Central Banks Returning to the Gold Standard

Central Banks Returning to the Gold Standard

It appears the Central Banks are secretly returning to the gold standard, giving substance to the evident failure of President Nixon’s action in 1971 on the then Bretton Woods global financial exchange system.  Since the gold standard was removed massive printing of paper money and spiralling inflation, has resulted in the global financial situation we now find ourselves.

Perhaps the central banks have realised this, or it may be a case of shoring up the diluted liquidity of their massive currency reserves.

Starting in 2010 central bank gold purchases jumped to a then all time high of 455 metric tons.  The biggest buy gold by central banks since 1964.

This year they are looking at a further 493 tons and Thomson Reuters of GFMS recently commented that central banks will remain, ‘a significant gold buyer for some time to come.”

In a recent interview with William Patalon of EFT Daily News, Real Asset Returns Editor Peter Krauth explained he completely agrees with that assessment.  “You can see their thinking, Bill … you can see them saying: “We have enough of all these fiat currencies in our bank reserves – now we want something that’s going to counter those holdings, that’s a valuable asset and that has all the right fundamentals in place.’ And that asset is gold.”

Banks have raised the gold capital adequacy ratio* to Tier One so gold is now viewed as a core capital of equity and disclosed reserves. 

Originally it was Tier Three, with a 50% risk weighing. The Basel Committee for Bank Supervision (or BCBS) met some months ago and decided that gold should be made a Tier 1 asset for commercial banks with a 100 percent weighing instead of the existing Tier 3 with just 50 percent weighing. A monumental step in restoring a gold standard.

We are seeing the results of this in the gold market place with Turkey purchasing 6.8 tons in September, and Brazil buying gold again after four years.  1.7 tons in fact.  Other countries aggressively buying gold include: South Korea, The Philippines, Kazakhstan, Russia, Mexico, Turkey, Argentina and the Ukraine.

“All the fundamentals are in place for this to continue,” Continued Peter Krauth, “These guys tend to have a long time frame in mind. So when you see a shift like this, it’s a big deal. And the chances are that this could last for a very long time.”

According to a recent World Gold Council report, gold rose by over 11 percent and is up 16 percent on a yearly basis, outperforming almost all the worlds’ stock markets.

To illustrate the point here are the top twenty central banks gold holdings for 2012.

European Union                   10,787.4

USA                                       8,133.5     

Germany                                3,396.3     

IMF                                        2,814.0     

Italy                                        2,451.8     

France                                    2,435.4     

China                                     1,054.1     

Switzerland                           1,040.1     

Russia                                      936.7       

Japan                                       765.2       

Netherlands                             612.5       

India                                        557.7       

European Central Bank           502.1       

Taiwan                                     422.4       

Portugal                                   382.5       

Venezuela                                372.9       

Saudi Arabia                           322.9       

United Kingdom                   9100.3

Lebanon                                  286.8       

Spain                                       281.6       

Austria                                    280.0       

Although many are reticent about how much gold they are buying, many of these above have added or are supplementing their gold reserves. In particular China and India. Both of whom have added hundreds of tones of gold to their reserves over the past couple of years.

In fact some analysts believe there has been consistent gold buying over the past 2 years by many Asian countries. “The thing that’s caught people’s minds is the massive increase in Chinese buying,” remarked Ross Norman of Sharps Pixley, a London gold brokerage.

On this Peter Krauth stated, “Even if you look at this conservatively, it’s clear that we’re just at the start of this – meaning the central bankers are going to be buyers for an extended period. Even if this upturn in buying only lasts half of [the 22 year downturn], we’re talking 11 years – meaning we’re only two years into this.”

“Some investors look at the current price of gold, and view it as expensive because it’s more than doubled in the last few years alone,” Peter said, “But given what I see coming at us, I can say this with a high degree of confidence: Three or four years from now, we’re going to look back on this as a period when gold was still cheap, and where the profit potential was vast, because of where prices are going to go from here.”

With the central banks buying gold, albeit slowly and quietly so as not to cause the price to raise, should this be looked at as a enormous hedge against a potential collapse of paper currency?  The Central Banks seem to think so.  Raising the gold capital adequacy ratio to the first tier. Buying gold like it is going out of fashion. All the indicators are there. Central Banks are returning, quietly, to the gold standard.

