Friday, December 06, 2013 6:44 PM
Ex Greek FinMin Warns "Europe's North-South Divide Has Become A Time Bomb"
Submitted by Tyler Durden on 12/07/2013 11:42 -0500
Authored by Yannos Papantoniou (Greece's Economy & Finance Minister 1994 to 2001), originally posted at Project Syndicate,
As the eurozone debt crisis has steadily widened the divide between Europe’s stronger northern economies and the weaker, more debt-laden economies in the south (with France a kind of no man’s land economy in between), one question is on everyone’s mind: Can Europe’s monetary union – indeed, the European Union itself – survive?
While the eurozone’s northern members enjoy low borrowing costs and stable growth, its southern members face high borrowing costs, recession, and deep cuts in incomes and social spending. They have also suffered substantial output losses, and have far higher unemployment rates than their northern counterparts. Unemployment in the eurozone as a whole averages about 12%, compared to more than 25% in Spain and Greece (where youth unemployment now stands at 60%). Indeed, while aggregate per capita income in the eurozone remains at 2007 levels, Greece has been pushed back to 2000 levels, and Italy today finds itself somewhere in 1997.
Europe’s southern economies owe their deteriorating circumstances largely to excessive austerity and the absence of measures to compensate for demand losses. Currency devaluation – which would boost the competitiveness of domestic industry by lowering export prices – obviously is not an option in a monetary union.
But Europe’s stronger economies have resisted pressure to undertake more expansionary fiscal policies, which would lift demand for its weaker economies’ exports. The European Central Bank did not follow the lead of other advanced-country central banks, such as the US Federal Reserve, in pursuing a more aggressive monetary policy to cut borrowing costs. And no financing has been offered for public-investment projects in the southern countries.
Moreover, fiscal and financial measures aimed at strengthening eurozone governance have been inadequate to restore confidence in the euro. And Europe’s troubled economies have been slow to undertake structural reforms; improvements in competitiveness reflect wage and salary cuts, rather than productivity gains.
While these policies – or lack thereof – have impeded recovery in the southern countries, they have yielded reasonable growth and very low unemployment rates for the northern economies. In fact, by maintaining large trade surpluses, Germany is exporting unemployment and recession to its weaker neighbors.
As Europe’s north-south divide widens, so will interest-rate differentials; as a result, conducting a single monetary policy will become increasingly difficult. In the recession-afflicted south, continued fiscal consolidation will demand new austerity measures – a prospect that citizens will reject. Such impasses will lead to social tension and political crisis, or to new requests for financial assistance, which the northern countries are certain to resist. Either way, financial and political instability could lead to the common currency’s collapse.
As long as the eurozone establishes a kind of wary equilibrium, with the weaker economies stabilizing at low growth rates, current policies are unlikely to change.Incremental intergovernmental solutions will continue to prevail, and Europe’s economy will soldier on, steadily losing ground to the US and emerging economies like China and India.
For now, Germany is satisfied with the status quo, enjoying stable growth and retaining control over domestic economic policy, while the ECB’s limited powers and strict mandate to maintain price stability ease fears of inflation.
But how will Germany react when the north-south divide becomes large enough to threaten the euro’s survival? The answer depends on how Germans perceive their long-term interests, and on the choices of Chancellor Angela Merkel. Her recent election to a third term offers room for bolder policy choices, while forcing her to focus more on her legacy – specifically, whether she wishes to be associated with the euro’s collapse or with its revival.
Two outcomes now seem possible. One scenario is that the economic and political crisis in the southern countries spreads, inciting fears in Germany that the country faces a long-term threat. This could drive Germany to withdraw from the eurozone and form a smaller currency union with other northern countries.
The second possibility is that the crisis remains relatively contained, leading Germany to pursue closer economic and fiscal union. This would entail the mutualization of some national debt and the transfer of economic-policy sovereignty to supranational European institutions.
Of course, such a move would carry considerable political costs in Germany, where many taxpayers recoil at the notion of assuming the debts of the fiscally profligate southern countries, without considering how much Germany would benefit from a stable and dynamic monetary union. But a new grand coalition between Merkel and the Social Democrats could be sufficient to make this shift possible.
Even so, there could be victims. Indeed, the continued failure of smaller countries like Greece and Cyprus to fulfill their commitments reinforces the impression that they will forever be dependent on financial assistance. The exit of one or two of these “undisciplined” countries could be a requirement for the German public to agree to such a policy shift.
