Gold Will Get The Last Laugh On Central Banks

Intense recent selling of gold and other metals resulted from a number of factors. Europe launched the rout by pressuring Cyprus to sell the bulk of its gold reserves to help repay the 9 billion euro in European Central bank emergency aid.

Stephen Leeb
4/17/2013 @ 10:13AM
Forbes

Intense recent selling of gold and other precious metals resulted from a confluence of factors. Gold plunged 10% Monday, ending the session at about $1,350—down nearly 30% (and more than $500) from its highs, to its lowest level in more than two years.

Europe launched the rout by pressuring Cyprus last week to sell the bulk of its gold reserves to help repay €9 billion in European Central Bank emergency aid. Alas, the markets see the Mediterranean island as a model for future bailouts. The ECB’s eagerness to force the sale of gold reserves to cover soaring bail-out costs eliminated its role as a currency—at least for now.

Fact is, gold has acted strangely since the January 2013 release of the proposed Basel 3 liquidity regulations. These outlined assets that banks could count as liquid should world markets experience a repeat of 2008. Gold was conspicuously missing from the Basel 3 liquidity list, despite its stellar 2008 performance. Included in its stead sat such nonstarters as equities and low-rated bonds. Clearly the Bank for International Settlements—aka the bank of all banks—wished to telegraph the message that neither governments nor bankers should consider gold a currency.

When Japan stepped up with quantitative easing roughly three times larger than that of the U.S., and gold held steady. When Nicosia bowed to the EU and literally confiscated money from individual bank accounts—at least for a few days—gold also stayed put.

Finally, however, the dispute between Nicosia and the Central Bank of Cyprus broke gold’s back, as it were. Nicosia won. Cyprus bowed to EU, ECB and IMF instructions to sell gold, albeit only $500 million, a relative pittance, generating an unmistakable tell tale. Thou shall not regard gold as a currency or value store. The markets careened in its face

The Federal Reserve also wants to beat up on gold, via its drumbeat, suggesting that liquidity may be drying up and monetary easing might end soon. Never mind that recent economic data, on the whole, appears much weaker than expected, or that any halt to U.S. monetary easing could only follow higher inflation and commodity prices.

In short, the West desperately wants to maintain the dollar and euro as reserve currencies. To keep the status quo, however, Western economies must also ensure that gold remain in the background. Otherwise, the central banks could no longer control commodity prices or virtually anything else in the monetary realm.

I’m not a conspiracy buff, but everything suggests that the West, in ways not necessarily illegal, hopes to kneecap gold. It may work for a while, too but eventually gold will migrate into a reserve currency basket and its price will advance many times from its current level.

Until now, deep pockets have strongly motivated Germany to cement the euro zone in place. Despite huge sums the Bundesbank previously expended, Germany’s export-driven economy has benefitted immensely from Europe’s weak currency. A return to the deutschmark would stop Germany’s export engine cold. Yet weary of rescuing weaker EU member states, many Germans, including defectors from Chancellor Angela Merkel’s conservative Christian Democratic Union, now back the new Alternative for Germany party and seek to exit the euro.

Alternative for Germany undoubtedly will help shape the outcome of elections slated for September, and perhaps speed the euro’s demise. An unfettered deutsche mark could easily cause a Lehman-type event or worse. Indeed, in 2008 gold had already fallen 20% before Lehman collapsed

Most media blame plummeting gold and silver on news from China, where several recent economic data points underperformed expectations. First quarter GDP grew a mere 7.7%, year-over-year, against the 8% anticipated. China bears see slower Chinese demand for gold.

I have some surprises for them: base metals are more leveraged to China’s growth than gold. The Chinese currency set all-time highs last Sunday and Monday nights. China is hardly on the brink, least since consumers generated more than half of its growth, against only 10% from exports. Chinese demand for industrial commodities like copper remained robust in March. Its seemingly inexorable smart grid construction threatens the West. Finally, given China’s moderate inflation, its strong currency gives Beijing ample room to ease credit if necessary

Current gold and commodity trading looks to me like a liquidity-grab, similar to what occurred at the depths of the 2008 financial crisis. Selling assets for cash and bonds, regardless of fundamentals or cost, could turn a mere correction into an outright mugging, the worse for the U.S., given the near certainty that major gold buyers include the Chinese. Why not just hand them the keys to our capital?

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