Bank Of England Essentially Admits Intervening In Gold Market

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 |  Includes: BCBAY, GLD, IAU, JPM, NEM
by: Avery Goodman

The Bank of England claims to have about 10 million ounces of gold in its reserves. However, it refuses to disclose the amount of physical gold still in its vault, as opposed to gold that may now be owed to it by third parties. It reports all gold allegedly "in the vault" together with gold it has already swapped or leased to bullion banks, even though the latter type of gold is subject to counter party risk. For example, if the Bank of England had swapped or loaned out gold to MF Global, that gold would be lost forever, because the company has gone bankrupt.

James J. Bern is a citizen of England and a loyal subject of the Queen. He believes that government is by the People and for the People. Indeed, the right of Englishmen to elect representatives to Parliament, in one form or another, is now about 1,000 years old. Most Britons think as he does, and believe that they have a representative government. They do not realize that their nation's financial affairs are not controlled by the government, but, rather, by the banks. The British central bank is not controlled by an elected group of men. It is a club that is tightly connected to commercial banking interests.Even though Parliament is responsible for government, and the Bank of England is not, the bankers who run it appear to believe that their choice to engage in "gold market activities" amounts to a "government" policy.

Mr. Bern figured that citizens have to right to know about how their nations' gold was being used. He believed that the public ought to be told how much has been swapped or leased to commercial banks and how much is still in the vault. But, according to the Bank of England, he is wrong. Citizens have no right to know. Such knowledge would hurt the interests of "private customers" of the central bank, according to the bank. Mr. Bern was advised that no information about gold transactions would ever be disclosed, because such disclosure would hurt private banking interests and "government" financial interests.

The claim that disclosure would be detrimental to the government's "financial interests" is an interesting one. The only possible legitimate financial interest that the government might have in gold swapping and leasing would be if it earned some kind of return from engaging in such activities. But, the bank has not revealed that it earns any income at all from the gold activities. Instead, it simply wrote:

If we were to reveal how much gold has been swapped or is on loan on any given day in response to requests like this, then that would allow enquirers to find out what gold transactions have been taking place.

But, if a legitimate return on investment was being sought from otherwise inert stacks of gold, by means of leasing or swapping, don't citizens have a right to know how well the bank is doing its job? Don't they have a right to know whether the return is being maximized or not? God forbid that the People should know how the central bank is using their assets!

The bank also claims that public gold transactions are "private banking services". This is a ridiculous assertion, but it seems that the bank's staffers already know how spurious that claim actually is. They refused to disclose how they interpret the term "private banking services". But, any person of moderate intelligence, and certainly anyone trained in the law, knows that the leasing and swapping of publicly owned gold does not involve private banking services.

Some gold transactions are "private banking services". If Barclays (OTC:BCBAY), JP Morgan (NYSE:JPM), Royal Bank of Scotland (NYSE:RBS) et. al. deliver and pay for the storage of gold, owned by the banks, in a vault owned by the Bank of England, the bank could legitimately invoke the private banking exception. But, Mr. Bern was not asking about third-party assets. He was asking about gold assets belonging to the State. Such transactions are not private, because they involve the creation of claims to public property.

The bottom line of all this is that the Bank of England has essentially admitted to active interventions in the gold market. It does not deny the existence of gold swaps and loans, but refuses to disclose details. It claims that the disclosure of such information would hurt government financial interests, which implies that they must be very large. As such, the transactions will certainly affect the gold market. The fact that it has tried to claim the transactinos constitute "private banking services" infers that commercial banks are carrying out the interventions.

Over the last 11 years, as central bankers have swapped and leased gold, the price of gold has, nevertheless soared. Commercial bankers that have "borrowed" this gold must have lost a lot of money, because, eventually, they are supposed to pay back gold swaps and leases by replacing the gold they've taken. But, how will they return the gold, when the demand for gold already far exceeds yearly mine production, and the price is 7 times what it was in year 2000? In all likelihood, the physical gold that the Bank of England has swapped or leased is gone forever because to force bullion banks to return it would be to force them into bankruptcy. No wonder the Bank of England refuses to disclose the information.

