Sunday, August 21, 2011

Is a Run on Physical Gold Beginning? Hugo Chavez Launches 'The Largest Physical Move of Gold In Recent History'

Adding to the month's economic turbulence comes this announcement by Venezuela's dictator:

The largest physical movement of gold in recent history is under way... Hugo Chavez... wants to move his country’s 211 tonnes of gold (over $12B at Friday’s close) currently stored in American & European banks back to Caracas.

...this recent move by Venezuela is rather unique. Instead than buying more gold, Venezuala merely wants to repatriate what is already hers. Unlike central bank purchases, which could involve just a ledger entry, this is the real thing. Physical gold is being moved around. What’s more significant is the discovery that after accounting for the 99 tonnes and 11.2 tonnes being held at the Bank of England (BoE) and Bank of International Settlements (BIS) respectively, about half of this huge stash are held in bullion banks like JP Morgan Chase et al – all major gold shorts. The move has left them scrambling for the real stuff.

This has led many to believe that the “Golden Retrieval” may have been a contributing factor to the most recent spike in gold price. It hits at the core of what GATA has been highlighting for over a decade – that bullion banks have been working hand in glove with central banks to suppress the price of gold, and that much of the physical gold at bullion banks and central banks are encumbered, leased or sold many times over, resulting in multiple claims for each bar of physical gold.

Grant Williams offers a well-informed take on why this step is so important:

To sum up:

• It is common practice for most Central Banks to hold part of their gold reserves overseas in ‘gold trading centres’ (read London and New York)
• One of those Central Banks - that of Venezuela - wants its gold back
• That means that a group of banks (mainly in the UK and the USA) who are supposed to have that gold in their vaults need to GIVE it back...
• ...which in turn could potentially trigger a race to repatriate national gold holdings
• Neither Fort Knox nor the Federal Reserve (the world’s two biggest gold depositories) have been independently audited in recent times
• The status of the gold held in the Bundesbank (home to the world’s third-largest hoard) is somewhat unclear
• The practice of leasing gold by Central Banks has been going on so long that it even predates the time when Alan Greenspan advocated sound money
• The gold ‘physical market’ is approximately 100 times the size of the amount of actual underlying metal by which it is purportedly backed
• The top four bullion banks, or ‘commercials’ on the COMEX continue to run what we shall politely call ‘significant’ short positions...

In the three trading sessions since Chavez made his announcement on August 17th, gold has added almost $100, coming within a whisker of $1,900 before settling back at another record weekly close.

Last year, a board member of GATA ("The Gold Antitrust Action Committee"), predicted this "run on physical gold":

• the gold price is suppressed through fractional reserve bullion banking
• the gold market is selling on average 45 ounces of gold for every one ounce of real physical gold via “unallocated gold” (fractional reserve bullion banking). In other words the gold market is backed by only 2.3% gold
• The true price of physical gold is currently around $54,000/oz if fractional reserve bullion banking did not exist. In the presence of fractional reserve banking with 2.3% gold backing the market price of “gold” is reduced to $1200/oz
• The US dollar has a purchasing power that is 45 times over valued
• The way to end gold price suppression is for investors to ensure they have allocated physical bullion preferably held outside of the bullion banking system

Chavez' call to repatriate his country's gold could therefore be the start of a true "run on the bullion banks".

When a major “client” like Venezuala suddenly decides to have take physical possession of her gold, it may cause a run on the bullion banks, not unlike the much feared bank run for cash. Bank runs start when depositors begin to lose confidence in the banks holding their cash. All it takes is a a few large depositors withdrawing at the same time, thereby creating the initial stress in the fractional reserve banking system. Soon, the panic hits the masses and long lines form outside the banks.

The next few weeks of market action should be, er, exciting.


Anonymous said...

According to Zero Hedge the run on gold started late in the Spring. You can't find any anymore.

Frankenstein Government said...

I have been writing on this subject as well. If in fact, they have used that much leverage- which banks do- they will have to unwind 213x45 or 9500 tonnes of paper gold transactions.

This is unprecedented and could make for some hilarious shit.

He who panics first- panics best!

Carla R Ackley said...

Wait until George Soros dumps his gold..


Georg Felis said...

If you are a country, and want to sell some gold for a few quick bucks:
1) Pull the gold back to your country with many deep concerned words.
2) Watch the price skyrocket.
3) Sell the small portion you were intending on selling anyway, at a much nicer price.