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Dutch Central Bank Admits It Has Prepared for a New Gold Standard
Dutch Central Bank Admits It Has Prepared for a New Gold Standard
In a recent interview the Dutch central bank (DNB) shares it has equalized its gold reserves, relative to GDP, to other countries in the eurozone and outside of Europe. This has been a political decision. If there is a financial crisis the gold price will skyrocket, and official gold reserves can be used to underpin a new gold standard, according to DNB. These statements confirm what I have been writing for the past years about central banks having prepared for a new international gold standard.
Wouldn’t a central bank that has one primary objective—maintaining price stability—serve its mandate best by communicating the currency it issues can be relied upon in all circumstances? By saying gold will be the safe haven of choice during a financial collapse, DNB confesses its own currency (the euro) does not weather all storms. Indirectly, DNB encourages people to own gold to be protected from financial shocks, making the transition towards a gold based monetary system more likely.
Old gold vault of DNB in Amsterdam.
How to Prepare for a Gold Standard
In my latest article on this subject—“Europe Has Been Preparing a Global Gold Standard Since the 1970s. Part 2”—I have demonstrated that central banks of medium and large economies in the eurozone have balanced their official gold reserves, proportionally to GDP, to prepare for a gold standard (/gold price targeting system). My analysis was pieced together by scarce quotes from central banks and data of European gold and foreign exchange holdings. My conclusion was that several medium-size economies in Europe (the Netherlands, Belgium, Austria, and Portugal) sold large amounts of gold from the early 1990s to 2008 to come on par with France, Germany, and Italy. I wrote:
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The West Is Losing Control Over the Gold Price
The West Is Losing Control Over the Gold Price
An important change has unfolded in the global gold market. The East has been driving up the gold price, predominantly in late 2022 and the first months of 2023, breaking the West’s long standing pricing power.
Gold bazaar in Turkey. Pricing power in the gold market has recently shifted to the East.
Until recently, Western institutional money was driving the price of gold in wholesale markets such as London, mainly based on real interest rates. Gold was bought when real rates fell and vice versa. However, from late 2022 until June 2023 gold was up 17% while real rates were more or less flat, and Western institutions were net sellers. Most likely, Eastern central banks, and Turkish and Chinese private demand, lifted the price of gold.
Introduction
For about ninety years, up until 2022, there was a pattern of above-ground gold moving from West to East and back, in sync with the gold price falling and rising. Western institutions set the price of gold and bought from the East in bull markets. In bear markets the West sold to the East. For more information read my article: The West–East Ebb and Flood of Gold Revisited.
If we zoom in on the period from 2006 through 2021 the main reason for Western institutions to buy or sell gold was the 10-year TIPS rate, which reflects the 10-year expected real interest rate (“real rate,” in short) of US government bonds.
The physical gold price was predominantly set in the London Bullion Market and to a lesser extent Switzerland. Gold trade in London can be divided in three categories:
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Zoltan Pozsar, the Four Prices of Money, and the Coming Gold Bull Market
Zoltan Pozsar, the Four Prices of Money, and the Coming Gold Bull Market
Over the past 100 years there has been a correlation between major equity bear markets, adjustments in one of the four “prices of money,” and gold bull markets. If we let history be our guide, the current equity bear market is signaling a new gold bull market, supported by changes in the price of money.
With equities in a bear market, and the Fed adjusting the price of money, we can expect a gold bull market in the coming years.
One of the more intriguing financial analysts of our times is Zoltan Pozsar, Managing Director and Global Head of Short-Term Interest Rate Strategy at Credit Suisse. In his writings of the past months, one of the things that caught my attention was his framework for multiple prices of money. Remarkably, when I looked up big historical changes in the price of the US dollar, they usually succeeded equity bear markets and introduced gold bull markets. Because equities are in a bear market as we speak, we can expect a gold bull market in the years ahead, enabled by the Federal Reserve changing the price of money.
First, let’s see how changes in the price of the dollar have caused gold bull markets in the past 100 years. Then we will add the stock market.
The Four Prices of Money and Previous Gold Bull Markets
Pozsar’s money framework, which he got from his intellectual mentor Perry Mehrling, states money has four prices:
1) Par, which is the price of different types of the same money. Cash, bank deposits, and money fund shares should always trade at a one-to-one ratio.
2) Interest rates, which is the price of future money.
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Hitting Zero: 700 Years of Declining Global Real Interest Rates
Hitting Zero: 700 Years of Declining Global Real Interest Rates
Are negative interests here to stay?
