When it's midnight, do you know where your gold is?
Excerpted from miningweb.com:
What is not getting much serious attention – outside of conspiracy circles – is the short position, said to exceed 10,000 tonnes (four years of production or one third of all official book holdings) that is irretrievable. The short position has built up as a result of central bank gold loans where the metal remains on the books but which has in reality been consumed and is not readily available to be returned. This has created an effective "double-claim" on every ounce lent. Where speculative derivatives are layered on top of this paper gold, the double claim can multiply logarithmically. This is the heart of the excess supply problem.
The short position has been easy to manufacture and keep puffing up, but cannot be deflate without violence.
The central banks appear, on paper, to be in a position to cover the short position in an emergency, but the fact is a large portion of the holdings are entirely notional and paper committments written over long exited metal probably exceeds liquid supplies many, many times over. Milling Stanley agrees that current gold reporting is a Sword of Damocles. "We would like to see [official] gold holdings qualitatively separated." A recent WGC commissioned study by Jessica Cross concluded that the central banks have lent at least 5,000 tonnes which is still reported as "on hand" when it should be accounted for as gold receivables.
In an outstanding commentary on the subject by Douglas Pollitt, of his namesake Toronto broking firm, he says: "An ever-larger supply of lent gold is needed to fill the widening supply-demand gap and to ensure that the market remains depressed and investors remain disinclined to call in existing gold loans."
He highlights three conditions that could turn a "tinderbox" market into a raging gold inferno - a drought of official sector lending; faster reductions of new supply; and US dollar instability. One is sufficient for ignition, three would cause a wildfire that turns 1980 into an amateur stage production.
There's no middle ground in the debate on gold, but Pollitt leaves the sage advice for last. "Precious metal companies are...valued like options on the gold price, like portfolio insurance. Be positioned or be left out."
Milling Stanley says it another, more eloquent way: "When it's midnight, do you know where your gold is?" |
