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Quantum leap for banks as ABN AMRO questions gold price discovery

Quantum leap for banks as ABN AMRO questions gold price discovery

Earlier this week, an interesting article appeared on the website of the major Dutch bank ABN Amro, written by the bank’s currency and precious metals strategist, Georgette Boele.

The article, titled “A world with two gold prices?”, questions how, if gold is a safe haven asset, its price has not continued to reflect the ongoing crisis and stress in financial markets.

Boele then seeks an explanation of this puzzle in terms of a framework which consists of both safe haven gold demand and speculative gold demand, one of which reflects the purchase of physical gold (safe haven demand), and the other which speculates on the gold price via paper and synthetic gold products (speculative demand) which are not physically backed by gold.

This leads her to the observation that safe haven investors would not sell their physical gold in the midst of a crisis, as they “would think three times before parting ways with their gold”, and that it is speculative investors (those who are not invested in real physical gold) who are pushing the gold price around.

ABN AMRO Amsterdam – Enlightened about the gold price?

One Small Step

While the ABN AMRO strategist fails to address the reality of how the international gold price is really established, i.e. via gigantic trading volumes of fractional-reserve London unallocated gold and COMEX gold derivatives, she does take a quantum leap, at least for a prominent investment bank, when the penny drops that there are two separate things being traded. Finite tangible physical gold on the one hand, and paper gold synthetics on the other. Shouldn’t these two things have distinct prices? Boele then makes the jump:

Let’s now go a step further. Suppose there are two gold prices: one for physical gold and one for all other non-physical gold products. How would these two gold prices behave?

…click on the above link to read the rest of the article…

Italy’s Gold enters the Political Fray. But who really owns it?

Italy’s Gold enters the Political Fray. But who really owns it?

Italy’s unpredictable political situation continues to throw up surprises with a controversial claim in national newspaper La Stampa this week that the country’s coalition government wants to sell part of Italy’s gold reserves to cover spending plans and to prevent the need to increase VAT in a forthcoming Italian budget.

While the claims by La Stampa are not really based on anything new, they still managed to cause an international media frenzy as they came a few days after Italy’s governing coalition launched verbal attacks on Italy’s central bankers and financial regulators.

Note that Italy claims to be the world’s third largest sovereign gold holder behind the US and Germany, with claimed monetary gold holdings of 2451.8 tonnes. Interestingly, unlike most countries where sovereign gold is owned by the State but managed by the country’s central bank, the Italian gold is officially owned by Italy’s central bank, Banca d’Italia (Bank of Italy), and not owned by the Italian State.

The Banca d’Italia furthermore claims that 1199.4 tonnes of the gold (or roughly half), is stored in the Bank’s gold vaults under it’s Palazzo Koch headquarters building in Rome, with most of the other half stored in the vaults of the Federal Reserve Bank of New York (FRBNY), and a small balance kept the Bank of England in London, and in an account of the Bank for International Settlements (BIS) in the vaults of the Swiss National Bank (SNB) in Berne, Switzerland. But without any documentary evidence or independent auditing or verification of any of its gold, especially the foreign held gold, these claims are impossible to verify.

 …click on the above link to read the rest of the article…

Russian Central Bank buying Gold on the International market?

Russian Central Bank buying Gold on the International market?

For a number of years now and even more so during 2018, the central bank of the Russian Federation, the Bank of Russia, has remained in the spotlight as one of the world’s largest gold buyers, each month adding substantial amounts of gold to its monetary gold stockpiles.

Having bought another 37.3 tonnes of gold (1.2 million ounces) during November, and Bank of Russia now holds 2103 tonnes of monetary gold. On a year-to-date basis (for the 11 months from January to November 2018), the Russian central bank has added an incredible 264.3 tonnes of gold to its monetary reserve assets.

From January to November 2018, the Russian central bank has added 264.3 tonnes of gold to its reserves. Source: www.goldchartsrus.com

A key feature of the Russian gold market is that the Bank of Russia has a policy of sourcing its gold from domestic gold mining companies by using large Russian commercial banks such as Sberbank and VTB Bank as intermediaries.

The commercial banks finance the gold mining producers with development credits and loans. The miners then repay the banks with the gold they mine. After the gold is sent for refining to Russian gold refineries, the large commercial banks sell the refined gold (in bar form) to the central bank, which in turn stores the gold bars in the Bank of Russia’s storage vaults in Moscow and St Petersburg. Sounds simple in theory and even in practice. But this model only works smoothly as long as gold demand from the central bank is less than domestic gold mine supply. When demand is greater than supply, the marginal gold demand has to be sourced elsewhere.

All the mined gold and then some

…click on the above link to read the rest of the article…

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