Good morning. Let me extend a warm welcome to all of you to the United States and to the city of Boston. This is the 19th annual LBMA precious metals conference, and only the second time that the conference has taken place in the U.S., the first time being in San Francisco in 2002. Although Boston is among the oldest cities in the U.S., widely known as the birthplace of the American Revolution, it has continued to evolve from its colonial roots. It is a truly dynamic American city and today stands as a preeminent center of higher education and innovation, home to world-class universities and companies on the leading edge of industries like healthcare, technology and finance.
As always, the views I will express here today are mine alone and do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System.
LBMA & LPPM
First, I’d like to thank Paul Fisher for inviting me to speak today and Ruth Crowell for her leadership of the LBMA. I’d also like to thank LPPM Chairman Tim Pearce for his leadership of the LPPM. This annual conference presents a vital forum for exchanging insights among market participants in the precious metals industry, and I am excited to be a part of it.1
I’d like to acknowledge the critical functions performed by the LBMA as the preeminent global standard setting body for the wholesale precious metals market. Its Good Delivery Lists for gold and silver are universally acknowledged as the de facto standard of quality assured and assayed bullion. I would like to call out in particular the LBMA’s important work in defining best practices for conduct in precious metals markets through its recent launch of the Global Precious Metals Code.2 In the same vein as the recently released FX Global Code, the Global Precious Metals Code is an important step toward promoting fair, effective, transparent and responsible engagement within the global precious metals market.3 Likewise, the LBMA’s Responsible Sourcing Initiative, designed to strengthen standards around refiners’ due diligence procedures, will help underpin the integrity of the precious metals market going forward. In general, the Federal Reserve supports efforts to bring transparency and integrity to market pricing, trade reporting, and trading and settlement practices, and specific to precious metals, I would encourage market participants to carry forward these efforts to ensure continued public confidence in precious metals markets.
The history of the United States itself is linked inextricably with gold. Early on, the California gold rush drove settlers west and led to the settlement of what would later become the western U.S. Later, the gold standard—particularly whether or not to adhere to it—stood at the crux of some of the most intense political debates of the 20th century. It was the subject of one of the most famous speeches in US political history, when, in 1896, prospective US presidential nominee Williams Jennings Bryan railed against the gold standard, proclaiming that mankind should not be crucified “upon a cross of gold.”4 With the role of gold in U.S. economic affairs significantly diminished following the end of convertibility in 1971, gold still retains its unique socio-cultural importance. It remains a necessary part of well-diversified portfolios, a vital industrial input, and an important store of value for many nations.
The Federal Reserve & Gold Custody
The Federal Reserve’s history with gold dates to its earliest days and tracks the seismic shifts in world history and the international monetary system over the past century. Today, the Federal Reserve’s involvement with gold is solely as a provider of custody services to the global official community. The Fed does not hold gold on its own books, nor do we provide services beyond long-term storage of official gold. Yet, the large amount of gold held for safekeeping in the New York Fed’s vault—6,223 tons [$216 billion at current market prices]5 —is a powerful legacy and symbol of the U.S. and New York as a financial safe harbor.
The Fed’s gold custody services began in 1916 when the New York Fed received its first deposit in the form of $46.8 million of gold coins from a European central bank, worth approximately $1.3 billion in today’s dollars. The First World War was raging and the hazards of navigating trans-Atlantic sea lanes made the physical delivery of gold bullion increasingly perilous, which gave rise to the practice of earmarking gold for trade settlement and other purposes. The current headquarters of the New York Fed at 33 Liberty Street in lower Manhattan had not yet been erected, and gold held on behalf of foreign central banks was placed in the vaults of the New York Clearing House at 77 Cedar Street, across the street from modern-day Zuccotti Park.
It wasn’t until several years later that the New York Fed built its own gold vault around which its current headquarters was constructed. The vault is anchored deep within the bedrock of Manhattan, one of the few foundations able to support the 230 ton weight of the vault, not counting the weight of the gold inside.6 Its construction was described as “one of the most difficult and exacting pieces of engineering ever undertaken” at the time, partly on account of the undulating surface of the bedrock underlying the structure.7 When finally opened in 1924, the vault was the deepest basement in Manhattan, descending 80 feet below street level.
Gold balances at the New York Fed have fluctuated considerably, driven by war, the ebb and flow of global economic activity, and changes in the international financial architecture. Although the initial amount deposited at the time of the vault’s opening was small, holdings rose strongly during the economic expansion that took place in the US over the 1920s, driven by high US interest rates and speculation by foreigners in the US stock market. Just as soon as holdings peaked in 1931, however, they contracted sharply with the onset of the Great Depression. The slump in world trade and erosion of investor confidence prompted many nations to repatriate their gold. By the mid-1930s, however, the threat of war in Europe reversed the trend of Depression-era withdrawals, and gold holdings at the New York Fed more than doubled between 1935 and 1940. Following the war, as European economies began to recover and exports to the US rose, the US balance of payments deficit began to expand. Nations running trade surpluses with the US accumulated dollars, and often exchanged these dollars for gold. Indeed, during the Bretton Woods period, the dollar was, for all intents and purposes, “as good as gold.” Gold holdings expanded to the point that the Fed was obliged to build an auxiliary vault to accommodate the additional bullion, which flowed in from the US Treasury’s Assay Office in New York when foreign governments and central banks exchanged dollars for gold at the “gold window.” Custody balances increased steadily until 1971, the year that President Nixon broke the link between the US dollar and gold. Gold holdings peaked shortly thereafter, at 12,000 tons [or over $400 billion at current prices], in 1973. Since that time, the New York Fed has experienced a gradual but steady decline in overall holdings due to gold sales by the official sector and geographical repositioning of holdings of certain central banks. Nonetheless, the vault remains the world’s largest known depository of monetary gold.8
Today, in addition to our gold custody services, New York Fed offers banking and financial services to approximately 200 central banks, governments and international official institutions. These account holders maintain about $3.7 trillion in investments (excluding gold) mostly in US Treasury securities and short-term money-market type instruments.9 As my colleague Simon Potter discussed in his keynote address last year at the centennial commemoration ceremony for the Fed’s dollar account services, the safety, confidentiality, and reliability of these services, including the Fed’s gold custody services, provide important benefits that enable central banks around the world execute on their public mandates.10
Given the importance of the New York Fed as a gold custodian, let me say a word about the role of transparency in the global precious metals market. Transparency is critical to engendering greater confidence among precious metals investors, ultimately supporting improved price discovery and higher levels of market efficiency. In general, I applaud market participants’ efforts to improve transparency in the global precious metals market within the limits of customer confidentiality obligations. Consistent with this posture, the Federal Reserve System releases monthly summary statistics on gold custody holdings and has been doing so for over 30 years.11 Similarly, we recognize efforts undertaken by the LBMA to promote greater transparency in the global precious metals market, for instance, through its recent efforts to systematize OTC trade reporting and to begin, along with the Bank of England, publishing the holdings volumes of London’s gold and silver vaults.12
In closing, I’d again like thank the LBMA for organizing this conference. I expect that the LBMA will continue to serve as the leader in standard-setting for the global wholesale precious metals market and advance innovative efforts to ensure that global bullion trade is marked by the highest levels of integrity, transparency and quality. I’m looking forward to some fascinating panels and discussions over the coming days, and wish all of the participants a pleasant stay in Boston and the United States.