If you are a precious metals investor, you will no doubt have seen recent headlines of central banks across the world repatriating their , and in the case of some countries, buying up gold like its running out (we’ll come back to that) The repatriation even went legal in some instances.
Hungary has been in the news after they tripled their gold reserves, and have used “long term strategy” as their reasoning. They stated that Covid has brought about additional perils and gold is a way of safeguarding as it carries no counterparty risk. The World Gold Council released a report that countries were net buyers yet again in February with India leading the way with just over 11 tons. Russia has averaged buying over 200 tons of gold per year for the last seven years. China owns stacks of it, and has increased countless tons over the years. China potentially has more than twice the US maybe even more. These are not small numbers. So why the rush into gold in the last few years?
Well, I have written several articles on the upcoming Basel III rules and what it means for world debt and banks. We know that the NSFR comes into effect across Europe (with the UK having a six month extension due to the LBMA’s endless complaints (we all know why of course with their mass of unallocated gold from June 28, 2021, and the USA from July 1, 2021. We know under these new rules that the BIS is classifying gold as the same as cash and bonds. We know that unallocated gold will be incredibly expensive to trade (Read LMBA complaints again) and we know that banks will get audited prior to the deadline to prove their allocated gold. We also know that 95% or thereabouts of gold traded is paper, and never delivered at month end.
So what about world debt? Well the latest predictions take it to over 300% of world GDP. The US is at 130% of their GDP. Throughout the years, Gold has always tracked the debt levels and historically had sat between 20-40 debt ratio. At the lower levels that would put gold right now at just over $6000 per oz. So why isn’t it? Well as frustrated investors, we know that the gold price has been managed for years of course, because historically a high gold price reflects badly on the economy, and no government wants that headline published. Basel III and NSFR may turn this dynamic on its head, however.
When gold hit its low of 1678 and reversed higher, the long contracts outweighed the shorts by 3.4 x. In light of how gold will be traded in Q3 and beyond, have the banks started to unwind their dubious short positions at this low? It certainly looks that way.
For years and years gold has played a part as money. It is the only currency that is traded that won’t be debased vs fiat. What Wall Street tends to trade is the here and now and they are trading hype. The media will have us believe that we are out of this mess now and the figures coming out for 2021 will no doubt show a rebound. But that is all it is, a rebound. We are far away from the pre Covid levels of employment. Debt is at inconceivable numbers yet only ½% (yes half a percent) of traders it would appear hold gold. What will happen when the realisation that this rebound is done and the stock market will run out of reasons for the raging bull to continue, and we will be in a long period of risk off? Money will rotate into different sectors as it always does.
It is also worth noting that a lot of analysts are focusing on the wrong fundamentals for gold. They aren’t considering debt, Basel III, and what we haven’t covered in this article – supply and demand, which are all about to play a massive part in gold’s price. Supply, coincidentally is intrinsically linked to Basel III and the NSFR. Post June 28, when lending, banks must have a proven 1:1 ratio of gold, so are they really going to be trading their gold when it isn’t in their interests to do so? Of course they aren’t. Cash won’t appreciate over time. So with investment demand set to skyrocket when the average investor becomes aware of this, we could see gold premiums at similar levels to . Let’s not forget that exploration companies take years from finding a site to actually producing gold through mining. Above ground gold is being swallowed up at a rate of knots.
So why are central banks stacking gold yet trying to dissuade us from it, with some voices claiming it to be a relic of the stone age having no place in our digital society? Well they are frontrunning this trade in preparation for its next move higher/revaluation event (delete as appropriate how you foresee the move) If there is one thing we all know, it is the big players are in gold now and the big players always win, with the exception of Lehman Brothers of course, who didn’t. However, we can inadvertently thank them as what is about to play out in under 90 days’ time is a corner turned from their failings and a new start that could be the launchpad from dull, to a brighter, gold future.
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