The Mousetrap

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October 6, 1952 saw the debut of a new play at the Theatre Royal Nottingham in England that was based upon a short radio play titled Three Blind Mice. The playwright, Agatha Christie,

Mousetrap Plaque

asked that the short story upon which the original radio play was based not be published in the United Kingdom for as long as her stage play ran because it contained a twist in the ending that she desperately wanted to protect.

The play would tour Britain, being staged in Oxford, Birmingham, Liverpool, Manchester, and Newcastle before it reached the West End of London where it was to take up residence at the New Ambassador's Theatre on November 25, 1952.

The author was forced to rename the play at the insistence of Emile Littler, who had produced a play in the West End with the same title prior to WWII, and, when casting around for a suitable title, Christie sought the counsel of her son-in-law, Anthony Hicks, who suggested a tip of the hat to a famous scene in Shakespeare's Hamlet—specifically Act III, Scene 2:

Hamlet. Madam, how like you this play?

Queen. The lady doth protest too much, methinks.

Hamlet. O! but she'll keep her word.

King. Have you heard the argument? Is there no offence in 't?

Hamlet. No, no, they do but jest, poison in jest; no offence i' the world.

King. What do you call the play?

Hamlet. The Mouse-trap. Marry, how? Tropically. This play is the image of a murder done in Vienna: Gonzago is the duke's name; his wife, Baptista. You shall see anon; 'tis a knavish piece of work: but what of that? your majesty and we that have free souls, it touches us not: let the galled jade wince, our withers are unwrung.

And so it was that Christie's play about a murder came to be titled The Mousetrap.

For his contribution to the play, Hicks received the author's profound thanks, but Lady Luck would smile far more profoundly on Christie's young grandson, Matthew Prichard, whose 9th birthday coincided with Christie's writing of the play. By way of a gift to the young boy, Christie bequeathed him the rights to a play which she expected to have a reasonably successful run (though not as successful as others predicted):

(Wikipedia): Christie herself did not expect The Mousetrap to run for such a long time. In her autobiography, she reports a conversation that she had with Peter Saunders: "Fourteen months I am going to give it", says Saunders. To which Christie replies, "It won't run that long. Eight months perhaps. Yes, I think eight months."

Now, eight months was—is—a respectable time for a play to run, but both Saunders and Christie were a little off with their predictions concerning the longevity of The Mousetrap.

In April of 1955, the play celebrated its 1,000th performance. In September 1957, The Mousetrap broke the record for the longest-running play in the West End—an event marked by a telegram to Christie from a rather begrudging Noel Coward, who wrote:

"Much as it pains me, I really must congratulate you...."

By December 1964, it had racked up 5,000 performances, by 1976, 10,000, by December 2000, 20,000, and on 25 November 2002, it celebrated a remarkable 50-year continuous run with a gala performance in front of Queen Elizabeth II and Prince Philip.

Last Sunday, November 18th, 2012, a cast of theatrical celebrities staged the 25,000th performance of a play that keeps on going year after year.

Amazingly, a film version of The Mousetrap has never been made because Christie stipulated, when the play opened in 1952, that no such project could be undertaken until the West End production had been closed for at least six months. How little she knew.

The thing that sets Christie's play apart is the big twist in the tale that has been delighting and surprising audiences for years. So integral to the audience's enjoyment of the play is the dramatic shift, that Christie worried that, should the killer's identity be leaked by those who had seen the play, its impact would be ruined.

After much deliberation, she and her director, Peter Saunders, came up with a simple yet ingenious plan by which to keep the identity of the killer a secret—they would simply ask the audience, at the end of each performance, not to tell anybody who it was that did away with Mrs. Boyle (a character described as "A critical older woman who is pleased by nothing she observes") at the end of Act I, Scene 2.

Somewhat amazingly, this worked beautifully.

Audiences, imbued with a sense of involvement in a great secret, gave the play glowing reviews to their friends and relatives but stopped short of revealing whodunnit—encouraging people to instead go and find out for themselves. And go they did. In their droves.

Since its opening night, an estimated 10 million theatregoers have seen The Mousetrap in London alone. Throw in those who have watched any of the 60 productions that have been licensed in places such as China, Russia, the US, South Africa, and Canada, and the number increases significantly.

