The Changing Role of Gold

Attempts to Dismantle Gold’s Monetary Role Have Failed – Say the Central Banks

“And how do we keep our balance? That I can tell you in one word – Tradition. Because of our traditions, we’ve kept our balance for many years. You may ask how did this tradition get started? I don’t know. But its a tradition. Without our traditions, our lives would be as shaky as…as…a fiddler on the roof.” ~Topol from The Fiddler on the Roof

On July 13 2011, Ron Paul asked Federal Reserve Chairman Ben Bernanke if gold was money… to which Bernanke replied “no.” When asked why the Fed stores gold as a reserve asset on its balance sheets he said because….”it’s tradition.” And how will financial world once regain its global monetary balance? I can tell you in three little words, a restoration of tradition. The traditional role of Gold is to serve as ‘reserve asset.’ There simply is no other tool to restructure the balance sheets of world finance. In this sense, gold is not fungible.

The Official Monetary and Financial Institutions Forum, OMFIF (a forum comprised of central banks and sovereign wealth funds) confirmed the same recently when they described gold as “the official asset that plays no formal part in the monetary system, yet has never really gone away – is poised, yet again, to play a pivotal role.”

The OMFIF went on to say in its January 11 2013 World Gold Council press release, “western economies have attempted to dismantle gold’s monetary role. This has failed.” Though they did a darn good job of trying. The failure was not due for a lack of coordinated effort. But to their dismay, Gold’s role in the global financial system is simply not extinguishable. The OMFIF press release also warned of “twin shocks” to the dollar and the euro and of a “coming dollar shock. Gold has a lot going for it;” they said, adding that “it correlates negatively with the greenback, and no other reserve asset seems safe from the coming dollar shock. The world is headed towards the uncharted waters of a durable multi-currency reserve system. Demand for gold is likely to rise as the world heads towards a multi-currency reserve system under the impact of uncertainty about the stability of the dollar and the euro, the main official assets held by central banks and sovereign funds. During the coming period of uncertainty and transition between different reserve currencies, official central bank asset managers around the world are likely to increase their interest in gold as a result of doubts about the overall strength of global monetary arrangements.”

We Are One Year Closer to a Renewed Financial Crisis and Fiat Currency Collapse

Economist Alasdair Macleod recently observed in his Outlook for 2013 that “The global banking system for the last five years has struggled with insufficient capital, over-valued collateral, and an underlying tendency for balance sheets to deflate. Government and central bank manipulation of their economies and fiat monies have succeeded in deferring the bankruptcies and liquidation of accumulated malinvestments, to the point where their cost can no longer be sustained…

“And this is not just a single-country problem, because it has become a problem everywhere. The United States, the United Kingdom and the Eurozone countries reached this terminal point together while Japan had been waiting in the wings for them to catch up. The coincidence of all nations following the same path to destruction is the result of international coordination that has increasingly dominated global politics since the Bretton Woods Conference in 1944. The response to the financial crisis of 2008 was to draw in more participants, leading to the G20 becoming the post-crisis forum for international economic coordination. Never in modern history have we seen so many governments agreeing to make the same mistakes. We are one year closer to a renewed banking and financial crisis,” says Macleod, “the pace of which is quickening, and which can be expected to turn eventually into a fiat currency collapse.”

Possession Is Nine-Tenths of the Law

Possession is nine-tenths of the law, they say – meaning that ownership is easier to maintain if one has possession of something, and much more difficult to enforce if it does not. With twin currency shocks headed our way, and uncertain global monetary arrangements to transition through, it was no surprise to find the Bundesbank issue a press release on January 16 2013 announcing that it was initiating a gold repatriation program.

“By 2020, the Bundesbank intends to store half of Germany’s gold reserves in its own vaults in Germany. The other half will remain in storage at its partner central banks in New York and London. With this new storage plan, the Bundesbank is focusing on the two primary functions of the gold reserves: to build trust and confidence domestically, and the ability to exchange gold for foreign currencies at gold trading centres abroad within a short space of time.”

And the Bundesbank has good reason to move its gold back home. According to James Turk,

“Central banks say they own about 30,000 tonnes of gold. Now, the reality is that central banks probably own no more than 15,000 tonnes of gold and it could very well be less than that. [Central banks] don’t accurately report on their balance sheet how much gold they have in the vault, and how much gold they’ve taken out of the vault and loaned to various participants in the bullion market. There’s a big difference between having physical gold in the vault and having somebody owe you physical gold. The fact that central banks don’t really report how much physical gold they really have creates a huge uncertainty in the gold market.”

Repatriation of central bank gold sends a signal that certainty, trust, and confidence amongst central banks has begun to break down. Possession is nine-tenths of the law, and if it’s not in their own vaults, that ownership claim may be difficult to enforce. Better to repatriate half of your gold than to leave it all in someone else’s vault.