Saturday, December 31, 2011

Gold and Silver rebound/Gold finishes up 11% on the year/

Good morning Ladies and Gentlemen:

Gold finished the comex session at $1566.00 up $20.90 on the day.  Silver finished at $27.91 up 64 cents.

In the access market, here are the final prices for the metals this year:

gold: $1566.40
silver: $27.86

The markets were very quiet ahead of the New Years holiday weekend. However when everybody returns on Tuesday expect massive volatility on all bourses and commodity exchanges.

Let us head over to the comex and assess trading, inventory movements, and delivery notices for the upcoming January month as well as the COT report on positions held by speculators and commercials.

The total gold comex OI rose by a little over 3000 contracts to finish at 422,070 rising from Thursday's level of 418,907.  The front delivery month of January saw its OI fall slightly from 1038 to 981 due to options that were exercised for a futures contract.  The next big delivery month is February and here the OI rose from 239,266 to 240,297.  In light of the big deliveries for December, we will watch February in great interest.
The estimated volume at the gold comex was very light yesterday coming in at 100,668.  The confirmed volume on Thursday, the day of the monstrous raid came it at 144,364.

The total silver comex OI rose by over 700 contracts coming in at 105,982. The front delivery month of January saw its OI fall from 370 to 307.  The next big delivery month for silver is March and here the OI rose from 58,999 to 59565.  The estimated volume continues to be anemic for silver on Friday coming in at 23,896.  The confirmed volume on Thursday was slightly better at 39,827.


Inventory Movements and Delivery Notices for Gold: Dec.  31 2011:

Opening Inventory movements/ delivery notices/January:


Gold
Ounces
Withdrawals from Dealers Inventory in oz
nil
Withdrawals from Customer Inventory in oz
103,714 (HSBC,JPM)
Deposits to the Dealer Inventory in oz

nil
Deposits to the Customer Inventory, in oz
64,300
No of oz served (contracts) today
852 (85200)
No of oz to be served (notices)
186  (18600)
Total monthly oz gold served (contracts) so far this month
852  (85200
Total accumulative withdrawal of gold from the Dealers inventory this month
nil
Total accumulative withdrawal of gold from the Customer inventory this month

103,714


We had some movement in gold inventory but no gold entered as a deposit and no gold left
as a withdrawal.

We had a very sizable deposit into the customer at the HSBC vault:

1.  Into HSBC  64,300 oz or exactly 2.000 tonnes.
It seems to be that the comex is now all paper.  There is no way that exactly 2.000 physical tonnes was deposited.  This is nothing but a paper gold addition.

We had the following customer withdrawal:

 1.   100 oz of gold left HSBC
 2.   103,614 oz left JPM.

the latter is quite significant and this is real metal leaving due to increased risk holding the metal at registered comex vaults. We had one adjustment of 693 oz of gold leave the dealer and enter the customer vaults in a repayment of a prior liability.
The total registered or dealer gold rests today at 2.531 million oz or 78.77 tonnes.

The CME reported that we had 852 notices filed for options exercised on the first day delivery. This is huge for a generally weak January delivery month.  Thus, 85200 oz were served upon on first day notice.
To obtain the number of gold oz that should stand for January, I will take the original OI standing for Thursday at 1038 and subtract out the 852 notices filed, leaving us with  186 notices left to be served upon, or 18,600 oz.

Thus the total number of gold oz standing in this non delivery month of January is as follows:

85,200 (oz served upon first day notice)  +  18,600 oz (left to be served upon) =   103,800 oz  (3.22 tonnes of gold)
If we take the last 3 months we have 73.9 tonnes of gold standing against a registered gold inventory of 78.77 tonnes (93.8%).
Gold is not entering the dealer nor is gold leaving the dealer from its own inventory to settle these accounts.

And now for silver 

 the chart: December 31

Month of January now commences:


Silver
Ounces
Withdrawals from Dealers Inventorynil
Withdrawals fromCustomer Inventory603,781 (Scotia, Delaware,JPM)
Deposits to theDealer Inventorynil
Deposits to the Customer Inventory1,211,071(Delaware,brinks,Scotia)
No of oz served (contracts)239  (1,535,000)
No of oz to be served (notices)131  (655,000)
Total monthly oz silver served (contracts)239  (1,535,000)
Total accumulative withdrawal of silver from the Dealersinventory this monthnil
Total accumulative withdrawal of silver from the Customer inventory this month


 603,781 



We have been witnessing a massive amount of silver inventory enter the customer vaults lately.
However we still do not have any dealer silver enter as a deposit nor have we seen any silver leave the dealer to settle accounts.

