Is the world’s biggest gold vault empty?

In 1978, the peasant farmers in a small Chinese village called Xiaogang gathered late and in strict secrecy to sign a contract. The contract was signed under lamplight, and then hidden away in the straw roof of their hut. If discovered, it was dangerous enough to get all of them killed.

The Xiaogang farmers’ contract ended up changing China, and must be in with a shout as one of the most important documents in human history. What was it? It was a simple agreement which allowed the farmers to keep some of the produce they grew for themselves. Previously, all produce in Xiaogang was shared by the collective.

After a bumper harvest, their scheme was discovered. But they were lucky. At that time, influential people in the Communist Party leadership wanted to reform China’s economy, and the Xiaogang farmers were held up as role models. Within a few years, farms all over China adopted the principles in that secret document. The government launched other economic reforms, and China’s economy started to take off. Since the document was signed in 1978, around 500 million people have risen out of poverty in China.

This wasn’t the first time a seemingly innocuous event changed the course of history. Think of when JFK passed the Interest Equalisation Tax in 1963. His intention was to discourage Americans from investing abroad. He certainly didn’t plan on reviving the City of London – but that’s what happened. The tax led to the creation of the eurobond market, which brought London back from the brink and helped it surpass New York as the world’s leading financial centre.

Or consider when Jacques Delors wrote the Maastricht Treaty, which created the euro, in 1992. There were not many back then who foresaw how dangerous the euro would become, 20 years later.

My point is that when we look back at history, the most important turning points often go unnoticed at the time.

So, will 2014 come to be remembered as one of those times?

The Fed’s hidden treasure

The fifth subfloor of the Federal Reserve Bank of New York is home to the world’s largest gold vault. And pretty much anybody can take the elevator down 25 metres below street level to view the steel and concrete structure. But very few people are allowed past the 90-ton steel cylinder that protects the entrance to the vault – not even the owners of the gold stored inside.

Of course security has to be pretty tight, for the vault that contains over 20% of the world’s gold. But some owners have become increasingly suspicious over the existence of the gold.

When the German government recently asked to see around 1,536 tonnes of German gold stored in that vault, which amounts to roughly half of Berlin’s reserves, Der Spiegel reports that the Federal Reserve refused to allow German inspectors to view them in the interest of security and of the control process”.

Frustrated by the lack of transparency, the Germans recently decided to take back control and move some of their gold back to Germany. So last year the US agreed that 674 tonnes would be repatriated over eight years. That’s an annual run rate of about 84 tonnes a year.

The fact that it was going to take eight years didn’t exactly calm frayed nerves, but the powers that be put on a brave face and assured the German population that all was well with their gold.

Now, it’s a total mystery what’s going on within the New York Federal Reserve’s gold vaults. Hard numbers are very difficult to come by… but we got a new one recently. We learned that of the 84 tonnes that Germany is due this year, it’s received just five tonnes.

The US is officially by far the largest holder of gold in the world, so 84 tonnes should not have been a problem. But it would appear that it was. Despite holding 8,133 tonnes of its own gold, as well as 1,536 tonnes of Germany’s, it was only able to repatriate five tonnes back to Germany.

Will future historians look back on Germany’s missing shipments of gold as one of those turning points?

• This article originally appeared in the Metals & Miners newsletter on 14 April 2014. To learn more about Metals & Miners and Simon Popple, click here.

Metals & Miners is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares; never risk more than you can afford to lose. Past performance is not a reliable indicator of future results. Please seek independent financial advice if necessary. Customer Services: 020 7633 3600.

The outlook for gold in 2017

Gold began 2016 at £720 an ounce...

When Trump won the US Presidential election it hit £1078...

It’s now sitting just below the £1000 mark.

So should you enter the market now?

Our new report examines the forces likely to drive the price over the coming months...

Click here for your free copy

  • Theilard33

    I think the article needs to provide a few hints on why Germany’s missing shipments should be one of those turning points.

    A loss of confidence in the US?

  • Ellen12

    Bretton Woods was set up to peg all currencies to the US dollar, giving it the enviable status as World Reserve Currency. The dollar was chosen as it remained the only major currency that was backed by gold. The second world war and its aftermath had forced the other major currencies to come off the gold standard. So the idea was that the dollar was tied to gold – and the other currencies were tied to the dollar, to keep a store of value in each currency. In 1971, Richard Nixon was forced to take the dollar off the gold standard and the dollar also became a fiat. This was the end of Bretton Woods as the dollar no longer reflected any defined store of value but yet still remained the reserve currency through which world commodities are purchased. The US is keen to give the appearance the dollar remains valuable while, at the same time, spend more than they produce and pay for it through our new, unconventional policies of QE. If gold had been allowed to find its level, away from the derivatives market (specifically naked short selling), we would be able to see how worthless the dollar has become and it would cost us very little to buy the dollars to pay for our oil and other commodities. So value is kept in the dollar by artificially suppressing the value of gold. And the US Fed, presumably need to settle up their shorts from time to time either by trying to make a bear raid on the physical gold market, like the one in April 2013, or by using the gold in the vaults. I expect JP Morgan and Goldman Sachs are both instruments used in the process. However, the idea that the Germans have not receive much of their gold back could be a clue to the end of the game. The fact that Deutsche Bank have made a quick, unexplained exit from the London Fix and nobody want to take their place may be another.

  • dialucrii

    A nice succinct summation of the gold situation Ellen, it’s nice to see comments from someone who has done some research on the issue.