And yet...

The identity of the killer remained a closely guarded secret for over 50 years. So much so that, when, in August 2010, Wikipedia opted to reveal the identity online, it caused uproar:

(UK Daily Mail): For 58 years, the identity of the killer in Agatha Christie's The Mousetrap has been one of theatreland's most closely guarded secrets.

At the end of each performance of the world-famous countryhouse whodunit, the audience is asked not to reveal the name of the killer when they leave.

It was supposed to prevent the ending of the world's longest-running play from being spoilt for those who hadn't yet seen it.

Until now, it appeared to have worked.

But the identity of the killer has been published online by Wikipedia, despite protests from the author's family and petitions from fans to remove the spoiler.

Wikipedia tells readers the famous play is "known for its twist ending, which at the end of every performance, the audience is asked not to reveal."

But anyone who keeps reading will be told who the murderer is—without any warning.

Matthew Prichard, Christie's grandson, described the online encyclopedia's decision as "unfortunate".

So, after 58 years and with well over 10 million people in on the "conspiracy," the secret of the identity of Christie's most famous killer was revealed to a wide audience. Still, if you can keep 10 million people quiet for over 50 years, I'd say you were doing pretty well.

One would have to hazard a guess that there are substantially less than 10 million people who know the truth behind both the amount of gold bullion held by Western central banks as well as the degree to which prices are manipulated in order to maintain price stability—but, as conspiracies go, this one is right up there with the killing of JFK (certainly in financial circles).

Now, these conspiracy theories have polarized some of the finest minds in finance for many years, and many commentators for whom I have the utmost respect feel they are all utter nonsense. Personally, I believe there is no smoke without fire, and I always apply the two criteria of motive and means to any suspected conspiracy. In the case of gold (and silver), I cannot help but conclude that central banks and governments certainly have the motive to suppress prices (as they reveal only too clearly the extent to which the purchasing power of fiat currency is being debased), and as for the means...? Well, based on what we have seen in terms of intervention in the far larger sovereign bond markets in recent years, I think arguments over that particular part of the equation have been rendered somewhat redundant.

How ridiculous has government intervention become in the bond markets? Ladies and gentlemen, I give you the US Treasury curves of November 2000 and November 2012 plotted against a backdrop of the US Public Debt Outstanding:

Source: Bloomberg

As you can see, as the US has plunged deeper and deeper into debt, its cost of borrowing money has gotten lower and lower. In fact, the US can currently borrow 10-year money lower than at any time in the country's history (see chart, bottom of next page). How has that happened? Well, in large part it can be explained by the chart at the top of the next page, which shows the US Federal Reserve's holdings of US Treasury Securities between 2002 and today. As you can see, those holdings have trebled in that time period, which has helped yields hit those all-time lows depicted on the second chart.

Meanwhile, on the debt side of the ledger, as Kyle Bass pointed out most recently:

(Kyle Bass): It took the United States 193 years (1789-1981) to aggregate $1 trillion of government debt. It then took 20 years (1981-2001) to add an additional $4.8 trillion and, in the last 10 years (2001-2011), a whopping $9.8 trillion has been added to the federal debt. Since 1981, the US increased its sovereign debt by 1,560% while its population increased by only 35%…

Source: Bloomberg

US Rates 1790 to 2012
Source: Global Financial Data

All the debt that has been accumulating across the globe (and, as I have discussed ad nauseam, it is not just in the US) against the backing of an ever-dwindling public hoard of gold bullion is eventually going to matter, and probably to everybody at the same time, for that is generally the way these things work in the 21st century, and when it does, very few people seem to grasp the full implications. What better reason for governments to attempt to engineer the lowest gold price they possibly can?

Recently, there has been renewed focus on the amount of physical gold actually held by central banks and, potentially more worryingly, where it is held. Allow me to elaborate.

It began in August 2011 with Hugo Chavez.

The ailing Venezuelan dictator demanded that the Bank of England return the 99 tons of gold bullion that was stored in its vaults below Threadneedle Street in the heart of the City of London.

(Bloomberg): Venezuelan President Hugo Chavez ordered the central bank to repatriate $11 billion of gold reserves held in developed nations' institutions such as the Bank of England as prices for the metal rise to a record.

