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Gold Derivatives: Moving Towards Checkmate


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". . . In sum, the picture at the BIS since 1995 is more lending with less gold. Two points to note: (1) as of March 31, 2002, the BIS had loaned out approximately half the total gold on deposit with it by central banks; and (2) the BIS holds physical gold reserves that exceed its gold liabilities (deposits) by nearly 200 tonnes (about the amount of gold held for its own account). Gold lending on this scale by the central banks themselves would imply a short physical position in excess of 15,000 tonnes, but one against which the bullion banks hold virtually no physical reserves. . ." - article

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Yoshaviah,

 

Great article! I can only agree but am still very wary about what drastic measures the FED will take to prevent the collapse of the Titanic Bullion Bank ? JPM if the POG should rise dramatically. Will we have a new gold rush? Are market forces stronger than the FED?

 

Gold is usually associated as a hedge against inflation, but should perform well as a hoarding vehicle even in a deflationary environment. As credit around the globe deteriorates in quality the only real store of value is gold. Where do you think investors are going to put their hard earned dollars if we experience a massive wave of bankruptcies sweep businesses like bushfires in Australia? We all know the FEED?s motto: INFLATE or DIE! They have said repeatedly that deflation will not be accepted and that inflation can be created by Al?s magic wand. What?s to say that they don?t print too much and we get run-away inflation like in the 70s?

 

The lease rates for gold are normally about 1% to 2%. What is the spread that the bullion banks can make at today?s 41-year low interest rates? I find it hard to see how leasing gold from the central banks is profitable anymore. Could it be that suppressing the spot price is the only way to stay alive? The modern gold banking system requires that lease rates be lower than dollar interest rates. Falling U.S. interest rates have reduced the incentives for producers to engage in forward sales, for fabricators to borrow, or for anyone to borrow gold instead of dollars. Interest rates aren?t likely to rise anytime soon. That would be suicide. On the contrary, don?t be surprised to see them go lower. Surely, if tightness in the gold market cannot be remedied through higher lease rates because higher dollar rates is an acceptable policy choice, the only means left for restoring market balance is higher prices.

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I don't know what will happen on account of this situation. Gold leasing may go the way of the 30 year bond. The title of the article is checkmate, which means the game is over. US lawmakers will have some tough decisions to make about monetary policy. Some type of a new world order is likely to evolve from this, or disorder.

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