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Blanchard and Company, Inc. Thoughts

Should Countries Be Allowed to Loan Gold?

Of course! The gold held by each central bank around the globe on behalf of their nation is the asset of that nation. It is the individual country’s prerogative to buy, sell, loan, or swap that gold in any form or fashion it sees fit. We don’t believe in constraining the ability of any country to receive a return on one of their assets. What we are flummoxed by is why this information isn’t made public. Citizens of each country should be given the ability to see what their country is doing with their own reserves. Is 100% of the gold in their listed reserves actually out on loan?

Why Aren’t Gold Loans Made Public?

Good question. There is no reason (save the argument made by some that Central Banks are using gold loans to manipulate the gold price) Blanchard’s research has been able to unearth that explains why gold lending information is not made public, except for the unconscionable advantage it gives to bullion banks. Central banks report gold sales and purchases to the market, but no lending information is made available to the public. The simple answer is that the banks are not required to report the information, regardless of how helpful it would be to the market. If central banks fight the right for market participants to receive information on their gold lending activity, then additional questions need to be posed as to why.

Will Publicizing Gold Loan Information Increase the Price of Gold?

We believe, unequivocally, 100% yes. If for no reason other than that the market becomes a more fair and equitable one. Gold has made a credible climb from the late 1990s when the Washington Agreement was put into place by central banks to curb out-of-control sales into the gold market. That was just the beginning to new market transparency for the gold market. Publishing loan information is the logical extension to that Agreement.

Assuming the IMF Does Not Make the Change to Accounting Procedures for Gold Loans, How Much Longer Can the Lack of Lending Information Affect the Market?

Even if the IMF decides against clearing up the accounting issues for gold loans, the level of gold held by central banks in their vaults has fallen so considerably in the last decade that the lending market is becoming a smaller price influence on the market. This is not to say we don’t believe that gold lending isn’t a significant price influence currently, just that dwindling supply of gold in central banks and the complete disfavor of hedging in the market has already begun to marginalize the price impacts of gold loans.

Who is Hurt or Helped By Publicizing Loan Information?

The market as a whole will become more transparent and accessible if loan information is publicized, so it’s hard to argue that any market participant would be hurt by this information entering the public domain. Any global market dominated by massive physical activity from one OTC segment of the market is not a totally healthy market. The argument can be made that bullion banks will no longer control a segment of information in the market and that could harm their proprietary or client trading accounts that trade using non-public, gold loan information. But is that a bad thing? Of course it isn’t. If loan activity is publicized, certain countries could also suffer some financial ramifications because of credit ratings or bond issues tied directly to gold reserves.

Do Countries Have Credit Ratings and Loans Secured By Their Gold Holdings?

It is entirely possible that some credit ratings are secured by gold reserves, which means that IMF accounting treatments breaking out individual countries gold holdings into allocated account gold and gold out on loan would directly impact the potential credit ratings. A number of countries around the globe have some form or fashion of gold bonds offered for investment. If gold that is securing a bond rating for a country is actually out on loan into the gold market, counterparties to that bond rating might wish to change that rating. There could also be a problem if there is a large influx of redemptions received for gold linked bonds and that gold is not actually available to complete the redemptions. The IMF has stated to Blanchard that they do not look at actual gold holdings vs. gold that is loaned out in securing credit ratings. It is entirely possible that the IMF might change this policy if levels of actual gold holdings vs. gold out on loan are made public.

Do Bullion Banks have a Public Position on Publicizing Gold Loan Information?

We have been able to find no public position by any bullion bank in favor of publicizing central bank gold loan information. That doesn’t mean it isn’t out there somewhere, but we have been able to find no such statement by a bullion bank in favor of publicizing gold loan information.

Do Central Banks Have a Public Position on Publicizing Gold Loan Information?

Two Central Banks update gold lending information on a line item basis in their reserves reporting, the Swiss National Bank and Bank of Portugal. The Bank of England has a once annual update of year-end loan information and so does the Bank of Russia. No other banks break out their gold lending information on a line item basis. We have been able to find no public position from other central banks in favor of publicizing gold loan information.