Venezuela, which holds 211 tons of its 365 tons of gold reserves in U.S., European, Canadian and Swiss banks, will progressively return the bars to its central bank's vault, Chavez said yesterday...

"We've held 99 tons of gold at the Bank of England since 1980. I agree with bringing that home," Chavez said yesterday on state television. "It's a healthy decision."

As I wrote at the time (Things That Make You Go Hmmm..... August 20, 2011):

Chavez's move this week could set in motion a chain of events whereby central banks that store the bulk of their gold overseas in "safe" locations scramble to repossess their country's true "wealth." If that happens, the most high-stakes game of musical chairs the world has ever seen will have begun...

Personally, if I were a central bank governor, I know I would want to be absolutely certain that my gold was a) exactly where it was supposed to be, b) held in the amount advertised, and c)... well... made of gold, ideally—as opposed to tungsten.

Now, it has taken a little longer than I had expected for some movement to occur in the central bank gold market, but then so has the collapse of the European Union, the demise of the euro, the top of the US bond market, and the unmasking of France (more on that next week), but at last, the first signs are becoming apparent that ever so quietly, the game of musical chairs that I predicted would soon commence may finally be beginning.

It started at the end of October, when those traditional guardians of fiscal propriety (at least until recently), the Germans, reverted to type:

(Zerohedge): The German court of auditors (Bundesrechnungshof) has demanded that the Bundesbank undertake an audit of its gold reserves. In an "audit-the-Fed" style effort, the court wants to ensure that the nearly 3400 tons of gold is in fact in existence—"because stocks have never been checked for authenticity and weight". Furthermore, the Bundesbank's gold is stored in three other vaults around the world: The Bank of England, The Bank of France, and the US Federal Reserve. The court questions the practice of relying on a written confirmation from the custodians (foreign central banks). The decision means negotiating with the three foreign central banks for physical verification, but in anticipation, the Bundesbank has begun the process of shipping 50 tons per year from the Fed back to Germany for the next three years.

Der Spiegel added a little more colour (emphasis added):

(Der Spiegel): For quite some time now, [Peter] Gauweiler [CSU politician] has been pestering the government and the Bundesbank with questions concerning where and how the country's reserves are stored, and how often they are checked. He has submitted requests and commissioned reports on the topic.

Bundesbank Storage

Last week, Gauweiler celebrated his greatest triumph to date in his gold campaign, which has been a source of some amusement for many fellow German politicians: A secret report by the Federal Audit Office had been made public—and it contained stern criticism of the German central bank in Frankfurt. The Bonn-based auditors urged a better inventory system, including quality checks.

This demand, which even the bank's inspectors saw as nothing more than routine, alarmed the Berlin political establishment. Indeed, the partially blacked-out report read like the prologue to an espionage thriller in which the stunned central bankers could end up standing in front of empty vaults in the US.

For decades, German central bankers have contented themselves with written affirmations from their American colleagues that the gold still remains where it is said to be stored. According to the report, the bar list from New York stems from "1979/1980." The report also noted that the Federal Reserve Bank of New York refuses to allow the gold's owners to view their own reserves.

Not surprisingly, this prompted strong reactions in Berlin: The relevant Bundesbank board member Carl-Ludwig Thiele was summoned to Berlin to provide an explanation to the parliamentary budget committee. Heinz-Peter Haustein of the business-friendly Free Democratic Party (FDP) was even quoted by Germany's mass-circulation Bild newspaper as saying that "all the gold has to be shipped back."

As the late Michael Jackson once said:

"You wanna be startin' somethin'?"

A couple of days later, folks in the Netherlands (supposedly the world's 9th largest holder of gold by tonnage) began to get a little twitchy:

(Nederlands Dageblad): Almost 300 "concerned Netherlands citizens" have joined the German initiative for insight about the gold reserves.

In a petition the citizens committee demands "full openness on the quantity and storage location of the Netherlands' physical gold, and on the extent and nature of the gold claims."

In Germany, a lot of uneasiness has risen about the quantity, value, and quality of the gold reserves, which have not been audited in many years at various storage locations. Led by the tabloid newspaper Bild, German news media are wondering whether the 3.4-million kilograms of ingots are really there (valued at about €150 billion).

