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From the Mises Institute:
Post mortem on the Swiss Gold Initiative
The Swiss gold initiative has come and gone. It can be summarized as much ado about nothing. Even if it had passed, the initiative would have had no real impact on the central bank’s ability to print money or conduct monetary policy.
The central bank is currently defending a 1.2 Swiss-francs-to-the-euro floor. By pegging its currency, the Swiss central bank has basically opted to follow its neighbor’s excessively easy monetary policy. To keep the peg, the Swiss central bank has been purchasing euros by printing Swiss francs. The central bank then returns the euros to the Euro money supply by purchasing European government bonds. It could have just as easily used those euros to buy dollars for gold. In either case, the euros or dollars are returned to the market, and therefore the Swiss action does not influence the respective Euro or U.S. money supplies. We must remember that exchange rates are determined by differences in monetary growth rates and anticipation of what those differences will be in the future.
The Swiss government and Swiss central bank opposed the initiative. This should not be surprising. It is standard government policy to use fear tactics to justify continued government theft.
The Swiss central bank said that the initiative would limit its flexibility to deal with a liquidity crisis or runaway inflation. Since the central bank could not sell its gold, it claims it would be hard pressed to provide liquidity in the event of a banking crisis. Of course this assumes that the central bank would keep its balance sheet from expanding, which is nonsense. There is nothing stopping the central bank from printing Swiss francs for liquidity and print even more Swiss francs to buy gold.
What’s next for the dollar and gold?
Who would have predicted oil prices in the $60 range a year ago? Something is not right about these markets. Our take: don’t get burned when markets add fuel to the fire. Here’s what to watch out for as we head into 2015; ignore at your own peril.
The world isn’t running out of oil, but out of cheap oil. Therefore the fundamentals don’t support oil trading in the $60s. As oil prices have plunged from over $100 to just over $60 a barrel, it appears to us the market is driven by a combination of the following:
- The global economy is experiencing a severe slowdown
- Major liquidity providers have left the market
- Technicals rather than fundamentals are in charge
Europe can’t get back on its feet with sanctions imposed on Russia (hint to European Central Bank head Mario Draghi: printing money can’t fix this). China’s economy is in transition with significant headwinds coming from a housing bubble that’s deflating. In the U.S., we are made to believe our recovery is getting ever stronger; the energy markets appear to disagree.
The large moves we have seen in some markets of late – most notably in oil futures – may well also be a reflection that banks are no longer “risk takers” in these markets. The law of unintended consequences has removed these very large liquidity providers. Investors shouldn’t be surprised that moves have become more volatile.
The media attributes the drastic drop in oil prices to OPEC’s decision not to limit production. OPEC’s meeting last week might have been a catalyst, but fundamentals did not change radically enough to justify the dramatic decline. Some say commodity prices tend to be driven more by technicals, and we don’t disagree. We take it a step further, though, arguing all markets are ever more removed from fundamentals.
What’s happening in the oil markets is a symptom of what’s happening in all markets. Our long-term readers know that we have been most concerned about complacency in the markets: complacency is the absence of fear. In the equity markets, the VIX index measuring volatility is a good barometer of complacency. In our analysis, complacency on the backdrop of rising asset prices is a problem. It’s a problem because investors bidding up such asset prices are not appreciative of the inherent risks they are taking on. As fear comes back into the market, such investors can be gone in a heartbeat, as they suddenly realize their investments expose them to greater risk than they bargained for. In our assessment, an equity market that has relentlessly risen on the backdrop of low volatility is a box of tinder waiting to be lit.
Volatility has crept back into the markets, although casual observers might not have noticed. First, there was the equity market that briefly acted up in late September/early October. Pundits write this episode off as old history. Indeed, even we said a possible market crash is put on hold after Japan announced its $1.2 trillion pension fund would invest hundreds of billions in foreign equity markets. As we wrote in a recent analysis, this policy may only provide short-lived support to the markets and be ultimately a net negative for Japanese investors.
And then came the rout in commodities, at first also pulling down gold. But gold – at least as of this writing – is staging a furious comeback.
Oil’s drop threatens credit crisis but not gold
Those who are driving gold down today on the commodities exchanges forget that gold’s rise over the last several years (despite its interim downside correction) has been in response to disinflation, not inflation — and demand remains strong due to concerns about the stability of the financial system itself.
Belgium’s central bank considers repatriating gold
Following those in Germany and the Netherlands, Belgium’s central bank is considering repatriating its gold reserves, Bullion Star market analyst and GATA consultant Koos Jansen reports, citing the Flemish commercial broadcaster VTM.
China’s gold reserves may be greater than official figure
Taking advantage of the slump in international gold prices, the People’s Bank of China may have purchased large amounts of gold in a bid to diversify its reserves, thereby lowering its share of U.S. government bonds, inside sources say, according to Shanghai’s National Business Daily.
