WO IST MEIN GOLD: A Tale of German Gold and Naked Shorts

Over the last year, the world of finance has been treated to a singular spectacle that is equal parts farcical and worrisome. The spectacle, involving no less an entity than the U.S. Federal Reserve, has occasioned concern among savvy investors the world over. And not without reason, because the implications of the scandal at hand could prove to be far more severe than anything the modern world has seen in decades. But before we get to the bare bones of the spectacle I speak about, we have to go back to its roots: the Cold War.

During the Cold War period, West Germany held its Gold Reserves outside Germany over fear of a potential military conflict with the Eastern Bloc. The bulk of the gold- about 1500 metric tons- was held in the United States, with smaller amounts being deposited in France and Britain. Germany has continued to keep its Gold reserves in trust with foreign Central Banks; the Bundesbank- the German Central Bank- holds a paltry 31% of its gold reserves at its headquarters in Frankfurt as of January 2013. In late 2012, Germany’s Federal Court ordered the Bundesbank to audit its foreign Gold deposits, including those held by the U.S. Federal Reserve. But the Fed would not allow Germany to audit its own gold deposits, ostensibly for security reasons and because- according to the Fed- there was no room for visitors at the facility at Fort Knox. A very plausible reason, no doubt.

Then in January of 2013, Germany announced that it would be repatriating about 670 tons of their foreign-held gold- including 300 tonnes held at the New York Fed- to bring the share of German gold reserves held within Germany to about 50% by 2020. However, to the BuBa’s consternation, the Fed said it would take seven years to ship the 300 tonnes that the Germans wanted back in Frankfurt. Shocking as this announcement was and still is, it pales by comparison with the fact that the Fed only shipped a paltry 5 tonnes in 2013, of the 42 tonnes that it would need to ship every year until 2020 to meet Germany’s target. For precious metal bulls and conspiracy theorists alike, this was the best indication yet that the Fed did not have Germany’s gold in its custody. This experience echoes the situation in the dying days of the Bretton Woods system: when central banks, realizing that the dollar was grossly overvalued in terms of gold, began to redeem their dollars for Gold until the United States shut the Gold window, fearing a run on its Gold reserves. Is the BuBa waking up to the very possibility that there may be more paper and electronic gold than the physical gold to back it?

Whatever the case, it can be safely surmised that there is probably very little gold in the vaults at Fort Knox. This is the only possibility that fits with the Fed’s sneaky behavior in respect of Germany’s Gold. But what happened to 1500 metric tons of German gold and more than 8000 tonnes of America’s gold? The Fed couldn’t possibly have squandered it, could it? In fact, it could. Some people contend that over a period of at least a decade, the Federal Reserve has been manipulating the gold market to defend a declining dollar against gold. This is a line that has been pushed most notably by Dr.Paul Craig Roberts, the former assistant secretary of the U.S. Treasury. According to Roberts, the Fed has been manipulating the price of gold since the gold bull market began around the year 2000. This it has done to buoy stocks and other dollar-denominated assets.

Roberts contends that initially, the Fed depressed the price of gold by leasing out its gold to bullion banks. Leasing out Central Bank Gold to bullion banks should itself not exert downward pressure on the price. However, when reporting its gold holdings, the Fed does not separate the gold it has in its vaults from the gold it has leased out to these bullion banks. Therefore, if the fed holds 3000 tonnes of gold, half of which has been loaned out to bullion banks (and subsequently sold on the market), the Fed will report its holdings, not as 1500 tonnes, but 3000 tonnes. It is this piece of accounting acrobatics that depresses the price. But, as Roberts goes on to say, this option has become less available as demand for Gold has soared over the last few years. Central Banks have resorted to what many would term outright fraud.

NAKED SHORT SELLING

In the futures market, naked short selling is the practice of pledging to deliver an asset that is not available for delivery. Naked contracts are also referred to as uncovered contracts, because the assets underlying the contracts do not exist. Dr. Roberts argues that the Fed- through such banks as Nova Scotia and JPMorganChase- has been dumping uncovered futures contracts on the COMEX market to drive the price down. Roberts brings forward an illustrated chart which he believes is evidence of the Fed’s clandestine operations in the gold market. He highlights instances when the Comex market has fallen anomalously for no particular reason. The rapid declines are even more suspicious given their timing, and the frequency with which they have occurred since 2011, when the price of spot gold hit $1900/oz. In an example from December 2013, 11,681 contracts were dumped on the Comex floor. On aggregate, the contracts represent about 33 tonnes of gold- almost three times the amount of Gold that Comex has on hand for delivery.

Even more suspect is the timing of these transactions. While a prudent trader looking to dump such massive amounts of contracts would liquidate them over a period of time and during times of high liquidity, the sellers behind the suspicious transactions dump the Comex contracts during times of very low liquidity, and very swiftly. On January 6, 2014, 12,000 contracts were dumped in the space of less than sixty seconds. Clearly, then, the intention of the seller is to drive prices down. 

The German gold fiasco removes Central Bank naked short-selling (and other forms of gold manipulation) from a possibility and lodges it firmly in the realm of the very likely. The sluggishness of the repatriation of German gold leaves a lot to be desired. To be sure, some precious metal bulls (most notably Jim Rickards) do not believe that any significant amount of gold has left the Fed’s vaults. But this begs the question: if the Fed still holds Germany’s 1500 metric tons of gold, why did it prevent an audit of said holdings? And why would it take 7 years to return just a fifth of the reserves? And most important, why did it only ship 5 tonnes of the 42 tonnes it was supposed to have delivered? The writing is on the wall.