I own a few ounces of gold here and there, and though I'm sure it's safe, I always like to check on it -- just to make sure it's still where I know it should be. Seems reasonable, no? Which is why Austria is now the latest country to step up and say, "Hey, what's up with our gold? Is it still where it's supposed to be?"
Among weak thinkers, such an exercise is a pointless waste of time and resources. Of course the gold is where it should be -- in Austria's case, in vaults managed by the Bank of England. To suggest otherwise is a paranoid conspiracy theory. Then again, it was conspiracy theory for years to suggest the gold market was being manipulated at the highest levels -- and lo and behold, Barclays turns up having to pay fines this year in Britain for having jimmied with the gold market. Conspiracy theory is now conspiracy fact.
And so it is that the nascent efforts by Austria to account for its national gold adds fuel to the growing global worry that, just maybe, all the world's gold isn't as safe and secure as the weak thinkers presume it to be. And that has ramifications on you and me and our personal prosperity.
Austria owns some 280 tons of gold, with four of every five bars residing -- in theory -- somewhere in London with the British central bank. Austria last audited its London holdings in 2007. For the last couple of years, the country's Freedom Party (think: Tea Partiers with a German accent) have demanded repatriation of the gold or, at the very least, greater transparency from the country's central bank.
So, studious Austrian central bankers will soon trundle off to London to audit Austria's gold -- which, parenthetically, tells you that either the Freedom Party has greater powers of persuasion than the Tea Party and other Republicans who have unsuccessfully fought the Federal Reserve for decades to audit America's gold, or the Austrian central bank realizes that it serves the people and the government. How very novel.
They will, undoubtedly, find gold in the British vaults, and they will officiously report their findings back in the motherland. And the weak-thinkers will chirp and bellow about the waste of time and resources expended when, of course, the gold was there all along. They will not, of course, realize the inner workings of the gold market at the central bank level -- meaning, they will not realize that the central banks are active in the subterranean world of "gold leasing," in which the banks lend the gold they hold to other financial institutions for a small charge.
Think of it as a giant Ponzi scheme sanctioned by global governments. Bureaucrats would never cotton to such a disreputable term, but if it quacks like a duck and walks like a duck... To wit: Central banks lend out their gold to bullion banks for about 1% of the gold's value, and the bullion banks promise to return the gold by a certain date. The bullion banks then sell the gold to you and use that money to buy Treasury paper to earn 2% or 3%, thereby creating a nice, easy profit on the spread. It's the golden carry trade.
The central banks, being in charge of the party, continue to list the leased gold as an asset on their balance sheet, even though the gold no longer exists as a physical commodity the bank can put its hands on immediately. And therein lies the huge flaw in the system that Austria's auditing desires highlight: How can you and a central bank own the same piece of gold?
In a Crisis, You Beat the Central Banks
The obvious reality is that such a situation cannot exist in the tangible world of trees and rocks and gold bars that you and I can feel and see. It can only exist in an ephemeral world of financial gerrymandering tied to paper assets. Luckily, you, as the gold buyer, own the real asset. The central bank owns a piece of paper -- a claim to recoup from a bullion bank a piece of gold that the bullion bank no longer owns.
So, puzzle me this: What happens if, in a crisis of some sort that we can or cannot predict, a bullion bank runs into massive financial trouble and cannot buy back and return the gold it has leased? Well, we've suddenly got some very large balls in the air that are soon crashing to the ground in very unpleasant ways.
In a real crisis like we saw in 2007-08 -- let's say one tied to the dollar -- countries could demand that the Federal Reserve and the Bank of England return their gold. But the gold doesn't exist. It's in my safe and your safe and millions of private safes around the world, sold to us by bullion banks that leased the gold from the central banks. All the central banks have are worthless pieces of paper that tell them they once owned an asset.
Luckily, you, as the gold buyer, would see the value of your gold soar in that crisis as the central banks rushed to buy gold to meet repatriation demands. And if even they shot down repatriation demands as a way to manage the little snafu they've gotten themselves into, gold would still soar because the rest of the world would realize, "Houston, we have a problem…"
Gold: It Will Save Your Lifestyle
On some level, that's exactly what Austria's Freedom Party is saying. It wants the country's gold back amid the Wiener Schnitzel and Sachertortes because it fears a global crisis could expose the fact that central bank vaults in the West hold more (ultimately worthless) paper gold than they do physical gold. In a crisis, everyone wants their safest and strongest assets nearby.
And the Austrians are far from alone in their worry. Public pressure is growing on governments all over the world as people like me and you rise up to say, "Hey, what's up with our gold? Is it still where it's supposed to be?" The Germans want their gold back from the U.S., though the Federal Reserve is, quite oddly, dragging its feet on that request. Venezuela, Ecuador, Mexico, Romania, Azerbaijan, Libya and Iran are seeking repatriation as well. And like the Austrians, people in the Netherlands and Switzerland -- not to mention the U.S. -- want an audit of their countries' gold holdings.
But perhaps the Australians sum up this issue most profoundly in a petition that calls for the repatriation of their nation's gold for fears of "counter-party risks associated with holding national assets in financially distressed countries" such as the U.S. and the U.K. And to be clear, that counter-party risk is exactly the scenario I laid out above. Call it conspiracy theory all you want. At some point, however, you should be prepared for conspiracy fact.
A crisis is going to expose the fact that the emperor has no gold. In that world, the dollars that are in your wallet dive precipitously -- and gold soars to unimagined heights. Buy gold -- physical gold -- while the price is still relatively cheap. Store it. Check on it occasionally. And do not let it go. One day, in the not-too-distant future, it will save your lifestyle.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.