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Another
post by FOFOA that will get you thinking.
My response below.
FOFOA,
There would be many within the Mint who would be amused at you categorising
me as a “mainstream” view. I understand you are using my
explanations as representative of the mainstream view but I would like
readers to be clear that my personal view is different. To clarify this, some
comments on your piece.
While I have no direct evidence of the bullion bank's (BB) activities, I am
not as sure as others that the BBs are massively financially short gold (this
is not to say they don't run short term speculative positions). My reasoning
for this is that gains and losses on such positions impact their reported
profit and loss. If they were as massive short for as long as some claim,
their losses would have been visible.
I would also suggest readers ask why a BB would take on hundreds and hundreds
of tonnes of short gold positions over time in some attempt to suppress the
gold price. You only do this if you have a philosophical hatred of gold. I
understand that gold ownership is a political action, a rejection of fiat
currency and banking, but would (at this time) a bank with a BB division
really be threatened by the pathetic fraction of a percent of those investors
who hold gold? Threatened to the extent that they would of their own accord
take on a massive short position?
Now the above does not mean I think everything is OK. On my fractional fubar
post you mentioned, I commented “ It troubles me as well. The Mint has
been under no illusions about London unallocated as the legals say we are an
unsecured creditor and the bullion banks would never make any statement one
way or another about what they did with it. We have operated
accordingly.”
Bankers make money by intermediating – buying from one, selling to
another, borrowing from one, lending to another – and taking their cut
along the way. I would suggest readers consider the theory that BBs would be
willing to intermediate for someone else with that philosophical hatred of
gold and take their riskless cut along the way. Why risk your own money when
someone else is willing to do so, with the bonus that their activity protects
your banking “franchise”?
This then leads on to your statement that “there is no clearly defined
lender of last resort to cover the risks”. Is this really the case? You
mention two risks the BBs have.
1. Default – Borrowing gold doesn't solve this problem, as the act of
borrowing gives you an gold asset but also a gold liability. The only way to
solve this problem is to buy the gold, which results in a loss because you
have to give up dollars to acquire the gold asset.
2. Liquidity – Buying gold doesn't solve this problem as while it gives
you gold to give to your creditor but also gives you price exposure as you
have technically bought your gold asset which is due in the future. The solution
is to borrow gold directly, repaying it when your gold asset comes due.
Alternative, you can borrow synthetically by buy spot gold and then selling
forward (using the gold from your gold asset to deliver into this forward
sale).
I would therefore agree that BBs have "exchange rate risk" for the
default situation but not for the liquidity situation. This assumes that
holders of gold (which in cases of large volume really just means central
banks) are willing to sell (in case of default) or lend ( in case of
liquidity) to BBs. I therefore suggest the question is not whether central
banks are lenders of last resort, but whether they have the capacity, or
willingness, to fulfil that role now or in the future.
In my previous post I stated that central bankers are the gold market's
lenders of last resort. The fact that central banks hold gold as a physical
asset (and only gold) in addition to fiat currencies is clear indication to
me that gold is not just another commodity. However, the other side of this is
that central banks can be lenders of last resort of this “money”,
just as they are of dollars.
Central banks have been more than willing to lend dollars to banks to help
them out with their liquidity problems, eg taking on their crappy mortgages
etc, rather then have them fail and to avoid a systematic collapse of the
banking system.
Consider the situation where a bank comes to its central bank and say
“Hey, I've got all these pesky unallocated gold holders wanting
physical but all I have is these long term loans. Can you lend me some of
your physical gold and I'll replace it later when those borrowers repay their
leases? If you don't I'll have to declare bankruptcy, the gold price will
rocket up, this will cascade through the gold market and we will have a
systematic collapse of the banking system.”
Why would a central bank not be willing to support a bank's BB division in
such a situation, especially when they would do the same for dollars? For me
this is not the issue, I think they will do (are doing?) it.
You mention the CBGA as proof that (some) central banks are “are no
longer going to be the lender of last resort to this system”. I think
it is therefore very interesting that the 2009 statement makes no reference to
leasing as the previous two statements did. Why the change?
To me then the key issue is whether the central banks have the
capacity”.The interesting thing about capacity in respect of gold of
course is that you can't print it! Easy to do if your bank has a dollars
problem, not so if they have a gold problem. Questions to consider:
a. How much gold would central banks be willing to lend to prop up banks? All
of it? Or would they balk in the case of gold? Who cares about dollars, just
print more – but risk the country's only real asset?
b. Out of the total they are willing to lend, how much has already been lent?
A speculation: maybe the reference to no more leasing in the 1999 and 2004
CBGA statements was a message to the BB to clean up their books. However,
around 2008-09 the banks said they will fail without the backstop, need more
time to unwind, have increasing physical redemptions, so CBGA drops the
leasing reference to enable them to continue the "extend and pretend
that there is not a run on the bullion bank reserves."
In conclusion, I would like to suggest the following in respect of the two
risks
1. Default – This is most likely to happen if the BB lend to a short
seller who is now bust. In this case we should see buying and thus an
increase in the gold price.
2. Liquidity – As agreed, this will happen if unallocated holders are
calling for physical. In this case we should see an increase in the lease
rate.
Note that in the past the lease rate was around 1% to 2% with low gold
prices, during gold's bear market. This was because of the large amount of
miner forward selling that was going on. What we have seen in recent times
with miners closing down their hedging is low lease rates and high gold
prices (see this post for a chart). So there is a
very general relationship between short selling and lease rates over the long
term.
What would be interesting would be sustained increasing gold prices AND
higher lease rates, as it may indicate buying to cover defaults and borrowing
to cover liquidity.
Bron Suchecki
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