Europe’s north-south divide has become a time bomb lying at the foundations of the currency union. Defusing it will require less austerity, more demand stimulus, greater investment support, deeper reforms, and meaningful progress toward economic and political union. One hopes that modest recovery in the south, aided by strong German leadership in the north, will steer Europe in the right direction.
Marc Faber: "Financial Crisis Don't Happen Accidentally, They Are Inevitable"
Submitted by Tyler Durden on 12/06/2013 21:13 -0500
Authored by Marc Faber, originally posted atThe Daily Reckoning blog,
As a distant but interested observer of history and investment markets I am fascinated how major events that arose from longer-term trends are often explained by short-term causes. The First World War is explained as a consequence of the assassination of Archduke Franz Ferdinand, heir to the Austrian-Hungarian throne; the Depression in the 1930s as a result of the tight monetary policies of the Fed; the Second World War as having been caused by Hitler; and the Vietnam War as a result of the communist threat.
Similarly, the disinflation that followed after 1980 is attributed to Paul Volcker’s tight monetary policies. The 1987 stock market crash is blamed on portfolio insurance. And the Asian Crisis and the stock market crash of 1997 are attributed to foreigners attacking the Thai Baht (Thailand’s currency). A closer analysis of all these events, however, shows that their causes were far more complex and that there was always some “inevitability” at play.
Take the 1987 stock market crash. By the summer of 1987, the stock market had become extremely overbought and a correction was due regardless of how bright the future looked. Between the August 1987 high and the October 1987 low, the Dow Jones declined by 41%. As we all know, the Dow rose for another 20 years, to reach a high of 14,198 in October of 2007.
These swings remind us that we can have huge corrections within longer term trends.The Asian Crisis of 1997-98 is also interesting because it occurred long after Asian macroeconomic fundamentals had begun to deteriorate. Not surprisingly, the eternally optimistic Asian analysts, fund managers , and strategists remained positive about the Asian markets right up until disaster struck in 1997.
But even to the most casual observer it should have been obvious that something wasn’t quite right. The Nikkei Index and the Taiwan stock market had peaked out in 1990 and thereafter trended down or sidewards, while most other stock markets in Asia topped out in 1994. In fact, the Thailand SET Index was already down by 60% from its 1994 high when the Asian financial crisis sent the Thai Baht tumbling by 50% within a few months. That waked the perpetually over-confident bullish analyst and media crowd from their slumber of complacency.
I agree with the late Charles Kindleberger, who commented that “financial crises are associated with the peaks of business cycles”, and that financial crisis “is the culmination of a period of expansion and leads to downturn”. However, I also side with J.R. Hicks, who maintained that“really catastrophic depression” is likely to occur “when there is profound monetary instability — when the rot in the monetary system goes very deep”.
Simply put, a financial crisis doesn’t happen accidentally, but follows after a prolonged period of excesses (expansionary monetary policies and/or fiscal policies leading to excessive credit growth and excessive speculation). The problem lies in timing the onset of the crisis. Usually, as was the case in Asia in the 1990s, macroeconomic conditions deteriorate long before the onset of the crisis. However, expansionary monetary policies and excessive debt growth can extend the life of the business expansion for a very long time.
In the case of Asia, macroeconomic conditions began to deteriorate in 1988 when Asian countries’ trade and current account surpluses turned down. They then went negative in 1990. The economic expansion, however, continued — financed largely by excessive foreign borrowings. As a result, by the late 1990s, dead ahead of the 1997-98 crisis, the Asian bears were being totally discredited by the bullish crowd and their views were largely ignored.
While Asians were not quite so gullible as to believe that “the overall level of debt makes no difference … one person’s liability is another person’s asset” (as Paul Krugman has said), they advanced numerous other arguments in favour of Asia’s continuous economic expansion and to explain why Asia would never experience the kind of “tequila crisis” Mexico had encountered at the end of 1994, when the Mexican Peso collapsed by more than 50% within a few months.
In 1994, the Fed increased the Fed Fund Rate from 3% to nearly 6%. This led to a rout in the bond market. Ten-Year Treasury Note yields rose from less than 5.5% at the end of 1993 to over 8% in November 1994. In turn, the emerging market bond and stock markets collapsed. In 1994, it became obvious that the emerging economies were cooling down and that the world was headed towards a major economic slowdown, or even a recession.
But when President Clinton decided to bail out Mexico, over Congress’s opposition but with the support of Republican leaders Newt Gingrich and Bob Dole, and tapped an obscure Treasury fund to lend Mexico more than$20 billion, the markets stabilized. Loans made by the US Treasury, the International Monetary Fund and the Bank for International Settlements totalled almost $50 billion.
