Signup for our free newsletter:

Why are Central Banks Hiding their Gold?

Written By Geoffrey Pike

Posted October 7, 2015

cengoldYou don’t have to currently be bullish on gold to actually own gold. It is not a typical investment. We can certainly invest in gold in an attempt to make dollar profits, but there are many reasons to own the yellow metal.

Having gold in an investment portfolio is almost a form of insurance. It is a hedge against disaster. It is a hedge against depreciating money. It also serves as a form of diversification.

Most of these goals can be achieved by owning digital gold. This could mean owning certificates that represent gold or owning shares of an exchange-traded fund such as GLD.

But despite the convenience and low cost of trading, some people still choose to buy physical gold and store it themselves. Part of the reason is that they know it is real. It is the only assurance someone has of knowing he actually owns the gold. It is not depending on someone else’s word that his gold is stored in some warehouse.

Another reason to own physical gold is for privacy. If you own a few gold coins, they are not likely being tracked by the government. And you also don’t have to worry about a collapse of the digital financial system or some other event, at least concerning your gold coins.

If the government confiscates retirement accounts, you don’t have to worry about your gold coins. If the government confiscates gold as it did in 1933, then you will at least have the choice to make of whether or not to comply with the law. Someone invested in an ETF will not have that choice.

I don’t think any of this is likely to happen, but that is why gold serves as insurance. It is for the unexpected. It makes sense to have an allocation of your portfolio in gold-related investments. It is understandable that a portion of this be used to buy actual physical gold as a last resort.

While some individuals understandably seek privacy with their gold holdings, it is more curious why so many foreign central banks are obsessed with their own privacy, at least in terms of where their gold is stored.

A recent article by Ronan Manly highlighted central bank secrecy with their gold. We know that the Federal Reserve and other central banks are quite secretive about their operations behind closed doors, but why the secrecy with gold storage?

If You Have Nothing To Hide

Whenever the government seeks to gain new powers in spying on people (usually its own people), then you will inevitably hear politicians say that if you have nothing to hide, then you should have nothing to worry about. Of course, this is not true at all, as the 20th century saw tens of millions of people killed by their own government.

But I immediately ask the same question when governments or central banks want to hide things. For example, if the Fed has nothing to hide, why are the Fed members so afraid of an audit?

In Manly’s article he describes how he sent requests to various central banks asking where they store their gold. He highlighted 8 responses: one from the Bank for International Settlements (BIS) and 7 central banks – Japan, Spain, South Africa, Thailand, Singapore, Malaysia, and Paraguay.

All 8 responses basically said something to the effect that the information is not available or it is not for public consumption. But at least those central banks responded.

Requests to the central banks in Lebanon, Kazakhstan, Kuwait, Jordan, Morocco, and Cambodia yielded no responses.

It is thought that most of the gold held as reserves by these central banks are stored internally, with the Bank of England, with the Federal Reserve Bank of New York, or – most likely – a combination of these places.

Germany set off a small wave a couple of years ago when the Bundesbank started an effort to repatriate some of its gold. Some other countries have since followed.

But why is there so much secrecy by some of these central banks in where their gold reserves are stored? It is not like an individual seeking privacy. And the central banks are not likely worried about theft, or at least theft in the traditional sense.

Perhaps there has been theft and they are aware of it. But the theft isn’t from common criminals, unless you want to count politicians and central bankers as common criminals.

If the Fed or the Bank of England (or both) have leased out their gold holdings – or worse, sold their gold holdings – then some of these other central banks might have an incentive to downplay where their gold is stored.

If the Fed does undergo some kind of an audit one day, it will make things a lot harder to explain if there is a lot less gold in the vaults than what there is supposed to be. And if the Fed dumped gold that it was supposed to be holding for other countries, this wouldn’t look too good for the Fed or for the other central banks that trusted the Fed.

This is just all speculation, which is really all we can do since so much is a secret. Either way, it keeps coming back to the question of why central banks are so secretive about their gold holdings and where they are stored. And why won’t they allow a full audit of the gold?

If these central banks – including the Fed – have nothing to hide, then they should have nothing to worry about.