by Ronan Manly, GoldCore Consultant

- Introduction

- SNB Continues To Intervene In Politics

- 1,300 tonnes of gold sold: SNB’s Michael Paprotta

- SNB’s Paprotta Interview

- SNB’s Paprotta view on Swiss gold held in London

- Conclusion

Introduction

The Swiss referendum on monetary gold approaches on 30 November, less than four weeks, one aspect of the debate continues to focus on the need, or otherwise, for the Swiss National Bank (SNB) to continue to store a percentage of the Swiss gold reserves abroad.

SVP National Councillor, Lukas Reimann (SG) speaking at the launch of the Gold Initiative Committee’s press conference in Bern, 23 October 2014

One of the three objectives of the gold initiative is to have all Swiss gold stored in Switzerland. The Swiss central bankers and the ‘no’ campaign maintains that it’s imperative to maintain foreign gold storage at major gold trading centres that can be quickly traded in the event of a financial crisis. While the ‘yes’ campaign counters that this argument is redundant and that it is far safer to have Switzerland’s gold stored in Switzerland during a financial crisis.

For example, Luzi Stamm, an SVP politician of the ‘yes’ campaign, said recently that there is ‘no compelling reason’ to store Swiss gold abroad, while Thomas Jordan, chairman of the governing board of the Swiss National Bank maintains that it’s easier to activate foreign held gold in a financial emergency if its stored at a major gold trading hub.

Within this aspect of the debate, it’s therefore critical to look at where the foreign held Swiss gold is actually stored — with the Bank of Canada and Bank of England and in what form it may be stored — earmarked or unallocated.

It is also important to examine where the substantial Swiss gold sales in the early 2000s took place from — which included Swiss gold holdings that were stored at the US Federal Reserve Bank.

SNB Continues To Intervene In Politics

The Swiss National Bank (SNB) continued to enter the debate this week about Switzerland’s upcoming gold initiative, despite the SNB not normally entering into any political debates and discussions.

In an interview with Swiss newspaper NordWestSchweiz published on 29 October, SNB board member Fritz Zurbrügg said that while the SNB is usually very reluctant to comment on Swiss initiatives and referenda, on this occasion the central bank feels that they need to intervene[1].

Historic shot from Bank of Canada, Ottawa — Gold Vault (Source: Library and Archives Canada)

In the SNB’s view, the gold initiative is an exceptional issue since, if it passes, it will have a direct impact on the activities of the SNB and will prevent the Bank from fully following its mandate in terms of monetary and investment policy.

www.goldinitiative-nein.ch ), Zurbrügg attempted to connect the SNB’s gold holdings to the financial budgets of the Swiss cantons by highlighting that if gold holdings rose as a percentage of the SNB’s balance sheet, then a fall in the gold price could reduce distributable income to the Swiss Federation and the cantons, and that additionally gold also does not pay any interest or dividends.

Zurbrügg stated that “a high gold content does not guarantee currency stability”, and he re-introduced the argument that with the gold initiative calling for at least 20% of central bank reserve assets to be held in gold, that this gold cannot be sold and is therefore useless in a financial crisis.

This statement, that gold which cannot be sold becomes useless in a financial crisis is not factually correct. Many central banks in the past have either swapped monetary gold for US dollars as a way of raising dollar liquidity, for example the Swedish Riksbank in 2008[2], or used monetary gold as collateral to obtain US dollar loans during a crisis.

The World Gold Council (WGC) even has an entire team of staff dedicated to assisting and encouraging central banks to manage and optimise gold as part of their reserve portfolios, and the WGC regularly runs courses for central bank staff explaining how gold can provide liquidity and stability to central bank reserve portfolios.

In an argument for holding gold abroad, Zurbrügg said that an emergency supply of gold needs to be in ‘major gold trading centres’ of which he claimed both London and Ottawa to be ‘major gold trading centres’. That’s notwithstanding the fact that Ottawa has not been a major gold trading centre for many years.

One interesting question from the newspaper journalist to Zurbrügg that’s worth repeating was that when Zurbrügg was asked “How often does the Swiss National Bank inspect and check that the Swiss stocks (foreign held gold) are actually on site?”, he replied “I can say only this much: There are regular visits. The gold bars are numbered and identified at all times.”

