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In a world defined by "financial innovation", where $1 of hard collateral can spawn over $1000 in
repoed and rehypothecated liabilities (and assets), where "shadow banking" is far more important than traditional bank liabilities (and to this date remains
completely misunderstood),
and where every month the central and commercial banks force create
over $100 billion in credit money (which end consumers refuse to absorb
and which therefore ends up in the stock market), the concept of a "hard
asset" is an increasingly redundant anachronism. Yet while the Federal
Reserve has emerged as the bastion of the New Normal's financial
innovation front in which the concept of money is backed by absolutely
nothing other than the Dollar's increasingly fleeting reserve status,
when it comes to the definition of "Old Normal" money -
gold - it still is the domain of the first and original central bank: London.
At first blush, most would not associate London with the hard asset
mecca of the world: in fact, when it comes to some of the most
spectacular hyper-levered "New Normal" cataclysms in recent years: AIG,
Lehman, MF Global, JPMorgan's London Whale, all of them originated in
London. Yet for the most part these events occurred precisely because of
the mindboggling leverage already employed by the London financial
system. Recall that the UK has
some 600% in financial debt/GDP -
an unprecedented amount compared to any other developed world nation.
Yet, paradoxically, the fact that there is so much financial leverage
implies that there
must be an abundance of hard assets at the bottom of the London
Exter Pyramid.
After all, financial counterparties, especially in this day and age,
may be insolvent but they are not idiots, and all will demand at least
some paper representation that there is a trace of hard collateral at
the bottom of the latest financial Frankenstein CDO, SPV, CLO, CPDO,
RMBS or [
insert any other modern financial "asset" acronym]. And keep in mind we are talking private sector gold: Gordon Brown's
epic blunder of dumping the sovereign UK gold at rock bottom prices hardly needs a mention.
Which is why in order to spawn such a gargantuan amount of financial
debt, London, which for centuries was the financial capital of the world
and which sequestered the bulk of the world's real, tangible wealth
until the ascendancy of the US in the 20th century, London's commercial
vaults, are literally full of gold (as much as it may pale in comparison
with the total notional amount of liabilities it has created).
After all it is the
London Bullion Market Association. Not
New York, Zurich or
Singapore.
Why is London such an integral part of the gold financial world? We'll let none other than
JPMorgan explain:
The characteristics of the London market uniquely support the use of gold as collateral by ensuring:
- Quality and liquidity: “London Good Delivery” sets
the standard for gold quality. Rigorous specifications as to size and
purity ensure that each London ood Delivery gold bar meets pre-set
standards with little to no variation between one bar and the next. This
consistency ensures that counterparties will receive gold of an
expected quality (99.5% fine), which allows the metal to be easily
transferred between members of the London Bullion Market. Ultimately,
this facilitates trading and market liquidity—both desirable attributes
for collateral.
- Flexibility: The London gold market uses both
unallocated and allocated gold. In layman’s terms, allocated gold
specifically identifies each gold bar with a specific owner. Allocated
gold is essentially held in separate accounts; it cannot be pooled with
gold from others to satisfy obligations. In contrast, unallocated gold
is held in a general pool by the bullion dealer and the customer has a
general entitlement to the metal, but not to a specific gold bar. The
LMBA states that unallocated gold “is the most convenient, cheapest and
most commonly used method of holding the metal.”
In practical terms, unallocated gold is comparable to putting
dollars, pounds or euros into the bank. Once deposited, the money
becomes fungible—you can withdraw the same amount of money you put in,
but you will not receive back the same exact bills that you deposited.
The use of unallocated gold allows for amounts smaller than a gold bar
to be used as collateral between counterparties—a significant benefit to
a collateral program given that a London Good Delivery bar weighs 438.9
ounces, and gold is currently trading for over US$1,700 per ounce.
- Transparency: Readily available price information
promotes market transparency and aids in daily mark-to-market and margin
calculations. Gold is priced by the market twice daily (morning and
afternoon) and widely reported by both the financial press and data
vendors. Use of a predictable daily price fix point allows
counterparties to mitigate their daily exposure and set haircuts to
manage ongoing price fluctuations. The afternoon U.S. Dollar London old
Fix is viewed by market participants as the appropriate way to mark gold
given daily price fluctuations and increasing values.
