The New Gold Floor

Tyler Durden's picture

When two months ago we discussed the IMF's selling of one eighth of its gold reserves of which as most know by know half was recently acquired by India, we came to the conclusion that the IMF's proposed naive and subjective purpose for this disposition which was framed as "safeguarding against disruption in the gold market" would instead end up with "rioting in goldbugland." Based on gold price action over the past 3 days, we have been so far correct. And the concern for the IMF (and all Central Banks as well) is that India's example will be promptly followed by China, Russia and other sovereigns who are seeking to flee from their dollar holdings courtesy of continued madman-like behaviour out of the 3rd sub-basement at the Federal Reserve where all the Heidelberger Druckmaschinen are kept.

Because, as David Rosenberg points out, what India has done is it has established an effective floor in gold pricing:

Gold has broken out yet again and is up another 1% so far today as it begins to challenge the $1,100/oz mark (according to unofficial IMF estimates, the Reserve Bank of India bought gold at $1,045/oz. With the size of the purchase (8% of annual mined production) and at that price it certainly helps establish a floor! The fact that the yellow metal is accomplishing this with ongoing deflationary developments — Euroland PPI came out for September and showed a 0.4% MoM decline and a -7.7% YoY trend — suggests that other factors are driving bullion to new bullish heights. It’s called scarcity of supply relative to fiat currency.

Rosie has become much more vocal on gold lately, and it appears he now shares our view presented a month ago that the ever growing excess liquidity (read empty pieces of paper) are now directly translating into a ever rising bid for bullion, which has now detached from most (if not all) correlations with the DXY and the broader market. This means that unless the Fed is willing to see the next purchase of gold by a sovereign occur in the $1,100+ zone, and really activate gold's afterburners as it heads to $2,000, which would be monetary suicide for Central Banks everywhere, Bernanke will be forced to end his uber-liquidity scheme sooner rather than later.

Some more from Rosenberg on gold:

While the gold purchase by India’s central bank is widely viewed as the trigger point for the latest jump in the gold price, there are good reasons why bullion is in bull mode. It comes down to a fiscal policy in the U.S.A. that will stop at nothing to ensure that the economy embarks on an uptrend. Even with a fiscal deficit north of 10% of GDP, the article from yesterday’s WSJ that was titled Job-Creation Panel Leery of Spending really resonated. To wit: “So far, the White House and Congress have been weighing a range of short-term tax ideas to spur job growth, such as expanded refunds for big companies that suffered losses; extension of a first-time homebuyer tax credit; and a new tax credit for hiring.”

And this last tidbit:

Gold broke out to a new high yesterday of $1,084/oz (and continues to rally today). It did this despite the S&P 500 managing to tick up two points and despite the DXY index actually eking out an 8bps rise to 76.3. This is NOT just a U.S. dollar story — have a look at what bullion is doing in Euro terms. Very impressive. This is a broadly based breakout and that means a durable secular bull market.

Looking at the growth rates in fiat currency that central banks are creating to stimulate their economies and the amount of bullion that would be necessary to back up this massive global monetary infusion suggests that gold can at least double if not triple from here. If you missed the first 4x runup from the $250/oz lows a decade ago, don’t worry about it. It’s like worrying about how you would have missed the first half of the rally in the S&P 500 from 1982 to 1992 when the index was at 400 and still had 300% to go before finally peaking out and sputtering at the 1500+ highs eight years later. In other words, the cup is still half full — and still can be filled with gold eagle coins.

Looks like the gold bulls just acquired one more vocal member. Perhaps Rosenberg can now settle his bet with Joe Terranova in gold-indexed lunch futures.

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Ivanovich's picture

I still don't get how $2000 gold would be "monetary suicide for central bankers everywhere". 

whydtinogo's picture

Presumably $2k gold implies a significant loss in confidence in fiat currencies and consequently central bankers will be unable to "implement monetray policy". Should confidence be lost in paper currencies then some sort of return to a gold standard would be necessary to back the currencies and ultimately pay for the various bail outs.

Anonymous's picture

Were that the case, then what would happen if, for example, instead of confiscating gold, the CB's just declared that gold could not be monetized, ie, they shut down all official gold exchanges and declared that banks could no longer exchange currency for gold, as gold trade would be legal only between CBs?

