For years investors and traders have been speculating about how much central banks participate in the gold market (GLD). One knows about purchases and sales (eventually); but what about "off balance sheet" gold leasing? How much is supplied, via leases, to the gold market from a central bank's horde?
A small, glimpse into the dimly lit area of central bank gold leases was given recently by the central bank of Austria. From information it disclosed we can now reverse engineer the amount it leases to the gold market. An educated estimate is that 84 tons of gold is leased onto the market. This is approximately 30% of Austria's central bank's gold holdings, which we can now surmise are being supplied to the market. Below I show how I calculated this estimate from the information disclosed, and the effects on gold and foreign exchange analysis.
In response to a parliamentary question the bank [Austria's Central Bank] said that 224. 4 tonnes (around 80%) of Austrian gold reserves were in the United Kingdom, around 6.9 tonnes (around 3%) are in Switzerland and around 48.7 tonnes (around 17%) are in Austria itself.
The OeNB said that the reason to store gold abroad was that because in a time of crisis it could be speedily traded. Since 2007 Austria's National bank had a constant reserve of around 280 tons of gold. Through leasing of its gold the Austrian National Bank has in the last 10 years earned around 300,000,000 euros.
The key bit of light come from the statement, "Through leasing of its gold the Austrian National Bank has in the last 10 years earned around 300,000,000 euros." [$405 mm USD at an exchange rate of 1.35 EUR/USD]
One can then go to Austria's central banks web site and find their gold holdings for each year reported in millions of ounces as show below:
Now, data concerning gold lease rates is available from the London Bullion Market Association, (LBMA), along with gold prices.
I therefore took the GOFO rate:
Gold Forward Offered Rate. The gold equivalent to LIBOR. The rates at which dealers will lend gold on swap against US dollars.
to be the rate which the Central Bank of Austria received, over the last 10 years gold lending.
The LBMA lists maturities of 1, 2, 3, 6, and 12 months for the GOFO rate. I took the daily average for the whole year for each maturity and then averaged these five maturities to estimate an average rate, which the Austrian central bank received in a year.
Of course this is not the precise rate the central bank received, but without any other information, the average is the best, unbiased estimator of the actual rate.
I then also found the average yearly gold price, in Euros, for both the London AM & PM fixing (also on the LBMA web site). I then averaged the two fixings again, for the best, unbiased estimator of the price the gold was leased out at.
Having this data one can then make a fairly, educated guess about how much gold was leased, over the course of the last 10 years.
We have the data for the ounces of gold held (in millions), the average price of gold each year (in Euros), the estimated lease rate received, and finally the total amount of interest received over the last 10 years, €300mm Euros [$405mm USD].
The amount of interest received each year is:
Gold leased (ounces) X Rate X Average Gold Price = Interest Per Year
We then know that over approximately 10 years the total amount of interest received should equal €300 mm Euros [$405 mm USD]. It is simply then a matter of a goal seek iteration, in an excel spreadsheet, to find the average amount of gold that the Austrian central bank has outstanding as a percentage of its gold reserves. And the answer is...
Notice, that Austria's central bank never records a reduction for any amount of gold leased out. The drop over time from 10.2 mm ounces to 9.0 mm ounces was from "official sales". This is also confirmed in the data from the IMF. The reason for this is explained in a 2001 Paper (PDF) written by the IMF.
Gold loans or deposits are undertaken by monetary authorities to obtain a non-holding gain return on gold which otherwise earns none. ... The collateral does not change ownership and is accounted for as an off-balance sheet holding of the monetary
authority. [Footnote] 25 ... the transactions take on the same volume dimension as the other reverse transactions, the amount of gold to be returned is based on the volume in the first leg of the transaction, not its price. Therefore, regardless of the change in price during the life of the loan or deposit, the volume that was originally loaned or deposited is what is returned.
[Footnote:] 25 The collateral is retained on-balance sheet of the recipient of the gold loan or deposit. [Page 11]
In the Operational Guidelines, no practical distinction is drawn between gold held directly, gold on a gold swap, or gold on loan or deposit, (provided the treatment of gold swaps is that of a collateralized loan): they are all recorded as part of monetary gold. [Page 25]
... while gold loans and deposits have a close parallel with securities lending, this is not complete because, unlike securities lending where both parties record the transaction off-balance sheet the recipient of the gold loan or deposit is likely to record the gold on-balance sheet... causing an asymmetry in the system. [Page 25]
The option to treat gold loans or deposits as transactions in gold is not practical as monetary authorities are unprepared to adopt this approach. [Page 37]
Updated IMF reports, which I have not had time to read, can be found here.
The World Gold Council (WGC) provides supply and demand statistics for gold, as show below:
I highlighted where the WGC "plugs" in OTC gold investment. It is simply the difference between supply and demand. It is added or subtracted from "Demand" in order for it to equal "Supply". However, we know from looking at Austria's leasing, and the accounting of these leases, that more supply and demand are occurring than the WGC is accounting for, with its simple "plug" method. Approximately 30% of Austria's 9 mm ounces - 2.7 mm ounces, 84 metric tons, are available to the gold market each year, which is not currently shown in the WGC's figures. This leads me to be more hesitant to strictly use the supply and demand figures, that the WGC produces, to estimate a price for gold.
One can also conclude that Austria could only sell 70% of its current gold holdings onto the market, simply because 30% is already being supplied to the market place. If similar practices are taking place with other central banks then gold investors have less of a "supply overhang" to worry over.
Finally, foreign exchange traders (FXE) should be aware that Austria has fewer reserves than currently reported. Austria currently has 56% of its foreign exchange reserves in gold. If Austria is still leasing 30% of its gold reserves this means its foreign exchange reserves are 16.8% less, because of one cannot both lease and sell the same asset at the same time; although these days a central bank might be open to anything!
Additional disclosure: I am long gold