Parallel Universe in Gold: Wall Street’s Record Gold Shorts Amidst Rapid Inventory Depletion

If your source of information is only mainstream media, you’d have the impression that gold prices will be headed for the gutters. That's because gold shorts are at a record.

From yesterday’s Bloomberg: (bold mine)

Hedge funds are the least bullish on gold in more than five years as speculation about the pace of money printing by central banks whipsawed prices, driving volatility to a 17-month high.

Money managers cut their net-long position by 9 percent to 35,686 futures and options as of May 21, the lowest since July 2007, U.S. Commodity Futures Trading Commission data show. Holdings of short contracts rose 6.7 percent to a record 79,416. Net-bullish wagers across 18 U.S.-traded commodities slid 2.1 percent, as investors became more bearish on coffee and wheat.

Gold’s 60-day historical volatility touched the highest since December 2011 last week and a gauge of price swings for the SPDR Gold Trust, the biggest bullion-backed exchange-traded fund, surged 73 percent this year.

Record short contracts from SPDR Gold Trust as of May 23, 2013 (Bloomberg’s chart of the Day)

Another record short contract from COMEX gold. According to Zero Hedge on May 24th “showed that the Comex gold short position grew once again to a new all time high of 79,416 shorts”

In short, Wall Street seem to have repositioned for another assault on gold prices.

Despite such record shorts, so far gold prices has held. 

Japan’s twin bond and stock market crash appears to have benefited gold over the short run.

As a side note; yesterday the public holiday in the US in celebration of the Memorial Day is the likely reason for the late update from stockcharts.com.

Anyway, the interim short term rebound of the yen coincides with gold’s immediate rally. Notice too that gold prices seems to have formed a “double bottom”

What really interest me is the growing parallel universe in the gold markets, particularly the record pile up in shorts amidst rapidly dwindling physical inventories

Comex gold via 24 hours gold continues to plunge 

Harvey Organ reports of a sustained hemorrhage in GLD inventories which he calls a “bullion bank run”.

Last week’s withdrawals:

Friday: 2.41 tonnes

Thursday: 1.5 tonnes

Wednesday: 3.01 tonnes

Tuesday: 8.42 tonnes

Monday: 6.91 tonnes

The point is Wall Street appears to be selling what they barely possess.

I have repeatedly been pointing out of the widening disparities between real physical gold and Wall Street paper gold since gold’s flash crash in April. The chart above from the Daily Reckoning represents the Premium chart of silver coins (which I use here as a proxy for gold). 

The next point is that while Wall Street detests gold, main street loves gold. Thus falling inventories amidst record shorts only means of an on going transfer process of possession from Wall Street to the Physical real markets.

Yet this comes in spite of the obstacles thrown by some governments.

For instance, the Indian government today vastly expanded its frontlines on her war on gold. Today, the Indian government banned loans on gold funds.

From the Times of India

The Reserve Bank of India said on Monday banks would not be allowed to give loans against units of gold exchange-traded funds (ETFs) and gold mutual funds.

As these products are backed by bullion and primary gold, the restriction on grant of loan against gold bullion will be applicable to loan against units of gold ETFs and units of gold mutual funds, the RBI said in a statement.

The RBI also said that while giving loan against gold coins sold by banks, the lenders should ensure that the weight of the coins does not exceed 50 grams per customer

So the Indian government’s sustained assault on gold means official transactions (statistical growth) will be reduced as the black markets take over.

Importantly the Indian government’s brazen siege on gold, which has huge religious and cultural attachment on the Indians, will likely spawn violence in overtime. Apparently like almost all governments, the lessons from history are hardly heeded.

Additionally the robust demand in the physical gold market is being compounded by accumulations by emerging market central banks which have reportedly used the recent crash to add to their reserves.

From another Bloomberg report:

Russia and Kazakhstan expanded gold reserves for the seventh straight month in April, when prices tumbled into a bear market, International Monetary Fund data show. The volume for the Shanghai Gold Exchange’s benchmark cash contract jumped to a three-week high on May 24, while assets in gold-backed exchange-traded products dropped for a 15th week last week.

