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“All that Glitters is Not . . .” Oh, Never Mind!

COMMENT: One can but wonder if the political and economic realities set forth by Peggy and Sterling Seagrave in Gold Warriors are having an effect on the individuals and institutions making their moves in the gold market.

Perpetually in the shadow of World War II era political and economic manipulation, the gold market is, to say the least, capricious.

Another sign of how stressed out things are getting in the eurozone:  Central banks have switched from being heavy sellers of gold to net buyers.  It’s the heaviest central bank gold buying since the collapse of Bretton Woods 40 years ago and the first time since 1985 that central banks have been net gold buyers.  A mining industry representative characterizes the move as being in response to the US’s fiscal situation (i.e. too much debt) but that may well be spin since the article also notes that most of the buying was related to the Bank of Estonia buying a bunch of gold to join the European monetary union.

“Central Banks Return as Gold Buyers” by Jake Farchy; Financial Times; 9/19/2011.

EXCERPT: European central banks have become net buyers of gold for the first time in more than two decades, the latest sign of how the turbulence in the currency and debt markets has revolutionised the bullion market.

The purchases are minuscule compared with the size of the global gold market, but highlight a remarkable turnaround from a wave of heavy selling by European central banks.

The role of central banks in the gold market will be a central topic of debate at the annual London Bullion Market Association conference, the largest gathering of the gold industry, in Montreal this week. The switch from large selling to buying has helped propel the gold price more than 25 per cent higher so far this year, hitting a nominal record of $1,920 a troy ounce this month. The shift in Europe comes as central banks in emerging markets are also loading up on gold.

Mexico, Russia, South Korea and Thailand have all made large purchases this year, in a move to reduce their exposure to the dollar. Globally, central banks are set to buy more gold this year than at any time since the collapse of the Bretton Woods system 40 years ago – the last time the value of the dollar was linked to gold. . . . .

COMMENT: An allegation originating with [allegedly] leaked [ostensibly] State Department cables has surfaced courtesy of Al Jazeera.

The allegation weighs the possibility that China’s massive purchases of gold may be aimed at reducing their exposure to a weakening dollar. The WikiLeaks cables speculate that the Chinese are aiming at replacing the dollar as the reserve currency of choice.

In this context, one should remember that WikiLeaks itself was founded on an anti-Chinese ideological platform, as well as the more or less overt anti-American orientation evidenced in recent WikiLeaks releases.

It is also worth bearing in mind John Loftus’ analysis of “two CIA’s and two State Departments”–one of each identified with the Democrats and American interests on the one hand and the GOP and multinational corporate interests on the other.

In past discussion of WikiLeaks, we’ve considered the possibility that the “leaks” of State Department cables originate with the GOP faction of CIA and State, working to complicate the Obama administration’s already daunting task.

This cable might do both.

Al Jazeera, of course, has profound connections to the Muslim Brotherhood.

“China Buys Gold, Challenges U.S. Dollar” by Chris Arsenault; Al Jazeera; 9/12/2011.

EXCERPT: China is shifting some of its massive foreign holdings into gold and away from the US dollar, undermining the dollar’s role as the world’s reserve currency, accoding to a recently released WikiLeaks cable.

“They [the US and Europe] intend to weaken gold’s function as an international reserve currency. They don’t want to see other countries turning to gold reserves instead of the US dollar or Euro,” stated the 2009 cable, quoting Chinese Radio International. “China’s increased gold reserves will thus act as a model and lead other countries towards reserving more gold.”

The cable is titled “China increases its gold reserves in order to kill two birds with one stone”. Taken together with recent policy announcements from Chinese banking officials, it may signal moves by China to eventually replace the US dollar as the world’s reserve currency.

Last week, European business officials announced that China plans to make its currency, the yuan, fully convertible for trading on international markets by 2015. Zhou Xiaochuan, governor of China’s central bank, said the offshore market for the yuan is “developing faster than we had imagined” but there is no definitive timetable for making the currency fully convertible. Presently, the yuan cannot be easily converted into other currencies, because of government restrictions. . . .

. . .In March 2011, China held $3.04tn US dollars in reserves, Xinhua news agenecy reported. It is the largest holder of US treasuries, or government debt, with $1.166tn as of June 30, 2011, according to the San Francisco Chronicle. Thus, major devaluation of the dollar would hurt China, as it would be left holding wads of worthless paper.

“If you owe the bank $100, that’s your problem. If you owe the bank $100m, that’s the bank’s problem,” American industrialist Jean Paul Getty once remarked, in a parable that sums up China’s predicament.

“China is locked into a position where they cannot sell a big portion of their dollar reserves overnight without hurting themselves,” Aizenman said. “It is too late for now to diversify rapidly the stock they have already accumulated.”
The answer: Buy gold. Everyone seems to be doing it. The value of the glistening commodity, useless for most practical purposes, increased almost 400 per cent, from less than $500 an ounce in 2005 to about $1,900 in September.
“Gold has risen in value because of uncertainty in the world economy,” said Mark Weisbrot, the co-director of the Centre for Economic and Policy Research, a think-tank in Washington. “Normally, gold would rise due to high inflation. It is a store of value that increases if there is inflation. But in this case it is going up because nobody knows where else to put their money.”

In the WikiLeaks cable, China alleged that “the US and Europe have always suppressed the rising price of gold”, but neither Weisbrot or Aizenman think such a policy is taking place or even possible. . . .

Discussion

One comment for ““All that Glitters is Not . . .” Oh, Never Mind!”

  1. http://www.zerohedge.com/news/2012-10-24/why-did-bundesbank-secretly-withdraw-two-thirds-its-london-gold

    Why Did The Bundesbank Secretly Withdraw Two-Thirds Of Its London Gold?
    Tyler Durden’s picture
    Submitted by Tyler Durden on 10/24/2012 20:51 -0400

    Two days ago we reported that the German Court of Auditors demanded that the German Central Bank, the Bundesbank, verify and audit its official gold holdings consisting of 3,396 tons, held mostly offshore, namely New York, London and Paris, at least according to official documents. It also called for repatriation of 150 tons in the next three years to perform a quality inspection of the tungsten gold. Today, in a surprising development, via the Telegraph we learn that none other than the same Bundesbank which is causing endless nightmares for all the other broke European nations due to its insistence for sound money, decided to voluntarily pull two thirds of its gold holdings held by the Bank of England. According to a confidential report referenced by the Telegraph, Buba reclaimed 940 tons, reducing its BOE holdings from 1,440 in 2000 to 500 in 2001 allegedly “because storage costs were too high.” This is about as idiotic an excuse as the Fed cancelling its reporting of M3 in 2006 because “the costs of collecting the underlying data outweigh the benefits.” So why did Buba repatriate its gold? Ambrose Evans-Pritchard has an idea.

    The shift came as the euro was at its weakest, slumping to $0.84 against the dollar. But it also came as the Bank of England was selling off most of Britain’s gold reserves – at market lows – on orders from Gordon Brown.

    Peter Hambro, chair of the UK-listed gold miner Petropavlovsk, said the Bundesbank may have withdrawn its bullion in self-protection since it did not, apparently, have its own specifically allocated bars in London. “They may have decided that the Bank of England had lent out too much gold, and decided it was safer to bring theirs home. This is about the identification. Can you identify your own allocated gold, or are you just a general creditor with a metal account?”

    The watchdog report follows claims by the German civic campaign group “Bring Back our Gold” and its US allies in the Gold Anti-Trust Committee that official data cannot be trusted. They allege central banks have loaned out or “sold short” much of their gold.

    The refrain has been picked up by German legislators. “All the gold must come home: it is precisely in this crisis that we need certainty over our gold reserves,” said Heinz-Peter Haustein from the Free Democrats (FDP).

    Speculation aside, the fact that central banks, and even banks of central banks (i.e., the BIS), have long lent out gold, is no secret to anyone, traditionally to satisfy short-term physical gold confirmation claims upon a spike in demand, usually associated with a liquidity shortage (when the value of gold as monetary collateral truly shines). The problem with this rehypothecation scheme is what happens when the counterparty suddenly finds themselves insolvent, the gold has since been re-re-rehypothecated, and nobody really knows whose gold it is any more. This becomes a drastic problem when a counterparty in a collateral chain suddenly goes broke… like MF Global did last year, and the lawsuits started flying trying to determine whose gold is where. Needless to say, it was the London office of MF Global that was at fault for breaching a rehypothecation chain (because only in London was there no collateral haircut limit on rehypotehcation), and once physical delivery demands arose, nobody could locate bar XYZ with a given serial number.

    That, or the Bundesbank merely foresaw the ultimate unwind of the failed European mercantilist experiment at the start, and refused to leave its most precious asset in the hands of the banker oligarchy which it knew would do everything in its power to procure said gold once the feces hit the fan. Sure enough, BUBA’s ‘non-denial’ denial confirms this too:

    The Bundesbank said it had full trust in the “integrity and independence” of its custodians, and is given detailed accounts each year. Yet it hinted at further steps to secure its reserves. “This could also involve relocating part of the holdings,” it said.

    Yet what is left unsaid in all of the above is that Germany has done nothing wrong! It simply demanded a reclamation of what is rightfully Germany’s to demand.

    And here is the crux of the issue: in a globalized system, in which every sovereign is increasingly subjugated to the credit-creating power of the globalized “whole”, one must leave all thoughts of sovereign independence at the door and embrace the “new world order.” After all this is the only way that the globalized system can create the shadow cloud of infinite repoable liabilities, in which we currently all float light as a binary feather, which permits instantaeous capital flows and monetary fungibility, and which guarantees that there will be no sovereign bond issue failure as long as nobody dares to defect from the system in which all collateral is cross pledge and ultra-rehypothecated… for the greater good. Until the Buba secretly defected that is.

    And this is the whole story. Because by doing what it has every right to do, the German Central Bank implicitly broke the cardinal rule of true modern monetary system (never to be confused with that socialist acronym fad MMT, MMR or some such comparable mumbo-jumbo). And the rule is that a sovereign can never put its own people above the global corporatist-cum-banking oligarchy, which needs to have access to all hard (and otherwise) assets at any given moment, on a moment’s notice, as the system’s explicit leverage at last check inclusive of the nearly $1 quadrillion in derivatives, is about 20 times greater than global GDP. This also happens to be the reason why the entire world is always at most a few keystrokes away from a complete monetary (and trade) paralysis, as the Lehman aftermath and the Reserve Fund breaking the buck so aptly showed.

    We are confident that little if anything will be made of the Buba’s action, because dwelling on it too much may expose just who the first country will be (or already has been) when the tide finally breaks, and when it will be every sovereign for themselves. Because at that point, which will come eventually, not only Buba, but every other bank, corporation, and individual will scramble to recover their own gold located in some vault in London, New York, or Paris, or at your friendly bank vault down the street, and instead will merely find a recently emptied storage room with humorously written I.O.U. letters in the place of 1 kilo gold bricks.

    Posted by Qevets | October 25, 2012, 10:31 am

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