It’s been an interesting week so far in the world of gold prices and central banks making use of their gold reserves. For those asking if they should buy gold, two events this week provide further arguments on the benefits of holding the precious metal.
There is little doubt that central banks, notably the U.S. Federal Reserve, are going to have a mess to clean up after the catastrophe they have created in markets. Just about everything is jittery – equities, bonds, housing …etc.
Even gold and silver prices have been on a roller coaster ride from one day to the next.
After last week’s Fed meeting on Wednesday equity markets rallied but then declined. On Thursday and Friday, fear took hold – namely fear of recession/stagflation. See our post on June 16 Is the Game Over for the Fed?.
The chart below shows a comparison of gold, silver, select equity indices, and bitcoin.
During this time of market turmoil gold and silver have done their job of holding their value!
Take note of the sharp decline in Bitcoin once touted by many as the ‘new gold’ … in this instance Bitcoin is the largest decliner, but in US dollar terms gold has not declined at all!
Two other topics of interest made news this week:
Firstly $100,000,000 of Russian gold was moved into Switzerland and, secondly the newly released report from the Bank of International Settlements (BIS) on the future of the monetary system.
Russian gold shining again?
The Swiss Federal Customs Administration reported that it imported over 3 tons of gold from Russia in May. This is the first time that Switzerland has imported gold from Russia since the war broke out in February.
This could be a sign that the perception about Russia is changing as most refiners would not accept Russia’s gold after sanctions were implemented in late February.
Back then LBMA (London Bullion Market Association) removed Russia’s fabricators from its accredited list. This put a de facto ban on newly mined Russian gold.
However, previously mined gold was not prohibited from being further processed by other refiners. But some refiners were hesitant to do so.
Russia has a big impact on the gold market, it is the second-largest gold-producing country (following China) and its central bank holds the 5th largest gold reserves. Russia’s central bank holds 2299 tonnes of gold. For more see our post from December 9 Russia: A Prominent Player in the Global Gold Market
The physical move of gold from Russia to Switzerland does not mean that the Russian Central Bank is selling its gold.
More likely is that this gold is loan guarantee collateral. Obviously, no one but the Russian central bank knows for certain what is happening to this physical gold.
But it does once again give us a chance to remind everyone that counterparty risk is so important.
Russia may have willingly moved some of its refined gold to Switzerland because without doing so that physical gold cannot become the collateral for borrowing money or maybe even the basis of the gold sale.
No one would be willing to lend Russia money against that gold if the physical gold remained in Russia because: if you don’t hold it then you don’t own it.
Here is a hypothetical example to illustrate the workings of a loan for which this recently shipped gold serves as collateral. Assume that Russia wants to borrow $100,000,000 from India to pay for computer chips made in Singapore.
India might be willing to lend money to Russia despite the Ukraine war. However, India definitely knows Russia cannot be trusted to repay just because Russia previously agreed to pay.
Said another way, Russia is not considered a reliable counterparty, especially regarding assets contained within its own Russian borders. Furthermore, after a loan default, no Russian judge would dare rule India had a valid claim unless President Putin said so publicly. Hence India cannot rely upon the Russian legal system to protect India’s interests as a lender to Russia.
And India knows that its own Indian army is not strong enough to force its way into Russia. Then collect $100,000,000 of assets, and then leave Russia if the collection is needed following a loan default.
So, a peaceful collateral arrangement is necessary where the physical gold is moved to where India can seize it if the loan goes bad. Such holding and owning agreements are needed before any loan is made.
Without India being comfortable that the loan principal will be repaid by either cash from Russia or by India seizing the tonnes of gold, no loan would ever be advanced. So what is the solution?
The solution was that gold collateral for such a loan needed to rest with a counterparty acceptable to India.
India knows that Switzerland will hand over Russia’s gold once it is clear that Russia cannot (or will not) repay India any other way.
From the Indian lender perspective, Switzerland is an acceptable counterparty for physical gold whilst Russia is clearly not. This means the gold guarantee of a $200,000,000 loan must be held in Switzerland instead of Russia.