    One thing I would add about the German gold repatriation is that, according to Jim Rickards, it may well be the case that despite appearances Germany isn’t actually in much of a hurry to get its gold back from the US. He suggests that they had to be seen to request return of the gold due to pressure coming from their own financial media but when push comes to shove they need the gold price to be held in check against world currencies just as much as the US does and since the US is much better placed to manipulate the price through the paper markets than they are, they are quite happy to leave it in the US to be used as ammunition in the suppression campaign. I don’t know of any other commentators who also hold this view but Jim Rickards is certainly well connected enough to have the inside scoop and I can see how his argument makes sense:-

    • Chester

      Interesting comment on the gold conspiracy ..

      What no one has yet explained to me is why, if gold price supression is the instrument of maintaining currency stability, any central bank would sell physical gold at all?

      Handing the very leverage that provides fiat stability to economic rivals is the single most stupid thing any Govt could do … yet the conspiracy theorists continue to “talk their book” based on unproven assumption

      • JonnyTCP

        Chester, they don’t sell it, they lease it and therefore can still keep it on their balance sheets. The leasing is to intermediaries, who then sell the gold to meet physical demand. Bearing in mind the vast amount of gold already out of the ground and in bank vaults, there is more than enough gold available through this process to satisfy demand. This is a very convenient way to suppress the price of gold. Except of course the physical gold can’t be held in two (or more) places at once – unless of course you don’t let anyone audit how much of yours or their gold you are holding.

        As far as “unproven assumption” is concerned why don’t you ask the central banks to open up their gold vaults for audit and inspection by all interested parties. That would be a very simple expedient to blow all the conspiracy theorists away. It’s such an obvious way to end the speculation and yet strangely it doesn’t happen.

        • dialucrii


          Jonny TCP is absolutely right, if the manipulation of the gold market is nothing more than conspiracy theory then in one fell swoop of independent audits the world’s central banks could completely destroy that theory and further support their currencies by eliminating any doubt about who has what gold in their vaults.

          As Ellen has alluded to, the value of gold has remained pretty constant throughout history and it’s rise and fall has been nothing more than an indicator of the relative strength/weakness of the currency in which gold is priced in at the time. Thus, if you are printing trillions of dollars of currency under the delusion that it will create jobs and prosperity (history shows this has NEVER worked) then one way of ensuring that the public do not recognise that this diminshes the value of the notes in their pocket with every note printed, is to artificially suppress the price of gold to create the impression that the currency remains stronger than it really is and thereby avoid a possibly fatal loss of confidence in that currency. In essence as a central bank you just might be able to have your cake and eat it, for a while at least.

          The current system of leasing and rehypothecation of gold reserves allows central banks, BIS and bullion banks to suppress the price in this way.

          Most conspiracy facts (Libor ISDAfix, energy markets) start life as conspiracy theories and while not all become known conspiracy facts, there is an overwhelming amount of evidence to demonstrate that the gold price is manipulated and will in time be recognised as such. The BIS themselves admit to intervening in the the gold market in the interest of price stability.

          The truth about the situation is out there for all to see if only you are willing to do the research. Myself and others are pointing you in the direction of that information and have explained what is happening on many occasions, but you still say “no one will explain to you….manipulation…” but quite frankly it sounds more like you don’t like the sound of what you are being told/are finding out and are simply more comfortable, as are many people, to accept your own normalcy bias.

          Any opinion expressed about the markets can be labelled as “talking their book” and it is rather a cheap shot at dismissing the arguments being put forward.

          Perhaps instead you could give us a logical argument, as no one on this forum has managed to do thus far, as to how despite a backdrop of money printing, asset inflation and increased global demand we saw a 33% drop in the price last year?

          Only a fool could believe that the burden of proof in this situation lies with those making the manipulation argument.

          • dialucrii

            And please also explain who, aside from someone looking to push the price downwards, might have sold/be selling huge lumps of paper gold in into illiquid markets in one go at particularly illiquid times of day, as we have seen on dozens of occasions in the past few years?

            Some common sense and an analysis of who could benefit and how tells you that central banks in association with the bullion banks have the power, will and motivation to suppress the gold price. Markets have a way of unearthing the truth, however, and given enough time the truth will out here just as it did with the london gold pool.

    • Ellen14

      Nothing would surprise me, including possible German co operation with the Fed. Gold is not the threat to our system of currency. It just demonstrates what is dysfunctional about it. Since the financial crisis of 2008 and the start of QE, many countries have been busy setting up currency Swap (made up of other currency and commodities) arrangements exclusively for the purpose of bypassing the dollar. Among these are China, Japan, Iraq, Iran, Libya, Russia, India, Brazil, Korea, Indonesia, Australia, SA and NZ. Some African countries are banning the use of dollars entirely. There is rumours of a 23 country alliance preparing to drop the dollar, including some European countries.

      The backdrop to this is that half of all US dollars reside outside the US – and fewer countries want to be paid in dollars. There is nowhere for these dollars to go except back to the US. More countries are looking to have their gold repatriated and BRICs are gearing up to pave the way for a new international currency possibly through this new proposed bank.

      If there is a currency reset, and realistically we need a complete U turn in monetary policy to prevent one, we will not be given any warning. We will wake up one morning to find everything has already been put in place.

  • dialucrii

    Sorry, the comments on Germany’s gold are near the end of the interview.