This is exactly how I figured it worked, and I agree that the central bank does not retain title, and that there is therefore no double-counting or multiple claims of ownership, as the goldbugs are so wont to believe.
But what puzzles the heck out of me is that anyone would think it appropriate to call this a lease. This is clearly a repo, or if you prefer, it could be termed a swap or even a loan of bullion. But a lease? Why use that term to describe a transaction that seems (to me, admittedly not a lawyer) to have little to do with the customary use of that term? Does anyone know why they call this bullion leasing, when it really appears to be a bullion repo agreement?
All the best,
Erik
The use of the word leasing is not really appropriate as that is not what happens in most gold borrowing transactions, eg it is used when refering to the borrowing of unallocated gold, where obviously there is no specific physical asset to which title could be retained as would be implied by the word "lease".
Usually banks enter into specific precious metal lease agreements in addition to a master ISDA due to the unique nature of gold leases. Each bank has their own standard lease agreement and it would probably also be customised depending on the nature of the transactions contemplated with that counterparty. So there isn’t really any clear answer to the question of title as it is case by case specific.
Generally lease agreements have "we retain title" clauses (even when contemplating unallocated) which I think is just a way of the lender establishing a right to go after the borrower if they don’t repay. Below is some wording from an actual agreement which effectively acknowledges that title cannot practicably traced because it is "standard custom and dealing in the industry"
Furthermore, the Lessee hereby agrees that in the event that any Leased Metal is (i) sold by the Lessee to a third party, and/or (ii) used, converted or otherwise dealt with in such a manner that the Bank’s title to such Leased Metal can no longer be traced, the Lessee shall hold in trust for the Bank all consideration (including cash) received for such sold Leased Metal and/or any item or object that such Leased Metal has been used in, converted into or otherwise dealt with.Certainly banks word things in their favour, but I would not interpret the above as meaning allocated 400oz bars would be encumbered should someone further up the "daisy chain" of transactions in relation to that 400oz failed to repay a lease. My reasoning here is 1) because it is understood as "standard custom and dealing" that physical metal leased to a borrower is likely to be sold/use etc and 2) such an interpretation could easily backfire on the bank as the physical metal it holds would also be so encumbered as other banks, seeing this bank going against standard custom would retailate by doing the same.…
Lessee will not, directly or indirectly … Use, convert, commingle or otherwise deal with any Leased Metal or any part thereof except in the ordinary course of its business as now being conducted, or which is standard custom and dealing in the industry in which the Lessee is a participant.
Anyway, my guess is that the majority of "lease" transactions involve unallocated, which means they are really borrow/lend and there is no associated physical which can be "traced". The only time I can see leases being done where title is retained over specific bars by the lender (and the lender wants those specific bars back) is swaps/repos where the lender is only looking for short term funding, just using the gold as collateral.
This thread is now two weeks old, has seen 240 posts and almost 23,000 views. It has also been cross-linked by PM websites throughout the blogosphere. But the last few pages of comments have been dominated by just a few people.
I’d like to ask those readers who previously held GATA, Ted Butler, Harvey Organ, and Andrew Maguire in high esteem to indicate whether this discussion has changed your perspective at all, and if so, in what way(s)? My hope in beginning this discussion was to wake some of you up to the possibility that these people, well-meaning as they may be, really don’t know what they are talking about. I hoped some of you might realize that continuing to have faith in their viewpoints and advice, and particularly, making investment decisions based on same, is something that might warrant reconsideration. I certainly respect everyone’s right to their own opinion, and I understand that some of you will think it is I who don’t know what I am talking about. I’m just curious to know whether and to what extent this thread has changed anyone’s mind.
The non-participation of the people being criticized (even after being apprised of this thread and encouraged to join the conversation) seems quite telling to me. In my own estimation, despite the fact that these people may have good intentions, their absence here tells me that on some level - conscious or unconscious - they know deep down that their arguments are specious, and they don’t want to be shown up by the people here who actually know of which we speak. I suppose the counter-argument would be that it is me and the others here who have exposed the fallacies of the most popular manipulation theories who don’t know what we’re talking about. Ted Butler claims not to have time or interest in defending his views here, and has previously described Jeff Christian as a "lightweight" unworthy of Ted’s time or energy for a debate. Harvey Organ has stated flatly that he refuses to participate in ANY discussion to which Jeff is a party. Either these guys are scared to be shown up by Jeff’s superior market knowledge, or they are just so much better informed that they truly view people like Jeff and myself as "lightweights" not worthy of their time. And they can’t find time or interest to come defend their views here, despite the fact that 23,000 people have now viewed the thread, or that showing us up publically would be a profound marketing opportunity for them. You have to make up your own mind which explanation is more likely.