Under pressure from the German federal audit office, part of the gold stock will be repatriated from the United States to Frankfurt.

The Netherlands faces similar uneasiness about the position of its gold treasure—612,000 kilograms with of a value of about €25 billion. The gold, in part located at De Nederlandse Bank in Amsterdam (about 10 percent), is also located at the Federal Reserve Bank of New York, in Ottawa, and London.

A few more days went by before Ecuador dived for a chair:

(Zerohedge): Ecuador's government wants the nation's banks to repatriate about one-third of their foreign holdings to support national growth, the head of the country's tax agency said.

Carlos Carrasco, director of the tax agency known as the SRI, said today that Ecuador's lenders could repatriate about $1.7 billion and still fulfill obligations to international clients. Carrasco spoke at a congressional hearing in Quito on a government proposal to raise taxes on banks to finance cash subsidies to the South American nation's poor.

According to official statistics, Ecuador holds just 26.3 tonnes of gold which, in the scheme of things, isn't a whole lot—but to the good people of Quito and beyond, that represents about 16.5% of their wealth. Is it any wonder they'd prefer to have it under their own mattress?

Considering national gold holdings are supposed to be the property of the citizens of a given country, there seems to be an enormous amount of sensitivity surrounding any independent audit or verification of many of these stockpiles. Various excuses are always trotted out about the cost of an audit, but it seems as though the idea of even showing the gold to an outside party who could vouch for its existence is anathema to central banks and governments everywhere. You'd think they'd be kind of proud of all that shiny yellow metal?

Eric Sprott, a man who knows more about gold than most, recently penned another wonderful piece titled "Do Western Central Banks Have Any Gold Left???". The multiple question marks were Eric's, not mine. The set-up began thus:

(Sprott): Collectively, the governments/central banks of the United States, United Kingdom, Japan, Switzerland, Eurozone, and the International Monetary Fund (IMF) are believed to hold an impressive 23,349 tonnes of gold in their respective reserves, representing more than $1.3 trillion at today's gold price. Beyond the suggested tonnage, however, very little is actually known about the gold that makes up this massive stockpile. Western central banks disclose next to nothing about where it's stored, in what form, or how much of the gold reserves are utilized for other purposes. We are assured that it's all there, of course, but little effort has ever been made by the central banks to provide any details beyond the arbitrary references in their various financial reserve reports.

But soon Eric moved on to the nitty-gritty, providing a series of compelling metrics to back up his argument:

Global annual gold mine supply ex Russia and China (who do not export domestic production) is actually lower than it was in year 2000, and ever since the IMF announced the completion of its sale of 403 tonnes of gold in December 2010, there hasn't been any large, publicly disclosed seller of physical gold in the market for almost two years. Given the significant increase in physical demand that we've seen over the past decade, particularly from buyers in Asia, it suffices to say that we cannot identify where all the gold is coming from to supply it… but it has to be coming from somewhere.

After identifying the various sources of demand for gold bullion, Eric pondered the supply side of the equation:

What entities are releasing physical gold onto the market without reporting it? Where is all the gold coming from?

There is only one possible candidate: the Western central banks. It may very well be that a large portion of physical gold currently flowing to new buyers is actually coming from the Western central banks themselves. They are the only holders of physical gold who are capable of supplying gold in a quantity and manner that cannot be readily tracked.


But what has happened to this missing gold (if, as Eric and many others—including myself—believe, it is missing)?

Well, per the Central Bank Gold Agreement (CBGA), Western central banks were restricted in the amount of gold they could sell on an annual basis and, over the first two five-year periods that the agreement was in place, they took full advantage, as you can see from the shaded area in the chart below:

Source: IMF, Bloomberg

That didn't stop the price going up, but concerted selling on the part of the largest holders of gold would certainly have dampened its upward trajectory somewhat.

So what has been happening to all this physical gold over what has become a 12-year bull market (or, in the eyes of many who simply look at the price of the yellow metal, a gigantic bubble)?

