chavez

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The Great Gold Squeeze

So what’s next for gold? The weekend is over, and the week is about to begin — and that means gold, equities and debt trading in Asia will shortly be under way. Gold has been in a meteoric move upwards, spurred to even greater heights by Hugo Chavez’s announcement that Venezuela would repatriate its gold holdings from foreign banks — specifically those in London and New York.

From Things That Make You Go Hmmm (an absolute must-read):

Chavez’s move this week could set in motion a chain of events whereby Central banks who store the bulk of their gold overseas in ‘safe’ locations scramble to repossess their country’s true ‘wealth’. If that happens,the most high-stakes game of musical chairs the world hasever seen will have begun.One would imagine that a country’s gold would be storedonshore in their own vaults rather than be entrusted to a foreign power – after all, if tensions were to rise between the two sovereigns, amongst the first casualties would be said gold.

In trading since Chavez’s announcement, gold has shot up further. Of course there are other reasons for gold to rise — fiat debasement, sovereign debt concerns, equity weakness, concerns with overall trading conditions. But — ever since Gordon Brown offloaded Britain’s gold reserves for less than $300 an ounce at the millennium — coinciding with the peak of the fiat bubble — gold has shot up in value over 500%, and finally central banks are shifting holdings back into gold — especially the central banks of developing nations like China, Brazil and Russia, whose gold holdings have shot up 900%:

But the real problem may be that the vast growth in paper gold trading has been built on the backs of a very, very small physical base. Will the paper house of cards come tumbling down if part of the physical base is removed and sent to Venezuela? From Zero Hedge:

What could well be a gamechanger is that according to an update from Bloomberg, Venezuela has gold with, you guessed it, JP Morgan, Barclays, and Bank Of Nova Scotia. As most know, JPM is one of the 5 vault banks. The fun begins if Chavez demands physical delivery of more than 10.6 tons of physical because as today’s CME update of metal depository statistics, JPM only has 338,303 ounces of registered gold in storage. Or roughly 10.6 tons. A modest deposit of this size would cause some serious white hair at JPM as the bank scrambles to find the replacement gold, which has already been pledged about 100 times across the various paper markets.Keep an eye on gold in the illiquid after hour market. The overdue scramble for delivery may be about to begin.

The real question is whether any such scramble would cause more panics, more scrambles — to get out of cash, treasuries and equities and into gold and silver bullion — causing a deeper and harsher crash. Current data suggests that this is unlikely — but the deep worries over sovereign liquidity, fiat debasement, and food and fuel scarcity suggest that a panicked scramble out of cash is not entirely out of the question. Here’s a fantasy re-enactment of one not-entirely-improbable scenario:

$2000 gold ain’t far away:

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Chavez: “We Want Our Gold”

According to Federal Reserve Chairman Ben Bernanke:

Gold is not money. It’s a precious metal. We keep it in our vaults because of tradition.

So, if a nation — say, Venezuela — were to demand the full and final return of its (multi-leveraged) gold reserves from vaults across the West, would it be safe to assume that the “ barbarous relic“, and”anachronism” would be delivered quickly and in full? Further, would it be safe to assume that the price of gold would not shoot through the roof? Well, it seems like we are going to get to find out just how “barbarous” this “relic” really is. From Zero Hedge:

In addition to the nationalization of his gold industry, Chavez earlier also announced that he would recover virtually all gold that Venezuela holds abroad, starting with 99 tons of gold at the Bank of England. As the WSJ reported earlier, “The Bank of England recently received a request from the Venezuelan government about transferring the 99 tons of gold Venezuela holds in the bank back to Venezuela, said a person familiar with the matter. A spokesman from the Bank of England declined to comment whether Venezuela had any gold on deposit at the bank.” That’s great, but not really a gamechanger. After all the BOE should have said gold. What could well be a gamechanger is that according to an update from Bloomberg, Venezuela has gold with, you guessed it, JP Morgan, Barclays, and Bank Of Nova Scotia. As most know, JPM is one of the 5 vault banks. The fun begins if Chavez demands physical delivery of more than 10.6 tons of physical because as today’s CME update of metal depository statistics, JPM only has 338,303 ounces of registered gold in storage. Or roughly 10.6 tons. A modest deposit of this size would cause some serious white hair at JPM as the bank scrambles to find the replacement gold, which has already been pledged about 100 times across the various paper markets. Keep an eye on gold in the illiquid after hour market. The overdue scramble for delivery may be about to begin.