Belgian Central Bank ‘Lends’ 41% of Gold Reserves, Growing Role of Gold as Money

Tyler Durden of Zero Hedge points to CLSA’s Chris Wood’s report noting that the Belgian Central Bank has lent out 41% of its gold reserves and that gold and silver coins as money have been making strides in the US.

From CLSA (via Zero Hedge) [bold emphasis mine]

Belgian central bank Vice Governor Francoise Masai reportedly told shareholders that about 41% of the central bank’s 216 metric tons of gold was on loan at the end of last year, and that the central bank earned a 0.3% return on its loans of physical gold to commercial banks last year. There are two points to note about this. The first is the puny annualised return earned on the gold leasing market. The second is the significant percentage of the central bank’s gold lent out. This is a reminder that the paper gold market is significantly larger than the physical market. Just like a run on a bank in a fractional banking system, GREED & fear suspects it will be very hard to settle all the paper claims to gold physically in a real scramble for the metal. This is why in a parabolic spike physical gold is likely to trade at a significant premium to paper claims. On this point GREED & fear should make it clear that the 25% of the global portfolio for a US dollar-denominated pension fund allocated to gold bullion is in physical gold.

Meanwhile, it is an interesting note that more than a dozen state legislators in America have now seen bills introduced that would make gold and silver coins legal tender in the respective states. Thus, gold and silver coins minted by the US government are now considered legal tender in Utah. Much of this activism is coming from Tea Party supporters. Financial sophisticates will scoff. But to GREED & fear it is a healthy sign that some people in America are thinking. For more on this popular movement to return to the monetary role of gold read an article published last week by the Los Angeles Times (“Pushing for a return to the gold standard”, 3 June 2011 by Nathaniel Popper).

Gold leasing is almost equivalent to short sales.

As John Hathaway of Tocqueville Asset Management L.P explains,

The gold that is being borrowed from central banks [and private sources] is being sold into the physical market where it is being consumed as jewelry. It is no longer in liquid, deliverable form. Gold loans will not be as easy to repay as the borrowed yen. The shorts are facing an epic squeeze.

Aside from Belgium, I would suspect that many of central banks of major economies could have also lent out (shorted) part of their gold reserves.

Aside from the lease-short sale dynamics, the emerging fissures in the paper money system will likely drive many EM economies as major buyers of gold. Chart above from IBTimes

And that’s what we seem to be seeing today.

From gold.org May report,

As of the IMF’s May release of its International Financial Statistics, several countries have reported additional purchases of gold. Notably, Mexico reported to the IMF that it acquired 14.8 and 78.5 tonnes of gold in February and March, respectively. This was a significant increase in its gold holdings, raising Mexico’s position in the table to the 34th largest holder of gold with 100.2 tonnes. In its press release, the Banco de Mexico indicated that its acquisition of gold was in line with prudent diversification principles of reserves management. Indeed, Banco de Mexico’s acquisition of gold was likely motivated by a need to diversify its rapidly expanding foreign reserves, which increased from approximately $75 billion to $120 billion between Q1 2007 and Q1 2011.

Additionally, Thailand also reported an increase in its gold reserves of 9.3 tonnes in March, raising its total gold holdings to 108.9 tonnes. This follows an acquisition of 15 tonnes in July of last year. Finally, Russia continues to regularly add gold to its reserves, adding 22.5 tonnes between January and March. Russia is the 8th largest holder of gold.

The latest statistics show no significant selling by the signatory central banks in Year 2 of the third Central Bank Gold Agreement (CBGA3).

So these incentives should continue to drive the actions of the central banks, which should account for a significant force for higher gold prices.

Also as previously explained, rising gold prices has gradually been changing the outlook of the public; once an outcast which economic ideologues disparaged as the ‘Barbaric relic’, now momentum favors more acceptance of gold and silver as money—as it had been for most of human history.

This time won’t be different.