A recent study by Yale economist Paul Schmelzing suggests that global real interest rates “could soon enter permanently negative territory.”
In Mesopotamia around the third millennium B.C. there were two types of money circulating: barley and silver. The interest rate on a barley loan was usually 33%, whereas, on silver, it was 20%. At the time of writing, the interest rate where I live (the Netherlands) on my savings account—technically a loan to the bank—is zero percent. And my country is no exception. An enormous difference compared to the earliest economy we have written evidence of—that of the Sumerians living in Mesopotamia 4,500 years ago.
Schmelzing’s study, titled Eight centuries of global real interest rates, R-G, and the ‘suprasecular’ decline, 1311-2018, illustrates the historical decline in not only nominal interest rates, but also real interest rates. According to Schmelzing, there is a seven-hundred-year declining trend in real rates, which is not likely to reverse course.
In one of my previous articles I showed the (current) correlation between long-term real interest rates on sovereign bonds and the price of gold. I wrote:
One of the key drivers … for the US dollar gold price is real interest rates. It is thought that when interest rates on long-term sovereign bonds, minus inflation, are falling, it becomes more attractive to own gold as it is a less risky asset than sovereign bonds (gold has no counterparty risk).
Regarding this correlation, it’s valuable to get a sense of where real rates are heading.
Schmelzing points out real rates have declined (depending on the type of debt) by 0.006-0.016 % per year since 1311. Remarkably, he states, “that across successive monetary and fiscal regimes, and a variety of asset classes, real interest rates” have been falling.
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US Official Gold Reserves Auditor Caught Lying
US Official Gold Reserves Auditor Caught Lying
More false statements by the auditor have appeared, further eroding its credibility.
In my previous post, from March 2018, on the audits of US official gold reserves, I have exposed that during the audit procedures of the US official gold reserves from 1974 through 2008, repeatedly audit staff deviated from the auditing protocol, while internal control meant to prevent this was failing. Many audits and assay reports have been destroyed. For decades a significant share of the metal was excluded from verifications for no apparent reason. And, the US government went to great lengths in withholding information and spreading false information about the audits, among other findings in documents obtained through Freedom of Information Act (FOIA) requests. All in all, these findings made me question the integrity of the auditor.
After my last publication, I have obtained more documents from the US Treasury through FOIA requests, which expose another falsehood that puts the auditor in an even more peculiar position. In conflict with the audit protocol, the permanent seals of the vault compartments have been broken, time and again. In addition, the auditor has lied about these events, and when confronted, it’s unable to explain its actions. By now, I have lost faith in the auditor fully.
Prologue
It’s been a very long investigative journey that has led me to make bold statements, such as the ones above, about the auditor of the world’s largest gold holding. I wouldn’t claim anything of this magnitude if I didn’t thoroughly do my homework and research every single possibility that could have caused the auditor to have accidentally spread inaccurate material, including asking the auditor for an explanation.
If any of their statements appeared to be false, surely, they would be able to explain what I was missing. The head auditor said during a congressional hearing in 2011 (source video 42:50):
Transparency is our business.
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German Central Bank: Gold Is the Bedrock of Stability for the International Monetary System
German Central Bank: Gold Is the Bedrock of Stability for the International Monetary System
European central banks are slowly preparing for plan B: gold.
It was long believed in the gold space that Western central banks are against gold, but things have changed, for quite some years now. Instead of discouraging people from buying gold, or convincing them that gold is an irrelevant asset, many of these central banks are increasingly honest about the true properties of this monetary metal. Stating that gold is the ultimate store of value, that it preserves its purchasing power through time and is a global means of payment. Such statements, combined with actions that will be discussed below, reveal that more and more central banks are preparing for plan B.
The Bundesbank (the German central bank) published a book last year named Germany’s Gold. In the introduction, written by the President of the Bundesbank Jens Weidmann, the view of this bank leaves no room for interpretation. Weidmann writes (emphasis mine):
Ask anyone in Germany what they associate with gold and, more often than not, they will say that it is synonymous with enduring value and economic prosperity.
Ask us at the Bundesbank what our gold holdings mean for us and we will tell you that, first and foremost, they make up a very large share of Germany’s reserve assets … [and they] are a major anchor underpinning confidence in the intrinsic value of the Bundesbank’s balance sheet.
The Bundesbank produced this publication to give a detailed account, the first of its kind, of how gold has grown in importance over the course of history, first as medium of payment, later as the bedrock of stability for the international monetary system.
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