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If Central Banks Believe in Paper Money Why Are They Loading Up On Gold?

Phoenix Capital Research's picture





 

I’ve been
warning for years that an inflationary storm was coming. I’ve recently tailored
my forecast to allow for a resurgence in deflation based on QE 2 ending and the
economy diving, but my long-term forecast remains the same: inflation WILL be
exploding in the years to come.

 

Indeed, even
the biggest proponents of paper money (central banks) have begun to realize
that their grand experiment is coming to an end. Central banks officially
became net buyers of Gold last year. And we now find that they have acquired
the most Gold in over a decade.

 

The Financial Times reports:

 

Central banks have pulled 635 tonnes of
gold from the Bank for International Settlements in the past year, the largest withdrawal in more than a
decade.

 

The move, disclosed in the BIS's annual
report, marks a sharp reversal from the previous year, when central banks added
to deposits of gold at the so-called "bank for central banks" rather
than lending it directly to the private sector amid growing concerns over
counterparty risk.

 

Let’s
consider this. If you’re a central bank and you actually believe in the value of paper money and your ability to
create wealth by printing it…why would
you be loading up on Gold?

 

The answer
is simple: you see the writing on the wall.

 

The central
banks of the world are in a competition to devalue their respective currencies
against each other. They will work
together to suppress a particular currency if a carry-trade gets too out of
control (see Japan earlier this year), but in general the ECB wants a cheap
Euro, the Fed wants a cheap Dollar and so on and so forth.

 

These guys
know that the financial system is broken. They’ve known it for over a decade
(Greenspan even admitted that derivatives could “implode” the market in 1999).
But they’re going to kick the paper money can down the road as long as they
can… primarily because the entire financial system is banking on their ability
to “fix” things.

 

The 2008
Crisis was the first taste of systemic risk. The central banks threw everything
including the kitchen sink at the problem in an attempt to hold things up. And
it’s worked temporarily in the sense that the financial world still believes
central banks can handle the situation.

 

However, the
fact remains that the central banks actually didn’t fix anything. After all,
you can only fix a debt problem by paying the debt off or defaulting. Moving it
around and issuing more debt to meet current payments does nothing.

 

In this
sense, the world’s central banks literally “bet the farm” on themselves and the
view that sovereign balance sheets can stomach this toxic waste. As we’re now
discovering in Europe, the laws of the markets (oversaturation of debt, default
and the like) apply to countries as well as private banks.

 

The central
banks know this and are now acting accordingly. It is not coincidence that they
became net buyers of Gold within two years of the 2008 Crisis. Nor is it
coincidence that they are now loading up on Gold at the fastest pace in over a
decade. They KNOW (not think) that systemic risk is still on the table in a big
way and that they will be POWERLESS to address the next Crisis when it
explodes.

 

You can
already see this in their public statements. Bernanke himself even admitted the
Fed has no idea why the economy isn’t recovering. If you extend the
implications of this statement it becomes clear Bernanke and pals are realizing
that printing money is not going to patch up the financial system.

Hence the Gold purchases.

 

In plain
terms, the REAL Crisis, the Crisis that was put off temporarily during the last
two years, is coming. It will not be a Crisis of stocks or bonds. It will be a
Crisis of the financial system itself. A Crisis in which entire countries
default. And it will make 2008 look like a picnic.

 

Remember,
every asset class is defined relative to sovereign bonds. So if sovereign bonds
begin defaulting… KA-BOOM. Round One (2008) of the Financial Crisis wiped out over
$11 trillion in household wealth. Round Two will wipe out…?

 

On that
note, if you’ve not taken steps to prepare for the coming Crisis, you can
download my FREE report devoted to showing in painstaking detail how to protect
yourself and your portfolio from the coming ROUND TWO of the Financial Crisis.

 

I call it The
Financial Crisis “Round Two” Survival Kit
.
And its 17 pages contain a
wealth of information about portfolio protection, which investments to own,
which to avoid, and how to take out Catastrophe Insurance on the stock market
(this “insurance” paid out triple digit gains in the Autumn of 2008).

 

Again, this
is all 100% FREE. To pick up your copy today, go to http://www.gainspainscapital.com
and click on FREE REPORTS.

 

Good
Investing!