Does the IMF Have a Public Position on Publicizing Gold Loan Information?

By completing a position paper and committee recommendations that the accounting for gold lending needs to change with no exceptions, the IMF has essentially stated that they believe that the market should receive correct accounting on loan information. The final test will be the implementation of the new accounting rules.

Does the Market Need Liquidity From Gold Loans?

The main focus of liquidity for the gold market has been so that bullion banks, producers and funds could accomplish various derivative and lending transactions in the market. Yes, Central Banks were able to begin earning money on a static asset class, but without the growth of the gold derivative business and gold carry trade there would have otherwise been no market in which to lend that gold. Does the market need the liquidity to transact these massive derivative positions? Yes, otherwise the prices on gold available before central banks began ramping up gold lending in the 1990s would have been pushed considerably higher.

“Before we get too far along, let’s define what we mean by liquidity and why it’s important. Gold market liquidity is best described as the ability to transact in the gold market without significantly affecting the gold price. The liquidity of the market is important, since liquid markets are better at facilitating large capital flows. Furthermore, a less liquid gold market will generally be associated with more volatility in the gold price, all else being equal. Increased gold price volatility can potentially result in higher spreads as market participants seek compensation for the greater uncertainty, or “liquidity risk”, associated with transacting in the gold market.”

Liquidity: A User’s Perspective, LBMA 2002 Conference, San Francisco
Stephen J. Smith
Vice-President & Treasurer
Placer Dome Inc. (Placer Dome has since been acquired)

Do Gold Loans Providing Liquidity Constrain Price Increases?

GFMS certainly believes so and so do we! (see earlier quote from GFMS Gold Survey 1998 in Market Impact of Gold Loans segment)

Does the US Treasury Loan Gold?

Yes, the US Treasury has been allowed to monetize United States gold stocks. The total gold reserve holdings by the US Treasury are listed at over 8,100 tonnes of gold (+260 million ounces of gold). Of that total, the US Mint website lists that over 4,500 tonnes are held in Fort Knox, leaving potentially 3,550 tonnes of gold in the US reserves available to the lending market.

From the Federal Reserve:

Monetary gold is the U.S. government gold stock held by the Department of the Treasury. It excludes gold in other, non-monetary forms such as ore, bullion, coins and medallions, jewelry, and dental supplies (exports and imports of gold in these forms are, however, included in balance of payments statistics for merchandise trade). Monetary gold also excludes gold owned by foreign official institutions that is stored at the Federal Reserve Bank of New York. At present, all U.S. monetary gold is ‘‘monetized’’; when gold is monetized, the Treasury issues a gold certificate equal to the value of the gold to the Federal Reserve System, which increases the value of the Treasury’s deposit account by the same amount. In the flow of funds accounts, monetized gold is an asset of the monetary authority—the Federal Reserve Banks and certain Treasury monetary accounts (these accounts are not included in the federal government sector). In the past, amounts of unmonetized, monetary gold have been held by the Exchange Stabilization Fund, an entity within the Treasury Department.

http://www.federalreserve.gov/releases/Z1/fofguide.pdf

Do Mining Companies Have an Opinion on Publicizing Central Bank Gold Loans?

There are thousands of gold companies around the globe. We are quite confident that a number of gold mining companies would like to see gold lending information made public.

Does the World Gold Council Have an Opinion on Publicizing Central Bank Gold Loans?

The WGC has responded to Blanchard and Company, Inc. that the lending subject is a separate matter for each individual institution involved in the market. The WGC does not have a stance on the publication of gold lending.

Does Gold Fields Minerals Service Have an Opinion on Publicizing Central Bank Gold Loans?

GFMS is an analyst group for the gold market and has stated to Blanchard that having a public opinion on the potential impact of the publication of gold lending in the market would affect their ability to be impartial market observers. However, GFMS has recently put out releases stating that decreasing central bank gold sales will be positive for gold prices moving forward.

Does Virtual Metals Have an Opinion on Publicizing Central Bank Gold Loan Information?

Virtual Metals did not reply to our requests for comment.

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