Get Your Gold the Hell Outta Here

By Doug Hornig, Casey’s Gold & Resource Report

That’s the directive that came down from HSBC USA in late November.‎

It seems that everyone these days wants gold. Real, physical gold coins that they ‎can hold in their hands, or bars that they’re assured are resting safely in a well-‎guarded vault. HSBC’s New York vault, for example, buried deep below its 5th ‎Avenue tower, where it has stored people’s gold since it inherited the facility from ‎Republic Bank a decade ago. ‎hsbc-tower-5th-avenue

But no more.‎

HSBC has served notice to its retail customers – many of whom are simply ‎middle-men and custodial services which store gold with HSBC on behalf of ‎hundreds of their own account holders – that all their gold must be out of its ‎facility by July 2010. Otherwise, folks, prepare for an unwelcome knock at your ‎door. HSBC’s letter says that, in the absence of directions to the contrary, clients’ ‎metal “will be returned to the address of record… at your expense.”‎

Picture, if you will, what the Wall Street Journal reported: “fleets of armoured cars ‎laden with gold ferrying the precious metal out of New York.”‎

Where to? That’s a good question. One destination is a pair of warehouses ‎operated by FideliTrade, the parent company of Delaware Depository Service ‎Co. Its vaults in Wilmington have been filling up quickly, leading Jonathan Potts, ‎the managing director, to comment that, “I have never seen any relocation like ‎this.” Other depositories have seen a similar run.‎

The logic behind HSBC’s decision, according to the Journal, is simple. The vaults ‎are being cleared of smaller clients in order to make more room for institutional ‎holdings, because “retail customers tend to be more expensive [to service] in part ‎because of their diverse holdings. They usually buy American Eagle or Canadian ‎Maple Leaf coins, and bars of various weights and sizes, all of which need to be ‎categorized and stored separately. In contrast, institutions typically buy ‎standardized bars of 100 or 400 ounces, making them easier to store. Institutions ‎also tend to hold the metal for long periods.”‎

HSBC itself didn’t say why it’s doing this (in fact, its letter wasn’t intended for ‎public release). So, predictably, the Internet exploded with rumors that its action ‎had more sinister motives.‎

Chief among them has been the tungsten story. That one, in case you haven’t ‎already heard it, maintains that a foreign gold buyer – some say Indian, some ‎say Chinese – found to its dismay that bars it recently purchased were merely ‎gold-plated tungsten. (Tungsten would be the metal of choice for a counterfeiter ‎because it’s the closest metal to gold in specific gravity, and can fool the most ‎basic test for purity.) Some go as far as to claim that Fort Knox is full of fakes, ‎deliberately placed there to make our official stash appear bigger than it is. A ‎suspicion that’s easily stoked since no outside auditor has inspected U.S. gold ‎holdings in over 50 years.‎

Be that as it may, the latest rumor claims that the appearance of tungsten bars at ‎this time is going to cause widespread chemical testing of gold bars, and HSBC ‎doesn’t want to be caught with anything bogus. Thus they’re preemptively ‎moving their gold out, protecting themselves and at the same time laying off the ‎need to do any testing onto someone else.‎

This is a great tale, but it ignores the fact that it’s largely coins and small bars ‎that are being moved, and those are not cost effective to counterfeit in tungsten. ‎In addition, that the story is presently confined to the Net means it’s fiction until ‎proven otherwise. As Ed Steer – GATA activist and author of Casey Research’s ‎Gold and Silver Daily – points out, “If it were true, Bloomberg would be all over it ‎in a heartbeat.” ‎

Or someone would. And even if the mainstream media failed to do their job, ‎there’s still the absence of a smoking gun. Who’s seen the tungsten bars? What ‎are the names of officials who can confirm the fraud? Why aren’t the Indians ‎who’ve been ripped off waving the phonies in front of a TV camera? These ‎questions don’t yet have satisfactory answers. Thus the rumor will have to ‎remain just that.‎

Rumor #2: HSBC has less gold on deposit than it promises, and it’s doling out ‎what it does have to its best friends. This one might make some sense if HSBC ‎were getting out of the gold business entirely. But it isn’t. And if it does have any ‎physical shortages, it can cover them indefinitely with paper “equivalents.”‎

Rumor #3: HSBC is going under. Those storing large amounts of gold know it, ‎and they’re protecting their assets from future claims by creditors. HSBC is hiding ‎the mass exodus of gold by claiming to have ordered it. No way to confirm this, of ‎course, but the volume of gold that’s leaving means an awful lot of people know ‎what’s happening. Word of the bank’s fragility would surely have leaked out by ‎now. That it hasn’t makes this one highly doubtful – not to mention that HSBC ‎likely falls into the “too big to fail” category and would be propped up if it faced ‎collapse.‎

Rumor #4: The most outlandish of all. Under this scenario, Washington suspects ‎an attack in conjunction with the terrorist trials, and it’s ordered gold moved out of ‎New York so it isn’t contaminated in the event of a dirty bomb. (Those with the ‎deepest, darkest level of cynicism claim that this would also provide the ‎government with a handy excuse to default on foreign claims to physical metal – ‎as in, sorry, it’s gone, but here’s what you’re owed in dollars.)‎

All of these make for spicy Web chatter, but after checking with our own sources, ‎we believe that the truth is far more mundane, yet quite exciting in its own right. ‎In essence, we think the WSJ’s analysis is pretty close, with a twist.‎

It all has to do with the COMEX. That exchange, which handles futures activity in ‎gold, has to maintain a cache of metal with which to settle trades. As a courtesy, ‎it will also arrange to store gold for buyers who don’t want to take physical ‎delivery. But it has no vaults of its own. It contracts with four banks to do the ‎actual storage, though only two maintain significant amounts: of the 9.73 million ‎ounces of COMEX gold, Scotia Mocatta has the most, nearly 5.1 million; HSBC ‎USA is next, with over 4.1 million.‎

comex-approved-vaults

The amount of gold warehoused by the COMEX has exploded since the metal’s ‎bull run began in 2001, as you can see from the following chart (where ‎‎“registered stocks” are sitting there with someone’s name already on them, and ‎‎“eligible stocks” are awaiting either registration or delivery):‎

 comex-warehouse-gold-stocks

The trend is obvious, and what it means is that HSBC needs an ever-increasing ‎amount of space for its COMEX gold. Provided, of course, that the trend remains ‎in place. Or accelerates.‎

HSBC has cast its vote. It clearly believes that it’s going to be getting more gold ‎from the COMEX, maybe a lot more, and it’s making room by giving the boot to ‎other depositors. Perhaps the bank knows something we don’t know, or perhaps ‎it’s just acting out of reasonable expectation.‎

Either way, it’s telling us that the demand for gold is going to continue rising. And ‎coming from a major bullion bank, that’s about as bullish a signal as anyone ‎could want. If you don’t own any physical gold, it’s time.‎

Right now, gold is a bit off its recent highs… so, as believers in sound money, the Casey folks are ‎stocking up on their yellow metal before its price resumes its journey to the moon. This is the time ‎to learn everything you can about how and from whom to buy gold, where to safely store it, gold ‎proxies, and major gold stocks. Check out Casey’s Gold and Resource Report risk-free for 3 ‎months – it’s only $39 per year, a mere pittance for what you’ll get out of it. Click here to learn ‎more about gold and gold’s “slingshot effect.”‎

Worried about how to safely store your own gold?  Module 7 of our Gold Survival Guide ecourse shows you 4 ways to store gold.  You can get free access to the ecourse here which also shows 9 specific methods to buy gold and silver.

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