Purpose of Holding Gold

Most central banks hold their nation’s gold in the vaults of the world’s leading financial centers’ central bank vaults. These include New York, London, and Canada among others. In a peaceful, cooperative world, this is sensible as one of the prime purposes of central banks holding gold is to cover the nation’s international trade payments when their own currency becomes unacceptable and their reserves of foreign exchange are depleted. By positioning the gold outside the country, it’s instantly accessible for payments or guarantees of payments.

Dangers of a Nation Holding Gold in Another Nation’s Central Bank

In the last week we have heard the announcement that Iran has (according to them) 907 tonnes of gold. The developed world has just outlawed Iran dealing in gold and silver (there are other places, where if they wished to do so they will be able to trade). With their gold inside Iran, it is outside the reach of the developed world though. If they had held their gold in the world’s main, developed world vaults that would have been frozen along with Iran’s other overseas assets. We may not agree to Iran’s politics and attitudes, but there is a lesson to be learned here.

Ownership implies the freedom to do what you want with an asset. In this case we are talking about a nation’s assets. The handling of Iran’s assets by freezing of their assets shows that other nations can interfere with that freedom. Governments feel free to impose restraints on other people’s assets within their jurisdiction. It is this concept of a right to restrain the rights of ownership that will prove a growing issue.

With the world changing from an under-developed world with a developed world to an emerging world drawing down power and wealth from the developed world, there are many changes taking place which will lower the levels of international cooperation in the days ahead as political, religious, monetary and economic pressures rise.

One nation that has foreseen these pressures coming is Venezuela. Their 160 tonnes of gold was held in Canada, the U.S. and European vaults and out of their full control. Their policies –including the nationalization of gold mining and export—have proved unpopular in the developed world too. With Venezuela being an oil exporter primarily, the unpopular President (outside the nation) felt it prudent to ship his nation’s gold back home. The process began a few months ago.

Venezuela’s Gold Comes Home

Venezuela has now succeeded in bringing its 160 tonnes of gold from the developed world’s central bank vaults (i.e. Canada, U.S. and Europe). There’s no doubt that such a move does secure the nation’s monetary sovereignty. Now, Venezuela’s gold cannot be subject to the political wishes of the U.S., Canadian or European governments.

Furthermore, there’s a potential 3,000 tonnes of gold under the ground in Venezuela and the likelihood that the government will take that into their vaults over the time it takes to mine it. They will then be in a position to take the U.S. dollars they receive for their oil and pay their miners for the gold, so diversifying their reserves away from currencies and into gold. If they do that, then this is one more source of supply that will be removed from the gold market.

Whatever the nation’s politics, it is a central banker’s duty to do all in its power to protect its nation’s gold and foreign exchange reserves in terms of control and value. With dollar hegemony, a great deal of that power remains in the hands of the issuer of that currency. As sovereignty issues grow, it is becoming incumbent on central bankers to do more to protect nation’s reserves. The most vulnerable nations are those whose politics differ drastically from the developed world or those whose international trading is not dependent on the major developed world. After all, if you are a kind of economic colony of a major nation it will exercise its influence far more effectively through other routes.

The conclusion that best suits vulnerable nations logically is to hold as much of its gold at home. Its dollars have to be held in New York and its euros in Europe –something they can do little about. But a nation like Venezuela with its reserves of gold at home and a ‘natural’ diversifier in the gold under the ground, is acting in that nation’s interests in building up its gold reserves at home.

China Following the Same Path

China has outlawed the export of gold and vigorously broadened the number of banking import licenses for gold. The resulting flows of gold in with nothing coming out, is leading to the total national stock of gold in China rising fast.

• Last year saw around 360.96 tonnes of gold produced there with the government encouraging this growth of local production. But this figure may be a heavy underestimation as scrap and non-China Gold Association member’s production is not included in that number

   

• 490 tonnes of gold came into China through Hong Kong with more imports possible through other routes, not included in this total.

   

• At the start of 2012, demand for gold during the lunar New Year jumped over 50% pointing to much higher imports in 2012. These could lead to a jump of reported imports of 750 tonnes in 2012

China is preparing Shanghai as the center for Yuan trading and as their leading financial center. Hong Kong is the current, financial center and has huge modern gold vaults already. We have issued an article in our newsletter [www.GoldForecaster.com] giving our views on China growing to a second or first gold market hub in time. But we repeat that NO gold is allowed to leave the country! With privately held gold open to confiscation at some point in time, we consider the total gold held inside China as part of that nation’s available stock of gold in their reserves.

Part II will cover:

·        U.S. and U.K. citizens holding their gold in foreign vaults?

·        Switzerland

·        Gold held in a Swiss bank

·        Gold held in a Private Vault in Switzerland

·        What are the remaining dangers?

The Solution & Pending Announcement!

We’ve prepared a series of articles on this subject for publication over the next few weeks. To ensure you get these subscribe through www.GoldForecaster.com.

