A provocative discussion regarding the trading of gold-
Of Particular Note…
The mother of all short squeezes? Veterans of the markets know that some of the
greatest profits are made when commercials or institutions or large funds are forced to
cover their shorts or get out of long positions. Think the forced U.S. stock market
liquidations in the summer and early fall of 1974. Think the enormous rally in gold and
silver in the fall of 1979. Think the collapse in the U.S. bond market between January and
March 1980. Think the blow-off in the S&P 500 and the NASDAQ in the late 1990s.
Think oil and the grains in 2007-2008. Think the yen in the fall of 2012, when the
Japanese exporters were completely hedged—as evidenced by the December Tankan
survey, showing the big manufacturers expected the dollar to average 78.90 yen for fiscal
year 2012-2013.
Over the years, a lot of able analysts have written on the subject of gold leasing by the
central banks. For example, Sprott Asset Management wrote last September, as follows:
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.
In the fall of 1979, commodities—especially gold and silver—had a once-in-a-generation
parabolic blow-off. This was followed very quickly by the collapse in the bond market,
which led to the highest interest rates in the history of capitalism.
That event no doubt
is etched in the heart and soul of every central banker on the planet.
Paul Volcker was quoted in the Nikkei Weekly in 2004 regarding the 1973 dollar
devaluation against the yen, as follows:
That day the U.S. announced that the dollar would be devalued by 10%. By switching the yen to
a floating exchange rate, the Japanese currency appreciated, and a sufficient realignment in
exchange rates was realized. Joint intervention in gold sales to prevent a steep rise
in the price of gold, however, was not undertaken. That was a mistake.
Alan Greenspan was also quoted as follows: “Central Banks stand ready to lease gold
in increasing quantities should the price rise.”
In June 2007, we created a theme that would dominate the foreseeable future:
“Governments can and will do anything.” Draghi’s famous 13 words in July 2012 caused
a huge rally in European equities and sovereign credits. Likewise, Prime Minister Abe has
caused a major devaluation of the yen and a massive rally in Japanese equities just by
threatening to take over the BOJ. Think what governments could do if they
employed every tool at their disposal.
Why, then, do we advocate owning an asset that some central banks want to suppress the
price of? We have answered this question many times on these pages, but we will reiterate
a few key reasons. Last year, according to GFMS, central banks purchased 536 tons of
gold—the highest since the mid 1960s. The repatriation of some of Germany’s and
Switzerland’s gold holdings, as we discussed recently, underscores the lack of trust
between not only countries, but their central banks. In an era of competitive
devaluations and massive money printing, which the central banks understand
only too well, what nation wants to hold the ever-expanding paper credit of
another country? So central banks will continue to add to their gold holdings and if
other central banks suppress the price through short sales, this potentially leads to the
mother of all short squeezes.
It is difficult to know when a short squeeze could happen, but it will not be
difficult to identify when it begins. All it will take is a small percentage of those who
own paper gold to shift to physical delivery. And that could happen tomorrow, or next
week, or next year. It’s all about confidence and confidence is very fragile!
The implications are highlighted in a series of studies by the Research Center for Financial
Services at Steinbeis University Berlin, which found that 69% of Germans over the age of
18 have invested in gold and 70% were concerned about inflation. The number of
Germans with a net income of over €48,000 per year who said they intend to invest in
gold doubled last year. Nearly 50 million German adults collectively hold almost 8,000
metric tons of gold—over 4,200 tons as gold bullion plus 3,750 tons of jewelry. On top
of that, Germans hold over 1,000 tonnes of gold-backed securities (including ETFs.) All
told, private citizens in Germany—representing less than 0.7% of the world’s
population—own about 5.5% of all above-ground gold in existence.
Imagine what would happen if more people in more countries do the same.
How many
countries have experienced hyperinflation? Russia, France, Eastern Europe,
Japan, China, Brazil—to name just a few.
The Privateer (http://www.the-privateer.com/ capt@the-privateer.com reproduced with
permission) wrote poignantly on this subject, as follows:
In 1914, the Foreign Minister of Germany described a solemn treaty drawn up and agreed to
between sovereign governments as “a scrap of paper”. In 1971, the President of the United States
officially designated ALL the moneys of the world to be scraps of paper. The world of “good faith”
is a dimly fading memory in 2013. It still exists to a very large extent in the simple interactions of
individuals. But it does NOT exist in the interactions between individuals and their masters—
whether political or financial. Ours is a world of bad faith…
All of the virtues which once made for economic and financial confidence—thrift, productiveness,
self-responsibility and above all honesty—are sneered at by our powers that be.
Kiril Sokoloff
futr |