IMF data showed Turkey, Belarus, Azerbaijan and Greece joined Russia and Kazakhstan in adding gold to reserves last month. Mexico and Canada reduced holdings, the data showed. In China, the volume for cash bullion of 99.99 percent purity rose to 22,455 kilograms on May 24 from 12,521 kilograms on May 23, according to data on the Shanghai Gold Exchange’s website.

Bottom line: When the cabal of Wall Street-insolvent governments find themselves out of physical gold to short or when more people discover of the reality of fractional reserve gold trade used by Wall Street, there will be tremendous repercussions. (As an example: billionaire George Soros' reduced exposure to paper gold which was bandied by media as "bearish for gold" was really a redemption from paper to physical gold)

There will be bankruptcies of institutions who fail to meet required deliveries, perhaps this could have been the plight that led to the closure of the Hong Kong Mercantile Exchange. Gold markets will also be emancipated from political interventions and from the collusion to suppress gold prices. Importantly a gold buying panic to cover on such massive shorts.

 

BRICs Mull Bank to Bypass World Bank and IMF

Developing economies represented by the BRICs or Brazil Russia India and China, a popular acronym coined by Goldman Sach analyst Jim O’Neill, have been reported as intending to establish their own multilateral bank to bypass or breakout from the clutches of the influences of the US and the World Bank-IMF cabal. 

From Bloomberg:

The biggest emerging markets are uniting to tackle under-development and currency volatility with plans to set up institutions that encroach on the roles of the World Bank and International Monetary Fund.

The leaders of the so-called BRICS nations -- Brazil, Russia, India, China and South Africa -- are set to approve the establishment of a new development bank during an annual summit that starts today in the eastern South African city of Durban, officials from all five nations say. They will also discuss pooling foreign-currency reserves to ward off balance of payments or currency crises.

“The deepest rationale for the BRICS is almost certainly the creation of new Bretton Woods-type institutions that are inclined toward the developing world,” Martyn Davies, chief executive officer of Johannesburg-based Frontier Advisory, which provides research on emerging markets, said in a phone interview. “There’s a shift in power from the traditional to the emerging world. There is a lot of geo-political concern about this shift in the western world.”

The growing role of emerging markets suggests of a commensurate expansion in geopolitical clout. From the same article:

The BRICS nations, which have combined foreign-currency reserves of $4.4 trillion and account for 43 percent of the world’s population, are seeking greater sway in global finance to match their rising economic power. They have called for an overhaul of management of the World Bank and IMF, which were created in Bretton Woods, New Hampshire, in 1944, and oppose the practice of their respective presidents being drawn from the U.S. and Europe…

Trade within the group surged to $282 billion last year from $27 billion in 2002 and may reach $500 billion by 2015, according to data from Brazil’s government. 

But such plans are still on the drawing board…

While BRICS leaders may approve the creation of a development bank in principle at the summit, there’s still disagreement on how it should be funded and operated.

There is more than meets the eye from this development.

 

The BRICs has been expressing apprehension over central bank 'credit easing policies' adapted or imbued by developed economies led by the US Federal Reserve. 

Russia’s Putin calls Bernanke’s QEs as “hooliganism”. Brazil has blamed the Fed for inciting a currency war, and so with China’s censure of QE. 

And partly in response and also in part to promote advancing her geopolitical role, China has been promoting the yuan, via bilateral trade arrangements to the BRICs and the ASEAN.

BRICs along with other emerging markets have been major buyers of gold

Emerging markets led by the BRICs dominated buying in 2012 according to the Bullion Street:

Central bank buying lifted gold last year and is likely to do so this year as more and more emerging market central banks have become first time buyers in recent years.

Observers said central banks across the globe collectively bought more gold than they had previously over 40 years. The buyers were not the usual central bank suspects among the old world European nations, but emerging economies.

And also in 2011 (chart from Reuters)

And recent events in Cyprus only exhibits of the rapidly deteriorating state of the current central bank based fiat money system. 

As Tim Price at the Sovereign Man aptly commented

It matters because the inept handling of its crisis last week threw one facet of modern banking into sharp relief: if a deposit guarantee is seen to be fraudulent or sufficiently fragile to be easily smashed by politicians, then confidence in banks, and in unbacked paper currency itself, will be vulnerable to an unpredictable run.

