The Doc welcomed back Cheviot Asset Management’s Ned Naylor-Leyland for an exclusive interview Sunday regarding the German gold repatriation, and how it will affect the physical gold market going forward.
In this MUST READ interview, Naylor-Leyland stated that when you take into account the fractional reserve accounting by the bullion banks, the 50 ton annual gold repatriation number is much larger in terms of the impact on the underlying market.
Naylor-Leyland believes Germany and the other central banks storing their gold reserves at the BOE and the NY Fed are essentially SOL, stating: If you’re holding your central bank gold reserves either in the Bank of England or the NY Fed, unless you are Theseus trying to find the Minotaur, you have no chance of getting out of there with any metal. The gold ownership chain of custody is severely tarnished and it’s obvious that it’s a problem. In light of what we know about the tightness of the physical market it appears the pressure is on, and it’s not likely to dissipate.
Full MUST READ interview with Ned Naylor-Leyland on the central bank panic out of paper and into physical gold reserves below:
When asked about the German Federal Accountability Office’s ruling that the Bundesbank must repatriate & audit 150 tons of Germany’s gold reserves from the NY Fed over the next 3 years and whether it will trigger a loss of confidence in the system Naylor-Leyland responded:
You have to bear in mind that any physical which is removed from the fractionally backed system effectively unwinds leverage, so really the 50 ton annual number is much larger in terms of the impact on the underlying market.
The good news it that the Germans typically don’t let these types of things drop. Once they’ve got their teeth into something they remain focused upon it, so I’m very hopeful that this subject will become much more mainstream over the next few weeks.
When asked whether the gold price will respond to Germany’s repatriation request the same as it did in 2011 after Hugo Chavez repatriated 100 tons of Venezuela’s gold, Naylor-Leyland replied:
I expect a similar effect. I think the more important issue though is whether this (repatriation requests) spreads. We’ve seen some further comment from within Holland, although I think that’s still at quite an early stage development/story over there.
The key thing is that this particular subject becomes more widely understood and discussed.
As you and I know, if you’re holding your central bank gold reserves either in the Bank of England or the NY Fed, unless you are Theseus trying to find the Minotaur, you have no chance of getting out of there with any metal. It’s going to be a really interesting 3-6 month period here where undoubtedly the subject has to evolve from its current relatively early stage and become a much bigger deal.
The Doc asked Ned about his thoughts on this week’s report that Germany had withdrawn 1,000 tons of gold from the Bank of England from 2000-2001, almost exactly coinciding with Brown’s bottom and the Bank of England dumping 400 tons of gold at the lows in gold, and whether Germany’s repatriation of their gold reserves in the early 2000’s could have played a role in Brown’s bottom:
With the benefit of hindsight it must have had a role. I think there a number of things going on at that time that would have helped drive this change, but I think that it’s certainly a fair analysis to say that it must have had a role in it.
I think the interesting thing is that they were repatriating their gold even so far back as 2000. I’m quite intrigued about that. I’m surprised they’ve come out with this information in the first place if I’m honest. The question should be, ok, what is the rationale to take such a large amount (1,000 tons), especially when they are now claiming they only want little bits just to check the quality? If that is the case (only wanting to repatriate 150 tons from the NY Fed), then why did they take delivery of such a large amount from London at that point? It does seem very interesting, and one must hope that mainstream journalists will begin to ask these questions, and its up to you and I and the rest of the people in this sector to push the agenda.
With rumors swirling around the markets that Germany may be the one to withdraw from the Eurozone rather than one of the southern members such as Spain or Greece, The Doc asked Naylor-Leyland how critical it would be for Germany to have all of it’s gold reserves physically on hand prior to setting up a gold-backed Deutsche Mark:
It’s an interesting point you make. The honest answer in my opinion is that I don’t think it would make much difference. I think that if the Germans would go back to the Mark, I think it will be based on the German productivity and German culture and German philosophy towards investment and savings rather than the exact location of the gold reserves.
You and I know that in truth this is very important, and it is important, but I don’t think that it would stop their ability to either go back on the Mark or use a gold plated version thereof.
But clearly, if the gold ownership chain of custody is severely tarnished and it’s obvious that it’s a problem, then I think that it can certainly affect the valuation of the currency unit, which might or might not be backed by physical.
So the stories intertwine, and exactly at what level they become one I think is a difficult thing to be clear about. Really I think that we’ll never get to the bottom of unraveling the issues of the gold custody no matter how much things evolve towards the way you and I want them to, I don’t think we’ll ever get to the actual bottom of it. I think that the fact that the subject is now a discussion in a way that it wasn’t before is tremendously good news.
I did enjoy the language that was used by the Bundesbank where they said that ‘we don’t have the slightest doubt about our counter-party’. If they truly weren’t worried about it, they would have used language along the lines of ‘we are comfortable’ or ‘we know about this’, but the way they described the Bank of England and The Fed in such generous terms tends to suggest that this is more of a problem than it was a few weeks ago. In light of what we know about the tightness of the physical market it appears the pressure is on, and it’s not likely to dissipate.
Regarding whether Germany will proceed to audit or repatriate their entire gold holdings from the NY Fed Naylor-Leyland responded:
The Germans may say they’re in negotiations- I can’t think they are expecting a positive result with that anytime soon. So I suppose the issue for them is now ‘what on earth do we do about this?’ and the answer is not a lot. Unless they want to stop borrowing. They commented that it’s convenient for them to have it in New York because they can borrow dollars and have the collateral on site. Well first of all that’s absolutely bizarre, but even if that’s true, well then fine, borrow the dollars, and buy the gold through the LBMA. There are lots of ways that this can evolve, but expecting anyone to conduct some sort of audit at this point is completely unrealistic.
With gold repatriation initiatives in Venezuela, Switzerland, the Netherlands, and now Romania, The Doc asked how Naylor-Leyland sees this playing out going forward & whether the Fed and the Bank of England are in trouble:
Well I don’t think there’s any doubt that this is going to spread. The issue is will it be visible? I think it’s been spreading ever since Chavez repatriated Venezuela’s gold. Despite the tinge of comedy with which it was presented, which seems to always be the case with the Western media, I’m sure that wasn’t the case among some central bankers that weren’t particularly up to speed on the subject. I’m sure Chavez got their attention. I don’t think that they realistically can expect a positive solution out of it. In other words, no one can really expect to be able to call up their counter-party and say I want either a full exhaustive audit or a full delivery immediately. I don’t think either of those two things are in play, so the issue is simply whether this subject can evolve from it’s current status to become a large subject in the mainstream. Ambrose Evans-Pritchard touched on the subject last week in the Telegraph which was a surprise to me because gold is not a subject he likes to write about very often.
It’s going to be happening in the background. The subject is now alive and will become more and more important. Whether or not its taboo and too sensitive to discuss among the mainstream media is a different question and a difficult one for me to answer.
In terms of where is it going to go from here, the pressure is going to continue to ratchet up, the importance of this subject will continue to grow, and as you and I well know, with an accelerating price point behind it, it will become that much more relevant to the conversation.