Now is the time to buy gold, while the price is still low.

* Capital adequacy ratio is the ratio which decides the ability of a bank to meet its liabilities in the agreed upon time frame.

References:

http://buying-gold.goldprice.org/2012/06/gold-capital-adequacy-ratios.html

http://etfdailynews.com/2012/11/05/the-secret-return-to-the-gold-standard-gld-iau-sgol-slv/

http://www.forbes.com/sites/gordonchang/2012/01/29/why-are-the-chinese-buying-record-quantities-of-gold/

http://en.wikipedia.org/wiki/Gold_reserve

http://www.gold.org/government_affairs/gold_reserves/

Gold Derivatives

Many people believe that buying gold derivatives are an easy way to buy gold.  After all, you don’t need a lot of money to start with and you can make a quick profit if you do it right. 

However one can also make a terrible loss. Derivatives operate on the basis of not actually delivering a product or service.  The very name tells you there is no product.

What are Gold Derivatives?

A derivative is something that is based on another source. Derivatives derive from a product but do not actually represent that product, in this case gold. When you buy a derivative you are not buying gold but, instead, buying a paper representation of gold. Examples of derivatives are futures, option, or warrants. So gold derivatives include the following:

Gold Futures

A gold future is simply a deal to trade gold at a specific amount and price, decided now but with an agreed settlement day sometime in the future. That means you don't have to pay up front, except for a sort of deposit amount that stakes your claim as it were. And the seller doesn't need to deliver you any gold before that agreed upon date either.

A gold futures contract is usually for three months and on the settlement day at the end of the contract the actual exchange takes place and the buyer pays up, and the seller delivers the gold.

Now most futures traders use this delay to speculate. Both ways. The intention is to sell or buy back anything they have contracted, before settlement day is reached. At which point they only need to settle any gains and losses.  This means they can trade in very large amounts. They take bigger risks of course but the rewards are much higher.   Of course any losses are magnified also as they have to make good on them if they judge wrong.

Gold Options

A gold option is a contract to buy gold or sell gold bullion at a future date at a set price. The delivery date, quantity and price are all predetermined and the option is simply that. An option. It involves a choice and the purchaser is not obligated to actually excise the option and buy (or sell) The similarity to the gold futures contract is that the price, date of settlement and the amount are all preset at the start of the contract.  The main difference is that the option involves a choice whereby the futures contract is an obligation.

Because there is no gold backing either a gold futures contract or an option, and therefore no responsibility or ethics involved, gold derivatives have escalated to the ridiculous sum of at least $1.1 quadrillion world wide.  This is far in excess of the total actual gold world wide and so such contracts are impossible to fill.  People are buying and selling contracts for gold which they do not have.

Gold Warrants

Similar to a long call type of option. Warrants however are issued by companies and usually as a private placement.  That means most are privately held and not traded on the open market place.  Warrants are usually traded and not exercised.

Warrants are a very tiny part of the gold derivatives market.  The bigger slice is help by gold futures.

Conclusion

One could call gold derivatives fake gold.  They are not based on gold, but use the concept or word even of gold to represent a paper trade. Gold is being used in name only.  You could quite easily trade say, banana derivatives, or Bunsen Burner* derivatives and gleefully trade away 1.1 quadrillion Bunsen Burners and never see a banana or a Bunsen Burner in your life.

Gold derivatives bear no relationship to gold at all. Eventually, like any house built of cards, this will come crashing down eventually and all hell will break lose. The winners out of all this will be those banks, commercial institutions and individuals who actually hold real gold.  And the price of gold is going to sky rocket when the gold derivative house comes crashing to the ground.

Hence the importance of buying gold now as no one can be quite sure when the gold derivatives crash will occur and the price of gold will escalate.

Buy Gold on Dhanteras

Buy Gold on Dhanteras

In India people are queuing up to buy gold on Dhanteras in jewelery shops all over the country.

On the festival of Dhanteras it is considered auspicious to buy gold and silver and many jewelery shops and dealers are offering big discounts to attract customers.  It is indeed a buyers market.

The manager of Tanishq, Juti Kalita, said, "For the first time in years, gold prices has shot through the roof on Dhanteras. But surprisingly, this has not affected sales. Many customers are also making advance bookings. Gold bangles, rings, earrings, sets are flying off the racks. There is a great demand for gold and silver coins."

