by Ronan Manly, BullionStar:

During March and April, amid global financial turmoil, unprecedented demand for physical gold, refinery closures and a London lockdown, one question on the minds of many in the gold market was how HSBC London, the vault custodian of the SPDR Gold Trust (GLD), was consistently able to source huge amounts of gold bars to back the enormous inflows into the world’s largest gold-backed Exchange Traded Fund (ETF).

173 tonnes during London Lockdown

From Monday 23 March (the day Boris Johnson triggered the UK and London lockdown) to close of business 12 May, the SPDR Gold Trust claims to have taken in a massive inflow of 175 tonnes of gold bars, swelling its gold holdings from 908 tonnes to 1083 tonnes.

That’s an addition of approximately 14,065 large Good Delivery gold bars since 23 March, each weighing 400 troy ozs, which would take up 29 stacks of pallets, each 6 pallets high, and is more than three times the amount of gold pallets labelled in the below photo.

The time period of these GLD gold bar inflows was also not ‘business as usual’ in the London gold market despite what the London Bullion Market Association (LBMA) may have you think, coinciding as it did with London gold spot liquidity problems (LBMA market maker bid-ask spreads and COMEX futures – spot gold spreads both reaching nearly $100 on 24 March) and a period in which no one else around the world was able to get their hands on physical gold in large quantities.

It also came at a time in which HSBC now reveals that it had a $200 million one-day loss due to what HSBC describes as:

“unprecedented widening of the gold exchange-for-physical basis, reflecting Covid-19-related challenges in gold refining and transportation, which affected HSBC’s gold leasing and financing business and other gold hedging activity leading to mark-to-market losses. “

So how did HSBC manage to source so much gold for the GLD during these times? Having gold in the right place at the right time? Using a proverbial forklift truck to shunt 173 pallets of gold from one side of a secretive vault in London to the other during the London lockdown? Or begging and borrowing the gold from anywhere it could find it?

Lender of Last Resort – Bank of England

On some recent days it appears to have been the latter, for buried deep within the latest SPDR Gold Trust (GLD) quarterly SEC filing (10Q), filed on 8 May, we see the following admission from the Trust’s Sponsor, World Gold Trust Services (the US subsidiary of the World Gold Council):

“Since April 15, 2020, gold was held by a subcustodian (the Bank of England), and the greatest amount of gold held on April 27, 2020 was approximately 45.91 tonnes or 4.4% of the Trust’s gold.”

This means that during April, HSBC  used nearly 46 tonnes of gold stored in the Bank of England  gold vaults to add to the SPDR Gold Trust, instead of using gold at HSBC’s own commercial London vault.

And why is this important? It’s important because it implies that:

a) there isn’t enough gold in the HSBC vault in London to fulfill SPDR Gold Trust basket creation requests from GLD Authorized Participants (APs).

b) that gold which is ultimately borrowed central bank gold at the Bank of England is being used as a source of GLD gold holdings.

c) that there are physical gold float shortages in the London physical gold market as well as liquidity problems of LBMA market makers in the London paper gold market.

SPDR Gold Trust (GLD) gold bar inflows into HSBC London vault during the total London lockdown are:

— Ronan Manly (@ronanmanly) April 24, 2020

HSBC’s secretive Vault – An Open and Shut case?

Looking first at a), the GLD creation process is as follows. When Authorized Participants (APs) of the SPDR Gold Trust want new baskets of GLD shares to sell to investors, they transfer unallocated gold (gold credit) to the Trust, after which HSBC London then allocates the equivalent physical gold from its vault inventory to the SPDR Gold Trust account.

The fact that since mid April, HSBC has directed its custodian, the Bank of England, to allocate gold bars stored in the Bank of England vaults to the SPDR Gold Trust when processing Authorized Participant GLD creation requests implies that the HSBC London vault has not had sufficient gold inventory to provide at a minimum 45.91 tonnes gold bars to the SPDR Gold Trust (as of 27 April), and because of this had had to revert to using the gold of the GLD sub-custodian (the Bank of England).

From the GLD Prospectus:

“The subcustodians that the Custodian currently uses are the Bank of England, The Bank of Nova Scotia-ScotiaMocatta, ICBC Standard Bank London, JPMorgan Chase Bank and UBS AG.”

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