To Jim H and others who have previously viewed GATA, Ted, Harvey and Andrew as experts on these markets: I hope you’ll chime in and let us know whether this discussion has changed your views in any way.
Thanks,
Erik
Nice article - the last paragraph of which mirrors my thoughts that I shared with Victor - i.e. what happens when significant numbers of "monied interests" start flowing "meaningful sums" of their assets into the base of Exeters’ pyramid.
http://www.perthmintbullion.com/Libraries/Website_Downloads/120416_Blog_Watch.sflb.ashx
In this recent news article, Schroders Private Banking rejects claims that gold is in a bubble on the basis that
"The rise in price has been orderly, with no replay of the surge seen at the end of the previous bull run."
However, they have reduced their gold positions partly because of a high in their proprietary "relative pricing power measure" of
"above 500, where the level in 1930 was taken as 100" which suggests to them that "either gold is expensive and is therefore likely to fall in price or the rise in gold’s price is a portent of inflation to come". Because they have ruled "out extreme inflation in the near-term, Schroders Private Banking concludes gold’s price could be set to fall."
Nevertheless, their head of asset allocation, Robert Farago, concludes:
"It is not difficult to appreciate the value of a metal of which there is just 170,000 tonnes in existence at a time when I frequently find myself mixing my billions and trillions. For private clients who can afford to tuck away a meaningful sum of money in gold without worrying about its performance over the next decade, this seems a highly sensible option."
This thread has changed my views substantially. The links and discussion have been very thought-provoking and informative.
A small aside to anyone who decides to contribute any papers or articles on the precious metals markets and bullion banking: it helps non-professionals immensely when articles explain details and illustrated with simplified numbers. I’m just speaking off the top of my head here based on some articles I tried to understand last week, but when I read an article that states "the bank was willing to allow the party roll the forwards because this is worth more to the bank" and doesn’t elaborate, this is a bit obscure. If another article gives simple notional amounts and explains why and how process x is worth more to the bank this is immensely more useful. Illustrations, even very simplified ones, are lacking in many articles that aim to debunk the staunch GATA/Harvey Organ crowd. As a non futures trader, I’m willing to spend the time to do my homework and understand derivative and banking concepts when they are explained properly. If someone talks about synthetic calls or some arbitrage or who knows what I will sit and follow as long as the article guides me through what they are talking about, and I think I speak for a large number of non-professionals out there. However, when articles vaguely mention some process, assume I fully visualize the implications thereof and jump five steps ahead I have nothing to hold on to and I get lost. I know this seems slightly off topic but Erik did mention in his reply to Bron that the PM investment community is starving for good analysis, and this point is related to that. In skimming articles on hedging, bullion banking etc to try to understand this stuff further in the last week or two, I’ve read a bunch of good articles and I’ve read other articles that left me with more questions than answers.
But yes, I feel that this thread has made me a lot wiser regarding what goes on in the gold and silver markets. Hopefully I’ll be better prepared for the future as a consequence!
I started out thinking the PM market was massively manipulated. I still think it’s being manipulated, just maybe not as much as I thought. The opinion I want now is our faithful guide, Chris Martenson’s.
Bron,
Thanks for the reply. I will continue to think on what you wrote. Perhaps if I reword my statement, you will find it closer to your position? If not then feel free to correct me
…
So ‘gold (futures) contracts’ (on the COMEX) will crash in currency price, even as physical gold will soar in currency price – but you won’t see the latter, because physical gold is not quoted (on Kitco or the COMEX or the newspaper) (in size at least) (maybe you can get some coins on Ebay at near the COMEX price). Our current gold pricing mechanisms are based on the paper (COMEX futures) gold price and thus they will break down in a period of confusion. Contracts for gold will not perform. Physical gold will soar in value but there won’t be a market in place to quote a price (that ordinary people can see).