So the BRICs dissension over the current system has been prompting them to "diversify" (euphemism for acquiring insurance through gold purchases), as well as, to work on creating an alternative system that would circumvent the US dollar standard, possibly with their own bank. 

Perhaps BRICs officials are becoming more aware of the warning given by the French historian and philosopher François-Marie Arouet, popularly known by his nom de plume Voltaire: Paper money eventually returns to its intrinsic value--zero.

Emerging Market Central Banks Pile Up on Gold at Near Record Pace

Emerging market central banks, who seem to be growing apprehensions over the actions or policies of their developed contemporaries, continue to stockpile on gold at an accelerating pace.

From IBTimes

Central banks continued to purchase gold in the third quarter at near-record pace, driven by emerging market central banks looking to diversify away from traditional reserve currencies amid heightened economic insecurity and continuous unconventional monetary easing, according to World Gold Council data released Thursday.

Gold reserves at central banks increased by 97.6 metric tons during the July-September period, albeit at a slower pace compared with a record year-ago quarter. The official sector accounted for 9 percent of overall gold demand during the third quarter.

“I wouldn’t emphasize the fall of 31 percent [from a year ago],” said Marcus Grubb, managing director for investment at the WGC. “Anything close to 100 tons is very high by the last 15 years.”

The world’s central banks collectively bought 374 tons of gold in the first nine months of this year. That’s higher than last year’s 343 tons for the same period.

“We still think we might beat last year’s total for central banks of 456 tons, though it’s going to depend on Q4,” Grubb said. “[This year will likely come in at] somewhere between 455 tons and 500 tons, which will be another record since the early 1960s.”

As one would note, the combined balance sheet expansions of developed central banks have reached unprecedented scale.

And the price action gold has been highly correlated with the balance sheet expansion of major central banks (chart from Zero hedge)

I may further add that China’s record gold accumulation could have been understated

Notes the Zero Hedge (bold original)

Year-To-Date China has now imported a whopping 582 tons of gold, more than the official holdings of India at 558 tons, and which through November has certainly surpassed the holdings of the Netherlands, and make China's gross imports in just 2012 nominally the equivalent of Top 10 largest sovereign holder of gold.

This way at least we know where China is recycling all that vast trade surplus, which incidentally in October just printed, goalseeked or not, at the highest level - $32 billion - since January of 2009. Too bad China no longer recycles all those excess reserves into US Treasury paper (as we showed previously here).

YTD China gross imports from Hong Kong:

In my view, the recent decline of prices of gold seems inconsistent with the real world events that drives the direction of gold prices. Or perhaps, I may have missed something.

IMF’s Christine Lagarde Inflationist Delusions

From the Deutsche Borse Group: (bold added)

International Monetary Fund Managing Director Christine Lagarde praised monetary stimulus efforts of the world's major central banks Thursday, but said non-monetary authorities in Europe, the United States and elsewhere need to build on those steps to improve growth in a slowing world economy.

Lagarde, at a press conference ahead of the annual meetings of the IMF and World Bank, said she "expects courageous, cooperative action" at the meetings.

She also aimed criticism at China, whose top economic policymakers declined to attend the meetings because of territorial disputes with host Japan. China needs to be more of a global partner and increase demand for foreign products, not just concentrate on exporting its own products, she said, after pointedly noting its officials' absence.

Lagarde vowed the IMF "will spare no time and effort" to help Greece, but said the objective is to ultimately free that country from dependence on outside assistance.

Noting that the IMF has downgraded its projections of global growth, Lagarde said, "we are not expecting a very strong recovery." Indeed, she called high unemployment rates in advanced countries "terrifying and unacceptable."

The Federal Reserve, the European Central Bank and the Bank of Japan have all adopted additional easing measures, and she praised their moves, but said that by themselves those actions are "not sufficient." 

The "momentum" imparted by monetary easing "should be seized as an opportunity," she said.

