The End Of Paper Gold And Silver Markets

The true quantity of monetary gold

It is commonly stated that the above-ground gold stock is 200,000 tonnes. While that may be a reasonable approximation, most of it is not monetary gold in any sense of the definition and is not therefore its monetary supply.

The statist definition of monetary gold is physical bullion held as part of a central bank’s declared monetary reserves. According to the IMF, the current total of all such monetary gold is 35,244 tonnes, though as we have seen from the foregoing paragraphs it is unlikely to be all there or unencumbered. But to this we must add gold bullion hoarded and stored by all other parties on the assumption that it is either a more stable store of monetary value than fiat or an insurance against fiat currencies losing purchasing power. It must be in a form immediately available for monetary purposes, being in bar or coin form. Of an estimated 200,000 tonnes of above-ground gold, it is generally assumed that 60% is used for other purposes, mainly jewelry but also some industrial purposes, leaving 80,000 tonnes of monetary gold conforming with our definition. After subtracting official monetary gold from the total, we are left with 44,756 tonnes.

In October 2014 I published an article explaining why China had considerably more gold in storage than her declared reserves, and I estimated that by 2002 when the Chinese government removed the ban on personal ownership and opened the Shanghai Gold Exchange, the state could have acquired up to 25,000 tonnes.[viii] Much of this gold would have been leased gold sold into the London market. (Veneroso’s statement about ending up adorning Asian women could not have been true for Chinese women, because they were not permitted to own gold until 2002, and Indian imports were severely restricted for some of the relevant time).

That China had accumulated substantial undeclared bullion stocks was confirmed to me anecdotally by experienced China watchers. If we treat that as part of our estimate of monetary gold and make an allowance for Russia, of perhaps an unrecorded 5,000 tonnes, monetary gold in the hands of everyone else appears to amount to only 15,000 tonnes.

But this figure will have been bolstered by central bank leasing activity, perhaps even doubled, with leased gold appearing to have two or even more owners and the actual possession being in undeclared Asian hands. It is in this context that the threat to derivative trading from Basel 3 must be viewed. Not only will paper supply estimated at 11,300 tonnes equivalent in unregulated and regulated markets be threatened with removal, but there is an additional unknown figure of central bank leasing and swaps to be unwound. Obviously, there is significant guesswork involved, but if the numbers outlined herein have the slightest validity, the ending of gold derivative markets, if it is permitted to go ahead, will create a major gold crisis, of which the BIS regulators seem blissfully unaware.


The mechanics behind dealing in the LBMA silver market are the same as for unallocated gold. The LPMCL settlement system is the same, providing access only to LBMA members. The basis of calculating the net stable funding requirement is the same, so silver derivatives suffer from the same balance sheet disincentives. The principal difference is no silver is vaulted at the Bank of England, nor, so far as we are aware, in the vaults of any other Western central bank.

In terms of demand, it is also primarily an industrial metal and is mostly consumed. According to the Silver Institute, of a total annual demand of roughly a billion ounces that is forecast in the current year, 253 million ounces is identified as investment demand and a further 150 million ounces as ETF/ETP demand. Bizarrely, the report estimates there will be a fall in ETF demand when it is already rising. And of the supply, only 18.5% is from recycling.

The BIS figure for outstanding silver OTC derivatives is included in “Other precious metals” at $64bn. The same NSFR treatment for all commodity derivatives, including energy, involves an estimated $858bn’s worth. Not only is the introduction of the NSFR disruptive of precious metal markets, but it also threatens to disrupt wider commodities at a time when their prices are already increasing rapidly as a consequence of falling purchasing powers for fiat currencies.

[i] See The end of the LBMA is nigh

[ii] See the LBMA’s letter to the Prudential Regulatory Authority on the NSFR (undated but sent end-April)

[iii]BIS-recorded OTC gold derivatives plus Swap positions and their equivalents in regulated futures markets.

[iv] See

[v] See

[vi] See

[vii] Terry Smeeton, referred to by Veneroso in his Lima speech used to join me for lunch from time to time at the Banker’s Club. I never talked business with him — now I wish I had!

[viii] See

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