There’s something fishy going on in the gold market

In January, the contrarian investor in me won out: I decided to buy into gold miners.

In March I talked about how increased activity in the gold market might mean the precious metal has turned a corner.

But today, I ask that you forget all about gold’s recent price action. That’s a story for another day.

For now, let’s focus on what really matters: what I think are potentially explosive actions in the physical gold market.

Paper beats rock

Now, bear in mind that the physical gold market (dealing in wholesale bullion delivery) is tiny in relation its paper-based cousin (futures, options, leveraged trades, collateralised obligations, ETFs, etc).

In fact, it’s estimated that the paper gold market – which should be a derivative of the physical market – is actually some 100 times larger than the physical market – ie, if everyone holding paper gold ‘stood for delivery’ at the same time, it would be impossible for every party to fulfil their obligations.

The central banks don’t like it

Because the derivative market is so large, paper gold makes physical gold’s market price.

This is a problem for nervous central banks because when prices are perverted in this way, it causes anomalies in the market.

The big one right now is how the gold price seems to be completely out of kilter with underlying demand.

For example, how on earth can China and others be importing such massive amounts of physical gold – and yet the gold price refuses to budge?

All sorts of theories have been posited. One is that major Western central banks have been providing physical supply to balance the books, by leasing gold into the market.

But here’s the rub: this gold may belong to other nations, which is causing anxiety for countries that rely on the Western depositories to store their gold.

World to banks: Where’s my gold?

First, it was the Venezuela’s Hugo Chavez that kicked up a stink. He demanded Venezuela’s gold back from London and the US. That was a few years ago now.

Some astute nations took note. After all, Venezuela’s holdings are the 15th largest in the world – this was no piddling amount.

Then about a year and half ago, Germany was rumoured to be asking for an audit of its gold held in foreign depositories. Supposedly the American custodians said take a hike.

We don’t know if that’s true or not. But what we do know is that shortly afterwards, the Germans asked for much of their gold back. 674 tons, in fact – 374 from Banque de France and 300 from the US Fed in Manhattan.

Now, this certainly wasn’t a piddling amount either. But if the stuff was in the vaults, then what’s the problem?

Well, you can only imagine the Germans response to the announcement that the transfer, of their gold back to them, would take eight years to fulfil.

“What? Eight years? The Venezuelans took delivery within a couple of months. What’s going on here?”

What indeed? Perhaps the Americans placated the German delegation thus: “Now, now, keep calm. Don’t make a fuss. If you rock the boat and everyone gets nervous, this process could take a lot longer! We don’t want anyone else getting concerned.”

A full year after Germany asked for its gold back, a trifling 37 tons had been delivered. That’s way off the 87 tons envisaged… and even that figure was allowing eight full years for delivery. What’s more, a paltry five tons came from the US. The rest was from Paris.

When asked about progress on getting its gold back, the Bundesbank was rather coy.

Don’t worry, they said.

They would, though, wouldn’t they? It would hardly help to have other nations knocking on the Fed’s door asking for theirs back too now, would it?

The rumour mill is back in action

More recently, Austria was said to be giving its London custodians a prod.

A report in Austrian magazine Trend suggested they were planning to send auditors to check on the country’s gold holdings in the Bank of England.

Hey up, this is how the German repatriation thing started!

And Austria is no gold slouch either. Its IMF-reported reserves top 280 tons. That’s nearly half Austria’s foreign exchange reserves. They like the stuff!

In response to the rumour mill, Ewald Nowotny, governor of Austria’s central bank, recently played down matters:

“I acknowledge the request. Any grocery store is obliged to do inventory once a year.”

So the rumours of the audit appear to be true, then. And once again, the central bank tells everyone there’s nothing to see here. As I said – they would, wouldn’t they?

If there’s going to be a run, then get in line early, and don’t go shouting about it.

The perfect crime

Everything I’ve laid out above is conjecture, of course.

