Marshall Auerback: Central Banks Will Need to Recover Their Gold

Although I have heard this line of reasoning before, it was interesting to see it coming from the economist Marshall Auerback.

There is not much doubt in my mind that the markets are being 'managed' here. By whom, for what reasons, and for how long is another question. But the trades and the tape are telling their tale.

I am wondering if this is a new phase of the Fed's interference in the markets in lieu of genuine economic reform. They have used indirect means to pump equities as a means of wealth transmission before. This was a favorite ploy of Robert Rubin when he was Treasury Secretary.

It would not surprise me if the gold price was being held around 1600 in order to give the banks an opportunity to redeem their leased gold IOU's to avoid embarrassment before things get 'messy' in Europe. The people in Germany, Italy, Spain, England, and Portugal will be angry enough, and to find out that their irresponsible banks had sold off their gold to their cronies in the bullion banks on the cheap might be a bit much. As for the US, that is a murky situation indeed.

I tend to view this as a long term trend. So whether it comes to light next week, next month, or next year is of less consequence than the continual leaking of information that confirms the great changes that are occurring.

If one is looking for quick hot money there are plenty of places and ways to chase that rainbow. And plenty of carnival barkers and tricksters to tell you how easy it is to do it.

Get Ready for the Gold Rebound Before It Is Too Late: Marshall Auerback
by Brian Sylvester of The Gold Report
August 8, 2012

The Gold Report: Marshall, in a July 12, 2012, post on the Pinetree website, you suggest that some central banks may have forward-sold their gold against their initial positions, thereby eliminating them altogether. Can you tell us more?

Marshall Auerback: I have seen these central banks in action and have met with people from several of them. They would contend it was their obligation to maximize the yield on any of the assets they had in their reserves, including gold.

Back when gold was in the low $300s/ounce (oz), the Bundesbank considered gold nuclear waste from the old gold-standard era. There are some suggestions, based on Roger Lowenstein's work, that the Bank of Italy lent out some of its gold to Long Term Capital Management as a funding source. The point is that these banks have been a major source of flows into the market. These flows have had the same impact as de facto sales, in that they make available gold to the forward market and help fill the gap between supply and demand.

This is significant that the Bank for International Settlements has talked about reclassifying gold for commercial banks from a Tier 3 to a Tier 1 asset, which effectively means that gold will have 100% weighting, as opposed to 50%. This reflects a change in how the official sector views gold.

The second phenomenon is what has been happening in the Eurozone. A fiat currency is vaporizing before our eyes. A number of central banks hold a substantial amount of euros in their foreign exchange reserves that may be worth nothing. Some central banks may have gold holdings, but not as much as they claim, because of forward sales. There is most likely a structural short in the market from the central banks.

A decade ago, the mining companies would have been selling forward production, and the private sector would have had the structural short position. Today, nobody is selling forward gold because companies are much more optimistic about the price, and nobody wants to borrow it right now. As usual, the central banks are on the wrong side of the trade.

TGR: Are you willing to speculate about which central banks are shorting gold?

MA: From what I have heard, it would not surprise me if the International Monetary Fund and the Bank of Italy have done it. The Bank of Spain and the Bank of Portugal have sold a lot of their gold and may be lending the rest; also the Bundesbank.

A lot of these sales took place many years ago when the price of gold was $500–1,000/oz. My point is that the actual holdings these banks retain are much smaller than what appears on their balance sheets. Of course, they would want to get that gold back to spare the embarrassment if the euro blows up. This is why I have suggested that even if there is one more selloff in gold, the declines will be cushioned because the central banks will be bidding to buy back what they sold forward.

TGR: Could this information create a spike in the gold price?

MA: Many thoughtful people would see the demise of the euro as very bullish for gold, along with the possibility of higher inflation in China and all of the qualitative easing introduced by the Federal Reserve lately. Yet, gold has gone nowhere.