We had the following customer deposit:

1. Into Brinks:  600,577 oz
2. Into Delaware:  13,955 oz
3. Into Scotia:  596,539 oz

total deposit: 1,211,071 oz.

we had the following silver leave as a withdrawal by the customer:

1.  Out of Delaware:  1067 oz
2. Out of JPM; 597,408 oz
3. Out of Scotia:  5306 oz

total withdrawal:  603,781 oz

The CME notified us that first day notice saw 239 notices filed for 1,535,000 oz which is also considerably higher than expected.  To obtain what we believe will stand, I take the original OI standing on first day notice:
370 contracts and subtract out first day notices of 239 leaving us with 131 notices left to be served upon or  655,000 oz.

Thus the total number of silver oz standing in this non delivery month of January is as follows:

1,535,000 oz (served)  +  655,000 oz (to be served upon) =   2,190,000 oz

end.

To give you a little head start for Tuesday, we received late last night delivery notices for Tuesday.

In gold, we received 86 notices for 8600 oz
In silver: we received 82 notices for  410,000 oz.
It looks to me like we are going to have another big delivery month for gold and silver in what is considered a very poor month for that activity.

 Let us now proceed to our ETF's SLV and GLD and then our physical gold and silver funds:

Sprott and Central Fund of Canada.

The two ETF's that I follow are the GLD and SLV. You must be very careful in trading these vehicles as these funds do not have any beneficial gold or silver behind them. They probably have only paper claims and when the dust settles, on a collapse, there will be countless class action lawsuits trying to recover your lost investment.
There is now evidence that the GLD and SLV are paper settling on the comex.


Thus a default at either of the LBMA, or Comex will trigger a catastrophic event.



Dec 31:.2011:   (final for the year)


Total Gold in Trust

Tonnes:1,254.57

Ounces:40,335,690.64

Value US$:63,484,275,822.93

 



Dec 29.2011:


TOTAL GOLD IN TRUST

Tonnes:1,254.57

Ounces:40,335,690.64

Value US$:61,730,367,104.89





DEC 28.2011:



TOTAL GOLD IN TRUST

Tonnes:1,254.57

Ounces:40,335,690.64

Value US$:63,344,469,386.68






We lost zero oz of gold from the GLD.  It is very strange that for the week we saw gold hit in price and yet no gold left.  On Friday we saw gold rise and yet inventory remained constant.





And now for silver Dec 31.2011: 

(final inventory levels for the year)


Ounces of Silver in Trust308,833,295.500
Tonnes of Silver in Trust Tonnes of Silver in Trust9,605.79



Dec 29.2011:


Ounces of Silver in Trust308,833,295.500
Tonnes of Silver in Trust Tonnes of Silver in Trust9,605.79


 Dec 28.2011:


Ounces of Silver in Trust308,833,295.500
Tonnes of Silver in Trust Tonnes of Silver in Trust9,605.79

Dec 27.2011

Ounces of Silver in Trust308,833,295.500
Tonnes of Silver in Trust Tonnes of Silver in Trust9,605.79




we lost zero silver ounces at the SLV.








end



And now for our premiums to NAV for the funds I follow:


1. Central Fund of Canada: traded to a positive 1.8 percent to NAV in usa funds and a positive 2.0% to NAV for Cdn funds. ( Dec 31.2011).
2. Sprott silver fund (PSLV): Premium to NAV fell slightly   to  24.45% to NAV  Dec 31/2011
3. Sprott gold fund (PHYS): premium to NAV fell slightly to a 4.9% positive to NAV Dec 31.2011).



It looks like our banker friends refuse to do battle with Eric.  He has the muscle to bury them with silver purchases.  They are staying away from him like a plague. The Sprott gold funds continue to show good positives to NAV reflecting good demand for physical gold.

end.