In its letter to Mr. Bern, the Bank of England claims that it has weighed the legitimate interest of the public in disclosure against the harm to government financial interests if the information were ever disclosed. But, how can the public interest in the disposition of public assets not outweigh the inconsequential interest payments obtained from leasing and swapping out gold? Let us consider how much money we are talking about. The latest data I can find is from 2009, wherein the Bank of England claims just shy of about 10 million ounces of gold reserves (pdf). Even at the current price of $1,750 per ounce, that is only $17.5 billion dollars worth of gold. Gold leasing rates are almost always well below 1/2%. Let's assume that the bank leased one-eighth of its gold to bullion bankers. That means that the total interest it might hope to get this year is just shy of about $11 million. Public knowledge of the details of the transactions, at worst, might shave a tiny percentage from the interest payment. We are talking, at most, maybe, much less than $1 million this year..

But, interest payments in years past would have been even much lower because gold is now worth 7 times what it was worth in year 2000. So, the average historical loss resulting from complete public knowledge might be a few hundred thousand dollars a year. By contrast, in 2010, the UK budget was 326.6 billion pounds sterling, which is equal to about $522 billion US dollars. If these swaps and leases are legitimate transactions intended to create a "return" on otherwise "idle" gold assets, as the bank claims, the weighing of opposing interests would come out quite differently.

A person of even modest intelligence would see that the tiny amount of money that might (or might not be) lost from swaps and leases, is far outweighed by the loss of public confidence. By refusing to disclose this information, the Bank of England has knowingly added fuel for use by conspiracy theorists to undermine faith in British fiat paper money. Yet, the Bank of England considers the harm to the "government financial interest" is greater than the harm from loss of public confidence. If we were jurors presented with this circumstantial evidence, what conclusions would we reach? We are entitled to apply logic, reason and common sense to the circumstantial evidence. We would have to conclude that the bank's alleged "government financial interest" is not a legitimate interest in merely maximizing the return on sovereign gold investments. It is something much more than that.

No Act of the British Parliament has authorized gold price suppression. MPs would generally be shocked when and if presented with proof of such conduct. The proposed scheme violates fundamental concepts of British capitalism, and constitutes a criminal violation of a number of long-existing British securities laws that prohibit market manipulation. If there is a "government interest" in suppressing gold prices, that interest has never been endorsed by the British government. Rather, it would have been created by a group of unelected bankers, who extracted a monetary franchise from Parliament that they named the Bank of England, and who are acting, in this regard, far outside the scope of their authority.

In attempting to defend its position, the Bank of England has inadvertently given investors all the essential facts they need. All one needs to do is read between the lines. The British central bank essentially admits to intervening in the gold market. If they are doing it, then other central banks are also doing it. Central bankers may have wasted much of the world's sovereign gold reserves in trying to prop up paper money. Yet, if that were the goal, gold swapping and leasing has achieved only a marginal level of success. Periodically flooding markets with sovereign owned gold may serve to chase risk-averse investors out of gold, and into government bonds. However, as we know, the price of gold has risen 7 times over in the last 11 years. That means that, conspiracy or no conspiracy, regardless of heightened volatility, there are plenty of people who still want to own gold.

Yet, the biggest money in the world is in the hands of the most risk-averse people. The world's bond markets are worth approximately $95 trillion, whereas global equity markets have a total capitalization of about $55 trillion. See, here. In both 1934, and, again, in 1980, the exceedingly strong financial distress caused the percentage of the world's financial assets invested in gold to exceed 20%. But, as of year 2011, in spite of all the fallout from the Financial Crisis, a study by Sprott Management indicates that gold's share of financial assets is now only about 0.7%. When bond buyers, previously chased out of gold by volatility, take a bath on their supposedly "safer," less-volatile, fiat money denominated government bonds, we will see a large movement back into gold and other precious metals. That will push the price up dramatically.

A copy of the Bank of England's letter to Mr. Bern can be found on the GATA website here (pdf).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.