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Will The ECB Buy Gold? Check The Balance Sheet!
Picture: Part of German Gold Reserve
We can hear you think “yeah right, the ECB buying gold…”, but the title of this article did not fall from the sky; it is based on recent statements from a prominent member of the European Central Bank, Yves Mersch, who did not beat around the bush. The man from Luxembourg underlined that the ECB could start buying different types of assets to stimulate the economy when necessary. Not just government debt or mortgage-backed securities, but also stocks or ETFs. The Bank of Japan is already doing this today; buying into Japanese stocks and ETF's. Mersch also pointed to other assets that fulfill a monetary role on the central bank’s balance sheet, such as gold.
Purchasing gold is not such a crazy idea for the central bank when you think about it. Contrary to the US central bank, the gold reserves of the ECB is marked-to-market on its balance sheet. Coincidence or not, but the balance sheet of the ECB went downhill from the moment gold got stuck in a downtrend.
Source: ECB / Stockcharts
The two charts above – the ECB balance sheet on the left and gold (in EUR) on the right – are so similar, that we started digging a bit deeper. The detailed balance sheet of the ECB, which we found on their website, clearly shows that gold carries a lot of weight compared to other assets. On a total of 597 billion euros, the value of the ECB’s gold position is 329 billion euros, which amounts to 55%. The contrast with debt securities (160 billion euros) or equity and/or investment funds (360 million euros) is huge. We annotated the table below to point out these assets on the balance sheet.
Source: ECB
According to Mario Draghi’s recent statements, the European economy has to pick up steam and to accomplish that, inflation needs a little push. A higher inflation rate is synonymous with expanding the central bank’s balance sheet, however, which is what Draghi implicitly mentioned to expect. The market presumes, however, that this balance sheet expansion will be the result of buying debt securities but, as you can see on the table above, there are other ‘line items’ that can achieve the same result, including the purchase of gold.
Ultimately, we expect the ECB to mix up its purchases. In southern Europe they would love the central bank to buy up their worthless bonds at par, but that is not what Germany is hoping for, for example. The Germans are fans of minimizing risk and gold indisputably is a big part of a safer approach. We would not be astonished, as a consequence, if the ECB soon surprises friend and foe with a unique expansive policy that includes both debt securities and physical gold.
The recent repatriation of Dutch gold reserves from New York could serve as a catalyst in that regard. Germany also wants to get part of its gold back, but they did not get the same service as the Dutch. If the ECB starts buying gold then, it could be a brilliant counterstrike that calms down the Germans at the same time. It would also create a lot of upward price pressure on the gold market, moreover, pushing the gold price and the value of the gold position on the ECB balance sheet upward. Two birds with one stone.
It would also end gold’s downtrend. Admittedly so, we did not expect the bottom formation process in gold to take this long and the fact that the gold price is still running in place is remarkable, ultimately, in a financial system where the balance sheets of central banks have grown beyond control with no end in sight (look at Japan for example).
Despite the fact that the trend in gold has not turned yet, it would be wise not to ignore the yellow precious metal. We are watching the central banks like hawks and their message is clear: inflation will rise at whatever the cost. There is no doubt in our minds that these central banks will do everything in their power to achieve their goal, even if it means buying gold and pushing the gold price higher. Thus, gold remains an important asset in every diversified portfolio. The analysis of the gold positions of central banks speaks louder than words at least.
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The ECB has no gold, the gold on the ECB's balance sheet are promises from the member countries who may or may not have the gold in their vaults or someone else's vault.
I am shocked Sprott dared to bring this up because it is loaded with implications as we at Fofoa's blog have been watching forever.
If the ECB were to buy gold IN SIZE it would immediately strengthen the balance sheet by making it stronger due to the gold already held. Since there is essentially NO gold on the market at current prices an ECB offer at a high enough price (we think 30 to 50 times current levels) this would be an effective reset of the POG.
It would certainly apply to physical only.
So what does a guy like Sprott do? The paper price would tank and since gold is currently priced by the paper price there would be time for all ETF and gold fund owners to close their funds, cash out holders at the low level and then pocket the difference at the new physical level.
I'm not saying Sprott or anyone else would do this BUT IT IS THE HUGE RISK IN HOLDING PAPER GOLD.
In fact we expect this is the likely mechanism for a gold reset. An entity that marks gold to market (ECB is the only one I know of) offers to buy 200 tons of gold immediate delivery and only a giant holder of physical could supply it. The ECB buys it, puts it on its balance sheet along with its other 10,800 tons and presto, the ECB has the strongest balance sheet on earth and all other currencies are force to restructure their currencies and use gold as the reserve....Why? ..because at $50,000 per ounce the dollar then becomes worth 1/50,000 ounce of gold...it would collapse.
This is the long term game the euro has been quietly playing for 14 years. Soon that game will end and we will have a new monetary system based on gold as the reserve and free floating currencies backed. like the euro, by gold, marked to market on their balance sheets.
Sprott vs. Sprout
#TeamSprout #GreenGiant
The funny thing about gold these days is this: It is nearly worthless, in terms of utility, and gets more worthless each year.
Let me explain.
Gold these days is primarily seen as useful as money. Money is an intermediate trade good between what you have produced and what you really want. If the banksters, and their violence-puppets, governmnet, have destroyed the economy, then there is little being produced to trade with or for. Hence, gold becomes less and less valuable as they destroy the economy, as there is less need for trade and a trade intermediary.
Gold will increase in value once the collapse comes and there is more production and trade. So those with the most gold will have more wherewithal and power in the coming collapse. That is why CBs want gold--"Those with the gold will be able to make the rules..."
