Central Bank Selling

This FT.com article (you will need to register to read it) says "central banks have all but stopped lending gold to commercial and investment banks and other participants in the precious metals market". This has caused lease rates to rise/forward rates to drop as noted by SilverAxis.

I think it is a bit late for central banks to start worrying about counterparty risk. I have been corresponding with someone who has been watching the markets and gold over the past 20 years and their view after analysing different reported data sets is that central banks are holding closer to 10,000 tonnes than 30,000 tonnes (and this guy knows his data).

I haven’t reviewed his analysis to confirm those numbers, but it makes sense to me as if asked I would have guessed that the legimate market for precious metal borrowing (ie manufacturers) is no where near the amount that is lent out, therefore the balance must have be lent to bullion banks for ultimate use in financing short sales and other gold derivatives. With gold interest rates around 2%, the carry trade doesn’t look that good anymore.

I find it interesting that some gold advocates get hot and bothered about central bank lending/selling. I don’t see the problem. So what if central banks sell their last 10,000t into the market in an attempt to support those banks with either proprietary short positions or who have lend to others who are short without good collateral to cover that exposure. This will supress the price, allowing individuals to buy a cheap prices. Then that part of central bank lending which has been short sold has to be bought back (a short is a future buyer, just as a long is a future seller). If that is not possible, then the lucky ones are those to whom it was short sold.

The end result will be gold in the hands of individuals and what I call “the decades long privatisation of gold” will be complete. As per Professor Fekete, the power over the money “supply” will then be in the hands of the average person, where it should be:

"Since gold coins served as bank reserves under the gold standard, by withdrawing their deposits and converting their notes into gold coins savers could force the banks to contract outstanding credit. ... Not only did it have the ballot paper, the electorate also had the gold coin with which to vote. And vote it did, on every business day. If it did not like the credit policies of the banks and the government the whip, gold hoarding, was at hand."

Surely this current crisis has shown that individuals couldn’t be any worse than central banks in managing a country's money supply/credit/interest?

Steve Keen's Oz Debtwatch

http://www.debtdeflation.com/blogs/ subtitled: Analysing Australia’s 45 Year Obsession with Debt, a new addition to blogs I'm following after seeing him on the 7:30 report. Choice quotes:

"As the experience and the memory of the Great Depression receded, academic economics produced a hybrid of Keynes’s macroeconomic ideas grafted on top of Neoclassical microeconomics that they called “the Keynesian-Neoclassical Synthesis”.

Unfortunately, the ideas were incompatible–and over time, wherever there was a conflict, academic economics rejected the Keynesian graft, rather than the underlying Neoclassical microeconomics. After fifty years of this, Keynes’s ideas were completely ejected from the economic mainstream, the Neoclassical belief that the economy is self-correcting became dominant once more, and economists trained in this belief came to dominate Treasuries and Central Banks around the world. They ignored levels of private debt, championed deregulation of finance, and virtually encouraged asset price speculation.

Now we have twice as much debt as caused the Great Depression, and inflation so low that, were it not for unprecented factors (the rise of China, global warming and peak oil), deflation would almost be a certainty.

Having thus unlearnt the real lessons of the Great Depression, the economics profession may yet make us relive it."

"I can be pro-inflation and anti-gold at the same time because I have supreme confidence in the ability of our economic managers to FAIL to cause inflation. So I actually expect deflation in the future, in which case the money price of gold may well fall (though it will surely fall less than other commodities).

However, I could be gazumped by global warming and peak oil, which could cause the inflationary surge that our economic managers will finally realise is needed, but not know how to consciously cause. There is also the slim possibility that truly over the top increases in fiat money could trigger a hyperinflation.

So given those two possibilities, I’m not anti-gold; it depresses me to say that I have actually started considering whether I might put some of my money into gold. But I would still prefer to remain in both bank deposits and my super fund’s so-called cash accounts."

Congress, Remonetize Gold (and Silver) NOW and Save America From a Terrible Fate

Premiums & GLD

I found this comment to this SilverAxis blog of interest:

Is CEF’s “sizable” premium (9% at the moment), really all that high for a verifiable vaulted proxy for real metal (assuming it is), when there is a 45% premium on Silver Eagles and a 14% premium on a 100 oz bars deliverable from Tulving?

The premium on the Central Fund of Canada is interesting compared to GLD, which consistently seems to get questions about whether it really has the gold behind each share. GLD does not trade with such a premium, and sure its open ended nature ensures it closely matches the spot wholesale price, but are not the premiums on CEF and retail physical indicators of the market's assessment of the "safety" of such ways of holding gold relative to other methods like GLD? Of course the market is a voting machine, not a weighing machine so the premium may just indicate mood rather than real risk.

While not having anything more to rely on but GLD's assurances that it has the gold, personally, I consider that since it was created and sponsored by the World Gold Council, which is owned by gold miners (who want the price to go up), that they would not be involved in an ETF that wasn't talking physical off the market (which is ultimately the best way to make the price go up).