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 about

Switzerland’s upcoming gold initiative last week, 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.

In a tactic similar to that used by the recently formed anti ‘gold initiative’ political campaign (http://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

completely 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 their

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 facts 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 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 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”.

Conclusion

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.

With 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 every nations' sovereign gold reserves.

See Essential Guide to  Storing Gold and Silver In Switzerland here

[1] http://www.aargauerzeitung.ch/schweiz/das-thema-goldinitiative-treibt-mi...
[2] ‘Liquidity in the Global Gold Market' World Gold Council http://www.gold.org/sites/default/files/documents/gold-investment-resear...
[3] http://mobile2.tagesanzeiger.ch/articles/54340d4687da8b7864000001
[4] Speech given by Thomas J. Jordan, Chairman of the Governing Board, at the General Meeting of Shareholders of the Swiss National Bank, 26 April 20132013 http://www.snb.ch/en/mmr/speeches/id/ref_20130426_tjn/source/ref_2013042...
 [5] SNB media dossier on gold, Q & A format
http://www.snb.ch/fr/mmr/reference/media_dossier_gold_qa%20/source/media...
[6]http://www.bis.org/review/r050509b.pdf
[7] http://www.worldcat.org/title/day-at-the-fed/oclc/3511561/editions
 [8]https://www.bundesbank.de/Redaktion/DE/Downloads/Presse/Publikationen/20...
 [9] “The Bank of Canada’s move, and what it means for a fabled underground vault”, 11 June 2013 http://www.macleans.ca/society/life/the-secret-treasure/
[10] Head office renewal, Bank of Canada, Ottawa http://www.bankofcanada.ca/about/head-office-renewal/
[11] http://www.mint.ca/store/news/a-national-treasure-resurfaces-as-the-roya...
 [12] “Resume Of The Day: Meet The Man Who Sold 1,300 Tons Of Swiss Gold”, 4 October 2012,  http://www.zerohedge.com/news/2012-10-04/resume-day-meet-man-who-sold-13...
 [13] “Turns Out Dumping 1,300 Tons Of Swiss Gold Isn't A Resume Builder After All”, 5 October 2012 http://www.zerohedge.com/news/2012-10-05/turns-out-dumping-1300-tons-swi...
 [14] 8th Dubai City of Gold Conference http://www.dubaicityofgold.com/8conf/speakers1.html
 [15] Loco Berne http://www.bis.org/banking/finserv.htm
[16] Philipp Hildebrand: SNB gold sales – lessons and experiences, May 2005 http://www.bis.org/review/r050509b.pdf
[17] “Swiss National Bank faces referendum over gold sales” by Tristan Carlyle, Central Banking, 21 March 2013, http://www.centralbanking.com/central-banking/news/2256709/swiss-nationa...
[18] “Gold as a Reserve Asset: A key element of central bank portfolio management”, Central Banking Events, Hong Kong, May 2010, see page 4 http://ev590.eventive.incisivecms.co.uk/digital_assets/2456/gara_2010_up...
 [19] http://www.arabianmoney.net/gold-silver/2014/10/30/swiss-gold-referendum...