Tag Archives: Gold

Bonds vs Gold #7 – The FED and Leasing Out Gold

  By Richard from Canada | January 31, 2013 - 21:40 | ,
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So what is the gold lease market ?

Central banks don’t directly take their bullion to the market and lease it out. They use a vehicle called a bullion bank (BB). Although bullion banks are numerous, some of the more well known are Barclays, Goldman Sachs, JP Morgan, Bank of America, UBS, and Citibank. The central banks loan gold to the BBs at a rate of approximately 1%. The BBs take it to the LBM and sell it on the open market. The BBs take the cash from selling the bullion and in turn buy Treasuries.

So if the story were to end here, the bullion banks would just walk away with a net 4% return. But it doesn’t end, because they only have the leased gold for a certain length of time. They eventually have to give the gold back to the central banks, but now they are at risk of price swings in a very volatile market.

The answer to their problem is to go long the futures market. Essentially, they buy futures contracts to hedge their risk. In other words, they secure gold for delivery at a specific price, on a specific date in the future. Once they buy their futures contracts, it doesn’t matter what the price action of gold is.

http://www.rapidtrends.com/gold-carry-trade-what-is-it/

Now in a declining future gold price market this Leasing Out of Gold no doubt generated easy profits. In todays rising gold markets does it become more problemmatic? Maybe because the gold futures potentially will cost more to purchase and the treasuries are providing significantly less percentage return.

However observe that the FED is actually loaning out gold at a negative interest rate ? What ? Is this an error ?

http://jessescrossroadscafe.blogspot.ca/2013/01/kitco-shows-plunge-to-negative-in-gold.html

So does the rising gold price not also allow the Bullion Banks (BB) to take increased cash out of the economy and with it buy increased government bonds?!  It would actually appear that a “steady” rising gold price might be desired to accomplish just that?!! But why? Maybe to help soak up those excess reserves ? And the FED is paying negative interests to the BB to borrow gold and play this winning game !

Here is the updated Cheat Sheet.

Gold Flows

 

Bonds vs Gold #6 – Today A Rising Gold Price is a FED Deflationary Tool ?

  By Richard from Canada | January 20, 2013 - 05:30 | ,
9 Comments

A rising gold price was in the past always considered inflationary.

Why … because under the gold standard you first raised the price of gold against the “fixed exchange” of the national currency and that was an inflationary spike and was accomplished overnight. You were creating the high power reserves to be able to create new money but with the clear intention of spending the new money and causing price inflation. You were therefore creating actual new money secondly after an official currency devaluation.

Gold vs Bonds

However today it will be deflationary !?

Why … because under the current fiat money system the money has been created first and is sitting on the FED balance sheets as reserves with no clear intention of being spent.  In fact some people would argue the reserves are trapped. In this environment gold, as a global reserve currency, can be used to soak up any newly created fiat money to control the inflation as opposed to creating the inflation.  Is this indirectly what Ambrose is trying to say about making gold a third reserve currency?

The world is moving step by step towards a de facto Gold Standard, without any meetings of G20 leaders to announce the idea or bless the project…..It is no secret that China is buying the dips, seeking to raise the gold share of its reserves well above 2pc. Russia has openly targeted a 10pc share. Variants of this are occurring from the Pacific region to the Gulf and Latin America. And now the Bundesbank has chosen to pull part of its gold from New York and Paris….Let gold take its place as a third reserve currency, one that cannot be devalued, and one that holds the others to account, but not so dominant that it hitches our collective destinies to the inflationary ups (yes, gold was highly inflationary after the Conquista) and the deflationary downs of global mine supply. That would indeed be a return to a barbarous relic…A partial Gold Standard – created by the global market, and beholden to nobody – is the best of all worlds. It offers a store of value (though no yield). It acts as a balancing force. It is not dominant enough to smother the system.

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100022332/a-new-gold-standard-is-being-born/?utm_source=dlvr.it&utm_medium=twitter

My guess is that gold will simply rise in price to the equalibrium required to soak up the excess fiat reserves or to bring the global reserves into balance ??? This is therefore a deflationary event because it occurs after money creation as opposed to before ?! Right ?

SDR #17 – How to Monetize a SDR !?

  By Richard from Canada | January 5, 2013 - 16:24 |
7 Comments

 

I guess it is only appropriate that my 100th post on OTP is related to SDRs since my first post back on 18 Dec 2010 was SDR #1.

http://overthepeak.com/wordpress/archives/1640

Thanks Mystic for keeping this site alive and encouraging participation by all.

So how do you monetize a SDR ?  Well first you need to have some SDRs and this takes us back to another post on OTP explaining where SDRs come from.

http://overthepeak.com/wordpress/archives/1664

So Richard’s “Monetary Cheat Sheet” (MCS) needs to be updated to take into account:

1.   the allocation of SDRs to the USA from the IMF,

2.  the payment of the IMF quotas by the USA,

3.  the Treasury issuing a SDR Reserve Certificate to the FED, and

4.  the FED passing the newly monetized CASH to the Treasury !

That was a mouthful !?  Remember I am not suggesting that this diagram is even 80% accurate!?  Just trying to have one stop shopping for ”some” of the ideas that appear to be driving our monetary system.