However, the bailout attracted criticism.Former co-chairman of Goldman Sachs, US Treasury Secretary Robert Rubin used funds to bail out Mexican bonds of which Goldman Sachs was an underwriter and in which it owned positions valued at about $5 billion.
At this point I am not interested in discussing the merits or failures of the Mexican bailout of 1994. (Regular readers will know my critical stance on any form of bailout.) However, the consequences of the bailout were that bonds and equities soared. In particular, after 1994, emerging market bonds and loans performed superbly — that is, until the Asian Crisis in 1997. Clearly, the cost to the global economy was in the form of moral hazard because investors were emboldened by the bailout and piled into emerging market credits of even lower quality.
Above, I mentioned that, by 1994, it had become obvious that the emerging economies were cooling down and that the world was headed towards a meaningful economic slowdown or even a recession. But the bailout of Mexico prolonged the economic expansion in emerging economies by making available foreign capital with which to finance their trade and current account deficits. At the same time, it led to a far more serious crisis in Asia in 1997 and in Russia and the U.S. (LTCM) in 1998.
So, the lesson I learned from the Asian Crisis was that it was devastating because, given the natural business cycle, Asia should already have turned down in 1994. But because of the bailout of Mexico, Asia’s expansion was prolonged through the availability of foreign credits.
This debt financing in foreign currencies created a colossal mismatch of assets and liabilities. Assets that served as collateral for loans were in local currencies, whereas liabilities were denominated in foreign currencies. This mismatch exacerbated the Asian Crisis when the currencies began to weaken, because it induced local businesses to convert local currencies into dollars as fast as they could for the purpose of hedging their foreign exchange risks.
In turn, the weakening of the Asian currencies reduced the value of the collateral, because local assets fall in value not only in local currency terms but even more so in US dollar terms. This led locals and foreigners to liquidate their foreign loans, bonds and local equities. So, whereas the Indonesian stock market declined by “only” 65% between its 1997 high and 1998 low, it fell by 92% in US dollar terms because of the collapse of their currency, the Rupiah.
As an aside, the US enjoys a huge advantage by having the ability to borrow in US dollars against US dollar assets, which doesn’t lead to a mismatch of assets and liabilities. So, maybe Krugman’s economic painkillers, which provided only temporary relief of the symptoms of economic illness, worked for a while in the case of Mexico, but they created a huge problem for Asia in 1997.
Similarly, the housing bubble that Krugman advocated in 2001 relieved temporarily some of the symptoms of the economic malaise but then led to the vicious 2008 crisis. Therefore, it would appear that, more often than not, bailouts create larger problems down the road, and that the authorities should use them only very rarely and with great caution.
( Puts the inability of Germany to obtain or audit its gold allegedly in the possession of the New york Fed in perspective. )
Guest Post: There Is Too Little Gold In The West
Submitted by Tyler Durden on 12/06/2013 18:29 -0500
Submitted by Alasdair Macleod via Peak Prosperity blog,
Western central banks have tried to shake off the constraints of gold for a long time, which have created enormous difficulties for them. They have generally succeeded in managing opinion in the developed nations but been demonstrably unsuccessful in the lesser-developed world, particularly in Asia. It is the growing wealth earned by these nations that has fuelled demand for gold since the late 1960s. There is precious little bullion left in the West today to supply rapidly increasing Asian demand, and it is important to understand how little there is and the dangers this poses for financial stability.
An examination of the facts shows central banks have been on the back foot with respect to Asian gold demand since the emergence of the petrodollar. In the late 1960s, demand for oil began to expand rapidly, with oil pegged at $1.80 per barrel. By 1971 the average price had increased to $2.24, and there is little doubt that the appetite for gold from Middle-Eastern oil exporters was growing; and it should have been clear to President Nixon’s advisers in 1971 that this was a developing problem when he decided to halt the run on the US’s gold reserves by suspending the last vestiges of gold convertibility.
After all, the new arrangement was: America issued the petrodollars to pay for the oil, which were then recycled to Latin America and other countries in the West’s sphere of influence through the American banks. The Arabs knew exactly what was happening and gold was simply their escape route from this dodgy deal.