But don’t be surprised to learn that the central banks have been ‘leasing’ gold into the markets. In fact, we know for sure that they do – they’ve admitted as much.

And unlike dumping the stuff in the market – like Gordon Brown did with half our pot – lending the stuff can be done more surreptitiously.

In fact, it’s the perfect crime. This way they can dump it on the markets, and still record it on their own balance sheet.

And why not? The stuff is supposed to come back again after the lease is up.

But this isn’t like shorting shares. In the bullion markets, once the bullion has been lent short and dumped on the market, it’s mostly smelted into new bars that are demanded in Asia. It’s then shipped and stored in brand new vaults all over the globe.

Getting this stuff back after the lease is up could prove difficult for all the banks and hedge funds that have been shorting the stuff. ‘Only five tons delivery in one year’ kind of difficult!

Of course, if this story has legs, then it won’t be endorsed by any official any time soon. Mum’s the word.

It makes you wonder, doesn’t it? Venezuela, Germany, Austria… where are the whispering rumours gathering next?

And could there be an almighty run on the Western custodian banks to come?

Watch this space.

  • steveH

    So, if this is right, what do I do about my holdings in
    Blackrock Gold & General
    XGLS (DB Physical gold)

    • Guest

      Hand it over to someone who is less lethargic, like me for example, so that I can just wander around the world enjoying the rest of my life.

    • Colin Williams

      Get Your Physical Gold into A Safe At Home !!!! …..And Out Of The Evil Corrupt Banks/Institutions Hand Quickly **** Or You Could Lose It All !!!!!!

  • Richard2011

    The actual Germany request was for 2,350 tonnes of gold in Fort Knox which hold 8,200 tonnes and the USA have offered 300 over 7 years – and over the last 30 years USA has exported more gold than imported – final in 2009 China stated they had just over 1,000 tonnes – so if they stated holding now at it was 5,000 tonnes where did come from ?

  • kajoda1954

    Well Bengt, You are correct in your assumptions. But, why. has it taken so long for the penny to drop ?
    You know as well as me that gold should be much higher. Are you journalists now preparing for the inevitable revaluation of gold (and even more so silver)
    Some truth and not hints would now be in order. I do understand your dilemna though. Fighting central banks is not easy and can be un-profitable. Take heart though I have about 50 % of my estate (5 million gbps) in PM and I am not stupid, In fact I am entirely comfortable with my position.

    • Ellen12

      Yes, I think by now it’s pretty much assumed that gold and silver are even more rigged by than libor and forex. Anything that maintains the illusion of the US dollar supremacy may be assumed to be rigg(able).

      But shorting gold was never the problem. It is the naked shorts that distort the market. But central banks role, I believe, is far more direct than that of a nervous bystanders. When the gold market was crashed in April 2013, I believe the FED was not expecting so many to see the crash as a buying opportunity. I think it was crashed by the FED, maybe by using Goldmans or JP Mrogan, to enable them cover their short positions by shaking out weak hands or using technical stop loss selling. But, I would guess, most of the weak hand have been flushed out, speculation of the widespread manipulation of precious metals have gone mainstream – since the unexplained resignation of Deutsche Bank from the, appropriately named, ‘London Fix’. And nobody knows how much of whose gold the FED has spent trying to splurge QE around and simultaneously prop up the dollar to maintain its undeserved ‘reserve currency’ status.

  • Dave k

    Also the gold price is below the cost to produce it , that can’t last.
    REM up 110% , good call.

  • MGC Andy

    Is there likely to be a gold grab by BOE if they are pushed to return other peoples that they have lent and had smelted down now ? Is bullion Vault London covered or is it time to shift it to Zurich Vault or vault under house ? Stranger things have happened !

    • Colin Williams

      Keep Your Own Physical Gold In A Vault At Home !!!!……Best Wishes The Resistance ****

  • Mauritius

    If they do get to audit it, do they just look at it or do they actually check it’s 100% gold? I heard a story of The US sending ‘gold bars’ to China which when checked had a Tungsten core with gold around the edge.

