What is happening on the world gold reserves? On the gold market there is a cold war climate: for the first time in 50 years, central banks bought over 640 tons of gold bars last year, almost twice as much as in 2017 and the highest level raised since 1971, when US President Richard Nixon (pictured) closed the era of the Gold Standard.
The interesting fact is that the European central banks, together with the Asian ones, have been the most aggressive in their purchases: fear of the euro crisis and of currency wars?
In reality, and this is especially true in Europe, behind the great maneuvers on gold reserves there is not only the traditional protective shield against major risks: there is also the call of opportunity. A reminder of which few still seem to know, despite the appointment is now a matter of a few weeks: those that are missing March 29, 2019. The day of judgment for the Brexit will also be the advent for the gold market.
It is not clear whether by choice or by chance, the Bank of International Settlements of Basel, the «Central Bank of Banks» for its key role in the world financial system, has set an appointment with the story for March 29: resurrection of the Gold Standard in the banking world. For almost 60 years, the gold standard has regulated the convertibility between gold and dollar, engaging the market value: in 1971 it was the American president Richard Nixon, frightened by the bearish pressures that were likely to sink the dollar in the cold war, to cut the cordon with gold decreeing the end of the gold standard. Now something starts moving in the opposite direction.
Gold as cash
Il Sole 24 Ore has discovered that among the complex but well-known reforms of the standards for credit and finance from the “Basel 3” plan, there is an accounting alchemy that can turn gold into money in the balance sheets of the large banking groups. From 29 March, by decision of the BIS, the gold in the portfolio of commercial and business banks becomes “Cash Equivalent”, an asset equivalent to cash and therefore “risk free”. In fact, it is the first “reassuring of gold” since the time of the Bretton Woods agreement: technicians call it “Gold Remonetization”, a process that is the reverse of the “demonetization” of gold decided by Nixon.
Same status as sovereign bonds
The operation of the BIS, as reconstructed by the Sole24Ore, carries the signature of the FED, the ECB, the Bundesbank, the Bank of England and the Bank of France, the G-5 of the great global monetary powers. In 2016, when the new rules of the banking system included in the “Basel 3” package were defined, the Central Bankers Committee inserted an epoch-making norm that no one, however, has ever openly discussed in public. In practice, gold in “physical” bullion – hence not under the “synthetic” form as the certificates – returns to be considered by regulators as the equivalent of the dollar and the euro in terms of asset security, thus eliminating the obligation to weight the risk for the purpose of capital absorption, as with any other financial asset, excluding (for now) the eurozone government bonds. The turning point is not insignificant, for the gold market and for the very role of national gold reserves. The result is significant: with the new rules of Basel 3, gold is given the same status that is now recognized for sovereign bonds in banks’ balance sheets. A question therefore arises: is the promotion of gold the premise for applying a weighting of risk to the government securities held by banks? From the debt crisis, the regulators’ objective was in fact twofold: to impose on the banking system to hold an adequate equity to cover the extent of the risks. In the crosshairs there are mainly the Government Securities, that according to current rules can be held by banks without any impact on their assets. The issue mainly concerns low-rating countries such as Italy, Spain, Portugal and Greece, which were seen to be special after the debt crisis in 2011.
The banks of these countries, both to increase profitability (carry trade) and to facilitate the issue of public debt in auctions, have the highest amount of government securities in the euro area. And this phenomenon is particularly felt in Italy, where the banking system has 400 billion BTp on the 2.4 trillion of public debt. What would happen then, if it were applied to risk weighting on BTPs as the Basel Committee wants? The consequences depend on the level of risk weighting applied to the BTPs: if it were high, some banks could be forced to replace the securities with other financial assets, including gold, or to proceed with capital increases. At a time when the market is reluctant to buy bank shares, the risk of repercussions on the stability of the banking system could be high. Just look at the Credit default swaps (default risk insurance) on Italian banks: according to Bloomberg data, the 5-year CDS of some of the major Italian banks have surged since the spring of 2018, even tripling in some cases the value. It is in this context that the date of March 29 is approaching rapidly.
Countries that have repatriated gold from abroad regaining control and management are already protected from the risk of being short of physical gold after March 29 to make available to their banks in case they want to replace it with sovereign bonds . In the arsenal of the system, there is a golden mountain of 33,000 metric tons of gold worth 1,400 billion dollars at the current exchange rate. And that represents 20% of all the gold extracted in the world in almost 3 thousand years. As usual, the most forward-looking and prudent countries – or perhaps the best informed about the turnaround at the end of March, were Germany, Holland, Austria, France, Switzerland and Belgium, but also Poland, Romania and Hungary regained control of gold reserves, increasing their consistency. China, Russia, India and Turkey, on the other hand, have been the nations that have bought gold in the last two years more than anyone else, with Moscow having even liquidated its entire portfolio in US government bonds to replace them with precious metal. But the problem is not this: it is on the price of gold that the accounts do not return.
In 2018, as many as 641 tons of gold bars were bought by the monetary authorities of every continent, but above all in Europe: it is the highest level since 1971. The maneuver is unprecedented and should be seen in the phenomenon of repatriation of ingots of state entrusted in custody. Seven thousand tons of gold reserves were withdrawn from the central banks from the coffers of the New York Federal Reserve, while 400 tons were secretly released by the Bank of England. In recent years, but especially in 2018, a jump in the price of gold would have been in the order of things. On the contrary, gold closed last year with a 7% downturn and a negative financial return. How do you explain?
While the central banks raided “real” gold bars behind the scenes, they pushed and coordinated the offer of hundreds of tons of “synthetic gold” on the London and New York price lists, where 90% of the trading on metals takes place. precious: the excess supply of gold derivatives obviously served to knock down the price, forcing investors to liquidate positions to limit the large losses accumulated on futures. Thus, the more futures prices fell, the more investors sold “synthetic gold”, triggering bearish spirals exploited by central banks to buy physical gold at ever lower prices. With all due respect to those looking at gold as a safe haven. China, India, Russia and Turkey, has practically doubled the gold reserves in the last five years with this system. Moscow, to buy gold, has even sold the last 20% of American government bonds it held in currency reserves.
How compatible is such a situation with the duties of correctness and transparency of a central bank? Certainly, the system created by the Anglo-American “Goldfinger” really seems to be made for abuses. Who knows what will happen after March 29 …