The CME released the COT report at the close of trading Friday.  Let us see what we can glean from it.
First the Gold COT: (the report is from Dec 20 through to Dec 27, Tuesday to Tuesday night.



Gold COT Report - Futures
Large Speculators
Commercial
Total
Long
Short
Spreading
Long
Short
Long
Short
167,413
36,625
31,683
162,522
326,454
361,618
394,762
Change from Prior Reporting Period
-5,560
-2,412
-2,419
2,739
2,117
-5,240
-2,714
Traders
148
77
72
51
48
236
166


Small Speculators




Long
Short
Open Interest



57,327
24,183
418,945



720
-1,806
-4,520



non reportable positions
Change from the previous reporting period

COT Gold Report - Positions as of
Tuesday, December 27, 2011

Our large speculators that have been long in gold, pitched a huge 5,560 contracts from their long side.

Those large speculators that have been short in gold covered 2412 contracts from their short side.

Our commercials:

Those commercials that have been long in gold and are close to the physical scene added another 2739 contracts to their long side.

Those commercials that have been perennially short in gold like JPMorgan and cohorts added another 2117 contracts to their short side.

Our small specs:

Those small specs that have been long in gold, added a tiny 720 contracts to their long side.
Those small specs that have been short in gold covered a rather large 1806 contracts from their short side.

Conclusion: slightly more bullish  as we witness a net addition from the commercials.

And now for silver:

Silver COT Report - Futures
Large Speculators
Commercial
Total
Long
Short
Spreading
Long
Short
Long
Short
24,026
17,171
18,449
41,224
55,356
83,699
90,976
-276
297
470
1,207
514
1,401
1,281
Traders
59
39
43
38
41
121
107

Small Speculators




Long
Short
Open Interest



20,294
13,017
103,993



1,427
1,547
2,828



non reportable positions
Change from the previous reporting period

COT Silver Report - Positions as of
Tuesday, December 27, 2011


Our large speculators that have been long in silver pitched a tiny 276 contracts from their long side.

Our large speculators that have been short in silver added a tiny 297 contracts to their short side.

Our commercials;

Those commercials that are long in silver continued to add to positions to the tune of 1207 contracts.

Those commercials that are short in silver and subject to silver manipulation by the CFTC  added another 514 contracts to their short side.

Small Specs:

Those small specs that are long in silver, pounded the table by adding a large 1,427 contracts.
Those small specs that have been short in silver surprisingly added 1,547 contracts to their short side.

Conclusion:  slightly more bullish this week. The commercials that are long in silver are now at record levels.
The net short position by the commercials is now also at record low levels.


Let us now see some of the big stories of yesterday that shape the price of gold and silver.

Things are certainly heating up over in Iran.
(From Jim Sinclair/Reuters)


Iran to fire long-range missiles in drill-agency Fri Dec 30, 2011 9:45am EST
By Parisa Hafezi
TEHRAN, Dec 30 (Reuters) – Iran will fire long-range missiles during a naval drill in the Gulf on Saturday, a semi-official news agency reported, a show of force at a time when Iran has threatened to close shipping lanes if the West imposes sanctions on its oil exports.
Iran threatened on Tuesday to stop the flow of oil through the Strait of Hormuz if it became the target of an oil export embargo over its nuclear ambitions, a move that could trigger military conflict with countries dependent on Gulf oil.
"The Iranian navy will test several kinds of its missiles, including its long-range missiles, in the Persian Gulf on Saturday," Admiral Mahmoud Mousavi, deputy commander of the Iranian navy, told Fars news agency.


and more importantly:


Oil May Rise as Iran Threatens to Block Strait, Survey Shows By Mark Shenk – Dec 30, 2011 3:02 PM ET
Oil may rise next week after Iran’s threats to block the Strait of Hormuz, a critical waterway for shipping crude, a Bloomberg News survey showed.
Thirteen of 32 analysts, or 41 percent, forecast oil will increase through Jan. 6. Ten respondents, or 31 percent, predicted prices will decrease and nine estimated there will be little change. Last week, 38 percent of surveyed analysts expected a decline.
Futures surged to $101.77 a barrel on Dec. 27, the highest intraday price since Dec. 7, after Iran’s official Islamic Republic News Agency cited Vice President Mohammad Reza Rahimi as saying the country would bar shipments through the strait if sanctions are imposed on its oil exports.


end.