Ms, Lagarde’s “momentum” remarks essentially echoes former President Obama’s chief of staff and current Mayor of Chicago Emanuel Rahm’s infamous sly quote on establishing political controls over society…

You never let a serious crisis go to waste. And what I mean by that it's an opportunity to do things you think you could not do before.

And emerging market central banks have fawningly embraced Ms. Lagarde’s recommendations.

This from Reuters:

Emerging market central banks have clearly taken to heart the recent IMF warning that there is “an alarmingly high risk”  of a deeper global growth slump.

Two central banks have cut interest rates in the past 24 hours: Brazil  extended its year-long policy easing campaign with a quarter point cut to bring interest rates to a record low 7.25 percent and the Bank of Korea (BoK) also delivered a 25 basis point cut to 2.75 percent.  All eyes now are on Singapore which is expected to ease monetary policy on Friday while Turkey could do so next week and a Polish rate cut is looking a foregone conclusion for November.

South Africa, Hungary, Colombia, China and Turkey have eased policy in recent months while India has cut bank reserve ratios to spur lending.

The BoK’s explanation for its move shows how alarmed policymakers are becoming by the gloom  all around them. Its decision did not surprise markets but its (extremely dovish) post-meeting rhetoric did.  The bank said both exports and domestic demand were “lacklustre”.  (A change from July when it admitted exports were flagging but said domestic demand was resilient) But consumption has clearly failed to pick up after July’s surprise rate cut — retail sales disappointed even during September’s festival season.  BoK clearly expects things to get worse: it noted that ” a cut now is better than later to help the economy”.

Ms. Lagarde’s comments, which gives emphasis on the short term at greater costs of the future, can be summed up into two types of casuistry: 

The delusion of central planning: 

From the great Ludwig von Mises (Omnipotent Government),

It is a delusion to believe that planning and free enterprise can be reconciled. No compromise is possible between the two methods. Where the various enterprises are free to decide what to produce and how, there is capitalism. Where, on the other hand, the government authorities do the directing, there is socialist planning. Then the various firms are no longer capitalist enterprises; they are subordinate state organs bound to obey orders. The former en­trepreneur becomes a shop manager like the Betriebsführer in Nazi Germany.

As well as the delusions of the elixir of inflationism or perhaps a stealth scheme being employed by the cabal of central bankers to demolish what remains of laissez faire capitalism 

From the deity or icon of inflationism, Lord John Maynard Keynes (PBS.org) [bold added]

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

Inflationists are either aware of the evils their policies create but nevertheless insidiously impose them for covert political reasons, or have been too blinded by their possession of power.

Brazil and China Governments Slam the FED’s QE Forever

The US Federal Reserve’s QE ‘forever’ hasn’t been welcomed by some of the major emerging market central banking peers.

Brazil’s Finance Minister Guido Mantega, according to a Nasdaq/ Dow Jones report, accuses the Fed’s third-round of quantitative easing as "stimulating currency wars”.  Mr. Mantega, thus, will “continue to take whatever action is necessary to prevent speculative flows from flooding into the country” through currency interventions that will prevent Brazil’s currency, the real, from appreciating.

Brazil’s central bank, according to Mr. Mantega, “is going to buy more reserves” through the “use of the so-called reverse swap auctions that remove U.S. dollar-hedging contracts from the futures market”

Mr. Mantega will also adopt other measures including higher taxes on investment inflows.

China’s head of the Central Bank also rebuked the Fed's quantitative easing policies.

According to Sydney Morning Herald 

THE head of China's central bank, Zhou Xiaochuan, says quantitative easing is not working and more targeted measures are required to channel credit into areas where they are needed the most.

Mr Zhou made the call in a speech delivered in April but not published on the website of the People's Bank of China until this week, as the chairman of the US Federal Reserve, Ben Bernanke, announced a new round of quantitative easing - an injection of cheap credit into the financial sector - aimed at resuscitating the sluggish US economy.

Mr Zhou criticised the flood of cheap money as an inflexible and orthodox approach, although he stopped short of naming the Fed. Chinese authorities have long expressed their displeasure at US quantitative easing policy measures, which have eroded the value of the Chinese holding of US dollar-denominated assets such as Treasury bonds. Beijing is the largest holder of US government debts.