Look for more competitive currency devaluations, impositions of tariffs, CB gold hoarding, mercantilism, between the thieves, as the end gets closer. Row over gold and tariffs will be the clearest signs of the breakup of "honor" amongst the thieves. Going to be fun to watch.
An American, not US subject.
Money is not just a store of labor, it is a store of productive labor. The present system has fake labor that is not really productive, such as food stamps, welfare checks, QE in general, debt forgiveness, student loans for unusable degrees, expansion of overpaid political and governmental jobs, distant perpetual wars with large standing armies. All while our manufacturing has been shipped overseas.
In short, money that is not based fully on productive labor, is of a lesser value than the money that is based on actual real productive labor. Everything else is a con, gaming the system for theft of the real productive labor, or value creation.
"Money is not just a store of labor, it is a store of productive labor. The present system has fake labor that is not really productive, such as food stamps, welfare checks, QE in general, debt forgiveness, student loans for unusable degrees, expansion of overpaid political and governmental jobs, distant perpetual wars with large standing armies. All while our manufacturing has been shipped overseas.
In short, money that is not based fully on productive labor, is of a lesser value than the money that is based on actual real productive labor. Everything else is a con, gaming the system for theft of the real productive labor, or value creation."
Good analysis, however the current "system" is based on theft; IS theft. Period.
The criminals of governmnet steal from the producers what they give the recipients. The banksters steal the rest from the producers by "printing," counterfeiting.
Think of the movie "The Godfather," and imagine the whole economy were setup like that family and cabal of families, with all running around trying to get ahead by stealing and killing. Not a very pleasant thought. Also explains why the state of our current society is so oriented toward grift and violence.
Some fodder for thought:
Great intro on how the banksters steal and destroy via the banks: https://mises.org/sites/default/files/What%20Has%20Government%20Done%20t...
Much abridged version of Griffin's "Creature from Jekyll Island": http://www.germanvictims.com/wp-content/uploads/2013/06/TheCreatureFromJ...
An American, not US subject.
The identification that money represents productive work comes from here and nowhere else - http://ocsure.blogspot.com
The Rothbard link is an excellent villification of fractional reserve "banking."
However, he makes the same contradiction as Mises does by naming counterfeit as a money.
By identifying money as representing productive work and counterfeit as the impersonation of productive work, then the contradiction is corrected.
I induced this from Aristotle's discussion in Nicomachean Ethics and I am not aware of any other teachers, Austrian school or otherwise, that have stated the difference between money and counterfeit so implacably clear as I have done.
"The identification that money represents productive work comes from here and nowhere else - http://ocsure.blogspot.com"
With respect, money is nothing more than an intermediate trade good used in trading one's production for the production of another. I.e. money exists, and is generally not produced, and is used to trade one's production for that of another.
The idea of money representing "productive work" is a step toward Marx's "Labor Value of Money," and communism.
It also ignores savings and capital.
An American, not US subject.
Sidenote: The ultimate, currency, money, is time--"They aren't making anymore of it." The banksters' "printing" not only robs wealth producers, labor, and capital owners, of their output, but robs them of their time as well. That is why when one studies hyper-inflations, he will find the victimized societies become ever more focused on today, now, the short-term, than a non-victimized society.
The purpose of attaching the medium to productive work is to therefore attach it to those who imitate that they have performed productive work by passing off the "same" medium, to discern between money or counterfeit, worker or thief, capitalist or bankster.
My writings in this manner then by no way point to communism (quite the contrary if you have browsed).That savings and capital formation earn interest or are accretive actually requires more productive work in order to pay back the interest. I'm not familiar with Marx's Labor Value Theory anymore than hearing of it but never read it. Again, the interest is not conjured but must be returned over time by someone performing productive work to earn it to pay it back.
That productive work must be performed in any life does not necessitate that the society one is living in is Free or Authoritarian. I only mean to indicate that in order to meet the demands of living then one must perform productive work themself or steal from the efforts of someone elses productive work. If there were some other way to identify the difference between money and counterfeit without associating it to productive work then I don't know it.
Agree with you about time. The counterfeiters are sucking the life out of their hosts.
The morons are SO desperate for that inflation...they'll do "anything" to achieve it. Anything.
What is 'anything'? I wonder, just how stupid will they get?
They STILL haven't made the connection between the deflationary state of the economy, and the declining wages of the consumer-class. Sure, they will try anything. Anything EXCEPT allowing wages to rise.
So just where do they think inflationary pressures are going to come from? You can raise prices all you want...if no one will PAY those prices, you don't have inflation. You have seller wishful-thinking, and a lot of stagnant inventory sitting unsold, and depreciating by the day.
Inflation...don't make me laugh. And I know that some things ARE getting pricier, things that aren't counted in the inflation stats. But that STILL is not inflation, not the kind TPTB NEED. It is however, just enough to piss off the masses of people who have to fork over more for food and other necessities. Those folks don't own the kind of assets that would benefit from the type of inflation TPTB want and need.
Hey rich people, listen up! You will NOT be able to continue to 'grow' your wealth unless you start allowing everyone ELSE to benefit as well. Where do you think all your wealth COMES from? It comes from the labor and efforts of all those people you've been firing to cut costs...
Get it? Got it? Good.
I suspect what the banksters really want is high inflation only in asset prices to preserve the wealth of the richs while keeping commodity prices low to keep hyperinflation in check. If wages incresed for the consumer class, the price of consumer goods may go up faster than the wages.
We cannot raise wages unless we have comparable increase in our GDP.
NO.