 

Graham
Summers

 

PS. We also
offer a FREE Special Report on the inflation situation in the US. This other
FREE Special Report, The Inflationary
Disaster
explains not only why inflation is here now, why the Fed is
powerless to stop it, and three investments that absolutely EXPLODE as a result
of this.

 

All in all
its 14 pages contain a literal treasure trove of information on how to take
steps to prepare AND profit from what’s to come. And it’s all 100% FREE.

 

To pick up
your copy today, go to http://www.gainspainscapital.com
and click on FREE REPORTS.

 

 

 


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Fri, 07/08/2011 - 23:26 | Link to Comment Sambo
Sambo's picture

You are right. Where does one lock up the gold?

Fri, 07/08/2011 - 22:37 | Link to Comment sellstop
sellstop's picture

Because they are responsible. (Relatively speaking)

The central banks need to balance their balance sheet.

Yes, gold will be and is worth more paper.

Let's hope so.

We don't want paper to appreciate do we??

gh

Fri, 07/08/2011 - 22:27 | Link to Comment Buck Johnson
Buck Johnson's picture

There buying as much resources as they can with their monopoly money which will be worth nothing in the near future.  They know that they will be powerless to fix the problems, so they are hoarding and getting ready for the SHTF scenario. 

Fri, 07/08/2011 - 20:58 | Link to Comment AldousHuxley
AldousHuxley's picture

Jews know what's up. All that torah is made in gold, but in dollar bills.

 

Jewish Woman Tells Us Why Many Jews Don't Live In Israel

http://www.youtube.com/watch?v=7GQIptKdqNg

mass media will never air this in America

Fri, 07/08/2011 - 16:48 | Link to Comment nah
nah's picture

esay, you cant stop gold man

Fri, 07/08/2011 - 15:36 | Link to Comment dakine
dakine's picture

Each day we tick closer to inevitability. 

Fri, 07/08/2011 - 15:21 | Link to Comment DavidDavid
DavidDavid's picture

"The sky is falling."  More "doom & gloom" from Phoenix.  In the meantime, the Dow has rallied 90% in the past two years.  Where's the "doom & gloom?"  Gold rallied $12 today.  Big deal.  If things are so terrible, gold should have rallied $200 today.  It should be trading at $5,000 per ounce.  But it's not.  You know why?  Because the U.S. financial system is not nearly as bad as the "doom & gloom" crowd says it is.  Oh no!  The world is ending because gold rallied $12 today.  What a joke!

Fri, 07/08/2011 - 21:18 | Link to Comment sgorem
sgorem's picture

Although I disagree with you 100%, you're entitled to your opinion.

Fri, 07/08/2011 - 20:55 | Link to Comment Ranger4564
Ranger4564's picture

You're either insane, living in The Nile, or just delusional. Don't be scared... the economy will fail and you will suffer, but at least it will be relatively quick.  Are you on drugs or what? Look around... where is the health you speak of? Do you not read the news re unemployment, food stamps, prospects for economy, food costs, riots across the globe, riots in the US, WTO, BIS, IMF, UN, S&P, Moody's, currency wars, and everything else I'm not recalling... are you that trapped in the mainstream paradigm that you cannot see anymore?  Just W O W.  I know a lot of people like you actually.  I'm buying lots of popcorn while the prices are manageable to sit and watch the carnage.  I'll try to help those who survive.

Fri, 07/08/2011 - 17:14 | Link to Comment lawrence1
lawrence1's picture

Right, the economy is fine despite high unemployment, unprecedented debt, muncipal and state government failing.  I think you should go ahead and short the hell out of gold and silver, in other words, walk your idiot talk.

Fri, 07/08/2011 - 20:19 | Link to Comment Hook Line and S...
Hook Line and Sphincter's picture

Lawrence1,

I'm going to have to ask you to refine and extend your sarcasm to the end of the statement. I was hoping you'd really piss some of us off, and even get junked by those who thought you were serious. Opportunity lost!