The run on US gold reserves leading up to the Nixon Shock in August 1971 is blamed by monetary historians on France. But note this important passage from Ferdinand Lips’s bookGoldWars:
“Because Arabs did not understand bonds and stocks they invested their surplus funds in either real estate and/or gold. Since Biblical times, gold has been the best means to keep wealth and to transfer it from generation to generation. Gold therefore was the ideal vehicle for them. Furthermore after their oil reserves are exhausted in the distant future, they would still own gold. And gold, contrary to oil, could never be wasted.”
According to Lips, Swiss private bankers to whom many of the newly-enriched Arabs turned recommended a minimum of 10% and even as much as 40% should be held in gold bullion. This advice was wholly in tune with Arab thinking, creating extra demand for America’s gold reserves, some of which was auctioned off in the following years. Furthermore, Arab investors were unlikely to have been deterred by high dollar interest rates in the early eighties, because high interest rates simply compounded their rapidly-growing exposure to dollars.
Using numbers from BP’s Statistical Review and contemporary US Treasury 10-year bond yields to gauge dollar returns, we can estimate gross Arab petrodollar income including interest from 1965 to 2000 to total about $4.5 trillion. Taking average annual gold prices over that period, ten per cent of this would equate to about 50,500 tonnes, which compares with total mine production during those years of 62,750 tonnes, over 90% of which went into jewellery.
This is not to say that 50,000 tonnes were bought by the Arabs: it could only be partly accommodated even if the central banks supplied them gold in very large quantities, of which there is some evidence they did.Instead, it is to ram the point home that the Arabs, awash with printed-for-export petrodollars had good reason to buy all available gold. And importantly it also gives substance to Frank Veneroso’s conclusion in 2002 that official intervention, i.e. undeclared sales of significant quantities of government-owned gold, was effectively being used to manage the price in the face of persistent demand for physical gold as late as the 1990s.
Transition from Arab demand
Arabs trying to invest a portion of their petrodollars would have left for the advanced economies very little investment gold. As it happened, US citizens had been banned from holding bullion until 1974 and British citizens were banned until 1971. Instead they invested mainly in mining shares and Krugerrands, continuing this tradition by using derivatives and unbacked unallocated accounts with bullion banks in preference to bullion itself. This meant that, until the mid-seventies, investment in physical gold in the West was minimal, almost all gold being held in illiquid jewellery form. Western bullion investors were restricted to mainly German, French and Italians, mostly through Swiss banks. The 1970s bull market was therefore an Arab affair, and they will have continued to absorb gold through the subsequent bear market.
By the late-nineties a new generation of Swiss investment managers schooled in modern portfolio theory and less keen on gold, persuaded many of their European clients to reduce and even eliminate bullion holdings. At the same time, a younger generation of Western-educated Arabs began to replace more conservative patriarchs so it is reasonable to assume that Arab demand for gold waned somewhat, as infrastructure spending and investment in equity markets began to provide portfolio diversification. This was therefore a period of transition for bullion, driven by declining western investment sentiment and changing social structures in the Arab world.
It also marked the beginning of accelerating demand in emerging economies, notably India, but also in other countries such as Turkey and those in South-East Asia which were rapidly industrialising. In 1990 the Indian Government freed up the gold market by abolishing the Gold Control Act of 1968, paving the way for Indians to become the largest officially-recognised importers of gold until overtaken by China last year.
Lower prices in the 1990s stimulated demand for jewellery in the advanced economies, with Italy becoming the largest European manufacturing centre. At the same time gold leasing by central banks increased substantially, as bullion banks exploited the differential between gold lease rates and the yield on short-term government debt. This leased gold satisfied jewellery demand as well continuing Asian demand for gold bars.
So, despite the fall in prices between 1997-2000, all supply was absorbed into firm hands. When gold prices bottomed out, Western central banks almost certainly had less gold than publicly stated, the result of managing the price until 1985, and through leasing thereafter. This was the background to the London Bullion Market Association which was founded in 1987.
In 1987 the unallocated account system became formalized under LBMA rules, allowing the bullion banks to issue gold IOUs to their customers, making efficient use of the bullion available. The ability to expand customer business in the gold market without having to acquire physical bullion is the chief characteristic of the LBMA to this day. Futures markets in the US also expanded, and so derivatives and unallocated accounts became central to Western investment in gold. Today the only significant bullion held by Western investors is likely to be a small European residual plus ETF holdings. In total (including ETFs) this probably amounts to no more than a few thousand tonnes.
The LBMA was established in 1987 in the wake of the Financial Services Act in 1986. Prior to that date, the twice-daily gold fix had become the standard pricing mechanism for international dealers, whose ranks grew on the back of the 1970s bull market. This meant that international banks established their bullion dealing activities in London in preference to Zurich which was the investment centre for physical bullion. The establishment of the LBMA was the formalization of an existing gold market, based on the 400 ounce good delivery standard and the operation of both allocated and unallocated accounts.
