Gold Reserves Increasing at Central Banks

What many miss is that gold is money. Banking and gold have been inseparable from birth. This may not seem immediately apparent as the modern, controlled, social dialogue in Western media derides gold by categorizing it an inedible commodity metal and constantly referring to gold as an “investment,” instead of money arising out of spontaneous order. However, if curious to merely scratch the surface, one could consider the New York Fed’s “The Key to the Gold Vault,” which devotes all of page 1 to quoting Charles de Gaulle in superscript:

“Indeed, there can be no other criterion, no other standard than gold. Yes, gold, which never changes, which can be shaped into ingots, bars, coins, which has no nationality and which is eternally and universally accepted as the unalterable fiduciary value par excellence.”

The brochure goes on to describe how the Fed protects what it describes as “a medium of exchange, a measure of value and a store of wealth... that always has been assigned a role far beyond its value as a commodity.”
The Same Gold Claimed by Multiple Owners
One of the 36 foreign central banks and institutions that have metal stored 80 feet underneath the streets of New York is the Swiss National Bank (SNB). Four members of the Swiss parliament launched “Rettet Unser Schweizer Gold: An Initiative to Secure the Swiss National Bank’s Gold Reserves,” which states that the Swiss people should have a right to vote on three simple things:

1. Keeping the Swiss gold physically in Switzerland
2. Forbidding the SNB from selling any more of its gold reserves
3. The SNB has to hold at least 20% of its assets in gold

This initiative follows the German inquiry into the same issue, after Venezuela took the plunge in asking its custodians to collect the 160 tons of gold that was to take the flight back to Caracas. It is common practice for gold owners to hold their physical gold in central locations to lessen the cost of leasing and selling the reserve asset by saving the costs of time, insurance and shipping. However, now that central banks are diversifying out of paper assets and buying more gold than they are interested in selling or leasing, many owners are considering repatriation. This process is analogous to the first few withdrawal requests from a Ponzi scheme: they are easily satisfied. But what of the later requests?
To add further color to this question, all reserve managers should be thinking about the extent to which these reserves are truly titled and owned outright. Hong Kong-headquartered Credit Lyonnais Securities Asia, or CLSA, offers brokering, investment banking and alternative asset management. In a note, CLSA mentions the extent to which central banks use gold as a base to lever paper assets upon - by lending it - creating multiple claims on the same real asset. This will inevitably create huge implications for price and will result in a musical-chairs scenario as described:

“Belgian central bank Vice Governor Francoise Masai reportedly told shareholders that about 41% of the central bank’s 216 tons of gold was on loan at the end of last year, and that the central bank earned a 0.3% return on its loans of physical gold to commercial banks last year. There are two points to note about this. The first is the puny annualised return earned on the gold leasing market. The second is the significant percentage of the central bank’s gold lent out. This is a reminder that the paper gold market is significantly larger than the physical market. Just like a run on a bank in a fractional banking system, [CSLA’s Chris Woods] suspects it will be very hard to settle all the paper claims to gold physically in a real scramble for the metal. This is why in a parabolic spike physical gold is likely to trade at a significant premium to paper claims.”

Cue Mike Maloney: “If you can’t hold it, you don’t own it.”
Recent news from Turkey further illustrates how gold acts as the private base to the paper systems globally. The central bank in Turkey expanded its gold reserves by 29.7 tons to 239.3 tons in March. But the real tell is that the Turkish central bank also increased the allowable ratio of gold-to-paper lira reserves commercial banks are mandated to hold. Raising the limit to 25% would provide $5 billion worth of additional liquidity in the economy.
This reminds us of the fact that the FDIC and the commercial banking system in the U.S. considers gold bullion as a “zero risk-weighted asset,” as we described in a recent piece that answered the question: What exactly is a money-good asset, and why should I care?
In China and Turkey alike, commercial banks are set up to store a choice of monetary media, and they also act, as coin dealers do in the united States, as exchange houses. Mike Maloney reminds readers in his Guide to Investing in Gold and Silver about one of the issues:

“When the terrorist attacks happened September 11, 2001, gold rose 9 percent, and silver rose 11 percent, but if it was in a bank you couldn't get to it. During that week the stock markets were closed, the banks were closed, and ATMs ran out of cash. But the precious metals dealers were open, and you could walk in with your gold or silver, and walk out with $100 bills. The precious metals dealers were the banks that week, but only for those who could get to their gold and silver.”

