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Confiscation of Gold - Then What? Part 7

By: Julian D. W. Phillips | Wednesday, January 23, 2013
Special Report

Readers may not agree with our conclusions on the confiscation of gold, but we emphasis this reality. If we are wrong you will still own your gold. If we are right and you have not taken the right steps to guard against confiscation and the personal dangers to you individually, you will lose your gold if not suffer the penalties the "Gold Confiscation Order" brings with it.


Gold will move to a pivotal monetary position

Since August 2007 we have witnessed one banking crisis after another. We have seen the rise of Sovereign debt crises across the developed world. Today, we are hearing that the worst of the crises is over. Translated, that means the leaders have pumped sufficient funds into the banking system to keep it going in times of need and insolvency. But the fundamental problems of the developed world economies remain and could well impact much further on the monetary health of the developed world. In fact we are all well aware that bankers are themselves the most sensitized people when it comes to confidence in the banking system and money itself. Indications of this are being seen in the repatriation of gold to national banks. We expect Germany will be followed by many more central banks doing the same.

That's why we saw gold used in debt swaps by the central bank, the Bank of International Settlements in 2010 to the extent of 635 tonnes. Gold then made it easier for key banks to borrow when their credit rating among bankers was in doubt and ensured that the interest rate these loans carried was bearable. This was evidence that national gold reserves were used in the crisis.

We are of the opinion that commercial bankers are aware of the risks still attending the banking and monetary scene and know that a monetary crisis could return very quickly. That's why the lengthy laborious discussions under Basel III are ongoing.

[We wish to correct the statements that we reported from Sharps Pixley that stated that gold had been raised to a Level I asset in Bank reserves as this is not the case yet. Sharps Pixley corrected their statements as do we now]

However, we still believe that at some time in the next two or three years this will happen and gold will be elevated to a Level I asset by individual national banks. It will be precipitated by yet another currency/monetary crisis, which continues to be expected because a reformation of the monetary system has not taken place. It is not happily or willingly going to be done, but out of necessity. While the monetary system remains deeply faulted we expect more deep currency crises. The monetary system has fundamental flaws that need reformation to the extent unacceptable to the banking system. The banking system wants to see the current system continue and will do all in its power to make sure it does. That's why the banking system will continue to see solutions that don't truly address the structural faults. The prospects for more breakdowns remain almost certain. This requires gold returns to a pivotal position in the system to reinforce confidence in it and to delay any future crises.

Not only are the current faults in need of correction but a clearly visible pressure on the system has crossed the horizon and is rushing at us. It is the rise of China and the impact of the Chinese Yuan as a global world currency on the current state of the monetary system. With China in particular drawing down wealth from the developed world and likely to continue to do so in the future, it is unlikely that the developed world will be able to resist this debilitating process. Consequently, we are moving along a road to a poorer U.S.A. and E.U. unless protectionism rears its ugly head. That too would precede considerable currency turbulence that would require a safety net from gold. In view of the decay in confidence in currency values particularly among bankers themselves, gold remains a needed item to [as Axel Weber past head of the Bundesbank put it] "counter the swings of the dollar". We would extend this to all currencies, not just the dollar.

Is this just our opinion? No, the World Gold Council last week issued a report compiled by The O.M.F.I.F. the issuing statement was as follows:

Beijing, 11 January 2013 - Demand for gold is likely to rise as the world heads towards a multi-currency reserve system under the impact of uncertainty about the stability of the dollar and the euro, the main official assets held by central banks and sovereign funds. This is the conclusion of a wide-ranging analysis of the world monetary system by Official Monetary and Financial Institutions Forum, (OMFIF), in a report commissioned by the World Gold Council, the gold industry's market development body.

Some feel that so long as China and the Chinese are buying gold it will not be confiscated. With respect, this doesn't fit. China appears to be buying all of its domestic production for its reserves. And yet it is encouraging its citizens to buy gold. The net result is a huge campaign by government and through its citizens to bring as much gold into the country as they can [without forcing the gold price through the roof]. The foreign exchange reserves of China are well over $3 trillion making its published gold reserves a far too small component of its reserves compared to the largest developed world nations where it comprises around 70% of reserves. In China it remains in single digit numbers as a percentage of reserves. That's why China and a large number of countries across the emerging world are buying gold persistently.

Let's face it: if they keep this up or accelerate their buying in the international market then the tightness of supply will force a large rise in the gold price. Add that to the move of gold into a pivotal position in the monetary system and you see the only place many nations could quickly access gold for their reserves is from their citizens! So Chinese gold buying we feel is directly contributing to the case for the confiscation of gold in one or many more nations, in time. Additionally, it's a small step for the Chinese government to request gold be handed to government 'for the security of the nation'.

With newly mined gold around 2,700 tonnes a year and the balance of the total of 4,000+ tonnes of gold made up with re-sold gold [scrap] the amount of gold available for buying by central banks is very small. The newly mined gold in China, at around 340 tonnes per annum, goes straight from Chinese gold mines [we believe] straight into Chinese reserves. The amount of gold published by central banks last year was 540 tonnes [but this excluded Chinese purchases as these are made through an agent and such purchases handed to the People's Bank of China at five year intervals. The last time these were last made public was three years ago].

So why don't these purchases drive up the gold price? It's because central banks wait for the offer of large amounts of gold from their dealers, then accept such offers. This usually follows or accompanies a fall in the gold price, so only slowing the fall and not causing the gold price to rise. Match the price performance of gold to the amounts bought by central banks and you will see this. What has been apparent from the price pattern of gold and the supplies to the market is that there is a tight relationship between the two.

If suddenly Commercial Banks entered the market to buy gold for their reserves, then they would drive up gold price to unforeseen levels. Another statement of note from the OMFIF report [link above] is:

"While OMFIF does not envisage a return to a gold standard, the report says, 'Gold will increasingly have a renewed role in the global monetary system, attracting a higher level of attention from policy-makers and financial market practitioners.'"

According to Natalie Dempster, World Gold Council Director of Government Affairs: "The report makes a substantial contribution to the debate around the global transition to a multi-currency reserve system with important implications for reserve asset managers. We are already seeing many of the world's central banks increase the allocation of their reserves to gold and this report points to an acceleration of that trend."

The OMFIF report includes a foreword by Prof. Lord (Meghnad) Desai, chairman of the OMFIF Advisory Board. He states: "As China weighs up its options for joining in the reserve asset game, gold - the official asset that plays no formal part in the monetary system, yet has never really gone away - is poised, yet again, to play a pivotal role."

This has been our view for many years now!

We believe that the case for nation's confiscation of their citizen's gold has never been stronger. Indeed, a failure for nations to do so, may lead to the loss of credibility of many currencies in the global system and make it more difficult for nations to deal internationally when in financial difficulty. In a future part we will look more at the history of gold confiscation [with thanks to Adrian Ash of the Bullion Vault].

 


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Author: Julian D. W. Phillips

Julian D. W. Phillips
Gold Forecaster

Julian D. W. Phillips

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price.
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