Even Jim Rickards believes the USA will go to war with Iran:

(courtesy King World News/Ed Steer)


im Rickards: Audio Interview at King World News

Yesterday I posted Jim's blog about the U.S. going to war with Iran...and what that would do to gold and oil prices. This interview dovetails nicely with the Pepe Escobar interview above.
Eric slid this interview into my in-box just as I was about to hit the send button. It's a must listen...and the link is here.


This is certainly newsworthy as foreigners are dumping USA dollars:

(courtesy zero hedge)



Foreigners Dump Record Amount Of US Treasurys In Past Month

Tyler Durden's picture




With year end fund flows making absolutely no sense for the most part, thank you global central planning, as the euro plunges and the market refuses to follow, with risk assets rising on speculation the ECB (and/or Fed) are about to restart printing yet gold collapsing (on one or two hedge funds liquidating, yet econ PhDs already rewriting their theses on why the "gold bubble has popped"), and finally with Treasurys soaring to near all time highs (10 Year under 1.9% yesterday even as stocks surged on data from the National Advertisers of Realtors, aka NAR, of all fraudulent and corrupt entities), here is the latest observation to make the confusion complete. As the Fed's critical H.4.1 weekly update shows (which is leaps and bounds more accurate than the Treasury's TIC international fund flow data), in the week ended December 28, foreign investors sold the second highest amount of  US bonds in history, or $23 billion, bringing total UST custodial holdings to $2.67 trillion, a level first crossed to the upside back in April. This number peaked at $2.75 trillion in mid-August, and as the chart below shows the foreign holdings of US paper have been virtually flat in all of 2011, something which is in stark contrast with what the price of the 10 Year would indicate vis-a-vis investor demand. And going back further, the last week is merely the latest in a series of Custodial account outflows. In fact, in the last month (trailing 4 weeks), foreigners have sold a record $69 billion in US paper, a monthly outflow that was approached only once - in the aftermath of the US downgrade (when erroneously it is said that a surge in demand for US paper pushed rates lower - obviously as the chart shows nothing could be further from the truth).
So here is the conundrum for today: did China continue to dump US paper in the year end, something we saw started with the October TIC data, or was it French banks continuing to sell off any non-EUR assets, and in the process repatriate proceeds, keeping the EUR higher. We don't know, nor frankly, in this uber-centrally p(l)anned market, do we care much any longer.
Chart 1 - total UST holdings in Fed custody:
Chart 2 - monthly (trailing 4 week) change in UST holdings:


end.




Troubles continue for Spain as this nation unveils tax hikes and states that deficits will rise again in 2012:

(courtesy France International News 24/7 and Ed Steer)


Spain unveils tax hikes, warns deficit will rise




Spain's new government has unveiled fresh austerity measures to rein in its bigger-than-expected public deficit, including the extension of a public sector wage freeze and a surprise hike of income and property taxes.

By FRANCE 24  (video)
News Wires (text)
 
AP - Spain’s new government warned Friday that the country’s budget deficit will be higher than anticipated this year as it unveiled a first batch of austerity measures that include surprise income and property tax hikes.
Following the new conservative government’s second Cabinet meeting, the budget deficit for this year was revised up to 8 percent of national income from the previous government’s forecast of 6 percent

