The India Times recently reported that the Reserve Bank of India is planning to ship impure gold to the Bank of England to swap it for pure gold that can be traded as London pure bars.
If the objective is to exchange impure for pure bars that is very easily done. Any major refiner would be happy to smelt the gold, test it for impurities, remove the impurities, and then recast the gold at the purity India desires. The gold could then be shipped back to India, instead of being stored at the Bank of England, as the current scheme appears to require.
Is Something Else Happening?
It appears the Reserve Bank of India has been co opted by the Western central banks so that they can further prosecute their agenda of supplying physical gold at artificially suppressed prices.
The Reserve Bank in India historically has worked closely with the Western central banks. India has loaned gold to Western banks and has used the Bank of England as a custodian. There is little doubt that in that custodial relationship, the Bank of England is entitled to hypothecate and rehypothecate that physical gold….The Bank of India may not be doing anything honorable here, although it may be increasing the stakes and risk they never will see that gold again.
Whatever the reason for the scheme, it is surprising news. Since the new Indian government appeared to be set to eases restrictions, taxes and fees related to the public buying of gold. The shipping of gold to London appears to run counter to such a platform.
Has Gold Bottomed?
Turning to the gold market, physical prices were strong last week. It certainly would appear that the bottom was put in…late last year. We haven’t really seriously threatened that $1,200…level in some time. We appear to be at a happy medium, whatever available gold that can be mustered is sufficient, although he underlying bullish tone has continued. At least on a daily trading basis, serious strains don’t exist, but that doesn’t mean that gold can’t go higher….There’s very, very good demand. Sovereign bids have been slowly migrating higher, from the mid $1,200s low to the top $1,360s. If that trend continues, there’s a reasonable basis for optimism.
One of the biggest short squeezes in history is on the horizon.
The paper claims on gold exceed actual physical gold that trades between 90 and 100 to one. In addition, there are other very leveraged claims on gold, where physical gold is not present. Unallocated bank accounts, where individuals open a physical gold account at a bank. The bank gives the account holder a piece of paper saying they hold so many ounces of gold. The individual walks away with the satisfaction that a bank is going to be able to give you the gold when you ask for it. However, the bank does not go out and buy gold. Millions of people have such accounts around the world, for which there is no gold backing.
More Bullion Banks Defaulting?
I need to stress the risk inherent in this situation. Two such bullion banks have already defaulted, in April 2013, based on just such claims, Dutch banks ABN Amro and Rabobank. The banks did not deliver gold to the investors who held gold accounts. Investors received checks for the value of the gold when the accounts were closed. People got cashed out forcibly, because these accounts allow you to do this.
When they can’t keep a lid on this, the entire system is going to freeze up in this fashion. For bullion banks that have been shorting gold, when the physical market demarcates from the paper market, then it’s going to be game over. All these paper claims will be cashed out at some prior price, which they’re allowed to do, so that the banks can get out of these open ended obligations without going broke. Individuals who thought they owned gold will rush out and buy physical gold at worse terms to get the position they thought they had. In such a short squeeze, gold could hit $5,000 or $6,000 an ounce.
= = =