In reality all these signify as the proverbial pot calling the kettle black.

Both Chinese Central Bank and Brazil’s central bank have engaged in the same policies of waging war against interest rates although through more subtle means.

For instance I pointed out last week of the leakage from the sterilization measures by Brazil central bank’s foreign reserve accumulation have led to a bank credit boom which a Financial Times analyst sees as credit (QE) driven economic boom.

Chart from Mao Money, Mao Problems

And given the huge foreign reserves of $3.3 trillion during the first quarter held by China, the same policy dynamic may have been implemented by the People's Bank of China (PBoC). Evidence says that the PBoC's balance sheet continues to swell.

The world of politics is like a game of the hot potato, where some entity would have to take the blame to cover for one’s malfeasance.

Soros, Paulson and Emerging Market Central Banks Ramp Up Gold Purchases: Calm Before the Storm?

Speaking of demonstrated preference or actual choice revealed through actions taken, billionaire fund managers-investors George Soros and John Paulson have reportedly been escalating on their gold positions.

From the Bloomberg,

Billionaire investors George Soros and John Paulson increased their stakes in the biggest exchange- traded fund backed by gold as prices posted the largest quarterly drop since 2008.

Soros Fund Management more than doubled its investment in the SPDR Gold Trust to 884,400 shares as of June 30, compared with three months earlier, a U.S. Securities and Exchange Commission filing for second-quarter holdings showed yesterday. Paulson & Co. increased its holdings by 26 percent to 21.8 million shares…

Paulson, 56, who became a billionaire in 2007 by betting against the U.S. subprime mortgage market, lost 23 percent in his Gold Fund through July as lower bullion prices and slumping mining stocks contributed to declines.

Holdings in the SPDR Gold Trust are Paulson’s largest position. He also bought shares of NovaGold Resources Inc. (NG) last quarter and sold other stocks, leaving his $21 billion hedge fund with more than 44 percent of its U.S. traded equities tied to bullion.

Paulson’s U.S.-listed holdings peaked at $34.3 billion at the end of March 2011, with about $7.7 billion of that amount, or 23 percent, invested in gold related stocks. He had 33 percent of his U.S. stock holdings in gold-related securities at the end of the first quarter and 25 percent a year ago.

What has piqued my interests me has not just been Mr. Paulson or Mr. Soros’ gold buying spree, but of the apparent shifting made by Mr. Soros, who seem to be emptying his stock market exposure, particularly on the financials, and repositioning them all into gold ETFs.

Analyst Mac Slavo at the Shtfplan.com notes,

Soros, who manages funds through various accounts in the US and the Cayman Islands, has reportedly unloaded over one million shares of stock in financial companies and banks that include Citigroup (420,000 shares), JP Morgan (701,400 shares) and Goldman Sachs (120,000 shares). The total value of the stock sales amounts to nearly $50 million.

What’s equally as interesting as his sale of major financials is where Soros has shifted his money. At the same time he was selling bank stocks, he was acquiring some 884,000 shares (approx. $130 million) of Gold via the SPDR Gold Trust.

When a major global player with direct ties to the White House, Wall Street, and the banking system starts off-loading stocks and starts stacking gold, it suggests a very serious market move is set to happen.

And this hasn’t been just about Messrs. Soros and Paulson; emerging market central banks, including the Philippines, the ultimate insiders, seem to be joining the ranks of gold hoarders.

The Mineweb reports,

perhaps one of the most interesting findings of this latest analysis is that gold buying by the world's Central Banks hit a new record of 157.5 tonnes , more than double the level of Q2 2011 and accounting for 16% of overall global demand. This, by our reckoning is also around 22.5% of total gold supply over the period extrapolating from the WGC's own annual figures for 2011. Central banks that significantly bolstered their holdings during the quarter included the National Bank of Kazakhstan, and the central banks of the Philippines, Russia and Ukraine.

The irony of this is that all these insider buying comes amidst dampened demand for gold in terms of investment and jewelry.

Chart from Forexpros.com

Yet part of the current slowdown in the conventional demand for gold can be traced to the ongoing weakness in the global economy.

