247Bull.com Editor: The programme of gold leasing by central banks began in July 1998 when Fed Chairman Alan Greenspan stood before the House Committee on Banking and Financial Services and said, “Central banks stand ready to lease gold in increasing quantities should the price rise.” In other words central banks agreed to lease (loan) gold into the market in order to suppress the price. The central banks did not report these loans as sales, so their official gold reserves remained constant, however the gold is no longer available. It was loaned to the large bullion banks, such as Barclays, Goldman Sachs, JP Morgan, Bank of America, UBS, and Citibank for around 1%. The bullion banks then sold the gold into the market so that they could invest the proceeds at a higher yield. This was the so-called “gold carry trade” and the unwinding of the trade could prove to be a big catalyst for the gold price in the months and years ahead. This is the only way that central banks such as the Bundesbank will get their gold back, and it explains why it will take 7 years.
In this week’s talk with National Numismatics’ Tom Cloud, he explains why Germany’s gold repatriation is just the beginning, the US Mint’s silver shortage will continue, and the big money is right about precious metals.
DollarCollapse: Hi Tom. It’s been an eventful few weeks in precious metals, though you wouldn’t know from the price action alone. Hit the high points for us.
Tom Cloud: Germany’s gold repatriation is obviously a game changer. They got all their gold back from France right away. But the US government put them off for 7 years, probably by offering them some kind of premium to take their gold back slowly. More gold, Treasuries, no one knows what exactly but clearly it was a big inducement. It’s also clear that Germany won’t be the last country to bring its gold home. The Netherlands is next and then probably Switzerland. It’s become a game of musical chairs. No one wants to be caught when the music stops. And make no mistake, it will stop. Everybody in the industry knows the US doesn’t have the gold and can’t deliver it. They’ve leased it all out.
It’s important to understand that there are two big stashes of gold in the US. Fort Knox supposedly holds the gold that belongs to us. And the New York Fed holds gold that has been deposited by other countries for safe keeping. That’s where Germany’s gold would be if the US hadn’t leased it out.
DC: Then there’s the US Mint running out of silver eagles.
TC: They sold out in the first three weeks of the year and had to stop taking orders. They’ve since started back up but demand is immense [editor’s note: silver eagle sales are now running at roughly 5 times the December rate – see US Mint silver coin sales in January climb to a record]. Premiums are way up on silver eagles since a lot of customers are willing to pay up for the most recognizable coin. Others are either waiting for the premiums to go down or are buying maple leafs or silver buffalo or philharmonics, which have lower premiums.
DC: I thought buffalos were US government coins. Why aren’t they selling out too?
TC: The gold buffalo is made by the US Mint but the silver buffalo is not. It’s made by a private mint, which we shouldn’t name because they don’t need people calling them and bothering them. They’re doing great though.
DC: So who’s doing the buying now?
TC: Right now the big money is moving and the little money is not. The little guy is gonna wait till gold jumps over 1700 to start buying. We’ve been in this channel between 1600 and 1700 for a long time, but we’ll break out pretty soon. Then you’ll see everybody pile in.
DC: And what do your clients want to talk about?
TC: It seems almost funny for a gold guy to spend a third of his time answering questions about interest rates. But big gold buyers have a lot of bonds too. Everybody knows the top [in bonds] will be soon if we haven’t already seen it. Just like people get the gold stashes confused, people also get confused on interest rates because they read about “no interest rate increases till 2014”. But can you borrow money from the fed at zero percent? Not if you’re not a bank. Interest rates aren’t stable in the real world and have actually been edging up for a while. The rate on ten-year Treasuries is up from 1.6% to 2% lately. Very soon everyone will discover that the Fed can’t control this.