Alongside the upward revision, which comes amid predictions that the Spanish economy will soon be back in recession, the government, which is headed by Prime Minister Mariano Rajoy, announced further measures to get a handle on its debts, including €8.9 billion ($11.5 billion) in spending cuts
.
“This is the beginning of the beginning, ”government spokeswoman Soraya Saenz de Santamaria said. She said more reforms and austerity will come in 2012. The conservative Popular Party took power only last week after a landslide election win on Nov. 20 and its main priority is to make sure that Spain doesn’t get dragged into the debt crisis mire that has already forced Greece, Ireland and Portugal into seeking financial bailouts and is now threatening much-bigger Italy.
Though Spain’s budget deficit is higher than the 3 percent threshold that was supposedly part of the euro’s economic framework, it has so far avoided the same sort of bond market pressure that’s currently afflicting Italy, partly because its overall central government debt burden is relatively low at around 66 percent - Italy’s is around 120 percent. The yield on Spain’s benchmark ten-year bonds stands at just over 5 percent, lower than Italy’s 7 percent, a rate that is widely-considered to be unsustainable in the long-run.
Nevertheless, Spain has to keep a lid on its borrowings especially with unemployment so high and its regions and households so indebted too. An increase in the deficit forecast was not a total surprise, but its size was.
Many economists had predicted an increase because the economy stagnated in the third quarter and is now officially forecast to drop back into recession in the first quarter of 2012. Spain’s jobless rate is 21.5 percent, the highest in the euro zone.
Alongside the spending cuts, the new government maintained a freeze on civil servants’ salaries and on practically all government hiring. Taxes will be raised but only for two years. The increase will be progressive and affect all income tax brackets, but the impact on lower-income earners will be minimal, Treasury Minister Cristobal Montoro said.
Spokeswoman Saenz de Santamaria said the jump in the deficit forecast came as a surprise because the outgoing government was slow in turning over some documents, and the new number had to have consequences. “It is going to force us to take extraordinary measures,” she said.


We are confronted with an extraordinary and unforeseen situation which is going to force us to adopt extraordinary and unforeseen measures” Property taxes were also raised, but only through 2013. The measures will go before Parliament on Jan. 11.
Passage is assured because the Popular Party has a comfortable majority. The measures are part of an extension of the 2011 budget because the last government did not pass one for 2012.
A bigger austerity whack is expected when the new government passes a full blown 2012 budget by the end of March.

end


Here is how the Spanish 10 yr bond finished the year:


Snapshot

SUMMARYONE-YEAR CHART INTERACTIVE CHART
Value5.09One-Year Chart for SPANISH GOVERNMENT GENERIC BONDS - 10 YR NOTE (GSPG10YR:IND)
Change-0.083 (-1.610%)
Open5.19
High5.19
Low5.07


However the Italian bond seems to be the center of attention closing at 7.11% yield.


Snapshot

SUMMARYONE-YEAR CHART INTERACTIVE CHART
Value7.11One-Year Chart for Italy Govt Bonds 10 Year Gross Yield (GBTPGR10:IND)
Change(%)
Open7.07
High7.11
Low7.01





end.



 Over in Hungary, things just get worse by the day:

(courtesy BBC and special thanks to Robert H for sending this to me)


Hungary passes controversial central bank law



Hungary has passed a law that critics say could undermine the independence of its central bank.
The ruling Fidesz party, which has a two-thirds majority, has approved the constitutional change in the final session of parliament this year.
Ratings agency Standard & Poor's downgraded Hungary's debt to junk status last week, partly due to the proposed changes to the constitution.
EU and IMF officials have cut short aid talks with Hungary over to the law.
Hungary had been seeking a standby credit line of 15-20bn euros ($19.5bn, £12.6bn) in case it ran into trouble issuing new debt.
But the International Monetary Fund and the European Commission have both cast doubts over aid because of the law.
On Thursday, Hungary abandoned part of a planned bond auction, when investors demanded a higher interest rate on the debt the country planned to issue.
Hungary's central bank governor, Andras Simor, has said the bill amounts to a takeover of the central bank.
The law has also been criticised by the European Central Bank, who said it raised "concern as to whether [it] could be used to influence the decision-making process, to the detriment of central bank independence".
International pressure
The government wants to keep interest rates low to boost growth - but last week, Hungary's central bank increased rates for the the second month in a row, to 7% from 6.5%.
Consumer prices inflation in Hungary is currently running at 4.25%, well above the official 3% target.
"Some amendments have been made since the original draft was presented before the Christmas holiday, but concerns remain that the essence of the law has not changed," said the BBC's Eastern Europe reporter Nick Thorpe.
"The reform of the bank would introduce deputy governors and allow the government greater potential influence over key aspects of monetary policy, such as the level of interest rates."
Hungary was given a 20bn-euro standby loan by the IMF in 2008 to prevent it having to default on its debts.
But the newly-elected Prime Minister Viktor Orban decided not to renew the standby facility last year.
Standard & Poor's has cited heightened risks to the country's ability to repay its debts due to the weakening domestic and global economic outlook.
"In our view, the predictability of Hungary's policy framework continues to weaken, harming Hungary's medium-term growth prospects," S&P said.
Last month, fellow ratings agency Moody's also downgraded Hungary to junk status, blaming the economy's high levels of debt and weak prospects for growth.

end.