A sign of this can be seen in Lisbon Portugal where residents may have already depleted their jewelries for cash.

From Bloomberg,

In Portugal, the historical home of some of Europe’s biggest gold reserves, the number of jewelry stores, which include cash-for-gold shops, increased 29 percent in 2011 from a year earlier, a study commissioned by parliament found. In the first quarter, an average of two new stores opened every day, the report said. Now some of them are closing.

“Business has gone from great to terrible in a matter of months,” Luis Almeida, whose family has owned a gold store near Lisbon’s Rossio Square for more than 40 years, said in an interview. “The sad truth is that most of my clients have already sold all of their gold rings.”

Selling gold for cash exhibits that gold barely functions as hedges against deflation.

Technically speaking, gold prices has been in a two year consolidation phase.

A seeming trend-continuing pennant or wedge-neutral formation could suggest that a breakout of the 1,650 resistance level could incite a test on the previous highs at the 1900 level.

Nonetheless, could (White house insider) Mr. Soros, Mr. Paulson and emerging market central bankers (ultimate insiders), such as Bangko Sentral ng Pilipinas’ Amando Tetangco, Jr. be anticipating something big soon?

Does the current environment represent proverbial calm before the storm?

China’s Middle Class Support Demand for Gold

From Mineweb.com

The rise of China's middle-class is helping support demand for gold in the country. China, the largest producer of gold, is set to become the biggest consumer of the metal in 2012, with a significant proportion of luxury purchases in China veering towards gold accessories, bought by middle-class aspirational consumers.

By 2020, 25% of China's population is expected to be middle-class, creating great consumption demand. Diamond studded luxury items and gold watches are seeing `blow-out like demand' from wealthy shoppers in China, who are snapping up these expensive accessories to make a fashion statement, give as business gifts or just collect.

What also augurs well this year is that middle-class wealth is expected to spread to 600 million people in third-tier Chinese cities, with a sizeable percentage investing in gold or buying gold jewellery.

For a country whose gold production in the first four months of 2012 reached 109.6 tonnes, up 6.13% from the same period last year, passion for the yellow metal has scaled new heights.

Total retail sales of gold, silver and jewellery in China amounted to $2.82 billion in May, up 18.2% compared to the same period last year, according to the National Bureau of Statistics of China. Accumulative retail sales of the segment in the first five months of 2012 reached $14.6 billion, up 16.1% compared to the same period last year.

In May, the country's overall retail sales of consumer goods including gold, silver and jewellery totalled $262 billion, up 13.8% year-on-year at nominal growth rates. The real growth rate was 11%, data showed.

The jewellery sector in China has become a hot spot fuelled by surging investment demand for gold and precious stones. Jewellery retailers registered a 42% increase in sales last year, driven by consumers' taste for gold and gemstone-encrusted jewellery. Reports indicate that these jewellers are looking beyond traditional markets, eager to dig into the pockets of the newly rich middle-class in smaller cities.

For some time now, the country's growing middle-class has been pursuing a quality of lifestyle that includes appreciation for exquisite fine jewellery. And, retail jewellery chains are expanding to smaller cities and districts to keep up with demand.

Statists have always made the point that paper money has been the popular choice. But appeal to popularity premised on free lunch or Santa Claus politics cannot and will not supplant economic reality.

Today’s crisis have been manifestations of the unraveling of such unsustainable institutional arrangements.

Statists also say that people will have difficulty over adjusting or accepting to the return of gold as money. Maybe for the people of the West this may hold some substance. The intellectual elite may have successfully indoctrinated upon the public to accept the ideology that gold is a “barbaric metal” and where free lunch politics have promoted and embedded to their lifestyles the creed that “debt based spending is the path to prosperity” through government’s cartelized banking system.

But this certainly is far from reality for most of Asia such as China, India, Malaysia or Vietnam. The rate of growth of gold’s demand by China’s middle class looks like a testament to these.

In other words, should a global currency crisis emerge, then Asians are likely to reform their respective monetary system faster than that of the West. But that would be just a guess.

Yet it is unclear if prospective monetary reforms will include gold. But chances are increasing that gold may be part of it.

