines.”⁶ (Emphasis theirs). 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, “Gold (incl. gold swapped or on loan)”. That’s the verbatim phrase they use in their official statement. Same goes for the US Treasury and the ECB, which report their gold holdings as “Gold (including gold deposits and, if appropriate, gold swapped)” and “Gold (including gold deposits and gold swapped)”, respectively (see Chart B). 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, (Ed. As is the “including gold deposits” verbiage that they use – what else is “gold” supposed to refer to?) but at the same time not at all surprising. It would not lend much credence to central bank credibility if they admitted they were leasing their gold reserves to ‘bullion bank’ intermediaries who were then turning around and selling their gold to China, for example. But the numbers strongly suggest that that is exactly what has happened. The central banks’ gold is likely gone, and the bullion banks that sold it have no realistic chance of getting it back.

CHART B

Sources:
1)http://www.bankofengland.co.uk/statistics/Documents/reserves/2012/Aug/tempoutput.pdf
2) http://www.treasury.gov/resource-center/data-chart-center/IR-Position/Pages/08312012.aspx 
3)http://www.ecb.int/stats/external/reserves/html/assets_8.812.E.en.html
4) http://www.boj.or.jp/en/about/account/zai1205a.pdf
5) http://www.imf.org/external/np/exr/facts/gold.htm
6)http://www.snb.ch/en/mmr/reference/annrep_2011_komplett/source

Notes:
ECB Data as of July 2012. Bank of Japan data as of March 31, 2012.

* European Central Bank reserves is composed of reserves held by the ECB, Belgium, Germany, Estonia, Ireland, Greece, Spain, France, Italy, Cyprus, Luxembourg, Malta, The Netherlands, Austria, Portugal, Slovenia, Slovakia and Finland.
** Bank of Japan only lists its gold reserves in Yen at book value.

Our analysis of the physical gold market shows that central banks have most likely been a massive unreported supplier of physical gold, and strongly implies that their gold reserves are negligible today. If Frank Veneroso’s conclusions were even close to accurate back in 1998 (and we believe they were), when coupled with the 2,300 tonne net change in annual demand we can easily identify above, it can only lead to the conclusion that a large portion of the Western central banks’ stated 23,000 tonnes of gold reserves are merely a paper entry on their balance sheets – completely un-backed by anything tangible other than an IOU from whatever counterparty leased it from them in years past. At this stage of the game, we don’t believe these central banks will be able to get their gold back without extreme difficulty, especially if it turns out the gold has left their countries entirely. We can also only wonder how much gold within the central bank system has been ‘rehypothecated’ in the process, since the central banks in question seem so reluctant to divulge any meaningful details on their reserves in a way that would shed light on the various “swaps” and “loans” they imply to be participating in. We might also suggest that if a proper audit of Western central bank gold reserves was ever launched, as per Ron Paul’s recent proposal to audit the US Federal Reserve, the proverbial cat would be let out of the bag – with explosive implications for the gold price.

Notwithstanding the recent conversions of PIMCO’s Bill Gross, Bridegwater’s Ray Dalio and Ned Davis Research to gold, we realize that many mainstream institutional investors still continue to struggle with the topic. We also realize that some readers may scoff at any analysis of the gold market that hints at “conspiracy”. We’re not talking about conspiracy here however, we’re talking about stupidity. After all, Western central banks are probably under the impression that the gold they’ve swapped and/or lent out is still legally theirs, which technically it may be. But if what we are proposing turns out to be true, and those reserves are not physically theirs; not physically in their possession… then all bets are off regarding the future of our monetary system. As a general rule of common sense, when one embarks on an unlimited quantitative easing program targeted at the employment rate (see QE3), one had better make sure to have something in the vault as backup in case the ‘unlimited’ part actually ends up really meaning unlimited. We hope that it does not, for the sake of our monetary system, but given our analysis of the physical gold market, we’ll stick with our gold bars and take comfort as they collect more dust in our vaults, untouched.

1	http://www.bloomberg.com/news/2012-09-04/central-bank-gold-buying-seen-reaching-493-tons-in-2012-by-gfms.html
2	See notes in Chart A.
3	http://www.gold.org/government_affairs/reserve_asset_management/central_bank_gold_agreements/
4	http://www.imf.org/external/np/exr/faq/goldfaqs.htm
5	Mine supply estimate supplied by World Gold Council; YTD gold mine production data suggests that total 2012 gold mine supply will come in lower around 2,300 tonnes, ex Russia and China production. In addition, Frank Veneroso has recently published a new report that warns that the supply of recycled scrap gold could drop significantly going forward due to the depletion ofthe inventories of industrial scrap and long held jewelry over the past decade.
6	http://www.ecb.int/pub/pdf/other/statintreservesen.pdf