“We have recently seen one of the greatest interventions in the history of the gold market by Western central banks. Gold is one of the world’s least transparent markets, and misleading central bank accounting keeps it that way. But sometimes, by looking at different pieces of the puzzle, a picture starts emerging. So I have put together some of the pieces together….
“For example, there have been bottlenecks in moving metal, which is clearly flowing from West to East. Supply from mining in the West, excluding Russia and China which do not export their production, is about 160 tons per month. In addition, there may be another 50-to-80 tons per month of gold already in the above ground stock which moves around as a result of normal flows among countries and changing demand for different gold products.
But I estimate that recently over 500 tons per month have been moving around. This has had the effect of creating some transportation bottlenecks. The transport providers have not been able to cope with this remarkable development. Similarly, the refiners have not been able to cope with the historic level of demand by fabricating the metal needed to meet the frantic buying, even though they are operating 24/7. So we have to ask ourselves, where is all this metal coming from?
We are talking here about physical metal, Eric, and not just selling paper-gold with futures and other derivatives. The reality is that there has simply been too much metal moving from West to East — far beyond what has been dishoarded from ETFs and other visible sources like the Comex vaults. Much of this physical metal had to come from central bank vaults. That point is clear. But an important question still remains unanswered.
Even though Western central banks killed the gold price during the last couple of months with their dishoarding, we do not yet know precisely why they killed the gold price. What did the central planners want to accomplish by dishoarding so much metal in such a short period of time?
Of course we know the obvious reasons, like trying to keep people in national currencies, and the various risks these currencies involve, particularly the risk of keeping money on deposit in banks. Reasons such as these have been in play for more than a decade as the central planners have attempted to hold together a financial system that is no longer sustainable because of insolvent banks, unmanageable levels of debt and governments that cannot control their spending. These reasons have been well documented by the various analysts whose work has been published at places such as GATA and King World News.
But we have never before seen such a massive amount of dishoarding from central banks in such a short period of time. Given that the central bankers all recognize the importance of gold as a key monetary asset on their balance sheet and one they only sell gold reluctantly, why did they do it? Why the selling frenzy? And why right now?
Here is one possibility: It was to provide liquidity to ailing banks in Italy, or perhaps Spain. This is difficult to prove because central banks still do not prepare their accounts according to generally accepted accounting principles. But look at it this way, every 100 tons of gold is $4 billion of liquidity. So if central banks sold 500 tons, and I think at least this much was dishoarded by them recently, it is $20 billion, which is enough to provide a big lifeline to some insolvent banks.
It works like this. The banks borrow gold from the central bank, which they then sell for dollars/euros. The transaction is hidden from view because of central bank accounting, and the gold debt on the borrowing bank’s balance sheet is hidden among its total liabilities. The added benefit is that its gold liability diminishes as the gold price falls, making the bank appear even more solvent. Of course the bad assets remain, so this scheme is just a fig leaf for the insolvent banks to buy time.
However, there is an irony here for holders of gold: The dishoarding by central banks has caused the gold price to drop precipitously, but the central bank’s use of gold makes clear gold’s greatest attribute, which is the exceptional liquidity gold provides. Gold is money, and in this case it is rainy-day money in the sense that if I am right about how it is being used here, it is giving insolvent banks a lifeline.
The net result is that gold continues to flow from the West to the East where it is more highly valued. But even if desperate Western central banks are dishoarding gold in order to bail-out insolvent commercial banks, don’t take your eye off the ball. Keep accumulating physical gold and silver because they have always stood the test of time as the world’s only true money. All of these schemes by Western central planners will ultimately fail and the current financial system will end in disaster. As the system implodes, one of the only things left standing will be physical gold and silver.”