SDR Cheatsheet

 

Oh here is Jesse’s article from 2009 where he looks at SDRs and Gold and concludes:

Does any of this amount to a hill of beans? Perhaps, but probably not. At least the next time I need to look up some of these facts and history to explain or correct a question or misunderstanding, I will not have to look all around the web for it again, and wade through many links of incorrect misinformation and rubbish to find it.

http://jessescrossroadscafe.blogspot.ca/2009/10/how-much-gold-does-us-have-in-its.html

Have a great 2013 !!

 

Bonds vs Gold #5 – Gold Reserve Certificates

  By Richard from Canada | December 31, 2012 - 23:49 |
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Happy New Year …. everyone. This post is really an attempt to position the Issue of Gold Reserve Certificates within the existing monetary system. I know that we are no longer on a gold standard but that does not mean that gold is still not part of our monetary system!

Remember a previous post back in Dec 2010 where I introduced ISO 4217 as the international standard describing the currency codes for use in the banking and financial industry? Yes gold is still in the list.

http://en.wikipedia.org/wiki/ISO_4217

My real point is that the issue of a Gold Reserve Certificate to the FED, by the treasury in years gone by, resulted in the FED passing the Treasury new US dollars to spend without the issue of T-Bonds. I think this is called monetizing gold and it was last done at an adjusted gold price of $42.22 an ounce in 1973 and remains on the books at that price.

So below is my current summary of Monetary Realism!? It includes gold because gold is still on the books of all central banks. Can you also see the realism from Keen, Hudson, etc in that diagram ? Any others to add ?

Gold vs Bonds 1

The Fed changes gear

  By Mystic | December 14, 2012 - 05:55 | , ,
17 Comments

23

This odd result has created what I think is one of the more amusing equilibriums in monetary politics. Hard money types would like nothing more than to see their favorite asset, gold, revalued. But they don’t actively pursue the idea because of the expansionary effects a revaluation would have on the Fed’s balance sheet. Easy money types would like nothing more than to see the government get billions in free cash, but don’t like the idea of the barbaric metal getting a leg up. The upshot is that gold stays valued at its archaic price of $42.22.

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Fixing It #11 – Are Negative Interest Rates on Excess Reserves Coming ?

  By Richard from Canada | December 9, 2012 - 14:08 | ,
6 Comments

The Mystic might be unto something with all this talk about the Federal Reserve possibly wanting to unlock all those excess reserves to help create alittle inflation.  The chart below shows that there certainly is a large supply of excess reserves to play with.  The other references are worth a read.

He seems to be in step with the Economics Fanatic who says:

After the announcement of QE3, which seems more like QE infinity, can the next stimulus be negative interest rates on reserves parked by banks at the Fed ? ….

On the positive side, Treasury bond yields will trend even lower if $1.5 trillion of cash or more is invested in Treasuries. Lower yields will reduce debt service cost for the government and help them raise further debt at attractive rates.

On the flipside, households and business would not gain much out of this. Household debt has declined by $1.3 trillion from its peak in the third quarter of 2008, and the process of deleveraging is expected to continue….

On the contrary, negative interest rates on reserves would be more harmful than beneficial for households. If banks do have to pay on their deposits with the Fed, the deposit rates for households will also take a hit.

http://seekingalpha.com/article/880911-negative-interest-rates-on-reserves-the-right-or-wrong-stimulus

Nevertheless, if rates go negative, the U.S. Treasury Department’s Bureau of Engraving and Printing will likely be called upon to print a lot more currency as individuals and small businesses substitute cash for at least some of their bank balances.

For example, a taxpayer might choose to make large excess payments on her quarterly estimated federal income tax filings, with the idea of recovering the excess payments the following April. Similarly, a credit card holder might choose to make a large advance payment and then run down his balance with subsequent expenditures, reversing the usual practice of making purchases first and payments later.

We might also see some relatively simple avoidance strategies in connection with conventional payments. If I receive a check from the federal government, or some other creditworthy enterprise, I might choose to put the check in a drawer for a few months rather than deposit it in a bank (which charges interest). In fact, I might even go to my bank and withdraw funds in the form of a certified check made payable to myself, and then put that check in a drawer.

As interest rates go more negative, market participants will have increasing incentives to make payments quickly and to receive payments in forms that can be collected slowly…..

http://libertystreeteconomics.newyorkfed.org/2012/08/if-interest-rates-go-negative-or-be-careful-what-you-wish-for.html

The take-away from this post is that if interest rates go negative, we may see an epochal outburst of socially unproductive-even if individually beneficial-financial innovation. Financial service providers are likely to find their products and services being used in volumes and ways not previously anticipated, and regulators may find that private sector responses to negative interest rates have spawned new risks that are not fully priced by market participants.

Finally the Economics Fanatic concludes:

From an investment perspective, the idea is inflationary as its objective is to bring out the $1.5 trillion of excess reserves into circulation in the economy.

This is in line with the policymaker’s objective of having a steady dose of inflation in the economy. I do suspect that inflation will be much higher than what policymakers expect or plan.

So would lower short term rates (negative) and increased inflation not also lead to higher long term bond rates and higher borrowing costs for governments ?  Not if QE to infinity also continues and maintains a shortage of long term government debt in the market which keeps long term rates down.

So where will savings run to ?  Equities ? Gold ? Under the Mattress !  In The Cookie Jar ?