- Ease of transfer: The London Bullion Market clears
daily using paper transfers that evidence the unallocated gold held
between members. This allows them to simply and efficiently settle
mutual trades and transfers to/from third parties while mitigating the
costs and risks associated with physical movement of bullion. The use of
paper transfers and unallocated gold facilitate easy transfers between
counterparties when needed.
And speaking of JP Morgan, incidentally the subject of this post,
what do we know about their London-based gold vault services? Once
again, in
their words:
J.P. Morgan recently integrated its gold vaulting service in London with its tri-party collateral agency service.
- J.P. Morgan operates one of the two largest commercial gold
vaults in London (one of only six in the City) and is a member of the
London gold clearing system.
- J.P. Morgan is also one of the few truly global providers of
collateral management services. As collateral agent, J.P. Morgan works
with two parties that have an established collateralized lending or
financing arrangement.
Who is the
other largest commercial gold vault in London?
Why HSBC of course: the bank which has recently been embroiled in
virtually every scandal involving global money laundering, also happens
to be the custodian for such massive (supposedly) physical gold
repositories as those of the SPDR Gold GLD ETF. The HSBC gold vault is also known as "
Gold's secret hiding place"
as CNBC penned it, when Bob Pisani was allowed to take a look deep
inside the vault's bowels but only after he was theatrically blindfolded
(a visit which we commented on
at the time).
Yet Pisani's blindfold, while theatrical, was premeditated: the
number of people who know where the HSBC vault is located is a handful,
because
the last thing commercial gold vaults, and certainly
their customers, would want to deal with is a Simon Gruber-type Die Hard
2-style goldjacking.
Amusingly it was none other than the Bundesbank who in November
invoked the ghost of the fictional New York Fed gold heist when a
member of its executive board told NY Fed's Bill Dudley that
"you can be assured that we are confident that our gold is in safe
hands with you. The days in which Hollywood Germans such as Gerd Fröbe,
better known as Goldfinger,
and East German terrorist Simon Gruber, masterminded gold heists in US vaults are long gone. Nobody
can seriously imagine scenarios like these, which are reminiscent of a
James Bond movie with Goldfinger playing the role of a US Fed accounting
clerk." This happened two months before the Bundesbank diametrically
(and embarrassingly) flip-flopped and decided to, all pinky swears to
the contrary, begin repatriating its gold from the New York Fed (and
Paris) after all. But not London (at least not yet). It also perhaps
means that the days of Simon Gruber may not be "
long gone", especially if the whereabouts of vaults containing billions worth of gold bullion were known to the public.
And just like the SPDR would want nothing less than to have the
address of the HSBC gold vault made public (the same goes for HSBC of
course), so those other ETF providers who use JPM's London gold vault as
a custodian, such as
Blackrock's iShares IAU ETF, or
ETF Securities, would want nothing less than to have the location of JPM's vault exposed.
Needless to say, the actual addresses of "LBMA Vault" provided by the LBMA in its Annex 2 for "
The Good Delivery Rules for Gold and Silver Bars"
lists the headquarters office of the vaulting firm, and certainly not
the actual address, because it would have been somewhat disingenuous to
blindfold Pisani just to deliver him toe
8 Canada Square,
or the HSBC head office in London, the address provided by the LBMA as
vaulting address of HSBC. And certainly the address given for the JPM
vault at
125 London Wall,
aka Alban Gate, which was the firm's headquarters until its move to 25
Bank Street in 2012, is the last place even one bar of gold would be
found.
Which is why we were quite stunned to find, in the deep recesses of
the internet (and hosted by the Indonesian stock exchange of all place),
a trade ticket from May 26, 2011, issued by the Perth Mint of Australia
to Avocet Gold Mining (
a West African gold miner),
in which the Mint confirms its purchase of 2,126 ounces of gold at a
price of $1,526 for a total transaction price of $3.246 million.
What is notable about the trade ticket is the additional information
provided for the account clearer, in this case, none other than JPMorgan
Chase Bank NA, London, as well as the number of the Gold Account held
by said clearer: "
No. 01380" but what is
by far the most interesting, is that the actual physical address of the JPMorgan facility is provided:
60 Victoria Embankment, London.
Ladies and gentlemen: we may just have uncovered the actual location
of the ultra-secretive JPMorgan gold vault in the city of London.
