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I can’t help but think that the recent news
about Venezuela has had something do with gold’s rise late this past
week. And it may have had something to do with the strong run-up over the past
few weeks.
When Venezuela first made its intentions for gold
repatriation public, the press reports indentified the Bank of England as the
depository for 211 tonnes of its gold. Later, it came out that 99 tonnes were
on deposit at BoE and the rest sprinkled among JP Morgan Chase, Barclays,
Standard Chartered, and Bank of Nova Scotia — gold bullion banks all.
It was the addition of the bullion banks in press
reports that sent off alarm bells in the gold market. We were no longer
talking simply about gold under a depository arrangement at the BoE (a rather
benign proposition), but metal that had been committed to various lending
operations. The inclusion put a whole new light on the Venezuela matter in
that it suggests a short position in the physical metal that would need to be
filled. Financial Times called the Venezuela withdrawal “one of the
largest transfers of physical gold in recent history.” When the news
sunk in, gold promptly rallied — trading at $1850 as this is written and
trading as high as $1875 overnight Thursday/Friday. Too, and overlooked,
Venezuela’s repatriation effort might have been one of the chief driving
factors for gold’s strong rally over the past several weeks. The bullion
bank scramble, in other words, may have started weeks ago long before
Venezuela went public with its intentions.
In plain terms, it is unlikely that Venezuela’s
gold is sitting prettily in the above named bullion banks just waiting to be
loaded on a cargo plane and sent to Caracas. It was probably loaned out long
ago, and then perhaps, redeposited at some other bullion bank and loaned out
again, etc. on down the line until it was fractionalized, atomized, and
otherwise depleted from its unified whole. In short, it will not be easy for
the bullion banks to reassemble this golden Humpty Dumpty.
In turn, failure to materialize the physical metal
could prompt similar demands from other gold-depositing nation states and private
funds and individuals alike. Moneyed interests globally, as reported
extensively in the mainstream press, are on a hair trigger, and ready to move
defensively at a moment’s notice. At the whiff of trouble, the
equivalent of a bank run could develop in the bullion banking sector. (It is
interesting to note that a similar circumstance 40 years ago, almost to the
day, forced the United States to close the gold window.)
At the very least, some depositors might be prompted
to move their gold into allocated accounts thus removing it from the lending
pool. In other words, a great deal more incipient demand may be bubbling
beneath surface of the gold market than we presently know.
Michael J. Kosares
USAGold - Centennial Precious Metals, Inc.
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