Of course there would be a black market, but it would be pretty hard for gold to be a threat to any currency, under that circumstance.

The goldbugs may become a victim of their own success.

Coming Down in Powdery Sparks's picture

Why bother confiscating it?  Just print up some money and announce you're going to buy gold for $5000 an ounce.  I think you might see some sellers at that point.  Not me, of course, but it would probably get some gold into the coffers.

glenlloyd's picture

And this is exactly why confiscation isn't likely. Since the dollar is no longer tied to gold there's no legitimate reason to confiscate and revalue the dollar, just print more dollars. That is unless we turn into a police state with a govt who has no other alternative but to seize the gold of the citizenry in order to fund their own rotting carcass because no one accepts the dollar.

Slewburger's picture

Yea its called the emergency banking act.

Anonymous's picture

While that's a good point, I fear a move like that could really piss off countries that had been purchasing the gold and driving the rally (Russia, India, China etc.). That might even be grounds for war since it's essentially massive theft on an international scale.

Anonymous's picture

That would be like trying to outlaw sex or alcohol. A lot of people are always going to use real money, no matter what. Right now those people include: at least India and Japan, the two largest countries in the world; many people in every other country which produces some gold, including the USA; and lots of people who have saved some money and don't want a CB eroding their savings.

Damage Inc.'s picture

See the Prohibition of Alcohol for what a black market can do.

Big Red's picture

How about that War on Drugs?

chumbawamba's picture

Yeah, I'm really scared about central banks re-declaring their fiat currencies.  Talk about paper tigers.  Ha.

I am Chumbawamba.

Gwynplaine's picture
Gwynplaine (not verified) Nov 4, 2009 1:33 PM

I doubt there will be any confiscation of gold this time around.  I bet lots of politicians have gold holdings of their own.

When FDR signed that executive order, it must have been a real surprise.   These days there would be lawsuits and complications that would make it practically impossible to replicate.  Back in 1934 there was a lot more patriotism and a feeling that the government was ultimately acting in your best interests.   I suspect there was much more voluntary compliance.

chumbawamba's picture

From what I understand compliance was limited.  Only those unfortunate enough to have had their gold stored in bank saftey deposit boxes go robbed.  And only idiots volunteered it.

I am Chumbawamba.

Anonymous's picture

In 1933, the Americans held more gold per capita than any country on earth. This was primarily in the form of 22 carat gold coin.

FDR confiscated this coin, made bars of it and sent it to Ft Knox.

At the same time the FR Act was coming to an expiry. The original act was only in force for 20 years, 1913 to 1933. Not many people remember this.

The threat to the US was dramatic. People were going to the bank trying to shed their FRNs and replace them with USNs. The former is elastic, the latter is not. You can imagine the threat to the banking system.

When FDR came to office, the first thing he did was extend the FR Act. The second thing he did was confiscate the main competitor, gold coin, these were part of the same act.

According to Feteke, FDR, in his haste, did not bother to refine the confiscated coin. For this reason, much of the US gold reserves are 22 carat, not 24 carat, and therefore cannot be used to settle exchange contracts.

dhengineer's picture

Any gold confiscation within the United States would loudly tell the rest of the world that the dollar was indeed heading down in flames and that the crew had just bailed out.  Gold confiscation is the act of a desparate financial system.  They may call in gold, but they will destroy the rest of the paper-money system in the process, unless they turn around and back dollars with the newly-acquired gold.  And we know that ain't gonna happen, not on Benny's watch, anyway.

In contrast, China is actively encouraging gold and silver investments by the public.  If only a tenth of their population each bought one ounce of gold, that's 120 million ounces, or about 3750 tons.  With that much gold in the country floating around freely, not to mention the unknown tons of Chinese central bank gold, how long would it be before China could declare that the Yuan was now effectively a gold-backed currency, and a candidate for world reserve status?  Bye-bye paper dollar, hello gold Pandas.

A US-centric gold confiscation would be first met with a collective guffaw from the rest of the world.  Then, they would actively compete to unload their now-worthless green ink-stained paper.  Oil and every other world commodity would be repriced in gold, not dollars.  Exports into the US would also be priced in gold.

