Bank of England delivers gold to GLD?

The Bank of England lent gold to GLD, the largest gold ETF in the world, in the first quarter of this year. This is remarkable, because it has never happened before that the central bank has had to step in to supply the fund with gold.

Normally, this is the responsibility of the Bullion banks, which offer the precious metal as collateral for the issuance of new shares of the ETF. The fact that the central bank now also has to position itself as a 'lender of last resort' in the physical gold market suggests that there is an extreme scarcity in the gold market.

In its quarterly report to the SEC, GLD writes the following:

"Subcustodians held no gold on behalf of the Trust as of March 31, 2016. During the quarter ended March 31, 2016, the greatest amount of gold held by subcustodians was approximately 29 tonnes or approximately 3.8% of the Trust's gold at such date. The Bank of England held that gold as subcustodian."

29 tonnes from the Bank of England

The first-quarter report shows that the Bank of England lent 29 tonnes of gold to GLD during the quarter, accounting for 3.8% of the fund's total gold holdings at the time. Blogger FOFOA analyzed the inventory numbers and concluded that the central bank's intervention took place between February 19 and 26.

On Friday, February 19 and Monday, February 22, 19.33 tonnes of gold were added to the ETF, the second tranche of which was likely an emergency injection from the Bank of England. If you add the 8.03 tonnes of gold from Wednesday 24 February and the 2.08 tonnes from Friday 26 February, you arrive at the total of more than 29 February as stated in the quarterly report of the gold ETF.

The overview below shows the ETF's gold holdings. On the far left you can see the relevant date and on the far right you can see the daily movements of the stock. Circled in red is the period in which the Bank of England provided gold to the ETF.

The Bank of England provided gold to GLD at the end of February, click here for a larger version (Source: SPDR Gold Trust)

Where does GLD get its gold from?

In the interest of transparency, GLD periodically publishes a list of all gold bars in the gold stock. Blogger Warren James has kept track of all the changes in these lists in recent years and concluded based on the latest developments that since this year gold bars with completely different and random serial numbers have also been added to the list. According to Warren James, these are probably gold bars that come from a very old stockpile. So this could be the Bank of England's gold. FOFOA inquired with Warren James and he gave the following explanation:

"There are roughly three sources from which GLD gets its gold bars. About 30% is gold that has already been in the ETF in the past, another 30% is made up of brand new gold bars from smelter Johnson Matthey and the remaining 40% is a mix of random gold bars.

The events of the beginning of this year were startling, because at one point the ratio of these three sources changed from 30:30:40 to 0:0:100. This suggests that the first two sources of gold were temporarily unavailable. The question is whether that trend will continue or not."

The 'random gold bars' normally represent only 40% of the total inflow of gold into the ETF, but by the end of February, all the gold was coming from this stockpile. According to Warren James, these are gold bars that have been in the vault for a long time and have probably only been lent to the ETF.

Bank of England as a lender of last resort

It is very striking that the Bank of England lent gold to the ETF at the beginning of this year, because that is not normally the job of the central bank. It may have been possible for the Bullion banks The sudden influx of speculative money into the gold market was not affected and the central bank had to act as a temporary guarantor to fill this gap.

We stress once again that this has never happened before since the inception of the gold ETF in 2004. This reinforces our suspicion that the availability of physical gold at the current Gold price may be much smaller than is generally assumed. If the world's largest gold fund is already struggling to accumulate enough gold, what happens when the run on physical gold really takes off?

Make sure you Physical Gold because a claim on gold via an ETF no longer appears to be a hard guarantee...

Bank of England lent gold to GLD

This contribution comes from Market update