…
I realize that the OTC gold pricing mechanism will continue to function, but how long would it take for the price discovered in that manner to become public knowledge? I can see it filtering to the coin dealers, as they would be in contact with their suppliers and so on up the gold production chain to the OTC market. But how would kitco, CNBC, and the WSJ obtain the price quotes so they can publish it?
Would GLD reflect the OTC market price?
Having read this thread off and on over the past weeks and gleaned what I could from technical and nuanced contributions without worring too much whether I totally understood them all I have learned and/or reinforced the following perspectives.
Markets, global sized and instantly connected are inherantly complex interactive systems that will resist or ignor all our efforts to totally understand and predict them. In this respect I have come to a greater awareness of this complexity within the PM markets, but only insomuch as to see deeper levels of interaction, interpretation and more potential actions/decisions available to traders based upon their judgements. It seems to me that there will always be a reasonable assessment available at any given time to support either a buy or sell position and an uncertain future will be the final judge (both near and far).
So for me it comes down to risk, how much and when will I take it and for how long. Lucky enough to be of modest means I’m pretty much done with those decisions. My gold holdings can be concealed in one fist while the other could hold up a bag of silver at arms length. Some 3 to 4 figure paper positions complete the package acquired since becoming aware in 2008. Now, I sometimes feel like I should put more into PMs when insecure but because the only way for me to do that is with borrowed money it would only increase my insecurity and so I sit and watch (too much as I would be better off looking for income). Had I more to invest I think the old adage of divirsity is sound but in a traditional sense too narrowly defined and with one lucky lotto ticket I would be looking for the productive land, forrest, mines and water resources more than paper and in more than one country as well. And I would seek to multiply value by finding these assets close to home and leverage them by building relationships/community connections. This perspective has been most revealed and valued by my exposure to Chris Martenson and it is the one most lacking in respect to merely owning gold and silver (ideally I would sustainably mine silver locally and employ the community).
As it is I am too heavily weighted into PMs as a large % of my meager investments but I also hold the view that I have spoken with my cash by trading it in and thereby voting against paper as much as I am able. Despite taking the risks inherent in their ownership, the same risks of complexity are hugely multplied within the leveraged, fiat, political landscape of tradition investments and I feel good, knowing the value will not drop to zero and hoping I will not need to sell in some emergency. Instead I’ll pass them on, a quaint reminder of a time of transition to a much better system.
Thanks to all for such a rich forum of discussion and learning, this site demonstrates some of the best practices that the internet can aspire to.
[quote=Erik T.][quote=victorthecleaner]
(A) The first is a swap involving allocated gold. Legally this is a repurchase agreement, i.e. when the position is opened, the title to the bars is transferred from the central bank to the borrower. At the same time, the brrower of the gold lends the CB cash (the other side of the swap - serves as cash collateral for the loan). When the swap matures, the borrower needs to return an equal weight of (allocated) gold. In the meantime, the borrower can sell the borrowed gold to a jeweller who melts it down and creates necklaces from it. During the term of the swap, the CB does not own gold, but only has a claim against the borrower (who may default).[/quote]
This is exactly how I figured it worked, and I agree that the central bank does not retain title, and that there is therefore no double-counting or multiple claims of ownership, as the goldbugs are so wont to believe.
But what puzzles the heck out of me is that anyone would think it appropriate to call this a lease. This is clearly a repo, or if you prefer, it could be termed a swap or even a loan of bullion. But a lease? Why use that term to describe a transaction that seems (to me, admittedly not a lawyer) to have little to do with the customary use of that term? Does anyone know why they call this bullion leasing, when it really appears to be a bullion repo agreement?
All the best,
Erik
[/quote]
Hi Erik,
This has actually been one of Turk’s stronger points I think. Having entered into ‘lease’ agreements, the central banks are effectively reporting gold and gold receivables as one line item on their balance sheets. Given the tangible and unambiguous nature of physical gold possession, this seems inappropriate and perhaps even deceptive. If, as you suggest, CBs no longer hold title, why do they continue to report ownership of that metal? Of course this is probably what the ‘Brown’s Bottom’ UK gold sale was all about. Namely accounting recognition of metal that had already left the vault to bail out the bullion banks after the 1999 Washington Agreement almost blew up the London market.