If Ron Paul becomes President you can bet the farm that he will audit Fort Knox:

(courtesy Maggie Haberman/GATA/Politico.com)


Paul wants to check Fort Knox for goldBy MAGGIE HABERMAN |
12/29/11 6:39 PM EST
POLITICO's James Hohmann reports from Atlantic, Iowa:
Ron Paul said Thursday that he’s eager to find out how much gold the United States really owns.
A supporter at a town hall meeting asked about Fort Knox: "Would you reveal as president whether there’s actually gold there?"
Here is Paul’s full response: "Yes, and if I couldn’t accomplish that then there’s big trouble in this country. I may need to get some help for you. I tried for years to do this…I never went to Fort Knox. I made a request when the gold commission came up in the early 1980s. We had a study of the role of gold in the monetary system. There were 17 members, and I couldn’t get one other person to endorse the principle that we ought to go to Fort Knox and find out if there’s gold."
"Gold is in more places than Fort Knox. There’s some in New York City, as well as at West Point. And there’s already admission by our government: ‘Well, that gold in New York City, we haven’t been able to verify that for a long time.’ And we all know, and that’s why the audit of the Fed is important, because there’s a lot of shenanigans that go on. They’ll loan the gold, and they’ll use it as collateral on these international transactions. So there’s so much that we have to know about. But that should be on high priority. So I will continue to do that. I think I’ll have a little more clout as president, and I thank you for the question."
Many in the crowd of about 150 at the community center applauded energetically.
Crusading for the gold standard helped boost the Texas congressman politically, but of late he’s been trying to broaden his message to appeal to more traditional Republican voters ahead of the Jan. 3 caucuses. So the answer took him a little off message and reminded voters of his unorthodox views on issues other than Iran.
http://www.politico.com/blogs/burns-haberman/2011/12/paul-wants-
to-check-fort-knox-for-gold-109085.html

-END-


We are now seeing more lawsuits filed against JPMorgan and friends from the mortgage scandal:

(courtesy Bloomberg)

JPMorgan, Ally Sued by HSH Nordbank Over Mortgage Bond Losses

December 30, 2011, 8:52 AM ESTBy David McLaughlin
Dec. 30 (Bloomberg) -- JPMorgan Chase & Co., the biggest U.S. bank by assets, and Ally Financial Inc. were among the financial institutions blamed by the German lender HSH Nordbank AG in lawsuits over losses on about $293 million in mortgage bonds.
Offering documents for the securities contained “material misrepresentations and omissions” about the loans backing the securities, HSH Nordbank said in summonses filed yesterday in New York State Supreme Court.
Wrongdoing by JPMorgan, Ally and other defendants named in three separate cases “led directly” to losses on the securities, HSH Nordbank said. Barclays Capital Inc. and Credit Suisse Securities (USA) were also among those sued for their roles in different offerings, according to court papers.
HSH Nordbank also claims that offering materials contained misrepresentations about the legal validity of assignments of loans to mortgage-securitization trusts and the rights of the trusts to receive interest and principal payments on the loans, which are used to pay investors.
In one case, HSH Nordbank, based in Hamburg, Germany, is suing over $130 million in mortgage securities. Another covers about $117 million in bonds, and a third concerns $46 million, according to court papers.
Gina Proia, a spokeswoman for Detroit-based Ally, declined to immediately comment on the lawsuit. Steven Vames, a Credit Suisse spokesman, declined to comment. Representatives for Barclays and JPMorgan didn’t respond yesterday to e-mails seeking comment.
The case is HSH Nordbank AG v. Ally Financial, 653651-2011, New York State Supreme Court (Manhattan).
--Editors: Peter Blumberg, Charles Carter
To contact the reporter on this story: David McLaughlin in New York atdmclaughlin9@bloomberg.net.


