Do the central banks really own as much gold as they claim?

Since we’ve moved into the brave new world of modern day finance, gold has tended to be viewed as something akin to nuclear waste from a previous era.  Only the wildest gold bugs continued to harbour hopes and dreams that the metal would be remonetised again.

But with the recent discussion by the BIS in its progress report on Basel III implementation:, there has been discussion about reclassifying gold from a Tier 3 asset to a Tier 1 asset, at least as far as commercial banks go:

At national discretion, gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities can be treated as cash and therefore risk-weighted at 0%.”

For the BIS to do this now reveals an extraordinary reassessment of the status of gold. Though this proposed change by the BIS impacts commercial and not central banks directly, its implication for official institution attitudes toward gold as a reserve asset is a very big deal.  So if the central banks are becoming more gold friendly again, and more inclined to look at it as a preferable asset to hold in their reserve assets, the amount that they hold is a much more germane question.

According to the BIS, the value of spec holdings of gold derivatives became gigantic in the 2000s. How is that possible? Who took the other side?  Mostly likely, it was official institutions which took the other side, given their huge above-ground stockpiles.

But are the stated positions in the balance sheets the real ones?  One must remember that central banks routinely take hedge positions against their underlying reserve assets. They never, ever report the derivative overlay.  Hence, if a European national central bank with 2000 tonnes of gold in its vault sells forward against that position, basically thereby eliminating it, it doesn’t report the corresponding forward position.

Consequently, it may be that the official institutions do not have net/net the gold they purport to hold on their balance sheets.. Now, in the old days this just didn’t matter. The fraud in the reporting of reserve positions could go on and no one would notice or care. But in light of the BIS proposals (also backed by the Fed, the OCC, and the FDIC), now the gold at these higher prices is regarded as an important asset.

Consider the case of the ECB.  It has a net capital of 84 billion euros, which could be wiped out easily given its exposure to the PIIGS. But everyone now says that with the gold the ECB has a capital of 484 billion euros if the bullion is marked to market. But is that true?  How much has been hedged at $400 or $500 or even $1000 an ounce? It could be a lot. Nobody knows.  The ECB is remarkable for its lack of transparency on anything, as the recent bank run travails illustrate.

It is this consideration that makes the notion of the official sector becoming a net buyer of gold a much more plausible consideration.  This process may well have begun (see here –

Now it’s also the case that the net spec long position is still very high and this could well be one of the reasons why the gold price has not taken off, despite the favourable macro backdrop.  Even if so, it appeasr that the official sector could well mitigate the extent of the fall, given that central banks and other official institutions will likely stop selling and may become huge buyers.

3 thoughts on “Do the central banks really own as much gold as they claim?

  1. Dear Marshall Auerback,

    I’d like to draw your attention to the 1999 Washington Agreement on Gold (WAG):
    *This* was the turning point in the BIS’ policy on gold. Firstly, note that the period of 1998 to 2001 marks the low of the London gold price. Once the Euro central banks (BIS G5=gentlemen’s club: Germany, Italy, Netherlands, Belgium, Switzerland) stopped leasing and selling gold in 1999, the gold price started to increase.
    You may wish to ask the following questions:
    1) Why did the Euro central banks stop leasing gold in 1999? What happened in 1999?
    2) Why did they announce this publicly at the IMF meeting? Who was the target recipient of this message? Hint: Who bought all the US debt since 2001 after the Europeans had stopped funding the US trade deficit?
    3) On paper, the Euro central banks still sold some gold after 1999 under the Washington Agreement (“already decided sales”). What’s an “already decided sale”? So when did the physical gold move and when did they book the transactions on paper? Hint: Some of the European gold is held in custody at the FRBNY. The FRBNY reports their vault inventory regularly. So you should watch the FRBNY vault inventory, assume that a good part of it reflects the movement of European physical gold and then try to guess when the Europeans moved the physical and when the booked the sale on paper. Dimitri Speck has the old vault inventory data: the physical gold was largely moved before 1999, not after. So what’s an “already decided sale” as per WAG?
    4) Think about the role of the dollar as an international reserve, about the double US deficit (budget and trade), about Triffin’s dilemma, and about what would be the optimum solution for Europe, China and oil producers. What is going to replace the dollar (no question that it will be replaced), and who is going to decide about the how and when?

    Have fun!


  2. I might add that I do not agree with your comment “The second phenomenon is what has been happening in the Eurozone. A fiat currency is vaporizing before our eyes” here:

    The Euro as a currency (read: medium of exchange) is perfectly alive and kicking. It is just that some governments have borrowed more than they can service. So some will probably go bankrupt and have to restructure. It won’t be the first time in history nor will it be the last. Life will go on. So will the Euro !

    The Euro may even continue to be an acceptable store of value over the medium term (ECB inflation target of 2% annually). You know what you get and what you don’t. Does the ECB have the tools in order to achieve their inflation target? Sure they do. If the collapsing credit threatens to cause price deflation, they can print money and deliberately create inflation to offset this. But they need not print more than that. In fact, they won’t.

    I am not sure you are watching the right game. There is one game over there across the Atlantic ocean with a currency whose issuer has both a huge budget and a huge trade deficit. *That*’s some nice pressure on the currency once the hot money inflow has ceased. The dollar is where the real action will be. I cannot predict how long it will take, but I’d like to call you out with your own words “fiat currency ending”.


  3. Gold is being *considered* for zero risk weighting as an *asset*. Capital is a (special) kind of liability. How can a change in the risk-weighting of gold have any effect on the ECB’s absolute level of capital?

    (Obviously a zero weight on gold implies lower risk weighted assets and a higher Basel III ratio for banks with gold positions… But this won’t boost the absolute level of the ECB’s capital, which the article appears to suggest.)

    & do central banks really need capital anyway?