    I suspect any physical gold backing paper gold such as ETF’s and the like will be confiscated. Be very careful.

  • Oscar Foxtrot

    MGC Andy: I don’t know if the authorities could confiscate gold held in London with Bullionvault, but I am cost averaging from the Zurich vault as a precaution.
    kajoda1954: I admire your 50% PM holding. I thought mine was high at 25%. I suspect we will be rewarded – not sure when though!
    Well done Bengt with REM – 80% up since I bought.

  • quark

    The Gold Cartel by Dimitri Speck, is a book I mentioned in another post. It really is an eye
    opener. A must read for anyone interested in the Gold Price. And no, I am not the publisher or connected in any way to the author; but I found it fascinating and disturbing. How do we know that Bullion Vault isn’t lending out its Gold? How do we know, if our designated gold bars are being borrowed from some institution or being lent to Gold Miners? Now, my experience with Bullion Vault is first rate. And they are part owned by The Gold Council and Rothschilds; but I do wonder that if armageddon arrives, whether, like the banks, the vault owners will just close the doors. So I’ve come to the conclusion, that owning and storing Krugerands at home, is the only answer. Problem is, I would have a nervous breakdown every time I left home for the evening. There seems no doubt, that the Gold price is rigged, just like everything else where central banks are concerned.

    • Colin Williams

      Get Physical At Home xxxx …..Before The Banks Close Their Doors On You !!!!

  • Borderer

    Gold as a hedge? Maybe. But hold as Britannias. Worst case scenario they are VAT and CGT free and in my safe are not going to be confiscated by anyone. Bid -offer spread is painful when buying from e.g. bullionbypost but fairly liquid if you are prepared to take a further 1% hit from the supplier.

    But, oh, they are so lovely to weigh in your hand.

    Colour me romantic!

    • John Wynne

      Hi Borderer

      A good call, I think. I believe Britannias are 22 ct. What weight are they, please? Happy days are coming for gold bugs, methinks.

      • Borderer

        Hi John

        2013 & 2014 gold Britannia are 999.9 pure gold (24 carat). Earlier coins are 22 carat. I think Britannia are a better bet than sovereigns because their premium per ounce to the gold spot price is much less.

        Regarding where the gold price is going, I’m not ashamed to admit I’m mystified. But holding 5% or so of your portfolio as a VAT free and CGT free “insurance” seems to me a good idea.

        To quote my old Granddad, “if someone cleverer than me wants to buy it, then I want to keep it”.:)

        • Borderer

          Er – but he would have been wiped out if he had lived in Holland in the 17th century and took the same view on tulips!

    • Alan Harris

      Colour you idiotic!

    • Colin Williams

      Good Thinking Borderer xxxx

  • Pinkers Post

    The only “fishy” thing about gold is the ?precious metal itself. It’s in desperate need of a polish: Entry 11 April 2014 (pls scroll down)

  • Pinkers Post

    The only fishy thing about gold is the ?precious metal itself – clearly in need of a polish!

    Gold has been a bit of an unruly child recently, responding in an erratic and unpredictable manner to hitherto reliable indicators such as the threat of inflation (QE!), political turmoil and currency movements. This new, rather random ‘behaviour’, appears to have coincided with the rise of Exchange Traded Funds (ETF) that have introduced more flexibility and ease of trading and hence facilitating more speculative trading. Dubbed as a ‘cheaper’ and more ‘user-friendly’ platform, the ETF appears to have eroded gold’s traditional role as a trusted hedge and insurance policy.

    It is a myth to believe gold is a constant store of value. Like anything else, the price of gold is created by supply and demand.

