JGeropoulas
The Living Force
Investors Take Note: The Swiss Gold Referendum Has Already Changed The Gold Market
SeekingAlpha.com
11-26-14
_http://seekingalpha.com/article/2714475-investors-take-note-the-swiss-gold-referendum-has-already-changed-the-gold-market
SeekingAlpha.com
11-26-14
With a few days left before citizens of Switzerland go to the polls and vote on the much anticipated gold referendum, we've a number of recent events in the gold market that suggest that there has been a significant change in psychology. Whether the referendum passes or not, we think it has already transformed the gold market - gold is now in the public forum, and it seems like gold is proving to be a very political issue.
We're also seeing central banks starting to become very active in the gold market as well - the most sovereign and political activity in the gold market in quite some time.
Let us take a look at a few recent central bank actions that we think are proof of this change of psychology.
The Russian Central Bank Continues to Accumulate Gold
It was just last month that we covered the largest purchase of gold by the Russian Central Bank since 1998 - when the Ruble collapsed. Well it turns out that they weren't done, and despite some silly talk in the media about Russia selling gold to support the Ruble, Russia decided to buy another 600,000 ounces. [see graph of accumulation at link below]
This has simply continued a trend of the Russians buying gold in large regular amounts, after all 600,000 ounces of gold works out to a little less than 20 tonnes of gold. That's around 8% of total world gold mine production for the month - not an insignificant amount of gold.
The Netherlands Repatriates 122.5 Tonnes of Gold
In a rather surprising announcement issued on November 21st, the Dutch have secretly repatriated 122.5 tonnes of gold held at the Federal Bank of New York.
This was a very strange announcement because there really was no visible pressure for the country to change the location of its gold, especially considering it was being held in the supposedly safe NY Federal Reserve vaults. But these type of events do not happen haphazardly and do a lot to validate our position that the psychology in the gold market (at least when it comes to central banks) has changed, and there is a strong desire to repatriate gold.
The big question is why? We don't have a answer for that, but the only reasons that we can brainstorm is that either central banks are trusting each other less OR they are worried about the health of the financial system.
The European Central Bank May Turn to Buying Gold
Another very strange gold-related announcement came in a speech by Yves Mersch, a member of the European Central Bank (ECB) Executive Board, when he discussed the possibility of buying all types of financial assets - specifically mentioning gold as one of those assets. Gold is almost taboo in central banker speeches so the very mention of it is quite unusual, but when digging deeper there is even something stranger than that.
Compared to stocks and ETF's, the amount of physical gold available to be bought is a fraction of the other asset classes - it is not a big market. So for gold to be specifically mentioned as a potential asset to buy to inject liquidity in the financial system doesn't make a lot of sense UNLESS you have another purpose.
Oh La La! French Opposition Look to Repatriate French Gold
We've saved the best for last. Over the past week, Marine Le Pen, the leader of France's Front Nationale, the primary opposition party and the one that is currently leading in the polls, published a letter to the French Central Bank urging a complete repatriation of all French gold held abroad.
In this letter, she cited the Swiss Gold Referendum and the recent repatriation of Dutch gold as examples of other central banks and nations repatriating their own gold. Additionally, she also requests that the French should complete a complete audit of their gold, and a public disclosure of all gold leasing, lending, or arrangements concerning French gold.
First, the repatriation of 2400 tonnes of French gold (we don't know how much of that is currently abroad) may significantly affect the gold leasing market as if any of that gold is leased it will have to be bought back. The fact is that we think a lot of it may be leased or have multiple claims on it, and the evidence is the fact that Germany couldn't repatriate a much smaller amount of gold over a much longer time frame.
That is a topic for another day, but if there were no claims or gold leasing going on with the German gold it would have been repatriated as per their request - what happens if the French demand almost four times as much gold over a year? Somebody is going to have to buy a lot of gold on the physical market to cover this request and we highly doubt it can be done with gold prices anywhere close to current levels.
Finally, and perhaps more importantly, this French request is another domino that may knock over many other dominoes in the gold world. Just as Marine Le Pen cited the Dutch repatriation and Swiss gold referendum, other parties in other nations will cite the French repatriation request.
The Germans are the first to come to mind, but don't count out the Italians (Beppe Grillo is no fan of the euro) - both of those nations hold more gold than the French.
People shouldn't forget it was France's Charles De Gaulle that ultimately was the deciding factor in forcing the US to close the gold window by exchanging US dollars for gold - Marine Le Pen wouldn't be the first French leader to change the financial system by demanding France's gold.
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The public (both citizens and politicians) are now scrutinizing what central banks are doing with gold reserves - that in itself is something that is a game-changer. [i.e. the power of increased knowledge and awareness]
We already know that the physical gold market is quite small and that it has been driven by paper markets for years. But the repatriation attempts and attention paid to physical central bank gold holdings may finally push the physical market over the edge as there really are only a few ounces of physical gold that back a huge leveraged paper market.
If the gold market is leveraged, over-leased, and re-hypothecated as much as the evidence suggests (and we believe), then we may see a huge "bank-run" on physical gold. The consequences of this are very unpredictable - but it would certainly mean a much higher gold price
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Investors should remember that changing psychology is very hard to pinpoint with a single event - it takes time to see and become obvious. But there is change coming in the psychology of the gold market and the Swiss Referendum is so far the most obvious of those signs. We think we'll see many more of them to come regardless of what happens on November 30th.
If people doubt the importance of psychology all they have to do is look at any bank run - it all starts with a change in psychology and not a change in balance sheet.
A depositor simply requests to take physical possession to what he already supposedly owns (i.e. a net zero change on the balance sheet), and if enough people do it (i.e. change in psychology about where you want your money) then we have a bank-run.
Is that what we're seeing in the gold market? If so, you better have some gold.
_http://seekingalpha.com/article/2714475-investors-take-note-the-swiss-gold-referendum-has-already-changed-the-gold-market