And Preeti Agarwal, the manager of Manik Chand and Sons stated, "We are providing up to 30% discount on the making charge and for every purchase of 1 lakh, one gets a gold coin for free. We are also offering discounts of up to 10% on diamond jewellery."

The gold price is the highest in five years and this seems to spur Buyers on who are willing to splurge in this festive season and buy gold on Dhanteras.

According to Rajiv Nath, manager of MP Jewellers, "Apart from gold and silver coins, buyers are increasingly going for lightweight jewellery. This year's sales have surpassed the sales of last year."

Taru Deka, a resident of Silpukhuri was seen browsing through the shelves of a jewellery shop to make a pick. She said, "Although the prices are sky-high, I have come to buy some bangles because it considered auspicious."  And Rani Dutta of Beltola echoed similar sentiments. "I bought some gold coins because investing in gold is a good thing, especially for the future," she said.

"Dhanteras also known as Dhantrayodashi is celebrated on the 13th day of Krishna paksa in the month of Ashwin. On this day, people should buy gold coins to usher in prosperity and wealth. The gold coins should be kept on the right hand side of Kuber in a pot. Kuber is placed on the left side of Laxmi." Said Astrologer Pannalal explaining the importance of Dhanteras

Of course, to buy gold on Dhanteras is not the only time to accumulate gold. With the gold price still low anytime is the time to buy gold.

Where has all the Deutsch Gold Gone? Long Time Passing

Where has all the Deutsch Gold Gone?

Yes, where has all the German gold gone?  93 BILLION dollars worth of gold apparently sitting in the US Federal Reserve in New York and the Germans being refused permission to see it?  This gives credibility to the often pronounced theory that there is no gold, or very little, in the Federal Reserve. Otherwise why would the Fed not allow Germany to see its own gold?

Maybe they spent it. 

You know how it is.  Someone gives you 93 billion dollars worth of gold to look after, Well wars come and go, and they are expensive. Then the economy has its ups and downs.  The dollar gets a pounding and, well one thing leads to another and it gets (cough cough) spent.  How embarrassing!  Of course you can’t open the doors to the Fed and expose all that … Emptiness. I mean who would ever trust you again?

Perhaps the Federal Reserve’s alternative to gold is stone.  Stonewalling that is. The Fed is refusing to allow the Germans to see their gold.  According to Wealth Wire,

“Previous and repeated requests were only partially addressed. Bundesbank staff members were allowed to see the facility in 2007, but they reportedly only made it to the anteroom of the German reserves.

Bundesbank auditors made a second visit in May 2011. This time one of the nine compartments used to store Germany's gold was opened. Only a few bars were pulled out and weighed, but that was it.”

And details of that itsy bitsy little inspection was blacked out in a report, “Out of consideration for the Federal Reserve Bank of New York.”  Go figure.

Germany owns 1,536 metric tons of gold, currently worth around $93 billion at today’s’ prices. Perhaps they should call the bluff and ask for the gold to be returned to Germany?  Do a Venezuela perhaps? 

The Feds refusal to allow an inspection and in a recently leaked report from the German auditors about the gold reserves entrusted to the Fed, Carl-Ludwig Thiele, a Bundesbank board member said, "I would like more transparency on the issue."

Thiele was then summoned to Berlin to explain his comment to a parliamentary budget committee and stated to the committee that, "all the gold has to be shipped back."

According to GATA, “…the German financial journalist Lars Schall called attention to remarks delivered Thursday by a member of the executive board of the German Bundesbank, Andreas Dombret, at a reception held at the Bundesbank office in New York in the presence of the president of the Federal Reserve Bank of New York, William Dudley. Dombret's remarks, appended here, confirm that, as GATA often has reported, Germany's gold reserves are held in large part at the New York Fed to facilitate their presumably secret trading, since, as Dombret notes, "Frankfurt is not a gold-trading center."

Despite a pledge from the Bundesbank to retrieve 150 tones of gold from overseas, it is moot point how much they will really get to inspect. Currently it is 11 percent. 89 percent to go.  Don’t hold your breathe.

If the fed has spent it, or lent it out or ate it, they are not saying and we may never know.  The question remains then, where has all the Deutsch Gold Gone?  Long time passing.