The question is, are lease agreements - obscured on the CB balance sheet - masking immediate and ongoing demand for physical metal? Presumably to close the lease the bullion bank either has to coax the metal from private hands (at higher prices) or purchase mine supply, which is becoming increasingly expensive and risky.
[quote=jonesb.mta]
I started out thinking the PM market was massively manipulated. I still think it’s being manipulated, just maybe not as much as I thought. The opinion I want now is our faithful guide, Chris Martenson’s.[/quote]
The public record of the BIS makes it abundantly clear that gold is subject to the same intervention that is a characteristic of the forex market. They’ve referenced it in speeches and official documentation. Jim Rickards recently confirmed his own view - shared by many less excitable goldbugs like myself - that the BIS are co-ordinating gold’s orderly ascent. Note also that Ben Bernanke’s own famous treatise arguably calls for a devaluation against gold. It’s clear to me that central banks want higher gold prices, but gradually and on their own terms.
For all the excellent commentary and analysis on this thread, I do think GATA have been done something of a disservice. For all their flaws, they have a solid and diligent track record of research and FOI requests that have illuminated the importance and political nature of gold. This during a time in which gold had become discredited as a monetary asset. The documents cited in this piece by Chris Powell represent a good collection of primary historical sources, from which it’s fairly easy to conclude that gold is subject to co-ordinated central bank activity:
http://www.gata.org/node/9545
The only question remains is whether you want to classify that as ‘conspiracy’ or ‘policy’. I don’t mind and will continue to accumulate physical metal.
Very good discussion of how leasing may make CB balance sheets deceptive.
Erik T… Thanks again for all your energy in this thread… I want to answer your survey… but I am still
learning here : )… Will try to summarize my thoughts in the next day or two.
On a side note, in case you have not noticed, TPTB and our wonderful mainstream media are ramping up the anti-Gold rhetoric as of late… I am sure most on this thread know how Charlie Munger (Warren Buffet’s partner) disparaged Gold during the yearly Berkshire Hathaway Lovefest;
http://truthingold.blogspot.com/2012/05/i-cant-believe-charlie-munger-buffet.html
But then we get this today from Warren’s Billionaire Bro Bill Gates (video link in linked piece);
http://libertyblitzkrieg.com/2012/05/07/watch-bill-gates-stutter-like-a-moron-on-gold/
"He also states that once people want to sell “there is no floor.” I mean come on man. Gold is the only currency that has survived purchasing power intact since the ancient Egyptians. The worst part about him saying all this publicly is that he is actively discouraging the sheeple who actually listen to him from protecting themselves. That is morally repugnant."
Can you say Contrarian Indicator?
I contacted Jeff Christian about the leasing question. He didn’t have time to write in the thread himself, but sent the following via e-mail:
[quote=In back-channel e-mail, Jeffrey Christian of CPM Group]
A swap is not a lease. People refer to leasing gold ‘generically.’ In the first period, starting in the late 1970s and going through much of the 1980s, central banks leased gold to bullion dealers and banks. They lent the gold to the banks in a conventional leasing arrangement, and were repaid principal and interest along an agreed upon schedule. As the 1980s progressed, bank deregulation spread around the world, non-bank financial institutions became more involved in gold leasing, and gold lending volumes rose, central banks became more concerned about their exposure to the borrowers. They started moving to swaps and repurchase agreements, which gave them greater security. They still called it lending, but there was less real lending and more swaps. The Drexel bankruptcy greatly accelerated this change, as Drexel had enormous gold loans on its books, and many central banks wound up getting shares of New Street Co., the successor, in return for their gold. (It turned out all right for many of them, as gold prices fell and the New Street shares rose sharply. But, still they were central banks and not investors seeking work-out shares.)
So, swaps are not leases, most central bank lending the past 22 years has been swaps not leases, but people still use the term lease when referring to these transactions.