Well, in order to help readers understand this, I turned to my good friend Nick Laird of Sharelynx, who is among the savviest of all gold-watchers. Nick's database of gold-related charts is, in my opinion, the most complete anywhere on the planet, and you can find out a lot more about them by visiting his excellent website,

The direction of physical-bullion movement has been consistent and telling throughout the entire bull-run; West to East. If you'd like to know what that looks like, thanks to Nick, I can show you.

The shape of this chart you will recognize from the one above, but by adding one extra line, the story it tells is significantly different.

The gold bars represent the total official holdings of gold as per the IMF that you saw in the previous chart. The red line illustrates the percentage of world official gold holdings that are in the hands of Asian central banks. As can be seen quite clearly, this number had been growing consistently until the beginning of the 2008 financial crisis, at which point it went parabolic.

East vs West
Source: Sharelynx

A look at the demand statistics that make up those numbers is even more compelling. First up, fabrication demand from the East and the West:

Gold Fab Demand 1
Source: Sharelynx

Throw in investment demand and you get the complete picture of the flows of gold bullion over the last twenty-five years; and it makes for a sobering illustration of prudence versus folly:

Fab - Investment Demand
Source: Sharelynx

Since the turn of the century, Western fabrication and investment demand has fallen 50% whilst that from the East has grown 30%—and when people talk of "The East," invariably they mean China—so let's take a look at what has been happening in everybody's favourite mystery kingdom.

Chinese Gold Production
Source: Sharelynx

Since 1980 (coincidentally, when the previous gold "bubble" was at its peak), Chinese gold production has increased at a staggering pace from around ten tonnes per year in 1980 to 365 in 2011, which made China the world's largest producer of gold.

Not one ounce of that gold is allowed to (legally) leave China. Instead, in addition to world-leading production, Chinese imports through Hong Kong have also jumped at a mind-numbing pace, as can be seen in the chart below, which shows net imports up almost 1,000% since 2007.

Chinese Gold Imports
Source: Sharelynx

Putting that into perspective over a longer time frame is even more telling, as can be seen from the chart below, which Nick assembled using data going back to 1930:

China Gold 1930
Source: Sharelynx

As of today, China's official gold holdings total 1,054 tonnes—or approximately 1.8% of their reserves. That number was released by the PBOC in 2009. Since then? Silence. All we know is that over the last four years, China has produced a similar amount of gold to that which they officially held in 2009—none of which has left the country—and has imported roughly the same again through Hong Kong.

When they made the 2009 announcement that they had bought around 600 tonnes of gold, thus increasing their reserves by 76%, it sparked a 20% rally in the gold price, and even though the fact that China is voraciously accumulating gold is staring the world in the face, until an official announcement is made, there will be no great rush into gold by investors trying to piggyback China.

But here's the thing...

Western governments are bankrupt. They all have huge, stifling, unfunded liabilities after a credit binge the like of which the world has never seen before. Their balance sheets are in disarray and are expanding monthly as they try desperately to keep things together long enough for "growth" to magically return and fix everything. In order to buy the time they believe they need, they have instituted a series of policies that are potentially wildly inflationary and that, in days gone by, would have seemed to the world to be exactly what they are—farcical. But community hides culpability, and so, as a group, these governments are able to act in unison to try and devalue their currencies whilst suppressing interest rates in a doomed experiment of Frankenstein dimensions.

Meanwhile, across the world, in Asia, stands a collection of governments that entered 2008 in far better shape from a balance sheet perspective—for the simple reason that, when their own crisis hit in 1997/1998, they were forced to take the pain that came with a credit-fuelled bust.

The Asian currency crisis of 1997/1998 was horrendous for this region, and yet, amazingly, many outside Asia don't know much about it. The havoc wreaked throughout Asia was significant (as the tables below highlight), but it had the effect of lowering debt levels significantly (mostly through default... are you listening, Europe? The USA?) and preparing Asia for 2008.

currency exchange rate
Source: R Cheatham/Wikipedia

currency gnp us $1 billion
Source: R Cheatham/Wikipedia

A look at government debt-to-GDP levels and forecasts (courtesy of Blackrock) shows just how skewed the regions have become and how they are headed in different directions:

Source: IMF/Blackrock

So... we have a group of nations in the West (and I include Japan, the world's third-largest and most-indebted economy) whose biggest problem is debt and which, to counter that, have implemented a series of desperate measures designed to avoid taking the necessary pain to purge the system—preferring to set about trying to create the inflation they deem necessary to dissolve the debt in the most politically expedient way possible.

