Gold insider Ronan Manly of BullionStar recently carried out a journalistic investigation into how Sweden audits its gold reserves. He began with the broader goal of gathering information about central bank gold reserves generally—a topic shrouded in much mystery indeed.
Manly makes the point that the Swedish central bank, Riksbank, “has the distinction of being the world’s oldest central bank (founded in 1668). The bank is responsible for the administration of Swedish monetary policy and the issuance of the Swedish currency, the Krona.” This means it doesn’t use the euro, and is independent from the European Central Bank (ECB). It’s a good choice if you want a sample that’s probably representative of central banking as a whole.
His straightforward questioning of the Swedish central bank revealed not only a lack of transparency—not surprising—but also dubious accounting and management practices by the Riksbank.
Buried In Secrecy
Mr. Manly’s colleague, Koos Jansen, conducted a similar inquiry into the U.S. Treasury’s gold reserves and auditing practices earlier this year. The revelations Jansen uncovered about shoddy auditing practices with regard to the custody of physical gold bars, as well as glaring obstruction to transparency, also held true for Sweden.
Many central banks sell, loan, or swap their gold at various times in much the same way such an institution would manage their foreign currency reserves in the course of conducting monetary policy. However, nearly all central banks—with a few commendable exceptions—obfuscate this process because it is riddled with risk like any other “paper” asset.
Through a series of emails with its employees, Manly found that Riksbank was not only secretive about whether or not it even conducts an audit of its gold bars, but was also not as forthcoming about how it uses its gold reserves as its own website is. There, Riksbank admits that, if necessary, it uses its gold (presumably in swap or loan arrangements) to influence the foreign exchange (forex) market.
Unavoidably, this type of activity by the central bank exposes its gold reserves to counterparty risk: Riksbank (or any other central bank or large institution) loans its gold bars in exchange for currency, and then those same gold bars are hypothecated—meaning claims on the gold or portions thereof are sold as collateral for further borrowing. This means that each gold bar (or some unit of weight of gold) may have multiple claims that could be defaulted on.
Not only is this more evidence that much of the world’s official gold is subject to this type of financialization, but Manly succinctly shows that, contrary to what Riksbank (and others) claim, all of their gold is certainly not “held in unencumbered custody on [the central bank’s] balance sheets.” He calls the notion that their loaned and swapped gold is accounted this way a “fiction.”
One of the appeals of gold is that, unlike a stock or bond, it cannot simply be defaulted on. It’s something tangible that you own. Such hypothecation defeats this purpose entirely.
In terms of transparency, the Swedish central bank representatives were quite evasive and defensive in responding to Manly. In fact, when pressed about the secrecy over its gold reserves, Manly was petulantly asked by Riksbank to make them aware of any other central banks that publish lists of their gold bars. (Mexico’s central bank, Banxico, recently did precisely that!) It was only in 2013 that the Riksbank revealed how much of its gold was held at various vaults. Mr. Manly even suggested a comparison to the biannual audit done by the administrators of the gold-backed ETF known as the SPDR Gold Trust (GLD).
When your job is to manage a country’s currency and monetary policy, and your accounting and auditing practices are less rigorous and forthcoming than a private investment fund, that’s a very bad sign!
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