Friday, April 20, 2012

Where is Australia's Gold? - Update

19th Century Gold scales on display at the RBA museum
I have been doing more research on this topic discussed earlier this week here on where Australia's Official Gold Reserves are physically stored and whether they are leased out.

On the leasing question I found the following two articles on the Reserve Bank of Australia's (RBA) website. It seems that in the year 2000 all of Australia's 80 tonnes of gold was on "loan" but by end 2011 only 1 tonne was on "loan".

For those who are not familiar with the concept of precious metal "loans" let me explain. When most people loan something they do so on in the basis they will actually get back what they loaned. If you lent your blue ford falcon to someone for a year (for a fee) you would expect to get your blue ford falcon back.

This is not the case with Central Bank loans. Central Banks "loan" gold into the market for which they receive a fee (interest), but what happens to the gold is that it is sold by those who borrow it. Borrowers are usually large mining companies forward selling gold they have in the ground but have yet to mine it, or bullion banks who act as an agent for refiners and other end users. 

At the end of the term of the loan either the loan is rolled over, at the prevailing interest rate (the most common practice) or the borrower has to go into the market and buy the same amount of gold to repay the loan. Basically it is the equivalent of your mate borrowing your blue ford falcon then selling it and when you want your car back going out and buying a "blue ford falcon" to repay loan.

I know gold is fungible, i.e. one bar of the same purity and weight is interchangeable for any other bar but the principle still stands Central Bank "loans" would be by normal people called sales or at best swaps for a paper promise.

Operations in Financial Markets

Year 2000:

In addition to investments in foreign currencies, the RBA also holds about 80 tonnes of gold, currently valued at $1.2 billion. No outright transactions in gold were undertaken during the year, but an active gold loan program, involving virtually all gold holdings, was maintained. The average maturity of loans out- standing is six months, with the longest maturity at a little over one year. Total returns for gold- lending operations for the year were $21 million, a little higher than in the previous year.

Year 2011:

In addition to foreign currency assets, the Reserve Bank holds 80 tonnes of gold on its balance sheet. Over 2010/11, the price of gold rose by 21 per cent in US dollar terms but declined by 4 per cent in Australian dollar terms. As a result, the value of the Bank's holdings of gold declined slightly to $3.6 billion at the end of June. The lack of activity in the gold lending market, noted in recent annual reports, continued in 2010/11. Reflecting this, income from gold lending fell to just $0.1 million for the year and, at the end of June 2011, there was only 1 tonneof gold on loan.

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On the where the 80 Tonnes of gold is stored, Australia or offshore, I received this response from the RBA's Media & Public Relations Office today:

"Thank you for your email.

The Bank does not publish the location of its gold reserves."

Make of that what you will. Personally I didn't think it would have killed them to say "Australia", after all it is a big place, plenty of space to hide 80 tonnes of gold with giving anything away.

Lastly on the topic of the sale of most of the RBA's gold in 1997 I found a confidential white paper from Dec 1996 outlining the RBA's view on its gold reserves and the actions they should take to convince the then newly elected Howard/Costello federal government to let them sell the gold and to keep the proceeds to "re-invest" in interest bearing foreign government bonds. Interesting to read that the RBA thought the following:

"This would require (meaning the gold sale) the approval of the Treasurer to allow the realised gains to be retained for the Reserve Bank Reserve Fund. The current budgetary climate suggests that the chances of gaining the Treasurer's agreement to this are better now than they have been for some years." 

I have just gained more respect for Paul Keating that the RBA didn't dare take this ludicrous suggestion to him when he was Treasurer or Prime Minister.

And the subsequent press release issued after the sale in 1997


  1. Relpy post to RBA, One simple question, is the Gold onshore or offshore? Heaven forbid that it just maybe 'stored' in that golden cookie monster called Fort Knox.

    1. I believe it maybe held in the New York Fed vault, along with gold from many other Western nations, which is fine during normal times but during a fiat currency collapse not a great idea.