During the twenty-year bear market attitudes to gold diverged, with capital markets increasingly taking the view that the inflation dragon had been slain and gold’s bull market with it. At the same time Asian demand, initially from the Arab oil exporters, but increasingly from other nations led by Turkey, India and Iran ensured there were buyers for all the physical gold available. Mine supply, which benefited from the introduction of heap-leaching techniques, had increased from 1,314 tonnes in 1980 to 2,137 tonnes in 1990, and 2,625 tonnes by 2000. Together with scrap supply London was in a strong position to intermediate between a substantial increase in gold flows to Asian buyers, and it was from this that central bank leasing naturally developed.
Gold backed by these physical flows was the ideal asset for the carry trade. A bullion bank would lease gold from a central bank, sell the gold and invest the proceeds in short-term government debt. It was profitable for the bullion bank, governments were happy to have the finance, and the lessor was happy to see an idle asset work up some extra income. However, leasing only works so long as the bullion bank can hedge by accessing future supply, so that the lease can eventually be terminated.
Before 2000 this was a growing activity, fuelled further by Swiss portfolio disinvestment in the late 1990s. As is usual in markets with a long-term behavioral trend, competition for this business extended the risks beyond being dangerous. This culminated in a crisis in September 1999, when a 30% jump in the price threatened to bankrupt some of the bullion banks who were in the habit of running short positions.
Bull markets always start with very little mainstream and public involvement, and so it has proved with gold since the start of this century. So let us recap where all the gold was at that time.
- Total above-ground gold stocks were about 129,000 tonnes, of which 31,800 tonnes were officially monetary gold. Of the balance, approximately 85-90% was turned into jewellery or other wrought forms, leaving only 10-15,000 tonnes invested in bar and coins and allocated for industrial use.
- Out of a maximum of 15,000 tonnes, coins (mostly krugerrands) accounted for about 1,500 tonnes and other uses (non-recovered industrial and dental) say 1,000 tonnes. This leaves a maximum of 12,500 tonnes and possibly as little as 7,500 tonnes of investment gold worldwide at that time.
- After Swiss fund managers disposed of most of the bullion held in portfolios for their clients in the late 1990s, there was very little investment gold left in European and American ownership.
- Frank Veneroso in 2002 concluded after diligent research that central banks had by then supplied between 10-15,000 tonnes of monetary gold into the market. Much of this would have gone into jewellery particularly in Asia but some would have gone to the Middle East. This explains how extra investment gold may have been supplied to satisfy Middle-East demand.
- Middle-Eastern countries must have been the largest holders of non-monetary gold in bar form at this time. We can see that 10% of petrodollars invested in gold would have totalled over 50,000 tonnes, yet there can only have been between 7,500-12,500 tonnes available in bar form for all investor categories world-wide. This may have been increased somewhat by the addition of monetary gold leased by central banks and acquired through the market.
It was at this point that the second gold bull market commenced against a background of very little liquidity. Investment bullion was tightly held, the central banks were badly short of their declared holdings of monetary gold, and from about 2004 onwards ETFs were to grow to over 1,500 tonnes. Asian demand continued to grow led by India, and China began actively promoting private ownership of gold at about the same time.
Other than through physically-backed ETFs Western investors were encouraged to satisfy their demand for bullion through derivatives and unallocated accounts at the bullion banks. There are no publicly available records detailing the extent of these unallocated accounts, but the point is Western demand has not resulted in increased holdings of bullion except through securitised ETFs. Instead the liabilities faced by the bullion banks on uncovered accounts will have increased to accommodate growth in demand. Therefore, the vested interests of the bullion banks and the central banks overseeing the gold market call for continued suppression of the gold price, so as to avoid a repeat of the crisis faced in September 1999 when the price increased by 30% in only two weeks.
Where are the sellers?
Price suppression can only be a temporary stop-gap, and there has never been sufficient supply to allow the central banks to retrieve their leased gold from the bullion banks. Therefore, Frank Veneroso’s conclusion in 2002 that there had to be existing leases totalling 10-15,000 tonnes is a starting point from which leases and loans have increased. There are two events which will almost certainly have increased this figure dramatically:
- When the price rose to $1900 in September 2011 there was a concerted attempt to suppress the price from further rises. The lesson from the 1999 crisis is that the bullion banks’ geared exposure to unallocated accounts was forcing a crisis upon them; and if they had been forced to cash-settle these accounts the gold price would almost certainly have risen further risking a widespread monetary crisis.
