COMMODITIES

If you play enough games with your own currencies, it's not surprising that you'd lose the ability to control the gold market, writes John Bougearal of Structural Logic: A Commodity Trading Advisor.

On January 11, central banks and sovereign wealth funds issued a press release stating that “attempts to dismantle gold’s monetary role have failed.”

They also warned of “twin shocks” to the US dollar and euro, adding that “no other reserve asset seems safe from the coming dollar shock,” and that central banks around the world “are likely to increase their interest in gold as a result of doubts about global monetary arrangements.”

Central bank demand for gold in 2012 was the strongest in 50 years. The world is headed towards a multi-reserve currency system, say the central banks. Global trade will no longer require the US dollar. Bilateral agreements and swaps will be all that is required. A return to bilateral swaps dates back to the China-Brazil swap deal in 2005.

The growing preference for monetary arrangements outside the US dollar reflect the fact that the world is flooded with a currency whose value is being eroded exponentially by the Federal Reserve and US government.

The global banking system, noted economist Alasdair Macleod in his 2013 outlook for gold, has struggled with insufficient capital and overvalued collateral. Government and central-bank manipulation of fiat currencies “have succeeded in deferring bankruptcies and liquidation of malinvestments to the point where their cost can no longer be sustained...and this...has become a problem everywhere."

"The coincidence of all nations following the same path to destruction is the result of international coordination that has dominated global politics since Bretton Woods in 1944. Never have we seen so many governments agreeing to make the same mistakes. We are one year closer to a renewed financial crisis, the pace of which is quickening.”

With the stakes soaring ever higher, it was no surprise to see the German Bundesbank issue a press release on January 16 announcing that it was initiating a gold repatriation program. “By 2020, the Bundesbank intends to store half of Germany’s gold reserves in its own vaults in Germany. The other half will remain in storage at its partner central banks in New York and London.”

With this new storage plan, the Bundesbank is focusing on the two primary functions of the gold reserves: To build trust and confidence domestically, and to exchange gold for foreign currencies.

The Bundesbank repatriation initiative signals a growing lack of trust with its foreign trading partners. Possession is nine-tenths of the law, and if not in their vaults, ownership claims are difficult to enforce. Better to repatriate half of your gold.

But the bigger issue is why the Bundesbank has chosen to take delivery over a seven-year time horizon. This speaks to the possibility that the Federal Reserve doesn’t possess all the gold that they officially report. In short, the Fed may have asked the Bundesbank to defer repatriation until 2020 because they had loaned it out.

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