Global central banks have been accumulating gold at a faster rate led by Asia.

From Reuters.com

The Bank for International Settlements (BIS) noted in its June 2012 Quarterly Review that "central bank balance sheets in emerging Asia expanded rapidly over the past decade because of the unprecedented rise in foreign reserve assets" Reserves rose from $1.1 trillion to $6.4 trillion in 2011.

This quote, which I earlier posted, attributed to Janos Feteke (who I think was the deputy governor of the National Bank of Hungary) looks apropos to the surging demand of gold from China’s middle class and to the micro versus macro debate on the return of the gold standard,

There are about three hundred economists in the world who are against gold, and they think that gold is a barbarous relic - and they might be right. Unfortunately, there are three billion inhabitants of the world who believe in gold.

What truly matters is to get monetary system out of government's hands or to depoliticize or denationalize (Hayek) money and allow for competition in banking (free banking), where gold standard may or may not be the accepted standard. Nevertheless sound money based on free markets.

Central Banks of the Philippines and Emerging Markets Ramp Up Gold Purchases

Gold prices may be falling but official or non-market entities seem to using this opportunity to stack up on gold reserves.

From Mineweb.com

The latest official Central Bank gold holding figures from the IMF confirm that Central Banks around the world are continuing to buy gold - some in pretty large quantities which should be yet another stabilising factor for the gold price - and if the trend continues suggests that the CBs will buy even more this year than last - and that's only the ones which let the world know exactly what their gold reserves are!

The latest figures not only show some substantial gold buying in April, but also a big lift in gold purchases by The Philippines which actually date back to March, but were slow in being notified to the IMF. The Phillipines' March gold purchases amounted to no less than 1.033 million ounces - 32 tonnes - of the yellow metal - the biggest volume since Mexico bought around 78 tonnes a little over a year ago - and increased tet country's gold reserves by almost 20%.

The Phillippines was not the only laggard in reporting increased gold reserves though. Tiny Sri Lanka raised its reserves by an even greater 39%, but dating back to January, with a rise of 2.177 tonnes to 7.807 tonnes - obviously far less significant in the global picture but yet another indication of the perceived significance of gold in particular in the Asian economies.

The most significant reported gold purchases in April itself included 29.7 tonnes by Turkey (a 14% increase in its reserves, but this is thought to have largely been due to its policy of acceptance of gold as collateral from commercial banks), 2.92 tonnes by Mexico, 2.02 tonnes by Kazakhstan, and 1.4 tonnes by the Ukraine.

The continued buying by Central Banks does continue to indicate an underlying unease about the sovereign debt situation and its impact on the value of some key reserve currencies- not least the dollar and the euro.

In an email to Mineweb respected New York gold analyst, Jeff Nichols, commented "The lastest IMF data on central bank gold reserves was just released earlier today -- showing gold purchases by Mexico, Kazakhstan, Ukraine, Russia, and the Philippines. Undoubtedly, China and perhaps a few other countries bought gold but did not report their purchases to the IMF." This reiterates the widespread belief that some countries - of which China is thought to be the major entity - for political reasons do not report their total holdings to the IMF, but hold new gold purchases in accounts that are not reported until it is considered politically expedient to do so. Last time China reported an increase in reserves was in 2009.

Since then there has been much speculation that China could be building up its reserves at a rate of four or five hundred tonnes a year or more given the level of domestic gold production and the big surge in imports seen.

Add to this the report of Russia’s recent gold purchases…

From Goldcore/goldseek.com

Today, the deputy chairman of Russia's central bank, Sergey Shvetsov, said that the Bank of Russia plans to keep buying gold on the domestic market in order to diversify their foreign exchange reserves.

"Last year we bought about 100 tonnes. This year it will be less but still a considerable figure," Shvetsov told Reuters on the sidelines of a financial conference in Milan

Evidently we are witnessing emerging markets take up insurance against rampant inflationist policies of the West.

If the Philippine BSP should continue with its actions of gold hoarding, then this should be very bullish for the peso over the long term.

