China is suffering from a massive credibility hit today as a scam to extract credit from Chinese banks by repeatedly pledging the same collateral of gold, and other commodities, over and over and over again unwinds.
China’s Chief Auditor has identified $15.2 billion in loans backed by falsified gold, according to the National Audit Office’s website.
It has been estimated that upwards of $80 Billion was advanced in gold backed loans alone, according to Goldman Sachs, as quoted in a Bloomberg article today.
If such large sums were pledged, and we are only now understanding the scope of this fraud, what possible effect could it have had on the gold market?
Was this $80 billion in fraudulent gold backed loans used to suppress the price of gold in 2013?
Today’s AM fix was USD 1,315.25, EUR 966.31 and GBP 1,315.25 per ounce.
Yesterday’s AM fix was USD 1,311.50, EUR 962.99 and GBP 770.56 per ounce.
Gold fell $3.10 or 0.23% yesterday to $1,316.20 per ounce and silver rose $0.05 or 0.24% to $21.08 per ounce.
China is suffering from a massive credibility hit today as a scam to extract credit from Chinese banks by repeatedly pledging the same collateral of gold, and other commodities, over and over and over again unwinds. China’s Chief Auditor has identified $15.2 billion in loans backed by falsified gold, according to the National Audit Office’s website. It has been estimated that upwards of $80 Billion was advanced in gold backed loans alone, according to Goldman Sachs, as quoted in a Bloomberg article today.
Doh! – A Gold Storage Warehouse in Qingdao, China?
If such large sums were pledged, and we are only now understanding the scope of this fraud, what possible effect could it have had on the gold market? In absolute terms and over the long term the effects might be minimal.
But it does show how poor oversight and lax auditing can be used to create a false market. It is worth noting that banks that have lent on gold as a collateral may have hedged their gold exposure by selling futures contracts in the market. It stands to reason that such exposures would be hedged in order to preserve the asset value of the collateral.
Such hedging can only have a suppressing effect on the gold market as the other side of the trade is fictitious – no long side or physical gold. Many commentators have argued voraciously that many aspects of the gold market have been manipulated for a very long time, by banks tinkering with the gold market reporting mechanisms and more importantly by officialdom, in the form of leasing gold into the markets, misrepresenting their net position of gold reserves.
Given that these same officials have recently taken to printing money with which to prop up their hyper indebted economies demonstrates the extreme times that we live in.
It is quite likely as the central banks of the world print money that they are in fact creating a massive false economy where capital and savings values are eroded, bad debts unreconciled and poor credit decisions the norm. It is possible that should confidence drain from the system the rush to the exit will become unmanageable, for a time at least.
Urgently, the market needs an Auditor General styled investigation into actual official and institutional gold reserves and the establishment of a system to track such assets in terms of loans and related collateral.
So What Should Investors Do?
Bubbles are forming all over the investment landscape and the fear is that an inflation monster is about to be unleashed. It is of critical importance for investors to own an allocation of their investments in gold. The rule of thumb is between 3% and 10%.
Owning gold via an ETF or in a pooled investment account is useless especially if the whole reason for owning it is to protect your portfolio from systemic risk. Such instruments rely heavily on the financial system and thus will offer little protection in times extremis. They are best used for short term speculative strategies, which should not be confused with investing and risk management and asset allocation.
Investors need to have direct unencumbered ownership of gold with as few counterparties as possible. Having legal line of sight is critical. Such arrangements cost money because you are paying for the legal certainty that your gold is where it is supposed to be and no one else can touch it.
The best way to own gold is in segregated allocated storage in a safe vault in a safe jurisdiction that only stores valuables. Your gold should never be mixed with anyone else’s gold. You should be able to visit your gold and move it wherever whenever you wish.
What Is The Best Price To Buy Gold At?
Any price, its all relative. Somewhat counter-intuitively the price of gold should be a secondary consideration for long term investors. Consider the cost of not having your appropriate allocation. For example if your assets are in property you have exposures to foreign exchange, geographical events, building events, government events and most importantly interest rate risk. Trust me a property deal done today, when money has effectively no net cost, could turn ugly as interest rates start to rise – i.e. normalise.
Furthermore you should hope the price of that bar falls and keeps falling, because if does the world will be in a better place, central bankers will have stopped printing money and the price of all the other assets you own will be performing well.