According to a report in the Swiss newspaper ‘Tages Anzeiger’ on 7 October, when Muzi Stamm’s gold initiative campaign team submitted their initiative to the Swiss Federal Chancellor in March 2013, the campaign founders had claimed that “almost half of the Swiss gold reserves were stored abroad — much of it in the United States”, and that it was specifically this claim that prompted the SNB to then reveal In April 2013, for the first time, that the Swiss gold reserves were 70% stored in Switzerland, 20% in England and 10% in Canada[3].

If there had, at some time, been almost half of Switzerland’s 2,590 tonnes of gold held abroad, much of it in the US, then there would have been approximately 1,300 tonnes of gold stored abroad, much of it in the US.

Swiss National Bank initial reaction to gold initiative

On 26 April 2013, just over a week after the Federal Chancellor had confirmed the validity of the gold initiative signature count and the wording of the gold initiative referendum, the Swiss National Bank (SNB) appeared to be panicked, since, at its general shareholders meeting, the Bank’s chairman of the governing board, Thomas Jordan spent over half his speech (4 entire pages of a 7 page speech) attempting to defend the Bank’s approach to its gold holdings.

Jordan began by disparagingly referring to the gold initiative as the ‘so-called gold initiative’ when in fact, ‘gold initiative’ forms part of the popular initiative’s official title, as confirmed by the Federal Chancellor Corina Casanova in her statement the previous week.

Jordan also attempted to dilute the gold initiative’s goal of repatriating foreign stored gold reserves by defending the strategy of keeping gold stored outside Switzerland, and by also revealing the locations of the foreign held gold.

Attributing the location revelations to the fact that “the SNB is aware that there has been a growing need for transparency in our population in the last few years”, Jordan went on to say that of the 1,040 remaining tonnes of Swiss gold, ‘more than’ 70% was stored in Switzerland, ‘roughly 20%’ was stored at the Bank of England and “approximately 10%” was stored at the Bank of Canada. He also stated that “the SNB has been storing gold exclusively in these countries for over ten years”, which would imply that there had not been any Swiss gold stored in the US since as early as late 2002.

On the subject of why the SNB stored some of its gold abroad, the SNB chairman stated that “it ensures that the SNB can in fact access its gold reserves, especially in an emergency”. Jordan also attempted to reassure those who might be concerned about whether the foreign held gold was there at all by stating “our partner central banks keep clearly identifiable gold bar holdings for the SNB. Each bar stored abroad has a bar identification and remains the property of the SNB. The availability of our gold holdings is fully guaranteed at all times.”[4]

Swiss gold at the US Federal Reserve

On 7 October 2014, in further reaction to the gold initiative in the run-up to the referendum, the SNB released a ‘media dossier on gold’ question and answer format, with this document only being available in French and German[5].

In the media dossier, the SNB answers some interesting questions about the locations and former locations of Switzerland’s foreign gold holdings, and reveals that Swiss foreign gold had included gold that was in custody with the US Federal Reserve, but that this gold had been completed sold as part of the Swiss gold sales. Since all foreign gold in the custody of the US Federal Reserve is held in the gold vaults of the Federal Reserve Bank of New York, the SNB are referring to the this gold account held at the FRBNY vault, sometimes referred to as the ‘Banque National Suisse’ gold account.

Given that the SNB’s Thomas Jordan had said in April 2013 that the SNB had for over 10 years exclusively stored its non-domestic gold with the Bank of England and Bank of Canada, this implies that the Swiss gold stored at the Federal Reserve would have had to have been completely sold prior to at least early 2003 if not earlier.

SNB Q: Since when has the SNB not stored additional gold in the United States? Were these (gold) stocks sold or repatriated?

SNB A: “The SNB stores 30% of its gold reserves abroad: 20% is stored in the Bank England, and 10% in the Bank of Canada. For over ten years, the SNB stores its gold reserves only in these two countries.

Stocks that were once at the Federal Reserve (Fed) have been sold.”

