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Global “Pawn Shop” Loans Central Banks Cash for Gold at Record Rate

Jul 7th, 2010
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The gold price level has pulled back of late and there’s a new reason to explain the move. Commodity Online suggests the price of gold could be taking a hit from the record rate at which the Bank for International Settlements (BIS) has been growing its holdings of central bank gold. The BIS has the ability to serve as a sort of global “pawn shop” for central bank gold and could be in the process of executing “the biggest gold swap in history.”

The BIS is known as “the central bank for central banks,” and as such coordinates the financial cooperation of its 57 member countries. Not surprisingly, its board includes central bank heads like Ben Bernanke, Jean-Claude Trichet, Mervyn King, and others.

The latest reports indicate that the BIS has taken in 349 tonnes of gold since December, worth about billion, which it has then loaned out to central banks as cash.

According to Commodity Online:

“Now it has come to the light that several central banks, which had increased their gold reserves, have pawned their gold with Bank for International Settlements at a record rate, taking advantage of the precious metal’s historically high value to raise cash.

“It is not clear whether India’s Reserve Bank [RBI] has pawned its gold with the BIS but many banks have already done it. According to reports appeared in Wall Street Journal and Financial Express, a report released last week by the BIS shows the international agency has taken 349 tonnes of gold since December — allowing central banks to raise a record billion.

“The number surprised the market, which had assumed most central banks had retained their holdings of gold. Instead, the BIS data show that they have been entering these gold swaps — exchanging their gold with the BIS in return for cash, agreeing to repurchase the gold at a later date. The RBI also may have pawned its gold for cash as it has become a normal practice this year.

“The increase in the use of gold swaps is particularly surprising because central banks have rarely used them for decades, and the amount of gold at the BIS has remained stable for years.”

The article indicates that gold swaps, because they are loans, should not singlehandedly depress the price of gold. However, there is a psychological impact on the market. Recently, central banks have been net buyers of gold, but, rather than simply holding it in vaults as expected, some are promptly exchanging it for cash.

A main problem is that in the event central banks are unable to make good on their cash loans the gold can be “seized and sold on the open market by the BIS.” That could create a situation where investors suddenly see an unanticipated glut of gold and a subsequently depressed gold value.

We’ll watch to see if this trend continues. You can read more details in Commodity Online’s coverage of central bank gold with the BIS.

Best,

Rocky Vega,
The Daily Reckoning

Global “Pawn Shop” Loans Central Banks Cash for Gold at Record Rate originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


Daily Reckoning
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US Still Spending Despite Global Shift Toward Austerity

Jul 7th, 2010
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In the sushi again…just like we said!

The US stock market managed a weak rally yesterday. The Dow rose 56 points. Gold fell, closing the day below ,200.

This morning, stocks are generally going down again all over the world.

Why does everything seem to be going down? Because it’s a Great Correction, what else?

The correction is doing its work. The feds tried to stop it with trillions in loans, guarantees, and ‘stimulus’ spending. They failed. Over the last three weeks we have had confirmation after confirmation – the recovery ain’t happening. Unemployment is getting worse. Prices are falling – even the price of labor. The banks don’t lend and the people don’t spend.

Cities and states are running out of money. Households are going broke. And the stock market looks like it wants to roll over and die.

Is that a great correction, or what?

Dear readers who are hoping to get rich on gold are probably going to have to wait. We’ve entered a period of gentle de-leveraging – at least that’s what it looks like today. Until we get some real crises – or better yet, some real inflation – gold will probably drift downwards.

Not that we’re worried about it. Ben Bernanke has added more to the nation’s monetary base than all the Fed chairmen that came before him combined – including Alan Greenspan. But don’t have any illusions. It can take a long time for this monetary inflation to turn into the kind of inflation that sends the price of gold soaring. And a lot can happen along the way.

But for now, businesses are reducing their debt. Households are reducing their debt. Even government is cutting back.

Bloomberg:

Rich nations will reduce their primary budget deficits, excluding interest payments, by 1.6 percentage points next year, the most since the Organization for Economic Cooperation and Development began keeping records in 1970, according to JPMorgan Chase & Co. economists. The budget squeeze will lop 0.9 percentage point off growth in 2011.

Greece is on target to cut its deficit in half. Europe, generally, is making a big effort to trim deficits and keep debt from getting out of control. They’ve all been rapped on the knuckles. They all know what happens when you let debt get away from you.

But people come to think what they need to think when they need to think it. And right now, the US government doesn’t need to think that debt is such a bad thing. It can borrow at low rates – almost indefinitely. In fact, US treasury yields are falling…it’s getting cheaper and cheaper for the US to bankrupt itself.

Which is what makes us think we have entered a period of gentle, pernicious de-leveraging.

The rest of the world is saving. What happens to the savings? The savers can thank the USA for taking them off their hands. While the rest of the world saves, the US is still borrowing…helping the world get rid of its surplus savings. In effect, the US government is now playing Japan’s role in its long, tired saga of de-leveraging. We guessed that the US would follow Japan into a long, slow, soft slump. Okay…we were 10 years too early! But now, it seems to be happening.

In Japan, the government helpfully absorbed household savings for 20 years. This allowed the people to de-leverage while the government kept spending. Now, the US is absorbing much of the world’s savings…allowing the rest of the world to put its balance sheets in order, while the US government keeps ‘stimulating.’

In the end, both programs are absurd. The savings disappear in boondoggles and bailouts. And the stimulus doesn’t stimulate anything but more government spending. But it suits the egos of the economists who imagine they are saving the world.

An economy can go on like this – softly, gently destroying savings…quietly bankrupting the government – for many, many years. That could be what is coming now.

