EmptyVaultWith an unallocated account the customer doesn’t have an entitlement to any specific bullion bars, and is a creditor of the bullion bank.   So long as the customer is happy with the counterparty risk, this is the cheapest way for him to have exposure to gold. F
rom the bank’s point of view, there is no need to hold more gold than required to meet customer withdrawals. Furthermore, even this gold doesn’t have to be bought, merely leased from a central bank, remaining in the Bank of England’s vault unless needed.
There can be little doubt that the increase in the quantity of gold held in the Bank’s vaults between 2006 and 2013 reflected, among other factors, physical backing for increasing unallocated accounts during the 2000-2012 bull market.
In the past a bullion bank’s risk to a rising gold price either went unhedged, or was managed through derivatives, using forwards futures and options. Therefore, so long as systemic risk is not regarded as a material factor, the bullion banking community can absorb significant gold demand from investors by expanding unallocated accounts without any physical buying required.
However, the investing public’s greater awareness of risk to bank deposits from bail-ins could change this in future. 

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By Alasdair Macleod, GoldMoney:

The debate in precious metal markets today is whether or not the three-year bear market is over and a new uptrend is establishing itself.
But assuming for a moment that the gold price has turned the corner, will the bullion banks be able to keep a lid on it?
Given the recent jump in their short positions as recorded in the Bank Participation Report on Comex, they presumably think so, and unallocated accounts in London will play an important role.

 

With an unallocated account the customer doesn’t have an entitlement to any specific bullion bars, and is a creditor of the bullion bank. So long as the customer is happy with the counterparty risk, this is the cheapest way for him to have exposure to gold. From the bank’s point of view, there is no need to hold more gold than required to meet customer withdrawals. Furthermore, even this gold doesn’t have to be bought, merely leased from a central bank, remaining in the Bank of England’s vault unless needed. There can be little doubt that the increase in the quantity of gold held in the Bank’s vaults between 2006 and 2013 reflected, among other factors, physical backing for increasing unallocated accounts during the 2000-2012 bull market.

In the past a bullion bank’s risk to a rising gold price either went unhedged, or was managed through derivatives, using forwards futures and options. Therefore, so long as systemic risk is not regarded as a material factor, the bullion banking community can absorb significant gold demand from investors by expanding unallocated accounts without any physical buying required. However, the investing public’s greater awareness of risk to bank deposits from bail-ins could change this in future. And it was only this week that wealthy German citizens were reminded of deposit risk when its government approved the introduction of bail-in procedures for bank insolvencies.
Increasing awareness of systemic risk by the rich and ultra-rich is likely to lead to a preference for allocated accounts or for vaulted gold held outside the banking system, over unallocated accounts. This being the case, the gold price is likely to rise more quickly for a given degree of increasing demand than it has in the past. For tangible confirmation of this conclusion we need look no further than the action of gold this week, which rose strongly at the same time as European bank shares fell sharply.

There is little evidence that dealers fully appreciate these developing dynamics. The sharp increase in the banks’ net short position on Comex reflected in the current Bank Participation Report suggests not.

Of course, it is possible the gold market is only rallying in an ongoing downtrend, in which case this analysis should be put on ice, but not forgotten. But anyone who believes that gold is still in a bear market should bear in mind that the only time gold has been cheaper relative to the total quantity of fiat dollars in circulation was in the late 1960s when the gold pool failed, and in 1999/2000, when the Bank of England sold half the UK’s gold reserves at the behest of Gordon Brown.


    • Hey Repub, tell me how great things are today in the metals market. Don’t see smoke Repub, I see lying fire! Don’t you get it yet?

  1. So, which of the gurus will be eating their shoe soles this time?  The precious is beaten down yet again….
     
    I think, I know what is going on….  every time silver and gold jumps up for, most of the time, unknown reasons, gurus come out of the dark forest, start beating their hair chests and screaming “to da moon, the world is falling apart”!  All of this is done is a vain attempt to capitalize on realistically unknown price change.  In case this change remains permanent, the guru can then safely claim his serendipity, start a subscriptions based news letter, get invited to various prestigious talk shows, make himself very important and bloated with wits and pride.  All you have to do is jump on the price change wave that will not correct down.  Their you have it – the definition of the guru.
     
    So, over the weekend a number of fechshyts came out claiming from 25 to 150/oz.  Eat your ties now, gurus… 

  2. Most of you here don’t realize how many gurus don’t post articles here or as often as once they did.  Volks you have made a true statement! The only reason I stay here is to watch the revolving door of Newbies and what’s new in the Bullshit circles!

  3.  The bankster scum  are stretching their atrophying muscles and still have some firepower left as can be seen this am.The litmus test will be how fast the price recovers.If prices are back to square one within a day or two then I wouldnt worry too much about this blip.If not Im writing a letter to that great Guru Mr Polny.

  4. I’m on the record in saying 15 silver in 3 months.  It’s as good a prediction as any. Given my record, silver will go up.
     The show must have actors, right Ranger?  We know what’s happening. Comic relief is required.  

  5. You try to get out and they drag you back in. Hopefully one of these years before I take my dirt nap, I will at least enjoy seeing my stacks worth as much as I paid for it. Hell, I have been to two county fairs and three box socials and tire of waiting on “WHEN” as promised by the most astute gurus to happen even a couple of years ago! So ah, any lies and fluffy smoke that can be said to those of us in waiting to make us feel better, just bring it on!

    • Let me paraphrase before I even read it… (i) USD is going down due to currency swaps signed by Russia and China, (ii) Petro Dollar ending due to Ukraine, ISIS, Israel/Hamas, etc (iii) BRICs are setting up their own “central” banking system this week to redeem UST for gold, there is a BRICs meeting this week and Putin is rumored to attend (iv) CRIMEX is going to default due to delivery notices from Russia, etc. (v) let me go back and read the last 5-10 years of his letters and regurgitate some more since those are the only ones that I can remember off of the top of my head right this second ;)

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