Are the central banks
running a fractional gold system?
This thought is prompted by a forensic study of the Bank
for International Settlements’ records and accounting
procedures with respect to its dealings in gold, which
was presented by Robert Lambourne to the Gold Symposium
in Sydney on 9th November. The link to his
report is
here.
Lambourne points out that the BIS was founded in 1930,
when settlements between central banks routinely
involved gold, and the primary function of the BIS was
to facilitate these settlements without the physical
transfer of bullion. This involved gold accounts being
maintained at the BIS for gold owned by central banks,
with other central banks at the main depository centres.
Lambourne cites the example of the pre-war German
Reichsbank, which held gold through the BIS in
Amsterdam, Berne, Brussels, London and Paris.
Central banks were offered two different types of
account at the BIS, earmarked and sight: earmarked
accounts recorded gold held separately and specifically
for a central bank, and sight accounts were
non-specific. Earmarked gold is allocated, while sight
gold is unallocated; earmarked is custodial and sight is
co-mingled.
The
flexibility of the system allowed a central bank to
diversify its gold reserves in a number of centres
through a politically neutral institution, and it made
sense to allocate some of this into a fungible account
to settle transactions with other central banks. But
that was pre-war, and before the US, with the
co-operation of the IMF and other European central
banks, demonetised gold.
Today, the BIS still operates earmarked and sight
accounts for central banks, but crucially, rather than
have the bulk of gold in earmarked accounts with a
smaller float in fungible sight accounts, the bulk of
central bank gold is now held in unallocated sight form.
Lambourne brings this point out in his analysis of the
2009/10 BIS Annual Report, which shows in Note 32 that
the BIS holds only 212 tonnes for central banks in
earmarked accounts, and 1,704 tonnes on its balance
sheet in sight accounts. Furthermore, the BIS accounts
disclose that almost all of the 1,704 tonnes is held at
central banks in unallocated sight form. This confirms
that the central banks themselves also operate sight
accounts.
So
to summarise so far, out of 1,912 tonnes at the BIS, 90%
of it is now unallocated and nearly all of this gold is
held in unallocated accounts at other central banks.
While this sight gold at central banks is technically
deliverable on demand, there is no apparent requirement
for them to actually have it. It is therefore entirely
possible for a central bank to retain only a small
portion of the total owed on sight accounts, which after
all is what banks have done from time immemorial.
The
temptations to use physical gold from these unallocated
sight accounts to supply the market have been enormous,
given the progressive demonetisation and discreditation
of gold by the BIS founder members. It is easy, without
proper audits, to keep these activities secret from the
markets and even from other central banks not in the
inner circle. It would be very interesting to know, for
example, the terms under which India agreed to buy 200
tonnes of gold from the IMF. Did she actually take
delivery into an earmarked account, or was it a pure
paper transaction across sight accounts? If she had
insisted on an earmarked account, would the deal have
gone to someone less picky? Was the IMF gold itself
earmarked or sight, existing or non-existent? As an
outsider from the inner BIS circle the Bank of India is
not in a position to suspect she may be the victim of a
pyramid scheme run by her superiors; nor indeed is any
other of the minor central banks with sight accounts in
London, New York or Zurich.
We
must hope for the sake of financial stability that such
suspicions are without foundation, but this hope is
untenable while the major note-issuing banks refuse to
provide independent audits of their activities. If
these central banks have been operating a fractional
sight system, then it could explain how they have
managed to supply so much bullion into the markets while
appearing to maintain their official reserves.
China and Russia must be watching this with great
interest. We can assume that their intelligence
services are more aware of the true position than the
general public, and if they also conclude that the
Western central banks are running a fractional system
using sight accounts, this knowledge hands them great
economic power.
It
is relevant to bear this in mind, because it will
condition the US’s response to what is developing into a
destructive gold crisis. Political and strategic
considerations will have to be weighed as well as purely
financial and practical ones. It would be downright
stupid, for example, for the US to confiscate privately
owned gold, without international agreement from Russia
China and India as well as the Europeans to take similar
action. And how co-operative would any nation be when
they discover that the gold they thought they had at the
BIS, the Fed and the Bank of England has actually
vanished?
This is important because the basic problem is that
government and banking debt around the world are both
rapidly moving towards default, and since governments
are guaranteeing the lot, the pace of monetary creation
is accelerating. The consequence is that the gold
suppression schemes, which have existed for the last one
hundred years in one form or another, are finally coming
to an end. We are trying to guess how dramatic that end
will be. It will be difficult enough to stop a run by
unallocated account holders on the bullion banks,
without forcing a cash-payout amnesty. But if the
central banks themselves cannot supply the necessary
bullion to prevent this, the prospect of a total
collapse of paper money will be staring us all in the
face.
16
December 2010
