And where is Banco de Mexico's gold?

Friday, 23 September 2011

Guillermo Barba

The title to this article should have an obvious reply, but that is not the case.

Thanks to two requests for information made to Banco de Mexico (Banxico) based on the Federal Law for Transparency, we can say that it is probable that the gold in the International Reserves of Mexico…is not in the country. The requests were made by a person that never imagined how complicated it would be to obtain answer to the question: “How many bars of gold make up the recent acquisition of 93 tonnes of gold made by Banxico en the first quarter of 2011?”

The first denial was not long in coming: “…we inform you that the information that you request, is classified as reserved”. Two months later, after interposing a Request for Revision, besides a Procedure for remedying the non-compliance of a request for delivery of information, the Unit for Liaison of Banxico responded in August with the written communication OFI007-4632, which increased doubts: “…the gold that composes the reserve in question is made up of bars which may have a minimum and maximum of gold. The bars with minimum content weight approximately 10.9 kilos, while those with maximum content have an approximate weight of 13.4 kilos. The information is published by The London Bullion Market Association (….) due to the variability of the content of gold in the bars, it is not possible to specify with certainty the exact number of bars purchased.”

Having received this reply, we asked the Central Bank: “in what country or countries is the gold that forms part of the International Reserves of Mexico physically located?” The answer coded OFI007-4934 (documents of which this writer possesses copies) dated 19 of September, is quite extraordinary: “The Information Committee of Banco de México (…) confirms the classifications made by the Administrative Unit and, therefore,  access to the requested information will not be granted, since it is classified as reserved” (Emphasis ours).

If Banxico doesn’t even know how many bars it purchased, it is possible that it also does not have certain knowledge of where the gold is located. In the last communiqué we mention, Banxico sought shelter under Subsection III of Article 13 of the Law on Transparency, which states that such information as may “harm the financial, economic or monetary stability of the country” may be classified as reserved. It is evident that physical gold as an asset without counterparty risk, if found within the borders of Mexico, would not have any reason to present any threat at all to national financial stability.

On the other hand, the reference made to The London Bullion Marketing Association, LBMA is disquieting. This association brings together the main banks specializing in precious metals, the Bullion Banks, producers, refiners, etc. and it is the center of the international market for gold and silver. Among its principal clients are the majority of Central Banks with gold reserves, among them ours. For this reason, in the best of cases, Mexico’s gold might be located in the United Kingdom. The big question is that the Bullion Banks operate under a system of fractional reserves, which in essence consists in that they may sell or lend with interest the same lot of gold several times over – in order to maximize profits at the cost of all the ingenuous clients who believe themselves, thanks to a promise on paper, to be the legitimate owners of their gold. In order for the system to function, there exists a very serious conditioning factor: that the majority of those to whom gold has been sold, shall never demand its delivery at the same time. If this should happen, it would be impossible to satisfy all. In other words, this is a Ponzi scheme, a time bomb.

And it is thanks to the fractional reserve system that these Banks are gifted with a false power: that of creating “gold” out of nothing and selling it as real. Among the largest implications of this fraud is quite naturally, of course, the artificial suppression of the price of gold and silver, for this [fractional reserve operation] generates a false sensation of more supply with each operation. The Gold Anti-Trust Action committee (GATA; gata.org) has studied and denounced this practice for years. As an indispensable reference we have an analysis carried out in 2010 by Adrian Douglas (http//bit.ly/nGWNPJ) of a document of the CPM Group (a group specialized in commodities and apologist for the fractional reserve system of the Bullion Banks) in which it is explained how they create so much fictitious “gold”. Jeff Christian, founder of the CPM Group, has declared before the CFTC that “the precious metals are financial assets like currencies y Treasury Bonds; they are interchanged at multiples of one hundred times their physical backing.” Some of this should invite interest from Agustín Carstens [Governor of the Mexican Central Bank, Banxico].

Faced with such evidence, it is obvious that it would be inconvenient to have the Mexican reserves located outside of Mexico. Far from reducing our risk, our risk is heightened. Moreover, based on the replies of Banxico, we can infer that they only have an “Unallocated Account” in which, according to LBMA itself, there is no possession of specific bars of gold but only a simple “general right” over the metal, and regarding which account the customer is “a non-insured creditor”.

How many owners might claim the 3.4 million ounces of gold [total reserves] that belong to Mexico? Impossible to know. What is certain is that in such a stormy financial sea as we have now, each day that passes without our having our gold here at home is a day in which we are unnecessarily exposed to non-payment. In this column we draw attention to this subject which is doubtless of the greatest transcendence for Mexicans. We hope there is prompt action.

memob@hotmail.com