This monetary debasement is showing up in weakening currencies and a steadily (but in the scheme of things, slowly) increasing gold price (though inflation remains mysteriously muted—certainly if you choose to believe the various official CPI statistics instead of your own monthly food and energy bills).

On the other side of the world, you have a series of countries that don't have the massive debt overhang that so tortures the West, but that are at the mercy of inflation, with vast populations who need feeding—a task that gets harder with every new dollar printed by Benny and the (ink)Jets.

So what happens?

Well, as we have seen, Western central banks have been consistently selling their gold over the last 30 years, whilst the Asian nations have been steadily accumulating it. In addition to outright sales, the spectre of central bank gold having been leased out many times over has bubbled away for years before raising its head spectacularly this past week when Austria's central bank boasted about how they had made a "profit" of $300 million from gold leasing.

(Bullion Street): Austria announced earning a whopping €300,000,000 through leasing its 280 tons of gold in the last ten years.

Replying to questions in the country's parliament, Austrian central bank, National Bank (OeNB) governor Wolfgang Duchatczek said 224. 4 tonnes (around 80%) of Austrian gold reserves were in the United Kingdom, around 6.9 tonnes (around 3%) are in Switzerland and around 48.7 tonnes (around 17%) are in Austria itself.

The OeNB said that the reason to store gold abroad was that because in a time of crisis it could be speedily traded. Since 2007, Austria's National Bank had had a constant reserve of around 280 tons of gold.

Through leasing of its gold, the Austrian National Bank has in the last 10 years earned around €300,000,000.

My friend, Ronni Stoeferle of Erste Bank in Vienna emailed me immediately after this news hit the wire with his own take on things:

I actually gave our central bankers a really hard time today... after they stated that they've "earned" €300 mln in 10 years by lending the gold, I made a back-of-the-envelope calculation, which had the result that €300 mln is impossible (given the lease rates in the last 10 years), unless they've leased out 100% (or even more??) of their gold...

I think I have stirred up a hornet's nest, because they shot out a press release immediately... stating that "only" 16% are lent out anymore... again: the numbers just don't add up...

Believe me when I tell you, Ronni knows his gold... Either way, in Austria, like many other nations, we have gold leasing and bullion stored outside the country—a familiar pattern that continues to crop up with alarming regularity.

The West sees gold as a means to hide the existence of inflation while the East sees it as protection from inflation. That means the West is selling gold whilst the East is buying it.

The longer the price of gold is kept as low as possible by Western central banks, the more bullion will flow from West to East, and the more gold emerging nations accumulate, the more they are likely to want custody of that gold.

The more central banks ask for audits and repatriation of their gold, the faster that trend will accelerate; and the faster that trend accelerates, the less gold will be left in the "safe" confines of the Federal Reserve and the Bank of England.

So let me ask you this, dear reader:

Just suppose for a moment that you apply means and motive to this little conundrum. And just suppose that—God forbid—central bank data was either misleading or downright wrong and the gold supposedly in vaults beneath the Bank of England and the Federal Reserve (amongst other places) had, in fact, been leased out through the bullion banks in return for a little interest. Now suppose that the creeping trend for audit and repatriation that started with Hugo Chavez and seems to be spreading rapidly to other nations continues to gather pace, and suppose that everybody decides that they'd rather err on the side of caution and have their gold back.

If the gold isn't all there, what do you suppose would happen?

"Is it more childish and foolish to insist that there is a conspiracy or that there is not?"

The secret of the killer's identity in The Mousetrap was kept intact by over 10 million people for half a century until the good folks at Wikipedia decided that they were doing the public a favour by revealing it. Now, if you want to know who the killer is, you just have to Google it.

If the truth about the bullion holdings of the world's central banks is finally revealed and it turns out that the rumours surrounding them are based in fact, all hell will let loose—I guarantee it. Consequently, don't expect any great admissions anytime soon. However, you might want to keep an eye on the increasing number of requests for repatriation. They may just flush out the truth anyway...

Until next time...

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