Most central banks reduce their gold holdings by the amount they swap gold, per conventional accounting. Banks that lend sometimes reduce their reported gold monetary reserves to reflect the lending, moving the gold on their accounts to a trading account instead of a monetary reserve account. Others leave leased gold on their books as monetary reserves. So, the people who fear ‘double counting’ are ultracrepidarians.[/quote]
To 50sQuiff's point about CBs not reducing their stated gold holdings after leasing out gold, I am not knowledgable on that subject myself and have not researched it. My read of Jeff's comments, however, is that he is saying that "most" CBs do reduce their reported reserves when they "lease" out bullion. I haven't read the analysis from "Turd", so cannot comment. (Sorry, but I just can't bring myself to take seriously someone who not only hides behind a pseudonym, but who chooses "Turd" as that pseudonym). EDIT: I just noticed you said "Turk", not "Turd", presumably referring to James Turk. My bad - I get so confused by all the people hiding behind pseudonyms that I didn't notice you were referring to someone else.Erik
[quote=Jim H]"He also states that once people want to sell “there is no floor.” I mean come on man. Gold is the only currency that has survived purchasing power intact since the ancient Egyptians. The worst part about him saying all this publicly is that he is actively discouraging the sheeple who actually listen to him from protecting themselves. That is morally repugnant."
Can you say Contrarian Indicator?
[/quote]
Jim,
I agree that Gates’ perspective fails to recognize some very important fundamentals. But I think you may be making a dangerous assumption here, and I think all of us would do well to think seriously about the "bottom falling out of the market" scenario.
Jim, your arguments are spot on, in the long run. But there is a HUGE amount of speculative money in gold, much of it held by weaker hands. If we see a general sell-off in risk assets (something I think VERY likely in the next 12 months), that correction will almost certainly take gold below the trendline that began in 2008 (presently around $1575). I think it quite possible that we could see a sell-off to the $1000 to $1200 level as a result. That will be the buying opportunity of a lifetime if it happens.
This really is mostly about psychology - on that point I think Gates is right. Right now the people in the gold market have strong conviction, and most have recognized the MSM gold-bashing and bubble-calling as nonsense. But if we see <$1400, a LOT of those people will "come around" to think it really was a bubble, and they will panic and sell. I hate to say it, but this whole manipulation conspiracy thing evidences quite clearly to me that a whole lot of the longs in the gold market are people who don’t know much about how this stuff really works, and in my estimation that makes them quite vulnerable to panic selling at the worst time.
You have to remember that fundamentals are in the background. The only thing that affects the price (and Gates sort-of alluded to this) is whether there are more buyers than sellers. If the weak hands get shaken out and the price falls to the level that the hedge funds think they can get out at $1450 and get back in at $1150, it becomes a self-fulfilling prophecy. Yes, a bigger-than-expected QE3 could very easily take the price north of $2000, never again to go lower. But $1000 is just as possible. Really.
Erik
[quote=Erik T.]
Jim,
I agree that Gates’ perspective fails to recognize some very important fundamentals. But I think you may be making a dangerous assumption here, and I think all of us would do well to think seriously about the "bottom falling out of the market" scenario.
Jim, your arguments are spot on, in the long run. But there is a HUGE amount of speculative money in gold, much of it held by weaker hands. If we see a general sell-off in risk assets (something I think VERY likely in the next 12 months), that correction will almost certainly take gold below the trendline that began in 2008 (presently around $1575). I think it quite possible that we could see a sell-off to the $1000 to $1200 level as a result. That will be the buying opportunity of a lifetime if it happens.
This really is mostly about psychology - on that point I think Gates is right. Right now the people in the gold market have strong conviction, and most have recognized the MSM gold-bashing and bubble-calling as nonsense. But if we see <$1400, a LOT of those people will "come around" to think it really was a bubble, and they will panic and sell. I hate to say it, but this whole manipulation conspiracy thing evidences quite clearly to me that a whole lot of the longs in the gold market are people who don’t know much about how this stuff really works, and in my estimation that makes them quite vulnerable to panic selling at the worst time.
You have to remember that fundamentals are in the background. The only thing that affects the price (and Gates sort-of alluded to this) is whether there are more buyers than sellers. If the weak hands get shaken out and the price falls to the level that the hedge funds think they can get out at $1450 and get back in at $1150, it becomes a self-fulfilling prophecy. Yes, a bigger-than-expected QE3 could very easily take the price north of $2000, never again to go lower. But $1000 is just as possible. Really.
Erik
[/quote]
Erik - if the possibility of no QE3 anytime soon is of equal chance as gold decreasing to $1200ish, who is going to step in and buy the $1 trillion plus in US debt that will need to be sold in the next 12 calendar months?