The SNB also reveals that most of the 1,550 tonnes of Swiss gold sold from 2000 to 2008 was from gold holdings held abroad. These sales of gold held abroad also undermine the arguments of the SNB and associated politicians who claim that foreign held gold is more valuable in a time of financial crisis than gold stored in Switzerland. If the approximate 700 remaining tonnes of gold now held by the SNB in Switzerland was not as important as the large quantities of gold held abroad, then why were the gold holdings that were held aboard sold and not the gold that was held domestically?

SNB Q:Are we sure that the SNB gold stored abroad is still available?

SNB A: Partner central banks store bars clearly identifiable like those of the SNB. Each ingot stored abroad is inventoried with an identification number; it remains at all times in the stock of the National Bank and remains the property of the SNB. Gold sales that occurred in the past have largely focused on stocks held abroad. They showed that gold stocks are available at any time.

The above two facts, and the claim by the gold initiative organisers that most of the foreign held gold was held in the US, reveal that the SNB had held significant gold at the Federal Reserve Bank of New York and that most of the gold sold by the Swiss in the 1,550 tonne gold sales was sold from stocks held abroad, including significant quantities of Swiss gold sold out of the Federal Reserve Bank of New York vaults.

Former head of the SNB Philipp Hildebrand stated in 2005, when commenting on the 2000 – 2005 Swiss gold sales, that 730 tonnes of these sales had been done on the spot market between 2001 and 2004, and that “typically, the Bank of England was used for the physical settlement of these operations[6]”

This does not necessarily mean that the gold sales that settled at the Bank of England were from Swiss gold that had been stored at the Bank of England. The SNB could have executed sizeable gold location swaps between New York and London so as to have had enough gold in London in order to settle gold sales out of London.

In an educational publication of the Federal Reserve Bank of New York titled ‘A Day at the Fed’ by Charles Parnow, published from 1973 to 1983[7], it states that in the Fed’s New York gold vault there is “a smaller auxiliary vault built in 1963” that holds the gold of three account holders. “One account with 107,000 bars is stacked with bricklayer precision into a solid wall 12 feet high, 10 feet wide and 18 feet deep.”

These 107,000 gold bars were US Assay office bars, as were the majority of gold bars stored at the FRBNY. If these bars were of .995 fineness and average weight of 400oz each, this would total approximately 1,330 tonnes. When this Fed guide was published, there were only a handful of central banks / international organisations that could have held 1,300 tonnes of gold at the FRB New York, Germany, the IMF and Switzerland. France had most of its gold stored in Paris and Italy had over half its gold not stored in New York.

The IMF, according to its Articles of Association, had to have over 50% of its 3,400 tonnes of gold stored in New York so this would be over 1,700 tonnes and would exceed the 107,000 mentioned by Charles Parnow.

The Bundesbank in January 2013 stated that it held 1,536 tonnes of gold (122,597 bars) in the Fed’s New York vaults[8]. Therefore, this 107,000 bar wall of gold most likely belonged to the Swiss National Bank’s gold account, and if this was the case, would suggest that the SNB disposed of this entire 1,300 tonnes of gold from New York.

Other questions in the SNB’s Q&A dossier address the foreign held gold stored at the Bank of England in London and the Bank of Canada in Ottawa.

SNB Q: Do representatives from the SNB have access to the storage locations?

SNB A: Access to the gold is governed by the provisions of the central bank and takes place by agreement between the parties.

SNB Q: When was the last visit of the SNB to these sites (abroad)?

SNB A: Representatives of the National Bank inspect the storage rooms of gold at regular intervals and in agreement with the central bank partners. The SNB has been satisfied in all respects by the result of these visits.

Swiss gold at the Bank of Canada, Ottawa

There are a number of significant fact about the Bank of Canada’s gold vault in Ottawa that the SNB is not telling the Swiss public. In fact, the SNB do not tell the Swiss public very much at all about the Swiss gold held in Ottawa. The following SNB Q&A illustrate the dearth of information imparted by the SNB:

SNB Q: Why does the SNB store gold in the UK and Canada? Where exactly are the stocks in these countries?

SNB A: The choice of countries where gold is stored meets a series of clearly defined criteria. It also achieves, outside Switzerland, an appropriate geographical and geopolitical diversification; the selected country must have a high level of economic and political stability, provide a high level protection for the immunity for central bank investments, but also provide an advantage in terms of market access. The Swiss National Bank knows the precise geographic location of storage areas in the countries concerned, but does not provide any information on that subject.