As a side note, I am not, at present, bullish the peso or local assets in a Risk OFF environment. Since I think we are in a state of limbo, I am basically neutral but with a slight bias on the downside, but am waiting for confirmatory evidences of either a bear market or the return of the bull market to develop.

Oh by the way, given the recent moves to ban coin "hoarding", the legislative branch of the Philippine government should also consider banning the BSP's hoarding of physical gold too, as this would mean "shortage" of gold in circulation around the world. That's how logic works in politics. Pffft.

The Implication of Emerging Market Central Banks’ Buying of Gold

The revolt against the US dollar regime seems underway.

The Bloomberg reports, (bold highlights mine)

Central banks that were net sellers of gold a decade ago are buying the precious metal to reduce their reliance on the dollar as a reserve currency, signaling demand that may extend a record rally in prices....

In 2010, central banks became net buyers for the first time in two decades, adding 87 metric tons in official-sector purchases by countries including Bolivia, Sri Lanka and Mauritius, according to World Gold Council data. China, with more than $3 trillion in foreign-currency reserves, plans to set up new funds to invest in precious metals, Century Weekly reported this week. Russia purchased 8 tons of gold in the first quarter...

China, which has just 1.6 percent of its reserves in gold, may invest more than $1 trillion in bullion, Pento said. “China wants to be an international player, and they need to own more gold than they currently have.”...

As of April, China was the sixth-largest official holder of gold, with 1,054.1 tons, according to World Gold Council estimates. The U.S. has the most, with 8,133.5 tons, or 74.8 percent of the nation’s currency reserves, council data show.

Central-bank buying may have the same impact on gold as the introduction of exchange-traded funds, Cuggino said. Prices have more than tripled since the SPDR Gold Trust, the biggest ETF backed by bullion, was introduced in November 2004.

Central banks in emerging markets may aim to hold 2 percent to 8 percent of their foreign-currency reserves in gold, Francisco Blanch, the head of commodities research at Bank of America Merrill Lynch in New York, said in an interview.

If emerging market central banks sustain the shift of their dollar reserve stash for gold or other metals, then this means that US government will have to increasingly rely on their resident savings or on the US Federal Reserve to finance their fiscal deficits.

Otherwise, the US economy faces the risk of higher interest rates.

So far, while the nominal amount of US treasuries debt held by foreign central banks continue to climb; the annual rate of change has been falling since 2009. (chart courtesy of yardeni.com)

BRICs and East Asia are major holders ‘financiers’ of long term US debts. (charts above and below from Wikipedia)

Yet about 28% of US debts has been owned by foreigners. The gist of these debts has been held by the Federal Reserve and intragovernmental Holdings whose trend has risen steadily since 1997.

Higher interest rates go against the implied guiding dogma of the incumbent authorities of the US Federal Reserve which has been anchored on low interest rates (ZIRP) to perpetuate permanently ‘quasi booms’.

Also higher interest rates can severely affect the balance sheets of the overleveraged banking system which may again result to another turmoil.

According to Wikipedia,

The U.S. banking sector's short-term liabilities as of October 11, 2008 are 15% of the GDP of the United States or 43% of its national debt, and the average bank leverage ratio (assets divided by net worth) is 12 to 1.

And given that the US government has spent and exposed her taxpayers to trillions of dollars worth to protect the banking industry, I expect the Federal Reserve to see the interests of the banking sector as a continuing political priority.

So going by the elimination process, I see the conditionality as:

-if emerging market central banks continue to reduce their US dollar exposure

-if savings of US residents would turn out to be inadequate to finance government deficits

-given the path dependency and political interests (priorities) of US government and

-the US government’s refusal to pare down spending

then the US Fed seems backed into a corner with further QEs (this may not happen immediately right after QE 2.0 in June, but any signs of weakness or volatility will likely prompt the FED for the next set of QE)

And more QEs extrapolate to higher gold prices, lower dollar, possibly higher equity prices (depending on the degree of the impact of CPI inflation) and more CPI inflation...all these signifying a feedback mechanism of the inflation cycle until CPI inflation turns into a nightmare.

Alternatively, the US can cut government spending and reduce debt, but that would be an anathema or a seeming taboo for politicians.