More evidence for fractionally reserved gold banking?

The following is actually not really news, but we thought it still worthy of comment. On July 13, Philip Klapwijk of Gold Fields Mineral Services opined on the gold swaps with the BIS that have recently made such waves, and which we have commented on before as well. The BIS has since explained that the swaps have been transactions 'with commercial banks'. It is of course always possible that said commercial banks are merely fronting for a central bank in the euro area, but this can not be proven.


Klapwijk gives us the by now well-known spiel that the swaps prove gold's utility for the financial system in desperate times, which we certainly agree with. 

What really caught our attention was however the following remark:


"My hunch is that this gold has probably come from commercial banks, and it may be tied up with difficulties that European commercial banks have had in obtaining U.S. dollar short-term financing," he said. While the size of the swap had heightened speculation of central bank involvement, Klapwijik said this was unlikely, in part because the sum involved was not much for a sovereign — meaning a country. "Commercial banks have of late had a lot of gold put on deposit with them, particularly from investment funds, from private individuals," he said. "Some of those balances could be accessible to the commercial banks concerned."


What Klapwijk speaks of here is gold that bank customers have stored in so-called 'unallocated accounts'. Such accounts are supposed to only keep the tantundem of the deposited gold available for the customer, whereas in allocated gold accounts, specific gold bars that are clearly identified are kept in the customer's name.

What Klapwijk tells us here is something the CPM Group's Jeffrey Christian mentioned off-handedly in the recent CFTC hearings on the precious metals futures markets: there is apparently a lot of 'fractionally reserved' gold banking going on. In short, the banks are not really keeping the tantundem in reserve, Instead, they are using their the gold their customers have stored in unallocated accounts for their own operations and financing, in the hope to restore the gold in time should depositors show up and demand delivery. This is something all holders of unallocated gold need to be aware of: very likely the banks are charging them for storage, whether the gold is or isn't there.

Not only that, but the supposed security imparted by gold ownership does not in fact exist when the gold to back these deposits is no longer there. Gold is the ultimate means of payment, or as Antal Fekete likes to say, the 'ultimate extinguisher of debt'. People hold it as insurance against the currency devaluation depredations of central banks , but also as insurance against a complete systemic collapse. Naturally this presupposes that they can actually access their gold in extremis. We would argue that fractionally reserved unallocated gold accounts are definitely not in keeping with this desire of gold depositors.

What's more, we strongly suspect that most of them do not even know that they have in fact 'lent' their gold to the banks to do with as the banks see fit. After all, they are probably charged with storage fees in any case – as has been shown in a previous case involving the charging of storage fees for non-existent silver by Morgan Stanley, which held this silver for its clients – or rather, didn't hold it, really, but only pretended to do so.



If you have gold stored at a bank in an unallocated account, you can not be sure that all of your gold is really there. Not of we can believe what Jeffrey Christian and Philip Klapwijk have told us lately, and we see absolutely no reason to doubt their assertions.

(image Credit : The Web – unknown author)




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