The only viable way I could see that happen would be if the Euro dissolved and there was a huge rush to safety into US Treasuries. Otherwise - who is going to buy this debt if not the Fed via QE? Are you suggesting that the market sans the Fed is sufficient to absorb these new Treasuries without long term rates rising appreciably to the point where the Fed deemed it necessary to intervene?
Erik,
Ultimately, is any trading fully divorced from psychology?
[quote=CPTWaffle]However, when articles vaguely mention some process, assume I fully visualize the implications thereof and jump five steps ahead I have nothing to hold on to and I get lost. I know this seems slightly off topic but Erik did mention in his reply to Bron that the PM investment community is starving for good analysis, and this point is related to that.[/quote]That’s why I started my personal blog and what I hope to do on the corporate site (will be creating a Research section with some educational stuff). You’ll see some "The Gold Value Chain" posts on my blog which try to explain. Problem is to go beyond that starts to get into some complex stuff that takes a lot of time to write. In my new role I’ll have the time to do that.
You are correct about vague mentions and assumed understanding of the implications. Often I do that simply because I don’t have the time to break down the point.
[quote=Michael H]
So ‘gold (futures) contracts’ (on the COMEX) will crash in currency price, even as physical gold will soar in currency price – but you won’t see the latter, because physical gold is not quoted (on Kitco or the COMEX or the newspaper) (in size at least) (maybe you can get some coins on Ebay at near the COMEX price). Our current gold pricing mechanisms are based on the paper (COMEX futures) gold price and thus they will break down in a period of confusion. Contracts for gold will not perform. Physical gold will soar in value but there won’t be a market in place to quote a price (that ordinary people can see).
I realize that the OTC gold pricing mechanism will continue to function, but how long would it take for the price discovered in that manner to become public knowledge? I can see it filtering to the coin dealers, as they would be in contact with their suppliers and so on up the gold production chain to the OTC market. But how would kitco, CNBC, and the WSJ obtain the price quotes so they can publish it?
Would GLD reflect the OTC market price?[/quote]
Your rephasing is correct, but only in the US as I gather most of the players there use COMEX as a price reference. Over here we use OTC prices as quoted by services like Reuters (see here for an example of how this works http://goldchat.blogspot.com.au/2008/06/investment-timeframes-part-ii.html).
The OTC market would take a bit of time to adjust to reflect the understanding that prices quoted by bullion banks on Reuters are for physical and not unallocated settlement, but I think it would happen. I don’t know where Kitco is getting their price feed, if it is Reuters/Bloomberg it would continue on. CNBC etc would just have to stop looking at COMEX prices and look at spot gold prices on Reuters/Bloomberg.
GLD will always reflect OTC prices as that is what it is arbitraged to (GLD’s metal is 400oz bars in London, not 100oz bars in COMEX). GLD is really the price of gold in London and not the price of gold in NY, even though it is a US listed product. This is not obvious to most people because the cost of moving metal (ie abitrage) between UK and US is small relative to metal prices.
Note that while COMEX is trading, there is also concurrent trading in the OTC market for gold settling in London (as well as off exchange settlement in the US).
If there was a real problem getting gold between UK and US (lets say gold exports are banned) or distrust in COMEX leading to its prices discounting but the London OTC market is still operating and trusted, you would see GLD trading at a "fair" or much higher price to COMEX. I can imagine that statement may be a bit of a freak out, but reflects the fact that as gold is physical, its location matters. This is usually only an issue for pro market players. See here for an explanation of this "loco" http://goldchat.blogspot.com.au/2008/07/gold-value-chain-part-v-trading-loco.html
That’s why I started my personal blog and what I hope to do on the corporate site (will be creating a Research section with some educational stuff). You’ll see some "The Gold Value Chain" posts on my blog which try to explain. Problem is to go beyond that starts to get into some complex stuff that takes a lot of time to write. In my new role I’ll have the time to do that.
You are correct about vague mentions and assumed understanding of the implications. Often I do that simply because I don’t have the time to break down the point.
[/quote]
Hi Bron. I was not directing my comment at you specifically. Looking forward to the soon-coming research section! Thanks! That will be very helpful.