The People’s Bank of China released data recently that showed the nation’s official gold reserves stood at 1,054 tonnes as of the end of 2013.
Gold transactions at the Shanghai Gold Exchange has now hit 1,100 tonnes a quarter now and the monthly delivery volume of gold has risen to 212 tonnes from the respective amounts of 362 tonnes and 44 tonnes in January 2008, reported National Business News. The newspaper also added that the transaction volume has picked up rapidly since April 2013, when international gold prices began to plunge.
Indians have $1 trillion worth of gold!
India’s love affair with gold grew stronger as it once again emerged as the world’s biggest consumer of the precious metal beating China.
Bringing more cheer to the gold industry, the government eased import curbs by scrapping the “80:20” scheme. Under this scheme, 20 percent of the imported gold had to be mandatorily exported before importing the new lot.
India imported a whopping 95,673 kg of gold in September, the highest level in the first six months of this financial year.
“The business of gold loans is about unleashing the hidden power of gold, bringing to life what is otherwise a dead investment,” V.P. Nandakumar, executive chairman, Manappuram Finance Ltd – the Rs 8,500 crore (Rs 85 billion) company, India’s first listed gold loan company – tells Shobha Warrier/Rediff.com.
At the moment, much of these reserves are locked up in our safes and vaults as a dead investment. If we can put the vast reserves of gold to constructive use, it would be a major boost to the economy.
Judge in Liberty Dollar case orders some metal forfeited, some returned
The judge in the Liberty Dollar case in U.S. District Court for the Western District of North Carolina, Richard Voorhees, yesterday ordered some of the Liberty Dollar’s coinage and metal forfeited to the U.S. government and some silver deposited by Liberty Dollar founder Bernard von NotHaus’ mother returned to her. The judge also recommended that the U.S. Treasury Department consider applications from Liberty Dollar customers for return of their metal if the customers claim not to have been participating in a counterfeiting scheme.
From the New York Sun:
Beyond Bernard von NotHaus
Congratulations are in order to U.S. District Judge Richard Voorhees of North Carolina for the judiciousness of his decision in the case of Bernard von NotHaus. We weren’t present at the courthouse at Stateville, where von NotHaus had been ordered to appear for sentencing on his conviction of uttering – introducing into circulation – his Liberty Dollars. But we were on tenterhooks because von NotHaus, 70, was looking at the possibility of spending the rest of his life in prison.
The reason we’ve been watching the case is that von NotHaus’ demarche is one of the few direct challenges to what the Foundation for the Advancement of Monetary Education likes to call “legal tender irredeemable electronic paper ticket money.” That refers to the scrip being issued by the Federal Reserve. Von NotHaus had designed and circulated a medallion made of pure silver, the same specie that was fixed on by the Founders of America as the basis of the constitutional dollar.
From Bloomberg News:
Fed leak tipped traders to historic stimulus move, prompted secret inquiry
Alarms went off inside the Federal Reserve: the Feds innermost secrets had leaked to Wall Street.
Confidential deliberations of the Federal Open Market Committee made their way into a research note circulated among traders.
The report – a fly-on-the-wall account of the FOMCs September 2012 meeting, with hints of Fed action to come that December – prompted a mole hunt that reached the highest levels of the central bank.
The story of the FOMC leak underscores the lengths to which outsiders will go to penetrate the inner workings of the Fed, and how valuable access can be. The Fed has never disclosed the investigation or its findings. …
Under Fed rules, the general counsel and FOMC secretary investigate if the chain of confidentiality is broken and report their findings to the chairman.
The Fed’s general counsel can also ask the Fed inspector general to investigate breaches. No specific mention was made of an inspector general investigation into the 2012 FOMC leak in that offices 2013 reports to Congress.
John Manibusan, a spokesman for the inspector general, declined to comment.
Federal Reserve confirms biggest foreign gold withdrawal in over 10 years
A week ago, when we reported that in a stunning move, the “Dutch Central Bank Secretly Withdrew 122 Tons Of Gold From The New York Fed,” and when looking at the N.Y. Fed’s monthly reports of gold deposits by foreign entities, we observed that “we can see that while the 5 tons outflow in 2013 was most likely Germany, the recent surge in gold repatriation from Liberty 33 was the Netherlands. That said, only 77.5 tons of N.Y. deposits gold has been officially repatriated through September, which means the October update, when it comes out, will be a doozy.”
Yesterday, the long anticipated October update of “earmarked gold” held on deposit at the NY Fed was released, and sure enough it did not disappoint. Declining in dollar value from $8.305 billion to $8.248 billion, this was the equivalent of 42 tonnes of gold being withdrawn, in the process reducing net gold located in the vault of JPMorgan the N.Y. Fed to 6,076 tonnes. The 42 tonnes withdrawal was also the biggest single monthly redemption from the N.Y. Fed since 2001.
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