Is the Gold Still in Fort Knox?

I never wear such a hat as it is well known that such hats make it easier for the government to track you. Get out your aluminum foil hat. At least that is what I thought about the possibility of Fort Knox being empty before one presentation at the Cambridge House seminars. I had only heard the goofy version of this, that Fort Knox and the gold at the Federal Reserve in New York was missing.

No, the gold is there all right, but the real question is "How much of it is pledged or lent to banks?" This is how it works. The Fed leases gold to a "gold bank" for a modest fee. The gold bank issues certificates can be redeemed for gold. The gold bank then buys bonds, often government bonds in the country that lent the gold to the bank in the first place. This has a great effect from the government perspective. They receive a fee and get to sell their bonds. From the bank's perspective they get a great spread on the difference between what they pay the central bank and the interest they receive from the bonds they buy—a win/win for both parties. Since most money center banks, the big ones, are bankrupt if they marked their assets to the price the market would give them for these assets, this allows them to replenish their capital on the sly. In fact a lot of the various oddness in the financial markets is explained by the banks’ desperate need for capital.

Pay No attention to the Banker behind the curtain. Are the banks doing this? Yes, the Austrian central bank released that they had lent a considerable amount of their gold out. How many other central banks did this? We do not know.

So is everything fine? Sure, as long as the paper gold is not ever returned to the central bank or the Federal Reserve. But if gold goes higher, and the banks are forced to return the gold and draw out the paper gold from circulation, these banks will go bust. In that case what will happen to the paper gold, the ETF? It will be worthless. If you buy gold, do not buy ETF's.

Can we be certain that this is a big a problem as I think it is? No. But there was one new interesting data point that became common knowledge. Germany has its gold stored mostly at the Bank of England, France, and the Federal Reserve. This is a legacy of the Cold War where it was feared that the Soviet Union might steal it in war. There was considerable buzz about German gold in Germany. So it was announced that all the gold would be returned—over 7 years. 

Will the German Bundesbank still love the Fed after 7 years? 7 Years.

7 Years!

7 Years?

Why not 7 months? I have no idea what is going on, but something is wrong. The probability that the gold is being double counted to drive down the price just went up—by a lot.

Here is a presentation similar to the one I saw at the Cambridge House seminars. I have my doubts about the extent of the problem, and we do risk being stuck in tinfoil hat territory, but there is no doubt that this gold lending is happening.