SNB Q: Since when has gold been stored in these countries (England and Canada)?

SNB A: Deposits in these two countries have existed for several decades

References by the SNB to the Bank of Canada in Ottawa as a ‘major gold trading centre’ are also inaccurate.

As well as Canada having sold nearly all of its own gold reserves in the 1980s and 1990s, the Bank of Canada only acts as gold custodian to four foreign central banks. As well as Switzerland, it’s known that the Netherlands and Sweden both gold small quantities of gold with the Bank of Canada in Ottawa. The 4th foreign central bank gold depositor is most likely the Bank of England or the Banque de France as they both had strong historic gold trading connections with the Bank of Canada during the 1950s and 1960s, as well as storing gold in the Ottawa vault during WWII.

What the SNB has also not said in the Swiss gold initiative debate is that the Bank of Canada’s remaining custody gold that had been stored in its gold vault in Ottawa has recently been moved to another vault[9].

The Bank of Canada’s headquarters building is situated on Wellington Street. The gold vault under the Bank of Canada’s HQ building runs from Wellington Street on one side of the building out towards Sparks Street on the other side.

This building is currently undergoing an extensive multi-year renovation which required the Bank to vacate the entire building last year, and empty it’s entire contents, including the gold stored in the subterranean vault[10]. The renovations will not be complete until January 2017. Representing 10% of the SNB’s total gold holdings of 1,040 tonnes, this means that over 100 tonnes of Swiss gold is has recently been moved and the Swiss public are not aware of this.

The gold in the Bank’s Ottawa vault, in the form of bars and coins, was relocated in advance of the Bank personnel move. Whatever gold was moved from the Bank of Canada’s HQ vault has most likely been moved to the Royal Canadian Mint (RCM) gold refinery vault just a mile down the road from Wellington Street.

This would also explain why historic Canadian gold coins from 1912-1914 that had been stored in the Bank’s vault for 75 years recently ended up in the RCM’s vault in November 2012, and why ex Bank of Canada governor Mark Carney appeared in publicity photo shoots at the RCM vault at that time, while holding the Bank of Canada gold coins.

“The Bank of Canada is proud to have safeguarded these national treasures for over 75 years and we are pleased that they have returned to the Mint so that Canadians can collect them as precious historical objects, said Mark Carney, Governor of the Bank of Canada.[11]”

If the Swiss gold that was previous held at the Bank of Canada’s Ottawa vault is now being stored in the Royal Canadian Mint’s vault, the Swiss public should be told this, and be assured that the Swiss gold is segregated from the Mint’s working inventory of gold.

1,300 tonnes of gold sold: SNB’s Michael Paprotta

In March 2013, just after the gold initiative committee had completed their signature gathering campaign to call a popular initiative referendum on the Swiss gold, Michael Paprotta, the former head of money market and precious metals at the Swiss National Bank, was interviewed by Central Banking magazine about the proposed gold referendum.

Of all Swiss National Bank employees and former employees, Paprotta is probably the one person who is most familiar with the Swiss gold reserves and the sales programme, since, while he worked at the SNB, he was actually responsible for the famous gold sales program, or as he put it in his LinkedIn profile “execution of a gold sales program of 1,300 tons”[12]. This gold sales accomplishment was quickly removed from his Linkedin profile in October 2012 after it became publicised[13].

As well as responsibility for the execution of the gold sale programme, Michael Paprotta, in his SNB gold role, also had responsibility for the SNB’s gold lending portfolio[14]. Prior to working in the SNB, Paprotta worked at Edmond Safra’s Republic National Bank in precious metals trading and sales, but moved to the SNB in January 2000, just after Republic National was taken over by HSBC.

Patrotta joined the SNB a few months before the start of the 1,300 gold sales programme which began in May 2000. The first 220 tonnes of sales were conducted via the gold trading desk of the Bank for International Settlements (BIS) in Basel. As well as loco London and loco New York, the BIS offers gold safekeeping and settlement facilities loco Berne[15], through its gold holdings in the Berne gold vaults of the Swiss National Bank.