  • Pois fisher

    Have any of you read “the Death of Money” by James Rickards. Scary stuff. I know it’s easy to think well of a publication when it’s views closely align with yours, so other viewpoints would be helpful, but it does all seem like common sense to me. Of course, it could just be the old guy in the market holding up the “end is near” board.
    How about a review from you Bengt.
    Think I’ll buy the real thing and bury it!

  • at

    I looked at a 20 year chart and gold appears to have risen more steeply from around 2008-2009 than in the previous 15 years. Assuming the very steep rise was a reaction to the 2008-2009 banking crisis and that we are out of the crisis now, the projected level of gold is around $1400/oz.

    Since 2008 gold has risen by 62.5%.

    I do not know what would be a fair comparison for gold, house prices, maybe, emeralds? (up by 6% since 2008), I am not sure, but the steep rise of gold price is way above the consumer price index.

    Assuming a 3% inflation each year, since 2008, the compound inflation would be around 20%.

    I think therefore that gold is overvalued by around 40% on the 2008 price, ie today’s price ought to be around $955 as inflation would dictate.

    Assuming a 5% inflation each year, since 2008, the compound inflation would be around 34% yielding today’s gold price around $1072.

    Disclaimer: I have invested heavily in gold, at quite high prices, so I hope my calculations are completely wrong.

  • dizpila

    This guy talks about gold, penny stocks… AAPL (which he predicted it would be drowning by now)… he knows about wines, cooks, builds houses… he’s your true renaissance man!

  • Bankrobber

    P M ??

    • Jeremy Shaw

      Precious Metals

  • common sense

    if you want to keep gold and are worried about security, dont let anyone know you have got it, then they wont burgle your house.
    dont by by post
    pick it up from bank / dealer and dont give your name and address/ pay cash
    I dont know if you can do this in the uk, but where i live in europe, you can pick up up to 15 without ID


      Tell your neighbor and he will tell his cousin that will come over at night and shoot you for it . Do not tell anyone about it. You can reveal where it is in your will just in case you pass away.

  • FreeMarketNotSlavery

    I the 40 years since 1971, when Nixon (& Governor John Connelly who was shot with JFK) took the dollar and the World off the Gold Standard, money creation has seen the amount of money circulating in the UK grow at an average of 11% per year.Yet official measures say inflation from 1989 to 2012 has averaged just 2.8%. This is because the official measure known as consumer price inflation (CPI), only looks at a basket of consumer goods and services, which – thanks to competition and increased productivity – have in many cases, not risen in price. Some items – clothes, furniture, electrical goods, food and so on – have actually fallen in price. In the UK (though figures are similar for the US) only about 10% of all money created between 1997 and 2007 went into consumer goods, according to research by think tank PositiveMoney, so CPI measures only the effect of 10% of money creation. Inflation measures do not take into account areas where Government runs up deficits – in education and health, for example (in the NHS prices have risen an average of 14% over the last 18 years). CPI does not take into account house price rises – yet between 1997 and 2007, 40% of newly created money went into residential and commercial property. 37% of newly created money goes into financial markets – no wonder the financial sector has grown – yet CPI does not include financial assets.

    It’s all part of the great obfuscation that is deliberately, or otherwise, taking place.

    Just 13% of newly created money between 1997 and 2007 went into real businesses that actually create jobs and boost economic growth.

    (The numbers are similar for the US). Our system of money is not greasing the wheels of exchange, as it should and once did. Instead it is causing asset price inflation, and making Western economies dependant on this inflation.