[quote=50sQuiff]This has actually been one of Turk’s stronger points I think. Having entered into ‘lease’ agreements, the central banks are effectively reporting gold and gold receivables as one line item on their balance sheets. Given the tangible and unambiguous nature of physical gold possession, this seems inappropriate and perhaps even deceptive. If, as you suggest, CBs no longer hold title, why do they continue to report ownership of that metal?[/quote]A few points:
- Some CBs report as one line, others break it down. Reserve Bank of Australia is a good example of the latter, in past annual reports (they do almost no leasing now) they go to the extent of breaking down their leases by the S&P rating of the borrower.
- Given the "we retain title" clauses in some lease agreements, that may be the basis on which the account for it the same. However, I think that physical gold held in the country by the CB, physical gold held outside the country, leases, swaps, and repos are all different and should be disclosed, no matter if legally title is retained.
- Jeff mentioned swaps/repos as preferred method and that this is because they are "safer". This may be why they are reported as one line.
Correct, but assumes the CB wants physical back - they may take unallocated (ie an exposure to the bank) if it is a domestic bank which is having "difficulties". In a lot of cases the BB does not buy physical from the mine, rather they buy it from the refinery (as mines can’t produce 400oz 99.5% bars). This is the lucky position the Perth Mint is in. Note, until I see BBs falling over themselves paying increasing premiums to acquire bog standard 400oz bars, there is no paper/physical divergence happening.
Thanks to Jeff (and Erik) for explaining the lease issue in post 249. It seems now they mostly use swaps or repurchases, and people just call them leases out of habit. So the gold becomes the property of the borrowing bank, and they have title to sell it.
This leads to questions regarding “lease rates” as posted by Kitco. http://www.kitco.com/market/lfrate.html
Can we assume these rates are really for swaps and repurchases, not actual leases?
Why is the “lease rate” sometimes negative? Why would I pay someone to borrow my gold? If I was a bullion bank, and especially if I was a central bank, why would I put a higher value on holding some cash for a month?
See the historic one month gold “lease rates” here and scroll down. Silver is also shown. http://www.kitco.com/lease.chart.html
They spiked down to -0.5% last September, just before gold prices crashed.
They spiked down to nearly -0.6% last December, just before gold prices crashed.
They stayed between -0.3% to -0.2% until gold crashed in March and are still at -0.1%.
There were virtually no negative rates from 2002 until 2009. They have been negative most of the time since.
Now I’m not saying that central banks loan their gold at a loss to bullion banks as part of a scheme to drive down prices. I don’t know enough to say. But if it is due to benign market forces then why didn’t we see the same spike down in lease rates in May 2011, when the rate went from -0.1% to positive before the dramatic gold decline?
And why did rates switch from consistently positive to mostly negative since 2009?
I find this all very peculiar and would appreciate help understanding these matters.
Travlin
[quote=Strawboss]
Erik - if the possibility of no QE3 anytime soon is of equal chance as gold decreasing to $1200ish, who is going to step in and buy the $1 trillion plus in US debt that will need to be sold in the next 12 calendar months?
The only viable way I could see that happen would be if the Euro dissolved and there was a huge rush to safety into US Treasuries. Otherwise - who is going to buy this debt if not the Fed via QE? Are you suggesting that the market sans the Fed is sufficient to absorb these new Treasuries without long term rates rising appreciably to the point where the Fed deemed it necessary to intervene?[/quote]
I can’t tell if you are reading unintended meaning into my statement, or if you are posing a new question. In any case, I am in complete agreement that QE3 has to come sooner or later, for the reasons you cite and others. However, one popular hypothesis is that they will wait for a significant correction to develop (10 - 20% SPX) or until after the election before taking action. A 10% correction in gold (and yes, a big risk selloff will pull gold down with it, unless there is big political unrest at the same time) is enough to trigger many technicians to sell, in turn triggering the waterfall effect. If you are one who believes all the manipulation theories, you might even suppose that crashing the gold price is a GOAL, although I don’t happen to see it that way myself.
I wasn’t saying no QE3, Steve, just that there is room for a big gold sell-off to get going here if equities correct significantly pre-QE3 and pre-election, which I think is possible. I’m not saying that’s likely - just that the "bottom falling out of the market" phenomenon is indeed possible if that were to happen. Let’s all hope it does, so that we can buy more gold at $1200!
@ao
Of course, and that’s my point. Like any other asset, independent of funamentals, herd mentality can take over before you know what hit you. We’re just above the 4-year trendline here. It wouldn’t take that much to trigger a stampede.
Erik