The SNB have said subsequently that the first Swiss gold sales in 2000 and 2001 were conducted using the BIS as selling agent because the SNB did not have the “necessary professionals, know-how, trading resources and contacts to the international gold market to trade directly[16]”. But this statement does not make sense in light of the fact that the SNB hired precious metals trader Paprotta in January 2000 with responsibility for the execution of the gold sales programme. So using the BIS as a selling agent in 2000 and 2001 was no doubt done for another specific reason. The BIS are, after all, the world’s inter-central bank gold broker.

SNB’s Paprotta Interview

In the 2013 Central Banking interview, Paprotta, now head of precious metals and bank notes trading at Raiffeisen bank in Switzerland, indicated that he plans to vote against the initiative. It influences the total reserve management of the Swiss National Bank, and I don’t think that is a good thing, he is quoted as saying.

Paprotta also said that if ratified in the Constitution, the Swiss gold initiative would create “colliding interests” and that in recent intervention operations where the SNB has been purchasing large amounts of foreign currency as a way of preventing the appreciation of the Swiss Franc “then under these proposals it would have to keep up buying on the gold side to maintain the minimum level of 20%”.

Paprotta thinks that the most ‘disturbing’ part of the gold initiative proposal is the attempt to prevent the SNB from selling gold, since, in his view, this creates inflexibility and puts a floor on the Switzerland’s gold holdings.

On the question of how the SNB will communicate their opposition to the initiative, Paprotta said I don’t see the Swiss National Bank coming out and starting a campaign by putting up billboards. I guess they will be involved in political discussion, and will make their point, but campaigning? I don’t think so.[17]

SNB’s Paprotta’s view on Swiss gold held in London

As well as dealing in gold, Paprotta is also knowledgeable about transporting and storing gold, since he gave a 2010 Central banking conference talk in Hong Kong on the subject of The Mechanics of Trading, Moving and Storing (Gold)[18].

On the subject of the SNB’s gold storage arrangements including the foreign held Swiss gold, Paprotta said in the interview I personally believe the Swiss National Bank did an outstanding job in terms of allocating where the gold is.”

According to Central Banking magazine, Paprotta “explained that Switzerland is not the largest centre for unallocated gold trading” and he noted “that the fixing is conducted in London, most bullion banks are based in London and they in turn receive clearing services from the Bank of England.” He added that it makes perfect sense to have part of your reserves, if you are actively managing them, in locations where you have quick access to markets.”

So it appears that the Swiss gold held by the SNB at the Bank of England in London is being actively managed and that this gold may not be in allocated storage. Paprotta’s statement therefore does not align with the continued SNB assurances from Thomas Jordan that all “each bar stored abroad has a bar identification and remains the property of the SNB. The availability of our gold holdings is fully guaranteed at all times”.

With the Swiss gold stored at the Bank of Canada, now having been transferred out of the Bank of Canada’s Ottawa vault to an unknown location, the Swiss public would be wise to question the SNB on this move.

The Swiss gold stored at the Bank of England in London seemingly being ‘actively managed’ one of the world’s largest centres for unallocated gold trading, the Swiss public would also be wise to enquire on this issue. And with significant historical quantities of Swiss gold that were stored with the US Federal Reserve Bank in New York no longer there after the SNB seemingly brought their US vaulted gold holdings to zero, the Swiss public need to question why these particular holdings were targeted for sales from 2000-2005 and not domestically held gold.

Transparency is a matter of public importance — including transparency regarding the individuals nation’s sovereign gold reserves.

See Essential Guide to Storing Gold and Silver In Switzerland here

www.snb.ch/en/mmr/speeches/id/ref_20130426_tjn/source/ref_2013042.

[5] SNB media dossier on gold, Q & A format

www.bis.org/review/r050509b.pdf

[8]https://www.bundesbank.de/Redaktion/DE/Downloads/Presse/Publikationen/2013_01_16_thiele_praesentation_pressegespraech_gold.pdf?__blob=publicationFile

www.macleans.ca/society/life/the-secret-treasure/

www.zerohedge.com/news/2012-10-04/resume-day-meet-man-who-sold-1300-tons-swiss-gold

www.zerohedge.com/news/2012-10-05/turns-out-dumping-1300-tons-swi.

www.bis.org/review/r050509b.pdf

www.centralbanking.com/central-banking/news/2256709/swiss-nationa.

ev590.eventive.incisivecms.co.uk/digital_assets/2456/gara_2010_up.