    ‘Life after the State’ by Dominic Frisby

    • Victor Pc

      The real Gold story goes like this, the League of Nations bankrupted all countries at the Geneva Convention in 1930, when the King of England offered to store hundreds of ships of Gold in exchange for paper Bonds. After the Gold Standard Act Amendment Bill 227 21 September 1931 [suspended] came the Uniform Commercial Code UCc (international Law), to act with honour towards humanity (i.e Gold Standard) – which the West failed to do – and dishonoured by printing paper money. The Gold ended up in USA for safe keeping, rescued in the National Economic Security & Reformation Act 2001 (A prosperity fund, redistribution of gold, due for implementation at 9am on 11 September 2001). The Gold was removed for returning to China a few days before 911 (which was staged to claim the destruction of the gold) and is currently in a secret location in the East. We are talking about enough Gold to give everyone about £3,000,000 in Gold, shared almost equally and fairly according to country of origin …so the above debates are not really touching on the fraud committed against China in 1) Acting dishonourably by offering to China only the price of the Gold as it was in 1930 rather than what it is today 2) Fraud in attempting to claim for the destruction of Gold which was staged – Ref: Neil Keenan, Benjamin Fulford, Ashtar, Mother Sekhmet

      • Victor Pc

        …the history of NESARA National Economic Security & Reformation Act, which imposes Gold Standard, outlaws taxation, bans patents on advanced technologies, returns all land and premises to people & communities, imposes free food, free travel, free accomodation, borderless travel – basically a Commercial Lien on all Nations trading on paper currency under UCc 3-503, without Prejudice UCc 1-308,, on all profit led corporations—-REFORMATION-ACT.html …so coming back to the article…The King of Kings, Indonesia, has the Gold for redistribution to the people, Ashtar & Mother Sekhmet are overseeing NESARA to completion for the Ascension of humanity, freedom from debts, because, humans are Divine children of God and Mother Earth belongs to the people NOT corporations – The Golden Age or Sat Yug started on 21 December 2012 – the deep underground military bases were pulverised in October 2011 – source Dr David Wilcock – so there will be no more paper money or electronic money or stocks and shares in the Golden Age – which was an illusion…to enslave humanity

        • spidergk

          Do you speak English at all?

          • Victor Pc

            No, why? Not when I’m posting anyway?

            • spidergk

              hehehe fair enough

        • fruganomics

          to victor Pc . . . cuckooooooooooo

  • Carl Jons

    They are price fixing the gold and silver price so that we all continue to use the pretty paper stuff they print and print and print. China and Russia love this, they can keep buying all the gold and silver from the west at a knock down price until we run out. Then we are left holding paper and they are holding all the gold and silver.

    • Warun Boofit

      Carl , If China and Russia end up with all the gold it could become virtually worthless unless they can find a practical use for it, they can sit and look at it or do a stomp around their pile while the rest of the world carries on regardless, I doubt it would make one iota of difference to the world economy in fact I would welcome an acceleration of the process, the Chinese and Russians can then spend all their time guarding the gold. The paper market could continue regardless after all traders close their positions prior to expiration or roll them forward they never take or make delivery, its a completely virtual market and all they need is volatility, the price does not matter to them, I dont see what difference it would make if the real stuff is even more out of reach than it is now

      • WA1

        Until, the Russians and Chinese DEMAND, a gold backed currency (or it’s physical equivalent) for THEIR resources – Russian Energy, Diamonds, Rare Earth Metals, Uranium, and Apple I-products, that Merica, doesn’t have the capability of producing anymore, because:

        1, Most of the population are dumbed down idiots

        2, The cap-ex costs are prohibitive (Esp, when interest rates go to 7% as they might)

        3, The production equipment is sourced overseas too, and the population of “Merica” are too busy flipping burgers, or writing Apps.

        4. The world has turned against their big-boy playground bullying tactics.

  • Thomtids

    I take it that Brown actually sold British Gold Reversionary interests rather than the real thing, hence the almost worthless valuation he achieved? Not unlike selling tenanted property?
    And presumably, this was because he had already leased the stuff to a load of dodgy dealers who had melted it down and from whom it wasn’t coming back so to “straighten the books” Brown sold his worthless paper as instructed by his mates in Germany?