If one measures the position of traders reports on the Comex and then factor in that the Over the Counter market (OTC) is about 5–10 times the size, the net long position of speculative interest in gold is huge. That said, net positions have been reduced substantially in the past several months—several hundred tonnes would be my guess—and yet the price hasn't declined that much, which suggests that there is a bid in the market. The official sector, perhaps?

I would say there could be another 400–500 tons liquidated, which would easily be absorbed by the central banks. Ultimately, this slow, ticking time bomb will resolve itself with a much higher gold price.

Source: Auerback at The Gold Report

Gold Daily and Silver Weekly Charts - Cap and Coil, Cap and Coil

The Chris Powell interview which I posted the other day is quite good, and I suggest you watch it if you have not done so already.

Someone is leaning all over the precious metals market. It is hard to tell who and why and when it might stop, but history suggests that if these fellows lose control of it, the result could be impressive.

That might make for a fairly straightforward trading strategy, except that Europe is tilting on a knife's edge of insolvency, and that induces quite a bit of event risk in the cash markets.

The real economy is faltering, the international money exchange system is broken, the financial system is crooked, and the politicians are in the grip of the monied interests and a nasty credibility trap.

Other than that, everything is fine.

This is 'the phony war' phase of the ongoing currency war. I suspect we might see some serious fireworks in September-October for a number of reasons that I do not care to go into at this time.

SP 500 and NDX Futures Daily Charts - More Low Volume Flim Flam

I do not wish to sound like a broken record, but the markets are clearly marking time until Europe falters, and then they hope the central banks step in with loads of newly printed money which can be used to bail out the bondholders, and which the financiers can channel into a fresh round of speculative excess.

So for now its summertime, and the living is easy.

Neil Barofsky on the Fed and Treasury Anger over Standard Chartered

This is the credibility trap.

Some of it is professional not-initiated-hereism, but quite a bit more is a culture of privilege and practical exemptions for the few who run the system. And professional courtesy with London for both our banks and theirs.

Cronyism and complicity, active or passive, take your pick.

"If you want to understand exactly what's going on here, reread the four or five pages in chapter 1 of my book about my battles with Washington over the FARC case. Exactly the same thing happening here.

They'd rather trash a potentially legitimate case than admit that they were asleep at the switch, especially now after the recent revelations about their failures with LIBOR and HSBC."

Neil Barofsky, speaking about the Standard Chartered affair.

Read the entire story at Business Insider here.

They didn't "fail" to regulate LIBOR. They did not even bother, for whatever motives that you care to impute or infer. They knew what was going on and turned a blind eye to it, just as they are doing with the rigging of the commodity and equity markets.

The incompetence and non-involvement defense is getting a little worn out in this financial scandal.

Casual corruption of the markets is now being accepted as a necessary system overhead, as a tax on the public to support the failed financial system, which is being kept alive to support a kleptocracy of politicians and the monied interests. It is sustained through fraud and force, but has little to do with the real economy anymore.

It is important to get this to understand what is going on.

As Glenn Greenwald describes it so well, the kleptocracy based on class position has become fully rationalized and institutionalized.

"What is radically different about today is not that the rule of law suddenly is not always being applied faithfully, because that has always been true. What is different about today, radically, is that we no longer bother to affirm that principle...

You can often, and I would say more often than not, in leading opinion-making elite circles, find an expressed renouncement or repudiation of that principle...All of these acts entail very aggressive and explicit arguments that the most powerful political and financial elites in our society should not be, and are not, subject to the rule of law because it is too disruptive, it is too divisive, it is more important that we should look forward, that we find ways to avoid repeating the problem...the rule of law is not that important of a value any longer...

The law is no respecter of persons, but the law is also a respecter of reality, meaning if it is too disruptive or divisive that it is actually in our common good, not the elite criminals, but in our common good, to exempt the most powerful from the consequences of their criminal acts, and that has become the template used in each of these instances."

Glenn Greenwald