Central Banks Making HUGE Gold Moves

2023 may set another new record for central bank gold buying

Bullion.Directory precious metals analysis 06 November, 2023
By Peter Reagan
Financial Market Strategist at Birch Gold Group

I’m not 100% sold on his thesis, but he makes some incredibly interesting points. Here’s a summary:

• Private gold ownership makes you an enemy of the central banks
• The Bank of International Settlements seems to be shielding someone(s) from the effects of its own Basel III agreement via secretive gold swaps
• This year has seen Deutsche Bank, Bank of America, JPMorgan Chase and Morgan Stanley employees all involved in price spoofing scandals (are they the fall guys?)
• No one believes that China’s official gold holdings are accurate.

China is the world’s largest gold producer (you don’t hear about it because it’s against to law to export gold from China!). and has trillions concealed in state-owned banks and other quasi-official institutions. Maybe the one thing Chinese media talks about freely is gold price suppression by Western central banks. In China, the subject is far from tinfoil hat territory.

If all this is happening, what would be the most tell-tale sign? Probably we’d see evidence in gold buying. The first thing you do when you’ve suppressed a valuable asset is to load up on it (otherwise, what’s the point?)

Speaking of gold buying: Central banks have officially bought another 800 tons of gold this year. That’s not only a record number for the period, it’s also a 14% net increase over last year. Remember last year, when central bank gold purchases reached the highest figure since records have been kept?

The move is part of a broad shift away from dollar reserves (as we’ve discussed extensively), but is also stoked by inflation and economic uncertainty.

The annual total of gold purchases by central banks is on track to set a new record, according to the World Gold Council. I don’t doubt it!

The weekly recap: Why price isn’t the whole story

Nobody claimed the $2,000 level would be easy, but it doesn’t have to be. Friday’s session was bouncy, as gold hit a low of $1,984 and a high of $2,003, closing just below the $2,000 level. Is that good or bad?

If one hoped for a no-stops rise to next resistances, it might be bad. But every seasoned investor knows that, the bumpier the road is, the greater the upside we can expect in the gold market.

The road to $2,000 has indeed been a protracted one, which might be one of the reasons why many are calling for gold to go upwards of $2,500 in the not-too-distant future.

Having the favor of market participants can easily be deemed more important than reaching an immediate price level, as the former will give way to the latter. Kitco’s double survey, polling both professional and retail investors, showed that both categories expect gold to gain in the near-term.

But perhaps more importantly, the conversation regarding Federal Reserve policy is starting to shift heavily in favor of gold.

As Adam Button, chief currency strategist at ForexLive, explained:

The gold market can see Fed rate cuts on the distant horizon. I think the message from the market this week is that the Federal Reserve is done. And that’s great news for gold.

That’s “great news for gold” because it’s bad news for the dollar. It’s bad news for getting inflation under control! Maybe folks have already forgotten that less than a year ago, even the “lowest lowball” official inflation measures were at 40-year highs.

The Federal Reserve’s job is not over. And while it’s true that any reduction in interest rates would set a fire under gold prices, if we’ve learned anything at all from the last year, it’s that gold’s price doesn’t need a return to the near-zero interest rates that defined the 21^st century so far.

Remember, two things drive gold’s price:

1. Fluctuations in currency value (weaker dollars)
2. Supply and demand

When your money is worth less, prices go up. Prices on consumption goods like food and fuel and appliances — also on assets like housing and gold.

When demand is strong, prices go up. See above.

That’s why it’s particularly interesting that the price of gold rose on Friday despite active selling. Why? A drop in the U.S. dollar’s value. That’s likely to continue. In fact, it’s difficult to recall a time when the dollar was facing more inflationary pressures than right now.

Consider: Since the last debt ceiling standoff ended back in March, the federal government will borrow another $2.85 trillion. As the always colorful Wolf Richter put it:

Government has gone nuts.

Keep in mind, this plan is coming from the same President who told us, back in May 2022:

… we need to keep reducing the federal deficit, which will help ease price pressures.

Conversely, increasing the deficit will add to “price pressures,“ or what we everyday folks who work for a living call “inflation.“

Every single dollar of deficit spending increases the money supply and crowds out private-sector investing. Deficit spending both devalues the dollar and contributes directly to higher prices.

This isn’t a tangential issue. This is exactly how the U.S. federal government is driving gold’s price up – unintentionally, to be sure. But nevertheless, inevitably.

HSBC seems to have forgotten about the Basel III agreement

HSBC’s announcement offering “tokenized” gold has been one a big story recently. They’re the first bank to do so – and I’m sure their developers worked very hard on the project.

The approach “generates a permissioned digital representation of clients’ physical gold holdings,” according to an HSBC press release. One token is equivalent to 0.001 troy ounce (0.028 grams), or one one-thousandth of an American buffalo gold coin. The same as the smallest-denomination Goldback note.

John O’Neill, global head, digital assets strategy, markets and securities services, HSBC, says:

In addition to demand for native digital assets, we are seeing appetite for tokenisation solutions that can maintain a link to specific real-world use cases, such as gold.

But we have to wonder how much appetite there is, really. Blockworks says that, with their offering, HSBC “adds fuel to the tokenization fire.”

The nuance in this story, however, is far more important to the overall gold market than any single product launch. HSBC isn’t talking about it and none of the fawning write-ups I’ve seen have mentioned it either. So I’ll point out the elephant in the room…

The Basel III agreement has been one of the biggest news stories over the past few years, and with good reason.

If you don’t know anything about the agreement, it suffices to say that it’s a ruleset meant to rein in the kinds of accounting tricks that got the so-called globally systemically important (GSI) megabanks in so much trouble back in 2007. We can sum up the thousands of pages of regulations and tables and glossaries in a handful of words:

Stop playing games with your capital reserves.

That’s a real problem for banks, because playing games with their capital reserves is a huge source of revenue. One much-abused banking shell game: claiming to own physical gold bullion as a portion of their reserves – but not actually owning it.

Basel III specifies that the only form of gold that’s actually a tier 1 or “riskless“ asset:

Gold held in own vaults or on an allocated basis has always been a tier 1 asset under the Basel Accords. This is because allocated gold attracts no credit risk – it is neither the asset or liability of the custodian bullion bank and is therefore not considered part of the custodian bank’s balance sheet.

Basel III made a lot of people anxious. It had to have been implemented in a very gradual and limited way, as the consensus was that a full implementation would immediately cause a global banking crisis. Even its current, slow-motion implementation was greeted with many calls for a new bull market in gold (which may or may not have already materialized).

Mind you, this was before any mention of Silicon Valley Bank, which is an entirely separate banking crisis.

So we have these new banking regulations that require that banks actually own the physical gold they claim as their own. We have gold bullion as the second most popular asset in the U.S.

And now we have HSBC’s announcement, which simply doesn’t fit. Why double down on blockchain-gold when both institutions and individuals want the real thing?

Crypto enthusiasts can argue all day long that tokenization of gold is good for both gold and crypto. I’m not convinced.

Actual implementation of the Basel III agreement remains in its earliest stages. U.S. banks swear they can’t afford to actually increase their reserves.

The more one delves into its background, the lesser the appetite they will have for any gold that hasn’t been minted the only way it counts.

This article was originally published here

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