Nobody really expects Greece to default on its debt and leave the eurozone. But Greek leaders do seem to be squeezing as much drama as possible from the bailout process:

Euro zone loses patience with Greece
(Reuters) – Euro zone finance ministers told Greece on Saturday it could not go ahead with an agreed deal to restructure privately-held debt until it guaranteed it would implement reforms needed to secure a second financing package from the euro zone and the IMF.

Euro zone ministers had hoped to meet on Monday to finalize the second Greek bailout, which has to be in place by mid-March if Athens is to avoid a chaotic default. But the meeting was postponed because of Greek reluctance to commit to reforms.

Instead, the ministers held a conference call on Saturday to take stock of progress on the second financing package, which euro zone leaders set at 130 billion euros back in October.

“There was a very clear message that was conveyed from all participants of the teleconference … to the Greeks that enough is enough,” one euro zone official said. “There is a great sense of frustration that they are dragging their feet.

“They should get their act together and start talking honestly, decisively and speedily with the Troika on the aspects of the programme that remain to be finalized – on fiscal and labor market reforms,” the official said.

The Troika are the representatives of the European Commission, the European Central Bank and the International Monetary Fund, who have prepared a Greek debt sustainability analysis on which the second financing programme will be based. “The main issue is the lack of reform, or prior action, in Greece,” a second euro zone official said.

Euro zone ministers were also dissatisfied with Greek Finance Minister Evangelos Venizelos because they believed the minister was paying more attention to his position within his party ahead of the April elections, than to talks about reforms.

“There is a great sense of frustration with Minister Venizelos, who is very hard to get hold of because he is very busy campaigning for the leadership of (the Greek party) PASOK, so he is not available to meet with Troika members,” the first official said.

“He is preparing his own political future, rather than the future of his country. People are seriously disgruntled about that and have conveyed this very clearly to him this afternoon,” the official said.

Recordings of these conference calls would be instant YouTube hits.

And with all the threats flying around you’d think that Greece would have long since been cowed into submission and forced to accept German control over its budget in return for credit it needs to cover its short-term debts. That they’re holding out implies that they’re really not that worried and believe they can get better terms, which in this case means smaller cuts in domestic spending, less of a decline in local wages, and more cash from the ECB. They’re probably right.

Over the past few months major brokerage houses have been churning out reports on what would happen if Greece or another eurozone country leaves the currency union and reverts to its old money. And without exception the predictions are apocalyptic. Here’s a general scenario:

Greece can’t come to terms with the IMF, ECB, Germany, et al, and announces that it’s leaving the euro and returning to the drachma. Instantly, everyone with a Greek bank account empties it and moves the proceeds out of the country. Greek banks close, oil imports stop, the national health ministry runs out of pharmaceuticals, etc., etc. Chaos leads to depression and, probably, to some sort of authoritarian government.

So far, this sounds like Greece’s problem, and a damn good reason to accept a bailout on pretty much any terms. But what happens next changes everything. The minute Greece announces that it’s leaving, investors instantly start looking around for the next domino, decide that pretty much all the PIIGS countries qualify, and pull money out of their banks, causing them to collapse and sending those economies into free-fall.

Then, since French and German banks have lent hundreds of billions of euros to those now-bankrupt countries, and are on the hook for untold trillions of credit default and currency swaps, they fail as well. The entire continent is plunged into chaos, with no obvious exit. The eurozone dissolves, all because one tiny country decides to leave.

Greece, of course, has read these reports and understands its own power — and knows that Europe’s leaders understand it too. So the Greek finance minister spending his time campaigning rather than waiting by the phone for yet another conference call should be seen as a classic bargaining tactic. Like George Bush Sr. going on vacation as the first Gulf War ramped up, he’s saying that he’s not worried, that this is the other guy’s problem and that by the time he gets back to the office the other guy should have some nice answers waiting.

Given the stakes, expect a deal more to Greece’s liking next week.

Enter Portugal
But of course a Greek deal is the beginning, not the end. Before the signatures dry, Portugal will demand the same bailout, using the same end-of-the-world scenario as its bargaining chip. It will get what it wants, and then Ireland will step up to the table.

In the end, so runs the analyst consensus, the only alternative will be a “fiscal union” where Germany and a handful of other core countries assume the debts of the periphery, in the same way that Washington absorbed Fannie Mae and Freddie Mac’s $5 trillion of mortgage paper. The ECB meanwhile, will have no choice but to finance the whole mess by buying ten or so trillion euros of low-grade paper with newly-created currency.

The euro will fall versus the dollar, yen and yuan, which will be great for German exports and Greek tourism, but bad for the eurozone’s trading partners. They’ll respond with inflation of their own, and so on, as the currency war really gets going. In this scenario it’s hard to see an upside limit for gold and silver.

DollarCollapse.com is managed by John Rubino, co-author, with GoldMoney’s James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street (Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.