It stretches across more than 300,000 square feet under the City, the finance quarter in the heart of Britain’s capital. There, beneath the pavement and commuters of Threadneedle Street, lies a maze of eight Bank of England gold vaults – each stacked with gold bars worth a total sum of around £141 billion ($200 billion).
The bars sit on rows of blue numbered shelves. Every bar weighs precisely 400 troy ounces (about 12kg), making each currently worth some £350,000 ($500,000), comfortably more than the average price of a house in the UK. Each bar looks subtly different depending on where it was refined. Some bars have sloping edges to make them easier to pick up; others look more like a loaf of bread.
There is no smell here: metal has none. There is no noise, either, on account of the vaults’ thick concrete walls. Every bar is worth some £350,000 ($500,000)
What there is, however, is one of the world’s most important traded assets. Deals are still done in gold in almost every country in the world. Its price is a crucial barometer for consumer confidence. Prices rise when markets are uncertain, and before US elections – like now.
These vaults lie right at the heart of this volatile, incredibly important market.
About one-fifth of all the gold held by the world’s governments is in London. In total, 6,256 tonnes of gold are stored in vaults in and around London – collectively worth about £172 billion ($248 billion).
The Bank of England vaults alone hold 5,134 tonnes, including the official reserves of the UK Treasury and the vast majority of the physical gold traded in London. Gold owned by 30 other countries is also in these vaults along with the hoards of about 25 banks.
So much gold is kept in Britain’s capital partly to keep it near where the metal is traded. It’s also a reflection of the security of London’s vaults.
Hiding your stash
The Bank of England vaults were built in the 1930s. During World War II, when Britain’s bullion was secretly moved to Canada to continue the war effort if Britain was overrun, one vault was used as a staff canteen for Bank of England employees. Vintage advertisements for the P&O cruise line, enticing Bank employees away to holiday, are still plastered across the walls. Later, in the 1940s, the vault was used as a bomb shelter.
But since 1945, the vaults have been used primarily for gold. Storing your assets in a huge safe might seem more fitting for a Tudor monarchy than a modern central bank. But the Bank of England still uses not only vaults, but several 3ft-long keys for access. Insiders believe that electronic access alone could be more prone to abuse. (You do still have to speak a password into a microphone and a computer matches your voice against a saved sample).
The bars arrive in London by surprisingly traditional methods, too. Some come by sea, shipped from refineries like PAMP in Switzerland or Rand Refinery outside Johannesburg in South Africa.
Gold is also moved on regular passenger airplanes. “In the cargo hold of commercial passenger planes, you often find gold, fresh flowers, and dead bodies,” says Ruth Crowell, chief executive of the London Bullion Market Association.
But more difficult than finding transport can be finding a place to house it. Because much of the City of London is on clay ground and because gold is such a dense substance, you can only stack the bars so high before the vault starts sinking into the clay, Crowell says. (The weight of a City skyscraper is spread over a larger footprint, which makes that risk less likely).
This is less of a problem in other cities. In Manhattan, which sits on bedrock, the Federal Reserve Bank can stack bars from floor to ceiling.
As a result, there are restrictions on how much gold can be stacked in the Bank’s vaults. On the top level, the gold bars can only be stacked four pallets high. On the lower, they can only be stacked up to six.
This means London needs to spread out its gold more to stop it sinking, and needs more vaults of smaller sizes.
As a result, it isn’t just the City’s streets that are paved with gold. There are seven smaller vaults inside the M25 (the motorway that encircles Greater London) owned by banks like JP Morgan and HSBC, including three at transport companies around Heathrow Airport.
Each owner attempts to keep their vault’s location secret. When CNBC journalists visited JP Morgan in 2011, for example, they had to surrender their mobile phones and travel in a car with blacked-out windows.
Getting your gold fix
It isn’t just vault locations that are kept under wraps. The gold market itself is secretive and steeped in tradition and ritual, particularly around the fixing system used for setting the price.
The price setting meetings or “fixes” – in which there are now 12 direct participants hailing from the UK, US, Canada, China and France – take place twice a day. When a price matches supply and demand, the price is fixed.
Until 2015, this was done verbally: a chairman would try different prices on the participants, each of whom would say if, at that price, they would be buyers or sellers. From 1919 until 2004 fixes were done in person in the City of London. Originally, if a participant wished to pause proceedings – to change between buying and selling, for example – he would raise a small UK flag.
In 2004, the fixes were moved to a conference call. Only last year did the system change to a more modern electronic auction platform run by the Intercontinental Exchange, which also owns the New York Stock Exchange.
“If everyone knows there are two key points in the day to show up, you get the best liquidity balance between buying and selling,” says Matthew Glenville, chief operating officer of the Intercontinental Exchange Benchmark Administration.
This ‘spot’ price is then used as a benchmark for people buying and selling gold around the world, a market where transactions total around £85 billion ($120 billion) a day.
During good times, gold is less in demand. But when the economy is tough, the metal is highly prized as a safe haven asset – not quite like storing cash under the mattress, but still a way to hedge against risk in other markets.
As a result, gold increases in value when markets are volatile. Since the 1,000-point Dow Jones plunge of August 2015, the average price of the morning fix has increased each month, rising from £705 ($1,000) in December to £870 ($1,250) in March. When stock markets slump, governments and private investors ditch equities and buy gold – like Russia and China are doing now.
Even so, only 32% of the world’s yellow metal is actually held by governments, banks and investors under lock and key. About 12% is used industrially, such as in electronics circuits. And more than half is used for jewellery.
China and India are particularly significant markets for jewellery, together accounting for half of world demand. In India alone, an average of 30 to 40 grams of gold are purchased for each of the country’s 10 million weddings each year.
“China and India, between the two of them, accounted for less than 10% of global demand in 2000,” says Ross Norman, chief executive of the bullion dealer Sharps Pixley. “Now it’s north of 90%.”
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