But wait. The US Senate refused to extend unemployment benefits. Even in the US, Republicans are talking about ‘austerity.’ Paul Krugman is hopping mad, referring to a coalition of the “heartless, the clueless and the confused” that is refusing to go along with his ‘spend, spend, spend’ agenda. All of a sudden, the Americans seem to be catching the ‘austerity’ bug, too. Uh oh…this could be a disaster for everyone. If everyone saves, who will use their savings? Who will spend? Who will keep the wheels of commerce turning? Who will keep the lights on in the malls and the grills hot in the restaurants?

What will happen if all the grasshoppers suddenly become ants…and all of them go on a rampage of financial prudence? Wouldn’t it cause a new economic Dark Age for the whole world?

Nah, don’t worry about it. In the first place, governments are not reducing their debts. They are just moderating the rate at which they add to them. In the second place, there’s plenty of demand coming on line from the emerging economies. And in the third place, the world has too much debt; getting rid of it would be no bad thing – even if it occasioned a difficult period of adjustment.

More importantly, the feds are zombies. The fewer resources they take the better off we are.

Bill Bonner
for The Daily Reckoning

US Still Spending Despite Global Shift Toward Austerity originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


Daily Reckoning
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How To Survive The Global Financial Crisis.

Jul 1st, 2010
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How To Survive The Global Financial Crisis.
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The Surprising Beneficiary of China’s Global Land Grab

Jun 16th, 2010
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On Thursday, June 10, China announced yet another investment in a global partner. Going where traders and investors no longer dare to venture, the Chinese are making investments in Greece – putting money into the country’s ports, to be exact.

While it may sound like a surprise move, it’s just China’s latest investment play around the world, following investments in countries like Venezuela and Africa over the last year or so. The deal has many in the market wondering which country will be next in line to benefit from the country’s deep pockets. So it makes sense to examine the transaction a little closer, because it does have specific implications for the foreign exchange world.

Under the terms of the agreement, China will invest approximately billion to build new docks and upgrade loading systems in Greece’s port city of Piraeus. The modernization plans will help the port compete with other major European maritime spots. Greek officials hope that this round of improvements will benefit surrounding areas, too, particularly Athens, which lies just east of Piraeus. And Chinese officials are hoping to expand their global reach, creating or improving access to major commercial markets. Both sides hope this agreement will boost bilateral trade – now worth about .5 billion – back to levels seen before the financial crisis of 2009.

Of course, this isn’t the first big economic investment undertaken by the Chinese. At the beginning of 2008, Chinese officials began courting African nations. In January, officials announced a million investment through the China-Africa Development Fund. The fund is designed to improve existing production facilities in major cities throughout the continent. The high-price commitment helped China National Petroleum Corp. complete a billion deal to develop oil reserves located in the Republic of Niger. And talks continue on a purchase of large oil-rich properties in Nigeria, just south of Niger, by China National Offshore Oil Company.

More recently, in April, Chinese officials inked a deal with Venezuelan President Hugo Chavez. Under the billion agreement, China provides Venezuela with billion in borrowed funds, while committing billion to another bilateral fund. The fund will invest in the development of several Venezuelan infrastructure projects. In return, China secures access to a global oil player, earning it up to 400,000 barrels a day.

Given China’s consumption of raw materials, the spending binge is not likely to stop. Beijing needs access to things like metals and crude oil. And it has decided the best way to get them is to buy them directly. It’s a completely different direction from its old strategy, which involved acquiring stock of some of the world’s biggest companies.

China Investment Corporation, the country’s sovereign wealth fund, initially made investments in Blackstone Group, Morgan Stanley and VISA back in 2007 for a total of .1 billion. But stock market volatility and anti-China sentiment in Washington have limited those investments, forcing officials to seek returns from more stable and long-term alternatives. As far back as 2005, CNOOC Ltd., a Chinese offshore oil producer, made an .5 billion bid for Unocal Corp., a US-based oil company. But the deal caved under political pressure as US policymakers worried the merger would be a breach of national security.

So what implications do China’s Greek port deal and its other global investments have on the foreign exchange market? In the longer term, it will benefit the US dollar. That’s because the greenback is still the preferred medium of exchange throughout world. Countries big and small still prefer to transact with the US dollar as a base currency. As a result, Beijing will require more of the American currency to complete deals with foreign nations, increasing the demand for the dollar. These US dollar outflows will more than likely offset inflows of foreign investment, helping to alleviate some appreciation of the Chinese currency.

Foreign direct investment, speculative and long term, from countries like the United States have recently increased the value of the Chinese yuan. Large-scale commodity purchases of this nature by the Chinese are also likely to slow China’s purchases of US Treasuries, which has grown to as much as 0 billion, if the relatively fixed currency is able to remain stable on the balance of these flows. People often warn that China could revalue its currency, which would cause financial chaos. But China wants to ensure a two-way flow of currencies, so Chinese officials are likely to keep such speculation at a minimum as the currency continues to hover at a 6.83 to 1 ratio.

So as long as China keeps making international deals while keeping their currency under wraps, the US dollar will reap some nice long-term benefits.

Richard Lee
for The Daily Reckoning

The Surprising Beneficiary of China’s Global Land Grab originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


Daily Reckoning
gold

Game Show: European Debt Road to Global Failure

Jun 8th, 2010
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John Clarke and Bryan Dawe are Australian comedians that put a humorous spin on the global sovereign debt crisis. Alas… it’s almost as frustrating as more serious portrayals of the problem. At least the accents are charming.

You can watch the plain-spoken, game show-like description of the European debt crisis below. It came to our attention by way of a SHTFPlan post on world collapse explained in three minutes.

Game Show: European Debt Road to Global Failure originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


Daily Reckoning
gold

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