See GoldCore’s Previous Coverage of the Save Our Swiss Gold Initiative at links below

MARKET UPDATE

Today’s AM fix was USD 1,170.75, EUR 936.90 and GBP 731.90 per ounce.

Friday’s AM fix was USD 1,173.25, EUR 933.45 and GBP 733.47 per ounce.

Gold and silver were both sharply down for the week at 4.78% and 5.99% respectively.

Gold fell $26.30 or 2.2% to $1,172.40 per ounce Friday and silver slid $0.33 or 2% to $16.16 per ounce.

Gold fell nearly 1% to $1,161.75/oz today and dropped to 4 year lows as the U.S. dollar strengthened and technical selling continued as prices had a weekly close below $1,180/oz.

Gold in U.S. Dollars — 5 Years (Thomson Reuters)

Gold for immediate delivery fell 0.3% to $1,169.28/oz by midday in London. Silver fell 2.4% to $15.77 an ounce in London, its lowest price since February 2010. Platinum remained unchanged at $1,236.30 an ounce. Palladium added 1.4% and is back over $800 at $803.45 an ounce.

The price of silver is down 18% this year after a 36% fall in 2013 which is leading to buyers again buying the dip. However, we as ever caution to avoid trying to catch a falling knife. Wait for the knife to land, bounce and stabilise before calmly picking it up. Therefore, it remains prudent to wait for a higher weekly or monthly close prior to dollar cost averaging into position.

The U.S. Fed said that it was ending QE3 last week and this has seen the dollar and equities make strong gains — pressurising gold. Investors are now awaiting a time frame for an interest rate hike. The Bank of Japan increased its QE from 60 trillion to 80 trillion yen per year.

Gold, in the short term, looks prone to further weakness. We could see gold test support at $1,156. which is the 61.8% retracement of the move from the October 2008 low to the all-time high at $1,921.

Below that is the big round number of $1,100/oz and then the even bigger round number of $1,000/oz.

Precious metals analysts are warning of further losses. Goldman, SocGen and Barclays and other banks expect weakness into year end. This seems quite possible given the poor technical position, poor sentiment in western markets and momentum which can be a powerful thing.

Another powerful thing not being factored into bearish analysts equation is huge Chinese demand for physical bullion.

Chinese demand’s best proxy is Shanghai Gold Exchange (SGE) withdrawals which were nearly 60 tonnes last week and heading for over 1,600 tonnes so far in 2014. On an annualised basis, Chinese demand looks set to be double the estimates of the World Gold Council which are accepted by the financial media and western gold analysts.

Gold’s 14 day relative-strength index (RSI) dropped to 25.5 on October 31st, below the level of 30 that suggests to some traders who study technical charts that price may be poised to rebound. The RSI was at 24.4 today.

However, short term weakness, possibly into year end seems likely prior to the secular bull market reasserting itself.

Another positive factor in the gold market being ignored by futures traders is the Swiss Gold Initiative.

Support for the Swiss gold initiative has waned marginally but remains high, according to a poll published late on Friday by the free Swiss newspaper 20 Minuten. Unusually, Reuters did not release the story to the wires and it appears to have been given exclusively to the Daily Mail in the UK.

The initiative has sent jitters through both the gold and currency markets, since it would require the SNB to massively increase its holdings of gold bullion and informed analysts think that it has a good chance of passing.

Speaking in Dubai last week, Dr Burkhard Varnholt, the CIO of Julius Baer, the Swiss private bank, said that he thinks the Swiss gold initiative referendum is likely to go through and that this should lead to higher gold prices.

Dr Varnholt is not against a gold standard but he said he would personally be voting against the referendum due to what he sees as the inflexibility it will causes the SNB in their implementation of monetary policy as reported by Arabian Money. Julius Baer is also a gold product provider through their Julius Baer Physical Gold Fund .

Interestingly, enough the respected Swiss bank which acquired Merrill Lynch private clients and their sizeable bank of high net worth clients in 2012, is recommending a healthy allocation of 10 to 20% gold bullion in their portfolios for diversification and protection against renewed dollar weakness.

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