Central Banks are NOT ordinary Gold Investors

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From the Archives : Originally published August 19th, 2009
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Category : Central Banks





Financial market letter writer Adam Hamilton's essay, "Central Bank Gold Agreement," is a fairy tale. Hamilton writes that central banks are just investors in gold like everyone else.


What Hamilton and most people overlook in analyzing central bank gold sales is that they are a farce that beats the best Monty Python sketches. The central banks have printing presses and now computers that can generate loads of fiat money. It is beyond side-splittingly funny that we should take central banks seriously that they need to sell gold in exchange for the stuff they manufacture for free.


Can you imagine the Saudis selling oil in exchange for sand, or Eskimos selling fish in exchange for ice, or Paul McCartney selling an apartment in London in exchange for a Beatles poster autographed by himself? Yes, you think those examples are funny, don't you? So why not have a big fat laugh at a central bank selling its gold for the funny paper it produces in infinite quantities?


Central banks run the world's biggest Ponzi scheme, issuing bits of paper that people will accept in return for real goods and services. If you enjoyed this privilege to the tune of a few trillion dollars that finance an empire, expending a few tonnes of gold to keep it going would be a no-brainer.


Central banks do not sell gold to get a few billion of their own fiat money in return, money they probably would throw on top of the stack of half a trillion freshly printed notes that rolled off their presses just that morning. No, central banks sell gold to make it appear that the paper stuff is more desirable than its true supply and demand fundamentals would allow. And when the game looks like it's coming to an end, the central banks can always buy back the gold.


It is not a problem to buy back the gold at even $50,000 per ounce when any amount of paper currency can be printed.


What is a big problem is if the currency loses its value so fast that no one will sell the central banks any gold for any amount of paper. (Try buying gold with Zimbabwean dollars.)


If that happens, the central banks lose and the people win, because when the music stops the people have the gold and the central banks are stuck with the depreciating paper.


Central banks have to use their gold to support their Ponzi paper creation, but they have to control the destruction of their currency's purchasing power so they can still buy their gold back with their own paper before the game ends and they have to start a new one.


When the paper currency has little purchasing power left but the central banks have bought back their gold, they can introduce a new currency and start the cycle all over again.


In this way they leverage their gold instead of having something honest like one-for-one backing in a classical gold standard. They have even found ways of having more leverage by selling paper promises for gold to make it look as if they have 10 or 20 times as much gold as they really have.


There is another problem. What if someone else with a large amount of worthless paper currency gets the idea to buy back your gold before you do?


Do you ever wonder why China kept so quiet about the 450-tonne increase in its gold reserve over the last five years? Clearly China would not want to tip off the Western central banks that it was going to beat them at their own game. If China has admitted to acquiring 450 tonnes of gold, it probably has a lot more than that.


This is all about world dominance. Whoever has the most gold is king.




Adrian Douglas

Marketforceanalys.com


Adrian Douglas is proprietor of the Market Force Analysis newsletter (www.marketforceanalysis.com) and a member of GATA's Board of Directors.


 



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