end

I will leave you with this Julian Phillips paper on a possible confiscation of gold

Philips is from the Austrian School of Economics:

(courtesy Julian Phillips/GoldSeek.com)




Gold Confiscation, a Reality?
By: Julian D. W. Phillips, Gold/Silver Forecaster - Global Watch -GoldForecaster.com 



Many of the leading fund managers in the U.S. and elsewhere are expecting that governments will confiscate their citizen’s gold. This will not be for the same reasons used in 1933. It will be to facilitate loans, swaps lower interest rates, and shore up international confidence in the turbulent, stressed paper-currency world in which we live. Each nation issues paper as money, dependent on the trust that nation can engender at home and abroad. But is this going to be sufficient, moving into an ever more turbulent 2012?
Traditional Use of Gold in Reserves
When gold was deemed money in the world under the Gold Standard, money was issued against the stock of gold a nation had –this formed the basis of the money supply. In 1933 as the Depression wreaked damage to the U.S. economy, the government needed to expand the supply of money to the economy, dramatically. The first step was to confiscate their citizen’s gold at a price of $20 per ounce. Two years later in 1935, the U.S. government devalued the dollar by 75% to $35 an ounce. This expanded the U.S. money supply by far more than 75% because of the additional gold in government vaults.
As U.S. influence spread abroad after the war, the need for a vast increase in global money supply and, in particular, the number of dollars outside of the U.S. (then limited to the amount of gold in U.S. coffers) the restraint on money supply was unbearable on the U.S., so it eliminated gold from its active role in the money system and replaced it with the USD, tied as it was to the oil price.
Thereafter, gold was relegated to the vaults as an important but passive, reserve asset. Now, we’re led to believe that central bankers feel that the amount of gold they should carry is either 3-months’ worth of international trade, or between 10 and 15% of total foreign exchange reserves –as though this is all it would take to resolve a crisis. Such formulae test credibility to the limit.
Uses of Gold in the Last Couple of Years in the Monetary System
But in 2011, the use of gold to fund a Eurozone bail-out implied was raised. A draft of the European Commission study on joint Eurobonds is the suggestion that gold could be used as collateral for them. It did not receive more than token recognition; the issue, however, was at least addressed in theory. Its use was not related to the expansion of the money supply –the suggestion did not imply any mobility as money at all. A new role for gold in official uses was starting to get recognition.
In 2010, gold was used by the Bank of International Settlements in currency swaps, giving little-to-no information as to the identity of their clients. Over 500 tonnes of gold was used in the currency / gold swaps. These did not relate to practical money raising, but to gold being used as collateral to facilitate cheaper and larger loans to the banks to provide liquidity where it was drying up. The stories came that gold was being used by commercial banks –who don’t hold gold on their balance sheets—but the only place they could get gold from was from central banks. So was it a dire need by commercial banks for liquidity or was it an attempt by central banks to cap the gold price? We might never know...But in 2011 these swaps were reversed, and the gold left the B.I.S. in the second half of the year [2011] gold lease rates dropped heavily into negative territory, telling us that central banks were lending gold again to banks at incredibly cheap rates –this coincided with the fall in the gold price from over $1,900 to current levels.
Irrespective of the reasons why, the most important feature of these actions was that gold came into use in the interbank monetary system yet again. And this happened at a time when European central banks had ceased selling their gold and the rest of the world began to steadily increase their central bank holdings.
Despite its passive role the U.S., Eurozone central banks hold nearly 20,000 tonnes of gold –worth nearly a trillion dollars; however and much to politician’s angst, this gold is not available to fund government borrowing; it would contravenes the Maastricht treaty which founded the Eurozone. Gold remains far too important to use in such financing. It will only be used if the very national structure of its money is in danger or in support of making a nation’s monetary system function internationally. But bullion could and is being used as collateral.
For prospective investors (no doubt including emerging market governments, sovereign wealth funds, and the like) the appeal comes from the likely hedge that gold would provide against an immediate default. If a country such as Italy were to default, most believe the price of gold (in Euros and in the USD) would skyrocket…
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Well that about does it for today.  I wish you all a very happy, healthy and prosperous New Year and let's hope that all your dreams for 2012 come true.

see you on Tuesday

Harvey


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