Monetary Metals Supply and Demand Report: 31 May, 2015

Last week, we were skeptical of the alleged coming Chinese gold standard and its alleged impact on the gold price. This week, the price of gold fell $15. The price of silver fell 35 cents. We’re not aware of any Chinese silver standard rumors, but perhaps if one were to begin then the price of [...]

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2 replies
  1. amusedobserver says:

    “The world is a mess—so why isn’t the price of gold taking off?”

    Your answer is spot on. Gold is many different things simultaneously. It can be a vehicle for short-term trading like any other commodity. It can be bought for long-term investment since it doesn’t spoil or decompose. It can be held as an historically proven instrument for carrying generational wealth into the future.

    Or it can be bought and held as insurance against a systemic financial calamity or currency crisis or collapse. I think this is the view held by institutions that own gold. Gold can always be sold, or posted as collateral; it is the universal currency accepted by everybody even when nothing else is accepted.

    One of the hallmarks of a financial crisis is the spiking of overnight repo rates. This is caused by cash going into hiding or hoarding or fleeing the system altogether. The overnight repo market is essentially a match-making operation pretty much run by JP Morgan. Banks with excess money to lend declare what they will accept as collateral for the loan (Tbills, Tbonds, commercial paper, gold, etc.) and banks that need to borrow post whatever they have that matches. In a financial crisis when interest rates are volatile and crazy and nobody knows what a proper rate should be or how to value any financial instrument, and nobody knows if their counter-party will go broke, everybody knows the price of gold as it is a 24 hour/day global market. So gold is what will be used. With an abnormal amount of gold coming on the market suddenly, what do you expect the price of it to do? Do insurance company stocks go up when a hurricane hits?

    Incidentally, I think this may explain the JP Morgan gold market manipulation rumors (not that they don’t do shenanigans on their own in other aspects). Since they run the match-making operation they also are custodian for the assets held for collateral. Just like your stock broker has ITS NAME on your stock certificates that you bought with your money, JPM has its name on the assets the banks have with it. When a bank accepts gold as collateral for the loan it immediately sells it (actually tells JPM to sell it) because their unit of account is a currency, not gold. And of course, all the banks that accepted gold as collateral are telling JPM to sell their gold too. That’s why you get a huge dumping of 100 tons of gold at 3:01am.

    After the financial hurricane passes and gold has performed its insurance function, gold stocks are rebuilt (and insurance company investments are replaced), and the price rises again.

    The last large dump of gold that I know of was about the first week of December 2013 but wasn’t aware of any financial crisis. Then about a week later I read that overnight repo rates in Ukraine had spiked to over 20%. Money was fleeing the country so the shortage of cash was extreme. And then in January 2014 the war started and the value of their currency collapsed.

  2. 956d1940 says:

    Can anybody point me to a more in depth discussion on the central banks borrowing versus printing?

    Or do they print (physical paper currency or numbers in an electronic balance sheet) in order that they can borrow?

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