This sounds awfully important considering the recent week of “glitches” that closed down online banking and access to customer money at nationalized Royal Bank of Scotland, at NatWest and Ulster banks. We still maintain that the issue was pegged when Ayten Altin, a 70-year-old housewife in Istanbul, explained: "I'm keen to save, so keeping gold at home is easy for me; there is no complicated procedure. In an emergency, I can convert it to cash, and I don't have to wait for the bank to say the asset has matured."
Turks are believed to have a massive 5,000 tons of gold “stashed under their pillows,” estimated Ozcan Halac, head of the Istanbul Gold Exchange. Historically, this has proven to be an excellent idea:

Turkey’s gold imports were 23.9 tons in June, the Istanbul Gold Exchange said on its website. However, as in Hong Kong, all of the gold that goes into Turkey does not necessarily stay there.
Turkey has been a net exporter of more than $1 billion worth of gold, jewelry and precious metals so far this year, after importing a net $411 million in the same period last year, according to official statistics. Mert Yildiz, chief economist for Turkey at Renaissance Capital, told Bloomberg on April 30 that “Turkey is exporting massive quantities of gold to Iran and Arab Spring countries as citizens in those countries switch to portable wealth.”
While it is well known that central banks are buying gold, it is only recently becoming obvious that they are encouraging commercial banks under their purview to do the same.
Recent Central Bank Gold Accumulation
While there has been much accumulation in the past few years by central banks globally, here are some recent additions:
Ukraine increased its gold reserves by 1.4 tons to 30.61 tons in April.
The Philippines added 32.13 tons, ending 194.24 tons in March--a 17% increase in its gold reserve in one purchase--the biggest volume since Mexico bought around 78 tons a little over a year ago.
Mexico increased gold holdings by 2.92 tons to 125.5 tons in April.
Sri Lanka, the island nation south of India and home to the central bank founded by one John Exter (of Exter’s Pyramid fame), raised its gold reserves by 39%, adding 2.18 tons to end at 7.81 tons.
Russia’s central bank, Bank Rossii, announced that it had increased gold stocks by 12.92 tons to 757 tons at April end. The deputy chairman of Russia's central bank, Sergey Shvetsov, announced plans to keep buying gold on the domestic market in order to diversify its foreign exchange reserves. "Last year we bought about 100 tonnes. This year it will be less but still a considerable figure."
Also in April, and seemingly every month since Kazakhstan began retaining mined gold internally, its holdings increased 2.02 tons to 98.19 tons. Kazakhstan, the second largest oil producer in the former Soviet Union after Russia, raised its target for gold purchases this year to 26 tons as it encourages producers to refine their output domestically.
China officially last added a whopping 454 tons to reserves in 2009, after accumulating the money over the previous six years. More recently, China has posted imports from Hong Kong. This does not exclude other points of import or domestically mined gold. Gold imports from the island into China totaled 135.5 tons between January and March 2012. China then went on to import another 103.3 tons in the month of April alone. In other words: in the first four months of 2012, Chinese purchases have increased by an unprecedented 782% over 2011. Eric Sprott of Sprott Asset Management puts it this way: “Chinese demand is accounting for half of the gold mined outside their borders every month, forever to disappear into pillowcases and vaults alike.”
2009 was the first year central banks bought more gold than they sold. In 2010, the Bank of International Settlements (BIS) reported that central banks pulled 635 tons of gold from the “bank of central banks” as the BIS is described. Central banks added 456.4 tons last year, the most in almost five decades, and will buy as much as 400 tons this year, the London-based World Gold Council estimates.