- Through 2012 Asian demand, particularly from China coinciding with continued investor demand for ETFs, was already proving impossible to contain. In February this year the Cyprus bail-in banking crisis warned depositors in the eurozone that all bank deposits over the insured limit risked being confiscated in the event of a wider eurozone banking crisis. This drove many unallocated account holders to seek delivery of physical gold from their banks, forcing ABN-AMRO and Rabobank to suspend all gold deliveries from their unallocated accounts. This was followed by a concerted central and bullion-bank bear raid on the market in early April, driving the price down to trigger stop-loss sales in derivative markets and subsequent liquidation of ETF holdings.
It is widely assumed that the unexpected rise in demand for bullion that resulted from the April take-down was satisfied through ETF sales; but an examination of the quantities involved shows they were insufficient. The table below includes officially reported demand for China and Indiaalone, not taking into account escalating demand from the Chinese diaspora in the Far East, and from elsewhere in Asia.
These figures do not include Chinese and Indian purchases of gold in foreign markets and stored abroad, typically carried out by the rich and very rich. Nor do they include foreign purchases by the Chinese Government and its agencies. Despite these omissions, in 2012 recorded demand from these two countries left the world in a supply deficit of 131 tonnes. Furthermore, ahead of the April smash-down in the first quarter of this year the deficit had jumped to 88 tons or an annualised rate of 352 tonnes.
Demands for delivery by panicking Europeans in the wake of the Cyprus fiasco could only provoke one reaction. On Friday 12th April 400 tonnes of paper gold were dumped on the market in two orders, triggering stop-loss sales and turning market sentiment bearish in the extreme. Western investors started to think about cutting their losses, and they sold down ETF holdings to the tune of 325 tonnes in 2013 by the end of May. However, it triggered record demand among those who looked on gold as insurance against currency and systemic risks.
Later that year in July Ben Bernanke told the Senate Banking Committee he didn’t understand gold. That was probably a reference to the April gold price smash orchestrated by the central banks, and how it unleashed record levels of demand. It was an admission that he thought everyone would follow the new trend acting like portfolio investors, forgetting that if you lower the price of a commodity you merely unleash demand. It was also an important admission of policy failure.
Since those events in April, someone has been supplying the market with significant quantities of gold to keep the price down. We know it is not Arab gold, because I have discovered through interviewing a director of a major Swiss refiner that Arab gold is being recast from LBMA specification bars into one kilo 9999 bars, which has become the new Asian standard. Arab gold does not appear to be being sold, only recast, and anyway it is only a small part of their overall wealth. We also know from our long-term analysis that any European gold bullion is relatively small in quantity and tightly held. There can only be one source for this gold, and that is the central banks.
I discovered that there was a discrepancy in the Bank of England’s custodial gold of up to 1,300 tonnes between the date of its last Annual Report (28th February) and mid-June when a lower figure was given out to the public on the Bank’s website. This fits in well with the additional amount of gold needed to manage the price between those months. Furthermore, the Finnish Central Bank recently admitted that all its gold held at the Bank of England was “invested”, i.e. sold, and further added that the practice “was common for central banks”.
Bearing in mind Veneroso’s conclusion in 2002 that there must be 10,000-15,000 tonnes out on lease and loan from the central banks at that time, one could imagine that this figure has increased significantly. Officially, the signatories of the Central Bank Gold Agreement, plus the US and UK own 20,393 tonnes. A number of other central banks are likely to have been persuaded to “invest” their gold, but this is bound to exclude Russia, China, the Central Asian States, Iran, and Venezuela. Taking these holders out (amounting to about 3,000 tonnes) leaves a balance of 8,401 tonnes for all the rest.If we further assume that half of that has been deposited in London, New York or Zurich and leased out that means the total gold leased and available for leasing since 2002 is about 12,000 tonnes. And once that has gone there is no monetary gold left for the purpose of price suppression.
Could this have disappeared since 2002 at an average rate of 1,000 tonnes per annum? Quite possibly: in which case the central banks are very close to losing all control over the gold price.
In Part 2: The Very Real Danger of a Failure in the Gold Market, I discuss why the Chinese are buying so much gold, and why the Reserve Bank of India is trying to suppress gold demand. I show that gold is substantially undervalued, and why that undervaluation is likely to correct itself spectacularly, precipitating a financial crisis.