On the other hand, Russia views Switzerland as a better counterparty than India for holding its gold because Switzerland has zero incentive to seize gold which does not belong to it – especially from Russia.
Notably, the Russians would never choose America as a counterparty for this gold loan. Since, America is already busy seizing whatever Russian assets it can find.
The Future Monetary system
The second topic this week is a special chapter from the Bank for International Settlements (BIS) annual Economic Report titled “The BIS presents a vision for the future monetary system”.
BIS is an international organisation that states its mission is to support central banks’ pursuit of monetary and financial stability through international cooperation and to act as the bank for central banks.
The key points of their chapter are that the limitations of ‘crypto’ and blockchain currencies make it unsuitable for central banks to adopt Bitcoin as the base of its monetary system:
Structural flaws make the crypto universe unsuitable as the basis for a monetary system. It lacks a stable nominal anchor, while limits to its scalability result in fragmentation.
Contrary to the decentralisation narrative, crypto often relies on unregulated intermediaries that pose financial risks.
The report goes on to explain that central banks have centralized the monetary system within a country and the far-reaching innovations, such as those in the crypto universe, entail a radical departure….
Innovations such as programmability and composability on permissionless blockchains enable these services.
Such systems are "always on", allowing for global transactions 24/7, based on open-source code and knowing no borders.
… As dramatic as the recent price collapses have been, focusing on the price action alone diverts attention away from the deeper structural flaws in crypto. This renders them unsuitable as the basis for a monetary system that serves society.
This report from BIS reinforces our long-held belief that cryptocurrencies are not going to be part of the ‘official’ central banking system for a long time to come.
Yes – the monetary system will evolve and digitize even further…. but not with private cryptocurrencies since central bankers will never endorse a system not clearly controlled by themselves.
Central banks won’t be replacing their gold holdings with crypto no matter how low or high the bitcoin price gets.
This weekend we are launching The M3 Report, our new show about Money, Metals and Markets. With highlights from our yet-to-be-released interview with Jim Rickards, Chart Watch with Gareth Solloway, and commentary from our own team, this is something not to be missed.
In Episode One we’re chatting about the power of perception so look out for the Wizard of Oz, thoughts on gas prices, and what Jim Rickards really feels about Janet Yellen!
From The Trading Desk
UK inflation numbers released yesterday came in at 9.1% with the BOE expecting inflation to continue to rise to 11% this year before pulling back.
These inflation numbers are feeding into the UK economy with UK business confidence at a level that signals a recession.
The same theme is running through Europe and the US too.
EU inflation is up to 8.8% with even higher numbers in the Baltic countries with inflation in Lithuania at 18.9% & Latvia at 16.9%.
Gold has continued this week within a tight trading range with a high of $1,843 before pulling back below near term support at $1,823.
Key levels to watch our 200-day moving average at $1,840.
Support is at $1,823 which we touched off earlier today and below that the $1815 and $1800 levels come into play.
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GOLD PRICES (USD, GBP & EUR – AM/ PM LBMA Fix)
22-06-2022 1827.30 1841.85 1494.37 1501.66 1738.49 1744.97
21-06-2022 1836.50 1840.25 1491.61 1498.33 1736.23 1742.72
20-06-2022 1841.20 1836.50 1502.60 1501.52 1746.75 1745.41
17-06-2022 1849.85 1841.55 1503.74 1506.39 1757.54 1756.47
16-06-2022 1831.55 1826.50 1511.40 1491.15 1758.84 1747.60
15-06-2022 1823.15 1823.75 1509.57 1510.07 1739.47 1749.52
14-06-2022 1823.65 1818.30 1501.59 1509.37 1745.42 1741.57
13-06-2022 1855.95 1830.85 1519.47 1503.13 1771.88 1753.95
10-06-2022 1843.35 1830.00 1477.45 1481.02 1738.83 1739.96
09-06-2022 1849.25 1844.85 1477.37 1469.79 1725.72 1727.89
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