Where is 60 Victoria Embankment, London? See below:
The building's southern/river face is the glorious facade of the City
of London School which occupied this location from 1879 until 1986 (and
which is currently situated just east of here along the Blackfriars
Underpass, next to the Millennium Bridge).
As the map above shows, it is a rather sizable building, located just
off the Thames river and steps away from the Blackfriars Bridge, whose
official designation until recently was
Morgan Guaranty Trust Company of New York, Ltd,
a remnant from the firm's merger with Guaranty Trust Company in 1959
(recall that JPM was called Morgan Guaranty Trust until 1989).
A cursory media search about the otherwise very nondescript looking
building at 60 Victoria reveals that it had been fully leased by JP
Morgan as long ago as 1991. What is more interesting, is that the
property had previously been bundled as part of a high-profile
commercial mortgage-backed securities, or CMBS, deal called White Tower
2006-3. The deal consolidated properties formerly owned by one-time
London real estate mogul,
Simon Halabi,
one of the financial crisis most notable falls from Grace, who had an
estimated net worth of $4.3 billion in 2007, and in April 2010 was
declared bankrupt, and whose current whereabouts have since been
unknown.
White Tower 2006-3, most infamous for being the first CMBS deal to be
placed in liquidation after the start of the currency crisis,
held a variety of properties near
and dear to JPMorgan's heart, first and foremost 60 Victoria
Embankment, the 420,000 sq ft of office buildings fully let to JP Morgan
Chase; but notably
Alban Gate,
the 382,000 sq ft office property located on London Wall in the heart
of the City and fully let to JP Morgan Chase. The latter also was JPM's
UK headquarters
until last year.
What happened next is interesting: in July 2010 Carlyle bought the
bulk of the "White Tower" asset portfolio from the defunct CMBS,
paying some £173 million for the 60 Victoria Embankment location.
Three very short months later,
none other than long-time 60 Victoria resident JPMorgan bought the very
same building from Carlyle for a whopping £350 million: a transaction
which doubled Carlyle's money in an unprecedented three months! At the
time the now former CEO of JPM's investment bank Jes Staley (and who
currently works for BlueMountain -
the same fund that made a killing by squeezing none other than
JPMorgan's London Whale traders), said, "These properties are long-term
investments and represent our continued commitment to London as one of
the world's most important financial centres." Frank Bisignano, chief
administrative officer, added: "These properties are among the most
attractive pieces of real estate in London. These buildings ensure that
our employees will have the necessary technology, infrastructure and
amenities to take our businesses forward." Curiously, JPM showed zero
love for its Alban Gate location, which it promptly departed to go to
its new Canary Wharf HQ, and Carlyle was forced to
pull the sale of this property a year later as it did not get enough satisfactory bids.
A pressing question remains: why did JPM, a long-time tenant of 60
Victoria not submit its own bid for the location it knew it would end up
purchasing outright in a few months from Carlyle anyway? Why overpay by
£177 million in exchange for merely having one more middleman do a
three-month transaction? We hope to find out.
Yet what is very clear is that there was something of far greater
value to JPM at the 60 Victoria location than at its old headquarters.
What that "thing" may be, and what is the missing puzzle piece in
this story, comes from a very peculiar article written nearly four years
ago in an Abu Dhabi/Arab Emirates website titled
TheNational, titled "
Mystery gold cargo linked to Saad, Gosaibi feud",
which described just that - the fate of a series of very peculiar gold
shipments, the key of which once again involved the two main
abovementioned players: Perth Mint and 60 Victoria Embankment.
We repost the entire story below, while highlighting the key parts:
The Qantas freighter QF71 that took off from Perth
Airport on November 3 last year bound for London would not have
attracted any special attention, despite the fact that it was carrying
1.2 tonnes of gold bullion, then worth about US$28 million (Dh102.8m).
Perth, in Western Australia, is home to Australia's Gold Corporation
Mint, where bullion is processed and turned into standard 12.5kg bricks.