  • malfosse

    Like any bartering medium it is only worth what it will buy, At the end of WW2 a lieca camera would buy a loaf of bread in Germany. You cannot eat gold, or survive on it. Some think it is better if the paper stuff fails to represent any purchasing value. it common to all nations, as a trading unit. We dig up Vicking hoards now and again, A wealthy man had a large pot of chopped up silver items, bits of bangles, cloak hasps, ect. it is only the art work we value now, The mans wealth and importance was but a pot of trash.

  • Fish

    M.Armstrong reckons we are going to touch the 1980’s highs before reversing in anticipation to loosing confidence in government. That would mean somewhere in the $875 area. For those holding its a momentous ride. Call it insurance, one day it may come in very handy – unless of course governments decide to declare it illegal, question is which governments? The price, however may not change very much in certain currencies such as Yen and Rubles ! Date to watch seems late 2015 to early 2016.


    They claim there is only 180,000 tons of gold in the world.
    There is probably millions of tons of gold in the world.
    Actually Silver is a lot rarer Metal than Gold and it is being used up fast. Right now only a 14 year supply of known reserves in the ground.

  • alanh

    This is madness. So the financial system crashes and youre gonna walk into the grocery store with a bit of gold and shave some off to pay for your beans, right ? You’ll be dead before you get home with the remainder (or the beans!) or tortured to reveal where youve hidden the rest.
    Gold is a practically useless material unless you want to make the most expensive item in the world (wedding rings) or teeth. Its value is in some ancient agreement between the peoples of the world when it was hard to find and no one was running the financial system. Theres so much now that its uneconomic to even dig it up. It only has a value when the financial system DOESNT collapse….at least then you can swap it for fiat currency. Why would anyone swap a basket of groceries for a paper weight? Silver may be a different story….at least It has its uses.

  • Hughspeaks

    I wonder whether there’s any connection between that Strauss-Kahn business, and the appointment of a lawyer with no financial qualifications, who worked for most of her professional career at a law firm from Obama’s home town of Chicago, as head of the IMF in July 2011, and the mysterious and sustained fall in the price of gold that started about two months later? The IMF apparently held about 3000 tons of gold at the time Christine Lagarde was appointed. What’s the bet that most of that gold has by now been swapped for freshly minted US treasury bonds and eurobonds?

  • Matt

    It clearly does make a difference, it may be a virtual market all based on nothing, and that’s fine so long as nobody knows it, when I read this article it occurred to me that apart from a financial instrument; gold is also an element that is actually mined and one day will run out, so I looked up projections for when that would happen, I can’t remember what it was, not long same as oil and gas, it always sounds like something they made up which will never happen….Anyway in the comments some guy was saying “There’ll be all the gold we already had, so why will we need more when it can’t be mined?” which is really not a very smart thing to be saying, the way I see it …(and I do have only a rudimentary understanding of anything that falls outside developing properties so forgive me if its me who is wrong) …is everything in the world economy is based on growth and as we grow and our currencies grow presumably new countries will need bigger gold reserves to continue to grow and back it up, and it occurred to me that even if and when the gas and oil are gone, I am at least gonna need the gold backing the financial system to go and buy myself an axe to chop down some wood to burn, that is to say I believe this virtual system and it’s continued perceived solvent nature to be more important than any other real tangible asset you can imagine, but like I said if it’s not property I am only guessing.

  • Verrillion

    Let me start by saying im a gold prospector. Ive prospected Britain for over 30 years and have found sites that could sustain very big gold mines some capable of producing millions of ounces. Problems would be from Crown Estates(not the easiest people to deal with ) and planning authoritys. But gold can be produced in mega millions if we put our mind to it.

  • Anthony Papagallo
  • Colin Williams

    Said It For Years !!!! Get Out of Paper Gold ….and ALL Paper Infact !!!! ****…and Get into Physical Gold and Silver Coins etc ^^^^ ….. Before There Is A Bank Run ….Get Your Cash Out and Save At Home In Dollars Pounds Euros and Swiss Francs xxxx