Example:

Right, the economy is SLOWLY TURNING FOR THE BETTER, despite THE ARTIFICIALLY INFLATED high unemployment NUMBERS, MILD/MANAGEABLE - IF NOT NEGLIGIBLE debt, AS WELL AS THE ONGOING munIcipal and state government RECOVERY.  I HONESTLY think you should DO WHAT I'VE DONE, AND go ahead and short the hell out of gold and silver. DON'T WAIT. INCIDENTALLY, I MADE A HUGE AMOUNT OF $ ON THE LAST DIP, EVEN SILVER WENT DOWN OVER 30%. THE US HAS HUGE RESERVES OF SILVER THAT THEY WILL RELEASE ANY DAY NOW, RUSSIA HAS HUGE STOCKS PILES OF PLATINUM, ASTEROID M56478AUI IS DUE TO IMPACT EARTH IN SEPTEMBER 2011 AND ITS CONTENT IS 38% GOLD (THIS MOUNTAIN OF AU WILL SURELY DELETERIOUSLY AFFECT THE CURRENT PRICE).

FOFOA DEEP THROATS IT, HE'S A GOV PLANT TO MISLEAD ALL THE PM/BM SHEEP INTO STUMBLING INTO WORTHLESS METAL.

TURK HAS CONSISTENTLY BEEN WRONG ABOUT EVERYTHING, INCLUDING WHICH WAY HIS UNDERWEAR IS SUPPOSE TO BE PUT ON.

TURD FERG TAKES BRIBES FROM JP MORGAN, HE'S BEEN SEEN ACCEPTING SUITCASES OF FRN'S OUTSIDE HIS YOGURT SHOP.

SPROTT SOLD PART OF HIS FUND AND ACTUALLY BOUGHT REAL ESTATE IN MANHATTAN WITH IT.

in other words, yoU'RE NOT ALONE.

/SARC

Fri, 07/08/2011 - 16:48 | Link to Comment MrBoompi
MrBoompi's picture

Who looks to the stock market when evaluating the health of the US economy? And how do we know the real price of gold in that manipulated market?

Oh David, David....

Fri, 07/08/2011 - 16:12 | Link to Comment Lednbrass
Lednbrass's picture

Indeed.

I recommend plowing your life savings into GM, with the great numbers they are putting up the stock should be at $50 by year end.

Fri, 07/08/2011 - 15:42 | Link to Comment nohweh
nohweh's picture

Thanks Dave, you're right, the financial system is just fine, and gold should be $5,000 an oz. 

Fri, 07/08/2011 - 15:26 | Link to Comment Thisson
Thisson's picture

This is going to be like an Earthquake - the result of a long period of incrementally increasing pressure.  That's what's happening now: the pressure is building.  When the Earthquake happens, it will cause a lot of damage to those who haven't prepared and/or left the zone of danger.

Fri, 07/08/2011 - 17:52 | Link to Comment Piranhanoia
Piranhanoia's picture

A burning ring o' fire, with earthquakes, volcanic eruptions, and cloud to cloud ground lightning.  Paul Revere won't need to alert every Middlesex village and town.  They will know suddenly, and not be prepared.

 

Fri, 07/08/2011 - 20:47 | Link to Comment Ranger4564
Ranger4564's picture

Please, leave something to my imagination.  You're directing too much. ;) hehe

Fri, 07/08/2011 - 15:24 | Link to Comment akak
akak's picture

Got lost on your way to Huffington Post?

Fri, 07/08/2011 - 15:17 | Link to Comment Thisson
Thisson's picture

Greenspan explained to Ron Paul in 2005 that CBs hoard gold in case of a return to the gold standard. I just posted on this topic earlier at Thisson.tumblr.com

Fri, 07/08/2011 - 14:45 | Link to Comment PulauHantu29
PulauHantu29's picture

When Hong Kong told the London to ship all the gold HK owns to HK, my suspicioins were confirmed.

They don't want to create a panic but all CBs are laoding up on gold. What did Sarkozy go after the very first thing in Libya?

Their GOLD.

Fri, 07/08/2011 - 14:24 | Link to Comment Smiddywesson
Smiddywesson's picture

1.  Central bankers are co-conspirators in the fiat money game.

2.  They are taking their chips off the table in the conspiracy and buying gold.

3.  They are also removing their gold from their communal hoard at the BIS

4.  They either don't want to risk a double cross, or they think the end of the scam is near.

5.  Either way, when co-conspirators start doubting each other, the end of the scam is near.

If you have any further gold purchases to make, you'd better hurry.

Fri, 07/08/2011 - 20:39 | Link to Comment Ranger4564
Ranger4564's picture

The financiers who run the banking industry don't have sides like you're imagining. All of the banks belong to them. 

 

The central banks are not buying gold to hedge against each other, it's to thwart any assault by other established institutions (corporations / militaries / multinationals, etc).  See, they're picking on the small fry for now, but eventually, they'll dismember vast numbers of corporations... they're not interested in money, it's power and control they want.  So, they will need bigger assets than other entities (said institutions) at some point.

 

You and me, we're screwed no matter how much shiny stuff we buy, because they spend more on protection while they eat breakfast, than we spend securing our savings.

 

I think my take is close to accurate, but who the hell knows... I'm just forced to speculate to try to explain current events like everyone else.  I'm using logic, others are relying on history. My advice, sincerely, don't rely on history... unpredictability is where it's at.

Fri, 07/08/2011 - 13:53 | Link to Comment White.Star.Line
White.Star.Line's picture

Let me take a shot here....

Owners of the Central banks know that the debt money they are creating will someday blow up into hyperinflation, while the gold they hold will skyrocket in value.
At that point, they will hold sway over the land in a much more powerful way than just the "moneyprinters" they are assumed to be.

Nice plan, pricks.....

Fri, 07/08/2011 - 14:20 | Link to Comment SamuelMaverick
SamuelMaverick's picture

Exactly.  TPTB and the Bankers never lose, they make money on both ends. 

Fri, 07/08/2011 - 20:30 | Link to Comment Ranger4564
Ranger4564's picture

Agreed ^ Agreed.  The plan is so blatant, it's embarrassing to even have to discuss it.  They are forcefully imploding the currencies and the governments, so they can control the populace and the value of assets directly. It's not all that difficult to grasp, but it is ingenious in its implementation... they really spent a good amount of effort to conceal this maneuvering. People have been placed in so many places, and others are unwitting accomplices by being dimwitted believers, that they really don't have to convince everyone or work that hard. Well, it's so close to curtain call, we might as well stay for the show. It's going to be very exciting.

Fri, 07/08/2011 - 17:59 | Link to Comment ihedgemyhedges
ihedgemyhedges's picture

"...they make money on both ends."

Same way my wife used to before I made her an honest woman................

Fri, 07/08/2011 - 19:51 | Link to Comment Hook Line and S...
Hook Line and Sphincter's picture

I know.

Fri, 07/08/2011 - 21:21 | Link to Comment ihedgemyhedges
ihedgemyhedges's picture

Did you pay at least $100?  She told me she never charged less than that..........Otherwise, she was too cheap and just a liar................

Fri, 07/08/2011 - 13:46 | Link to Comment amanfromMars
amanfromMars's picture

And the Crooks wear Armani and take Everyone for Useful Fools and Useless Tools.

Considering the flash cash now buying gold is supplied to the banking system by the People, for are they not being indebted with it, then does the gold belong to the people and not to the banking system.

And what do the People think of their cash being used to buy gold baubles for bankers, rather than using it to provide the People with what they need?

And why do you let it happen? Are y'all stupid/cowed/ignorant? What is the excuse?

Fri, 07/08/2011 - 13:28 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

Well, Hell, I have been buying PHYSICAL gold for longer than this guy has been flogging his business...  Be your OWN central bank by buying gold!

So, if you are interested in what a Bearing might have to say at HIS blog, send me a gmail at my name as my blog is under my own name.  160 of us ZH-ers can't be wrong!  Two short articles on gold and other neat stuff.

But, they KEY BLOG to survive all of this is:

fofoa.blogspot.com

FOFOA is the real deal.

Sat, 07/09/2011 - 00:47 | Link to Comment essence
essence's picture

The one serious drawback to embracing Gold, putting your 'eggs' in its basket is that governments can swiftly change the rules.

The nightmare scenario to my way of thinking is for a Gold standard to be implemented after the coming 'reset' ... only everything is horribly skewed to the benefit of the big western banks and their entrenched gov puppets and the status quo.

Even now we see how the U.S. gov puts the heat on any bank that caters to U.S. citizens. What's to say they won't do the same in spades after the world moves to a gold backed SDR. I can see it now,  paper currency is eliminated or heavily penalized so that easily trackable electronic currency can be used to monitor ones every transaction (worldwide). By threat of the U.S. military, homeland gestapo and financial weight, the banking cartel (ultimate force behind the western governments) squeezes anyone in the civilized world who dare buy/sell/trade/barter gold without paying the substantial fees the banking cartel/governments impose for those who deal in the commodity backing the new world reserve currency. There'll be no escape since governments will make it a point to ensure this is so and they have a pervasive security apparitus to enforce their will ..... You don't really think the TSA/Homeland security is concerned about terrorists do you? (unless one defines 'terriorist' as anyone who hinders the banking cartels quest for more power and control)

Even now we see how the banking cartel (via their proxies) is posturing for fiscal union in the EU. That's just a polite term for NWO/world government. A 'government' instituted by the banks, for the banks and with the goal of tighting their grip on the serfs. Look for a currency consolidation between USD/Pound/Euro after the coming crisis. Look for gold backing of the SDR ... and then, the 'fine print' in this story where individual, legacy holders of gold will be harrassed & persecuted.

I apologize for this pessimistic viewpoint, but observing goverments over the years leads me to believe they have to no good in them. Government is differnet groups fighting for the trigger of a gun so that they may turn it on the others. No group can match the legacy banking cartel families in power & scope, hence they dominate the fight to control government.

 

 

Fri, 07/08/2011 - 13:33 | Link to Comment shortus cynicus
shortus cynicus's picture

Yes, intersting what FOFO has to say. BIS is probbaly leveraged to, so who removes first will get real stuff. Music is still playing....

Fri, 07/08/2011 - 13:24 | Link to Comment ziggy59
ziggy59's picture

Kitco moves into creditor protection

http://www.vancouversun.com/Kitco+mo...303/story.html

Fri, 07/08/2011 - 13:19 | Link to Comment Zero Govt
Zero Govt's picture

when you say Central Banks are net buyers of Gold, does that include Huckleberry Catfishmouth Ben? ...the one who doesn't understand the attraction of Gold and why morons (Joe Public) are swapping their Benny Bucks for it?

Fri, 07/08/2011 - 13:04 | Link to Comment MiningJunkie
MiningJunkie's picture

All old news...that was my story back in 2002 - at $300 bullion. The infomercial grates on my nerves.

Fri, 07/08/2011 - 13:03 | Link to Comment TruthInSunshine
TruthInSunshine's picture

Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which — through a complex series of steps — the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

 

-- Alan Greenspan

 

Alan Greenspan, Gold and Economic Freedom (1966)
Fri, 07/08/2011 - 21:49 | Link to Comment nuinut
nuinut's picture

Central Banks are long gold because they are short currency.

 

Hedged.

 

Currency printing during hyperinflation is a short squeeze on the Central Bank. The value depreciating out of the currency is offset by the value appreciating into gold.

 

Hedged.

 

FOA’s front lawn dump quote is the ultimate perspective with regard to fractional reserve monetary systems. Everyone will come to appreciate this, sooner or later.

 

FOA said:

Debt is the very essence of fiat. As debt defaults, fiat is destroyed. Hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! Worthless dollars, of course, but no deflation in dollar terms! We will have hyperDEflation in everything measured against real money, GOLD, and we will have hyperINflation in everything measured against paper dollars.

 

To be net long physical gold is to stand ready to benefit from the arbitrage of this squeeze.

To build a long physical gold position is to hasten this squeeze.

 

There is no avoiding the squeeze.

 

http://flowofvalue.blogspot.com/

Fri, 07/08/2011 - 15:22 | Link to Comment akak
akak's picture

Diddling Ayn Rand must have infused into AG some modicum of rationality and morality, which has demonstrably long since dissipated.

Fri, 07/08/2011 - 16:49 | Link to Comment WestVillageIdiot
WestVillageIdiot's picture

Diddling Andrea Mitchell would do that to a guy.  She has a face like a flounder.

Fri, 07/08/2011 - 21:04 | Link to Comment sgorem
sgorem's picture

damn dude, I WAS THINKING THE SAME THING about Mitchell !

Fri, 07/08/2011 - 22:05 | Link to Comment jeff montanye
jeff montanye's picture

imo alan greenspan is lucky anything would diddle him.  he makes andrea look like scarlett johansson after a good night's sleep as seen in the most flattering light.

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