From there, the ingots are shipped daily around the globe to vaults in
America, Europe and Asia, evidence of the world's apparently insatiable
appetite for the precious metal. But what made this shipment unusual was
that it was the first of 15 such cargoes, of varying quantities and
values, which over the next seven months were eventually unloaded mainly
in London. Smaller amounts were also delivered to Dubai and Zurich.
The total value of the bullion exported in these operations
approached $430m at current market prices, and it weighed 10.4 tonnes.
The other distinguishing factor was the identity of the recipients, or
"consignees" as they are known. According to documentation seen by The
National, they were all companies associated with the al Gosaibi family
of Saudi Arabia. The al Gosaibis have since fallen out spectacularly
with their partner, Maan al Sanea of Saad Group, in the biggest
corporate scandal to hit the Middle East, leaving about 120 banks
worldwide with debts estimated at up to $22 billion and a decreasing
likelihood of getting their money back.
In a global hunt for assets to offset their losses, the banks have
looked into every corner of the Al Gosaibi trading empire and the Saad
Group controlled by Mr al Sanea. A small army of lawyers, forensic
accountants and corporate investigators has been hired to track down
assets over which the banks believe they have claim. They have turned up
property, financial investments, relatively small amounts of cash and
other baubles of the wealthy, such as aircraft leases. There was even a
private zoo. But the most curious discovery so far is the Gosaibi gold.
Perhaps the most remarkable fact about the shipments is that
although there are detailed and specific records of them having taken
place, neither party in the al Gosaibi-al Sanea confrontation seems to
lay any claim to their ownership. Each side denies it was
responsible for the shipments. Despite being regularly ranked among the
world's billionaires, neither the family's controlling partnership,
Ahmad Hamad Al Gosaibi and Brothers, nor Mr Al Sanea's Saad Group has
any previous known involvement in the bullion business.
The first shipment took place just as the world appeared on the verge
of financial meltdown last November. They continued until May, when the
crisis in the two Saudi families exploded into the public domain after
they failed to make repayments on loans associated with their banking
businesses in Bahrain. The shipments reached a peak in late February and
early March, just as tensions within the al Gosaibi family intensified
after the death of Sulaiman, the family patriarch and chairman, on
February 22.
One shipping document shows that, the following day, "a
shipment of 21,500 fine ounces of large 12.5kg gold bars, minimum 99.5
per cent purity" was sent from AGR Matthey, a well known Australian
bullion dealer, from Perth Airport via Singapore to London's Heathrow.
From there, the bullion was moved to the vaults of Standard Bank of
South Africa, located in the London offices of JPMorgan Chase at 60
Victoria Embankment, Blackfriars, London.
The shipment was marked "London good delivery", meaning it met the
internationally recognised standards for bullion delivery and could be
deposited alongside bullion of the same quality. The Standard
Bank account in which it was deposited was in the name of Al Gosaibi
Trading Services, one of the companies owned by the al Gosaibi family. But financing such a transaction - the gold was worth about $20m - is a complicated process.
The usual procedure is for the consignee to arrange a letter of
credit with the supplier, which is then guaranteed by a bank. In this
case, the letter of credit bears the reference number "Awal 157". Awal
is the Bahraini bank owned by Mr al Sanea, but which is now in the
administration of the Bahrain Central Bank. Ten of the 15 shipping
documents bear the Awal reference, while the rest have reference to
"TIBC", The International Banking Corporation, the al Gosaibis' Bahraini
bank which is similarly in administration.
It is common practice in the trade finance business for those letters
of credit to be separately financed by a third party, such as an
international bank. This is what happened with the Gosaibi gold. The
amounts paid for the bullion were drawn down from lending facilities
with these global banks but those borrowings have not been repaid,
banking sources say. International banks, so far frozen out of the
settlement process in Saudi Arabia or offered derisory amounts by the
feuding families, are keen to track down the location and ownership of
this bullion, to seize and offset against debts owed them. While most of
the bullion ended up in London, two shipments went to other locations.
Also on February 23, some 629kg of "London good delivery" were
shipped from Perth on Singapore Airlines flight SQ226/SQ490 to Dubai
International Airport. The shipment was delivered to the Brinks Global
Services facilities at the Dubai Airport Free Zone, marked for the
attention of: "Malcolm Clingham, for account of Al Gosaibi Trading
Services Ltd." Again, the financing reference was "Awal 158". Attempts
to reach Mr Clingham were unsuccessful. An employee of Brinks in Dubai
said he left the company about four months ago.
