Best of the Week
Most Popular
1.Stock Market Continues Defying Gravity, Dow New All Time High - Nadeem_Walayat
2.America Superpower 2016 - Ian Bremmer
3.The US Dollar and the Precious Metals Complex - Rambus_Chartology
4.UK Immigration Crisis Could Prompt BREXIT, Propelling Britain Out of EU Despite German Factor - Nadeem_Walayat
5.The “Real Flash Crash” Will Scare You to Death - Shah Gilani
6.Gold Price Trend Forecast - Bob_Louka
7.UK Deflation Warning - Bank of England Economic Propaganda to Print and Inflate Debt - Nadeem_Walayat
8.Gold Lifeboat to Global Economies “Titanic Problem” Warn HSBC - GoldCore
9.Will Interest Rates Ever Rise? - BATR
10.Who’s Killing the Stock Market? - Shah Gilani
Last 5 days
This New Currency Could Wipe Out the Euro - 28th May 15
US Housing Market - Something Smells Fishy - 28th May 15
US Economy – Semi b2b Amps Up its Trend - 28th May 15
U.S. Fed Exported QE Travesty: Meet The BLICS Nations - 28th May 15
World War D—Deflation - Secular Bear Markets Analysis - 28th May 15
George Soros Warns of “Third World War” - 28th May 15
Why You Shouldn't Try to Invest Like Warren Buffett - 28th May 15
Stock Markets Buy and Hold is Back! - 28th May 15
We're Now Frighteningly Vulnerable to a Bond Market Crash - 28th May 15
Austerity, Economics and Religion - 28th May 15
National Holidays London and the Magic of Legoland UK Review - 27th May 15
Imminent Stocks Bear Market Signaled by Dow Theory ... - 27th May 15
Gold Price Has Bottomed – More Evidence - 27th May 15
Three Reasons You Shouldn’t Try to Invest Like Warren Buffett - 27th May 15
Gold Is “100% Guarantee from Legal and Political Risks” States Russian Central Bank - 27th May 15
Don't Drown in the Sea of Global Debt - 27th May 15
Three Reasons Why Carl Icahn Is Wrong About Apple Stock - 27th May 15
Crude Oil Price Stochastic Signals - 26th May 15
Why the Stock Market Will Crash - 26th May 15
GDP, Inflation, Employment Economic Statistics: It’s All a Lie - 26th May 15
Introduction to Peak Food - 26th May 15
Should We Dump the Euro? - 26th May 15
A Geopolitical Net Assessment of Europe - 26th May 15
Stock Market Top in Place? - 26th May 15
Best Cash ISA SBI 2.3% - 2.8 Year Fix, UK Interest Rates 2016 - 26th May 15
China Sets Up Gold Bullion Fund For Central Banks - 25th May 15
Is The Silver Trade Getting Crowded? - 25th May 15
Money Murder Mystery: Who Killed the Stock Market? - 25th May 15
Why Do We Celebrate Rising U.S. House Prices? - 24th May 15
Mario Draghi’s Slippery Downward Slope - 24th May 15
Gold : Truth is Stranger than Fiction - 24th May 15
Facebook Stock Price Forecast - 24th May 15
Make a Killing on the Coming Energy "Debt Bubble" - 24th May 15
Stock Market SPX Uptrend Inflection Point - 23rd May 15
What You Know for Certain - Huge Demand for Gold And Silver - 23rd May 15
Are We in Another Credit Bubble? And Is It Different than Before? - 23rd May 15
The “Real Flash Crash” Will Scare You to Death - 23rd May 15
Venezuela: No Rule of Law, Bad Money - 23rd May 15
Robots That Can Beat the Market by 100% - 23rd May 15
Why Shake Shack Stock Is a Bad Investment - 23rd May 15
Gold Price Primary Driver Bullish - 23rd May 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Biggest Debt Bomb in History

Will the Use of Gold as Collateral Push the Gold Price Down?