The race to unload dollars in favor of world gold would become a bloodbath as everyone dumped dollars in favor of hard assets.  Zimbabwe would look like the paragon of fiscal virtue in comparison.

Gold confiscation isn't going to happen.

Quintus's picture

Because the entire Fiat Currency Ponzi scheme is completely dependent on nothing more substantial than confidence.  The CBs have devoted a lot of time effort and money shepherding J6P away from Gold and Silver and into paper, which is much more amenable to tinkering and debasement by the monetary 'Experts'.  Gold is, in effect, the 'Anti-Currency'.

Gold price suppression (to conceal the hidden tax of inflation) has been a key element of this effort.  An exploding gold price reveals, for all to see, the utter fragility of the Fiat currency system.  Imagine if the effects of every bailout, boondoggle and money printing episode was reflected instantly in the Gold Price.  The debasement of the currency, and therefore the public's savings and investments, would be writ large in a way that anyone can grasp.

There is also the problem that JPM, Barclays, Deutsche Bank and a handful of other entities are massively short Precious Metals (at the behest of the Treasury).  If Gold and Silver explodes, so will these banks.

Ivanovich's picture

The bank short argument is probably the most virulent argument I can see.  As for the "it'll show the world" argument, I'm not sure Central Banks give a crap.  I know Banana Ben doesn't.

Anonymous's picture

Hidden tax of inflation = hidden theft via inflation.

Anonymous's picture

And when one of the precious metals ETFs is exposed as a front for central bank manipulation a whole host of dominoes would fall.

Anonymous's picture

Yeah I've been wondering about the gold shorts.

Back in 2001 I read lots about gold leasing by bullion banks from CBs at crazy low rates. The standard GATA conspiracy was that selling this gold into the market was designed to suppress the price of gold. The bug in the ointment was that Treasury had leased out all "their" gold and unless the bullion banks could get physical delivery then Treasury would never get their gold back.

So what has happened to all this gold leasing? Have the bullion banks simply rolled over their positions with ever increasing unrealised losses? How does this play out when gold is $1000 let alone $2000? It was ~$250 in 2001.i

Anonymous's picture

ABX set the floor on gold pricing when they withdrew their hedges

SWRichmond's picture

Yes, this was the tipping point; when Barrick, the world's largest central-bank gold agent, gives up on capping gold, it's time to give up capping gold.

I am still not convinced there's not a "risk-off" move coming.  I am gently buying into this move but I still remember $147 oil.

I am the worst market timer imaginable.

DiverCity's picture

I'm right there with you.  I and others had expected one last hurrah for the "cappers," but either it didn't happen or their efforts were futile, as the FRN price of gold barely dipped last month.  I'd still like to see it hit the FRN$900 level one more time so I could add more, but I think I might have to start buying in as well.

chumbawamba's picture

$900/ozt gold is history.  Maybe on the next fiat cycle...

I am Chumbawamba.

Anonymous's picture

The floor is 1046 as IMF defined.

Anonymous's picture

Its important to note the spike in volume of ABX shares starting on 8/31, the day we learned of chinas derivative default n deals with western banks. The smart money moved to gold immediately and the MSM never mentioned chinas intentions. A week later china moves its physical gold from london to hong kong and offers to buy all the IMF Gold. I'm afraid what we may be seeing is a flight to safety before the DERIVATIVE DEATH STAR EXPLODES! Proton torpedos away!

vanderrook's picture

I hope your gold is buried in the backyard- one of their best moves will be saved for last...the confiscation of all gold, just like '33. Then they'll reset the price back to 20 or 30 bucks an ounce again- sell it back after that. Pure profit for them.

"I, Franklin D. Roosevelt, President of the United States of America, do declare that said national emergency still continues to exist and pursuant to said section to do hereby prohibit the hoarding gold coin, gold bullion, and gold certificates within the continental United States by individuals, partnerships, associations and corporations and hereby prescribe the following regulations for carrying out the purposes of the order"

Section 9. Whoever willfully violates any provision...may be fined not more than $10,000, or, if a natural person may be imprisoned for not more than ten years or both...

 

SilverIsKing's picture

Can you pay the $10,000 fine with worthless fiat?

vanderrook's picture

Negative; Not even they will want their own FRN's. You must pay in property- of course, if you have none, they'll just throw you in a camp somewhere...an enemy of the state!

Hephasteus's picture

Camps and prisons are places for authority to punish people who accept authority. War and shootouts in the streets are what will happen. In the 30's they demanded citizens turn over gold to central banks. If I have to take a trip to a central bank I'm bringing guns, a belt sander, lemon juice, razor blades, rope. Not gold.

chumbawamba's picture

What a load of unserious hog droppings.  First of all, by the time they would even be considering the confiscation of gold they will be on the verge of losing any power or legitimacy that they had.  I'd like to see someone's hand get shot off just as it reaches for my fucking gold.

I am Chumbawamba.

vanderrook's picture

Ouch! I will not obey either....

 

...but, it has happened before...

LoneStarHog's picture

Ponder this:  India has been a depository of IMF gold and it is well known that India WAS a whore of the U.S. Government, as WAS Japan.  It is also well known that the U.S. has been supressing the price of gold by supplying the physical market, as part of Rubin's scam of a Strong Dollar Policy.

Is it possible that the gold that India supposedly purchased does in fact NOT exist?  That the gold was used as part of the price supression scheme?  That in order to cover the fact that there is NO physical gold, India is provided with the money to supposedly purchase the gold that is already in its care?  Is this possibly WHY India got the purchase rather than China, because the physical gold DOES NOT exist for actual sale?

The gold market is the most manipulated and corrupt market on planet Earth.  Think about this before you discount it.

Catullus's picture

Awesome! I like where your heads at.

Big question: "is will the gold being transferred to India?"  If I'm just moving it on the IMF balance sheet to India's account at the IMF, who cares? 

tip e. canoe's picture

i agree...something's fishy about this so-called 'purchase'.  india used SDR's that were allocated to them just 2 months ago to buy it.

whydtinogo's picture

Assuming they get the gold wouldn't you buy something hard and shiny rather than keep the book entry item.

tip e. canoe's picture

fyi, the suspicion does not come from looking at it from india's POV.
(and yes, agreed, they got a great deal all considering)

Anonymous's picture

One of the Rueters stories yesterdays says India did NOT use SDRs, but purchased the gold with "hard currency".

faustian bargain's picture

golly, so they bought gold with gold?

geopol's picture

Special Drawing Rights are the same as FRN's worthless paper... No such thing as Hard Currency.

 

But I get your point..

Joe Sixpack's picture

One of the Reuter's stories on the India gold purchase stated that India did NOT use SDRs,  but used "hard currency". Can you verify they used SDRs?

tip e. canoe's picture

http://www.zerohedge.com/article/gold-ignores-dollar-strength-rushes-new...

courtesy of the india times via puffin.  just checked: as of yet, no correction to the article.

you say hard currency, i say SDR.
you say reuters, i say india times.
dollars, gold, sterling, silver
let's call the whole thing tinfoil

Gunther's picture

Lone Star, you are not alone thinking that.

http://harveyorgan.blogspot.com/2009/11/nov-309-commentaryvery-important...

The argument made in that blog is that while the trade was settled no delivery of metal took place.

 

LoneStarHog's picture

Yes, as I stated, India has been a custodian of IMF gold.

Moe Speeks's picture

GOLD GOLD GOLD

HIGHER HIGHER HIGHER

RowdyRoddyPiper's picture

I love a good conspiracy about an alleged conspiracy.

Anonymous's picture

This market action theoretically prevents central bankers from furthering their race to the bottom in global currency markets. Which of the monetary-policy-distorted export market bubbles collapses first, then? My poe's on China. Remember that Rosie's other favorite thesis is that "decoupling" is a myth.

TumblingDice's picture

Gold: it never goes down.

And by the same logic...it never goes up either. The most boring savings play ever and yet people love talking about it to death. I'll make a bet with the goldbugs...oil will outperform gold for the next two, five or ten years. Any takers?

hack3434's picture

Yeah! Hold physical oil...