The other non-London shipment took place on April 29, when 689kg of
gold left Perth on Singapore Airlines flight SQ226/SQ346 to Zurich in
Switzerland. The shipment was marked for delivery to: "UBS AG Zurich,
for account Standard Bank PLC." Although no named consignee account was
mentioned on the shipping document, the financing reference was "TIBC
438". The final shipment to arrive in London took place on May 6, when
722kg was placed on a Delta Airlines flight DL94 in Salt Lake City,
Utah, in the US. This was marked for the Al Gosaibi Trading Services account at Standard Bank at the JPMorgan Chase building in London. The financing reference was "Awal 177".
So while there is plenty of evidence that the gold shipments
took place, there is huge uncertainty about who initiated them, who owns
the bullion, and even where the gold is now. The company named
as the bullion account holder, Al Gosaibi Trading Services (ATS), is a
wholly owned subsidiary of Bahrain-based Al Gosaibi Investment Holdings
(AIH), based in Bahrain which is in turn owned by three family members.
But the management control of ATS and AIH is in dispute.
In a legal filing in New York, John D Potter, a former general
manager of Al Gosaibi Investment Holdings, declared that: "Mr al Sanea
exercised complete control over the operations and activities of AIH, to
the exclusion or virtual exclusion of the other directors and the
shareholders." Lawyers for Mr al Sanea, the London firm of Harbottle
& Lewis, declined to comment on the gold shipments. But sources
close to the Kuwait-born financier have denied he was involved in the
transactions.
Creditor banks, which asked to remain anonymous, have told The National that their
inquiries to Standard Bank in London have not so far produced any
positive indication of ownership of the bullion, or even confirmation
that it is still in Standard's vaults. Through its South African head office, a spokesman for Standard Bank said: "Our
executives in London are adamant they cannot comment - not even off the
record - as this would be a breach of client confidentiality."
Whoever ends up owning the gold from Perth will at
least have made some money out of the Saudi confrontation, which has
affected the kingdom's economy and stock market, and ravaged the balance
sheets of regional and international banks. The gold price has risen by
nearly 50 per cent over the past year. The shipment last November,
worth some $28m when QF71 took off from Perth, is now valued at $42m -
wherever it might be.
Courtesy of TheNational, we now know that one of the key features of the building at 60 Victoria is that it houses
at least the
vault of the Standard Bank of South Africa: in other words, somewhere
deep underground, there is, indeed, a major gold vault. We also know,
that after leasing this location for nearly two decades, JPMorgan
decided to take the plunge and bought it outright in 2010, in a
transaction that as shown above was a scramble to park cash and to
procure the property for sale. In other words, JPM now has sole
custodial possession of all the vaulting services offered under its 60
Victoria Embankment address.
So is this where the legendary JPMorgan London vault is located?
Certainly nothing short of Blythe Masters admitting on live TV that yes,
this is where one of the two largest commercial gold vaults in the UK
is located, and as JPM admitted previously, only one of only six
commercial vaults in all of London, there will be speculation and one
can't be certain.
However, a quick cursory virtual trip around this building using
Google's Street View feature shows that this building, barricaded on
every side by a dense forest of bollards, is as protected from outside
interest (especially of the automotive kind) as any modern day fortress.
The building's entrance on John Carpenter street, just north of Victoria's embankment - bollards everywhere:
The building's reinforced back/delivery entrance: corner of Kingscote
and Tudor: barriers, a reinforced gate with a screen on top of it, and
even more bollards which surround the entire building and prevent the
parking of any cars in proximity to the building:
And finally, not one,
but two rows of bollards, cordoning off a 60 foot area in the street on both sides. South view:
And north view:
Needless to say, no car, or any other potential threat, can enter that ~60 foot space from either side.
Is that where, dozens of feet underground, the world's most secretive commercial gold vault is located? Just below what was once the main campus of the City of London School for boys.
* * *
Update: a quick Google Street View trip around the block from the
main JPM entrance to Carmelite Street, just south of Tudor Street, or
here...
... reveals the following armored Brinks trucks waiting:
And
In front of an even more impressive looking gate:
