EDITOR: | May 31st, 2016 | 3 Comments

Gold repatriation may indicate it’s being trusted as “real” money again

| May 31, 2016 | 3 Comments
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Gold_BriefcaseIt has been a long time practice for countries to store their gold with a small group of central banks, most notably in New York, London and Paris. But there now seems to be a growing sense of unease with this, a growing tendency not to trust the foreign custodians. And it may also indicate that the metal is being remonetized: that is, being restored as money or legal tender.

Edmund Moy, former Director of the United States Mint (Fort Knox), said this on June 13, 2014: “Finally, more countries are repatriating their gold. For them, an audit is not enough. They would like their gold back. Azerbaijan, Ecuador, Iran, Libya, Mexico, Romania and Venezuela is a short list of countries that have requests into their custodians to transfer some or all their gold back to their countries.” (Venezuela has most recently been selling its gold to keep the country afloat.)

In the aftermath of the financial meltdown in 2008 central banks again realized the importance of gold as an anchor in the monetary system. European central banks stopped selling gold, Asian and South-American central banks increased official purchases, and central banks from all continents began to worry if storing gold abroad was wise when the global financial crisis evolved.

There are rumors that U.S. has sold a portion of this gold to underpin the U.S. dollar hegemony in recent decades.

Is gold remonetizing?  From London I would suggest yes, although for the present, only de facto; de jure probably comes later, after the next great financial crisis hits, probably ending the Great Nixonian Error/Experiment with fiat money.

(“Richard Nixon’s August 1971 decision to suspend the convertibility of dollars into gold was one of the most important chapters in modern economic history. Nixon’s move, which was precipitated by rising U.S. balance of payments deficits, ended the system of fixed exchange rates that had been established at the Bretton Woods conference of 1944 and ushered in a regime of floating rates.” Source: The Bancroft Library, University of California, Berkeley.)

A major change is underway in the international gold market and has been for quite some time.  In November 2014, the Dutch central bank announced that they had secretly repatriated to their Amsterdam vaults some 122.50 tonnes of their gold from New York City vaults. Post 2007-2009, gold is back in fashion for reserves again, with a preference for holding it close to home.

Gold is consistently leaving the west and heading east, to Russia, India, Singapore and China among others. With India and China that’s a one way trip for bullion, since both countries ban the export of gold bullion. China rates gold as a “strategic” metal. India, being India, means a good deal of smuggling takes place, both into and out of the country depending on the Indian price and the international price and government policy.  In the first four months of 2016, Russia alone added 15.50 tonnes a month to its gold reserves, equivalent to an annual rate of 186 tonnes-a-year.  The World Gold Council rates China as holding some 1,797.50 tonnes of gold bullion as of May 9, 2016. Most outside followers of gold think that China holds closer to 4,000 tonnes of gold.

But this month China’s ICBC Standard Bank (formed last year after Industrial and Commercial Bank of China Ltd took a controlling stake in Standard Bank Plc’s global markets section) bought Barclays London bullion vault, which can hold up to 2,000 tonnes of gold or other precious metals. ICBC Standard expects the purchase of the vault and related contracts to be completed in July. My guess is that at some point ahead, the Shanghai Gold Exchange, formed in 2014, will allow gold stored in London to be exempt from China’s strategic metal designation.

Since April 19, 2016, the Shanghai Gold Exchange has joined the London Bullion Market Association in twice a day fixing the international price of gold. In Shanghai, gold trades in one kilo bars of 99.99 purity, and more significantly, trades in renminbi per gram. In London it trades in 400 ounce bars fixed in U.S. dollars twice daily. Essentially the world now has two competing financial centres using auctions to set the price of gold bullion twice a day.

Is this significant to the international market in gold bullion? Well my guess is that as China moves this century to become the largest consumer and hoarder of gold, China intends Shanghai to replace London as the primary centre setting the price of physical gold. Ever so quietly, so as not to set off a speculative gold rush, many of the world’s nations are now hedging via gold against the next financial crisis, probably triggered when the world next tips into recession. It was against this back drop that I read with great interest Eugene Gerden’s informative article of Russia’s stepped up gold mining plans (click here).

2016_5_31_WorldOfficialGoldRussia sees a long term need to keep on building up gold reserves. Who am I to disagree? I think that gold and silver are still grossly under appreciated and under-priced, and under-invested in.

Below are the official gold reserves (in tonnes) published on May 9 by the World Gold Council. My only comment is that I don’t believe the figure cited for the U.S.A or that of Germany. The U.S. figures haven’t been fully audited since the cold war 1950s. The bulk of Germany’s gold reserves are held in America and it is proving extremely difficult for Berlin to repatriate those, as it wishes to do.

For the record, India has just 557.7 tonnes for their 1.1 billion population, the European Central Bank some 504.8 tonnes, and the UK just 310.3 tonnes (after selling off 395 tonnes at an average price of $275 from July 1999 through March 2002. Someone got a bargain, though it wasn’t the UK.)


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Comments

  • jeff stufsky

    Gold has real value, but probably not as real money. There isn’t enough of it to support global growth. If it did replace paper, or stones like on the Island of Yap, it would inevitably float to some “equilibrium’ price based on trust and perceived comparable value among all trading partners. If members of the “lucky geological endowment club” tried to hoard their gold, then another exchange medium would undoubtedly pop up. The repatriation trend is likely just a reflection of political tensions and the revisited reality that possession is nine-tenths of the law.

    June 1, 2016 - 2:33 PM

  • Graeme

    Jeff, I don’t expect gold and silver coins to start circulating again, but when the next recession blows up our financialised, global leveraged debt system, I suspect that gold will return in some form of Bretton Woods Two. The rising Asian nations will not allow a new corrupt western fiat money system to dominate again. I suspect that the powers of the BIS will be expanded to settle out national trade accounts using gold, but at substantially higher notional value than today’s rigged prices. I think it’s what lies behind the quiet accumulation of gold and efforts underway to repatriate much of it to local storage. That America seems to have difficulty repartriating Germany’s gold, suggests to me that much of America’s gold has been leased/sold. Probably much of Germany’s too, possibly under secret clauses settling the end of WW2.

    June 2, 2016 - 2:35 AM

  • jeff stufsky

    I’m just not sure how it’s possible unless each unit of (everyone’s) currency can freely float in respect of each unit of gold (and vice versa). And then it wouldn’t seem to matter in terms of preventing credit or other financial excesses or bubbles. I didn’t realize that the US or the UK was not allowing Germany to repatriate its gold according to whatever agreement was struck between them. I thought this was taking place under a multi-year plan. Leasing gold has taken place for the longest time, including by various governments, and relies on the same credit analysis as every other form of lending. It would be curious if the US was leasing another party’s gold without their consent. Otherwise, I’d wonder what the harm is? I’ve never followed how the price of gold was somehow rigged and by whom. Like many other modestly-sized financial spaces, it is susceptible to relatively small inflows and outflows resulting in outsized moves.

    June 2, 2016 - 1:47 PM

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