Commodities / Gold and Silver 2011 Nov 28, 2011 - 09:00 AM GMT

By: Julian_DW_Phillips

Commodities

Gold Forecaster has for years now pointed to gold's coming monetary role as collateral. We have never believed that a return to the Gold Standard was feasible in the form it was used in last century. We have never believed it would return as day-to-day money. We have always seen its return tied into its use on a global basis, most likely between governments, as we saw under the Bretton Woods system after the Second World War. We have always pointed to a time when it would return to a key monetary position in the global financial system.


Its use requires the skill to offer it as a final resort should all else fail and not as immediate unconditional repayment. In the last two years we've witnessed over 500 tonnes of gold used in gold/currency swaps, which were reversed last year. We think these swaps were linked to debt-distressed government loans. No public statements on this were made. Secrecy was thrown over the story, and the details were hidden from the public.

In the last year, the subject of using gold as collateral has come from politicians, hoping to use the country's family jewels to shore up holes they made. But a nation's gold is under their central bank and not available for political ends. Then, recently, the politicians were at it again, but this time addressing the matter of using it along the lines central banks are required to do -cvwhen all else fails.

Gold Backing the Eurobond

A draft paper of the European Commission has suggested that gold could be used as collateral for new Eurobonds. The rationale for any central bank holding gold is straightforward. It can be used as a source of capital if a currency is not redeemable or if a country falls out of favor with the international capital markets. Both India and Korea have used gold as collateral in the last 15 years. The arguments against any Eurozone constituent using gold as collateral currently are powerful. The move would smack of desperation and might even harm a country's ability to borrow, rather than help it. Also the European Central Bank is likely to frown on the idea. While we do not think Eurozone central bank gold will be used by any peripheral nation as collateral in the near term, the subject is on the table and being discussed.

The Precipitant

For it to move to the center of the table, the Eurozone sovereign debt/banking crisis will have to continue to degenerate further. After the failure of the German government bond auction this week, we may be closer than you think. When investors fail to buy all the German government bonds on offer, they're in essences saying that they believe that Germany will eventually be left holding Eurozone debt that is un-repayable. They're not prepared to back Germany on that basis. This is now a crisis for the entire Eurozone, not just the weaker nations.

With the failure of Germany's Bund auction this week, we saw yet another degenerating step to the Eurozone crisis. But this appears not to be about Germany itself, but about the Eurozone banking system that could drag in the major banks of the developed world. We're seeing European financial institutions being part of the gold liquidation process, not through gold sales, but increased gold leasing. This means that they lend gold to the market, which can then sell it for cash. The central and major banks then receive the benefit of easier borrowing on better terms and the eventual return of their gold. Bond issues and short-term funding have been seizing up as the unease over government bonds has spread to banks, which themselves are big holders of government bonds.

The initial reaction of us all is to say, "No, this can't be happening." It won't come to that. But step back five years -would you have believed we would go to where we are now? Go back a month -would you have thought that a German bond auction would have failed? So take this decay forward, and it be comes easy to see a situation that brings some order to the growing disorderliness we're seeing in the developed world's markets.

Initially, the price of gold has been pushed down as some institutions, investors, and traders push the gold price down. But these are sales of gold. Bear in mind the lessor of that gold will have to return it either from mining production or by buying it back in the market. It's most unlikely that the lessees will accept a cash settlement. Only gold will do. What may confuse some is the thought that collateral may mean sales of gold. It does not. The handing over of gold to a creditor may also not mean sales. If it's another central bank, such a forfeiture of gold may lead to the creditor's gold reserves increasing. Should a creditor opt to sell the gold he receives in the event of a default, current central bank buyers will leap at the chance to obtain bulk gold now. Russia's October purchases of 18.6 tonnes tells us how keen central banks are to buy.

Add to that the underlying strength of the gold price holding present levels as other markets fall, and you can see how even significant sellers are not panic sellers. So it doesn't look like the use of gold as collateral will lead to lower gold prices. But that needs to be understood fully to see just what effect gold as collateral will have on the gold price. It becomes more dynamic when we look closer at the subject...

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2011 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Julian DW Phillips Archive

© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History