Bullion banks and borrowing gold

Economics Economics Questions
1

I was just reading in an article linked to from another post here that explains the “bullion banks” currently “borrow” gold from the central banks at 1% interest… which is very strange indeed.

It makes me wonder whether these bullion banks have enough gold in their coffers to pay back the central banks all the gold they "borrowed, given that various bullion banks sell gold on to people like you and me. It also makes me wonder is how accurate the figures are on the quantities held in reserve by the various central banks. If they’ve lent money to bullion banks that aren’t able to pay those loans back then those “assets” on the central bank’s balance sheets which take the form of bullion loaned out might well be about as accurately priced as, for example, housing loans that had rather optimistic estimations placed on the ability of mortgage holders to pay those loans back.

Indeed, does anyone ever “borrow” gold from these bullion banks and, if so, for what purpose? If no one is borrowing from the bullion banks then why on earth are they borrowing from the central banks? Surely the answer must be that they are selling what they’re borrowing and this implies that they’re likley well short of the amount of gold they’d need to pay back even the principle (in gold) much less the interest… which implies that the central bank’s gold assets could very well be just as overstated as subprime mortgages right?

2

Read Frederic Lips “Gold Wars”.

He was a swiss banker and he saw it firsthand as bullion banks were created for the purpose to sell gold and keep it’s price down.

Of course, you are correct in that bullion banks don’t have the gold they have borrowed nor can they possibly obtain it to return to treasury.

Just like the investment banks that are bust now, so are the bullion banks. So is treasury… There was never a proper audit of gold kept there, why do you think it is? Treasury reports gold on their last audit as “including loaned” because they cannot reveal that it is gone.

Besides selling gold on the open market in massive quantities to bring it’s price down, there was another motive.

Unless you’re very young, you should know that people steal as norm. To steal enough, you need a huge current of money flowing, designated, earmarked, whatever. This is where you can bite a piece for yourself. This is a main reason for most government programs, be it social security or gold sales, war in Iraq or bailing out banks, it is always the same, - to create an enormous current so that the theft is less noticeable. You wouldn’t buy a house to “save” on loan interest deductions, unless you’re under common impression that this is “saving”. (I assume you wouldn’t, because you’re on this board and can count on the back of the napkin.). But here is the thing: if it is someone else, like Joe Q. Public, who pays the mortgage, and you are taking his deductions, then you are saving, big time. This is how gold loaning works as well: you tell the idiot at the wheel that this will bring the price down, you put the program in motion, and then you haul away the metal into your own wharehouse, under the shadow of the bigger process, while bullion banks cover you up, because you have created an opportunity for them to do exactly nothing and get the spreads.

I f you ever going to work for the government, you will participate in this first hand.

Read the “Gold Wars”, there is a lot more on gold than the bullion banks.

3

Bullion banks act like any other bank, they borrow something from one party and lend it to another. They do not keep the something in their coffers. The large international commercial banks are the primary players in the market. They basically borrow from the central banks and lend to gold producers.

For the gold producers, this loan makes sense since they are preselling future production at a fixed price. This is particularly important in market conditions that are prevalent today, where there is a huge difference between the value of unmined gold reserves as determined by the price of the mining company stocks, and prevailing price of gold. For example, I recently saw an analysis that the mining company Seabridge, which has reserves primarily in Canada, can be purchased for the equivalent of less than $20 per ounce of unmined gold.

Another reason for a mining company to take out a gold loan is in order to exploit a lean gold deposit. Let’s say such a deposit has a production cost of $500 per ounce, which would not be unusual. The mining company can make a profit on that today, but if the price falls in the future they will lose money. By borrowing gold today, they can sell the gold at today’s price and deliver their production several years from now in payment of the gold loan.

Looked at from the point of the view of the bank, this is exactly like any other type of loan, the risk lies in the ability of the mining company to produce and deliver the gold at loan maturity,which is precisely the same analysis they would do for currency loan.

4

My understanding was that a bullion bank was a 100% reserve bank that basically warehouses your gold for a fee.

The good ones at least. The others lease gold from other sources like central banks and claim that as their reserves or even sell deposit certificates to gold they don’t even possess in the purest fractional reserve tradition. The ‘too big to fail’ banks get busted for this practice every so often it seems but the profits are higher than the fines so it continues.

I am kind of suspicious of an analysis such as this.

It is more likely that the ‘market’ has priced the profit of future production at $20/oz and not the gold sitting in the ground at that level.

If they were to sell off one of their gold mines they couldn’t expect to get market price for all the gold underground because it isn’t a marketable commodity until it is removed, it’s just land until mixed with labor and eventually becomes a consumer good.

I don’t know about lovely Canada but in the US the government has made it virtually impossible to mine gold at a profit due to all their shennagans. Last I heard the mining companies made something like 5% profits which the State was looking to take away due to the fact that most gold is on public lands so were considering raising the fee to extract it to close to that level.