Germany Brings it Home - Gold Repatriation as Stocks Scare

The WealthCycles Staff

The German Bundesbank is now concerned with acquiring their physical gold, while other central banks are busily investing the cash they create into stocks (see the Banks of Japan, Israel, and the indirectly Federal Reserve-funded plunge protection team). Meanwhile, risk appetite in markets has reached extreme levels, according to the Barclays chart below.

As we can see, the market is exhibiting historically extreme exuberance related to the belief that investor portfolios are “insured” by central banks.  As we now have QEternity (the new Federal Reserve program to create $40 billion in new currency monthly with no  identified end date), stocks, gold and silver are significantly lower in price than before the new printing rate disappointed markets. With extreme risk appetite combining with serious economic headwinds such as the net global contraction in real terms, Art Cashin of UBS recently considered the Black Monday of 1987. We suggest the same. Fundamentals eventually win out -- so watch out!

[On that day] the NYSE had one of its most dramatic trading days in its 220 year history. It suffered its largest single day percentage loss (22%) …
What is often lost in the retelling is that the next day, Tuesday, was far more dangerous. It was the day that the wheels almost did come off the locomotive.
The Dow opened up about 200 points Tuesday to a round of cheers on the floor. But, stocks quickly turned lower. The 200 point gain was erased and the Dow went negative, accompanied by an audible gasp on the floor. Soon it was nearing -100 and trading was being halted in several of the Blue Chips that make up the Dow.
Then we learned that several key banks were shutting down the credit lines of market makers and NYSE specialists. The banks feared exposure to an apparently collapsing stock market.
NYSE Chairman Phelan reached out to the recently appointed head of the Fed, Alan Greenspan. Unfortunately, Greenspan was on a plane. Desperate, Phelan called the President of the New York Fed, Gerry Corrigan. He [Corrigan] sensed the danger immediately and began calling the banks to reopen the credit lines. They were reluctant but Corrigan ultimately cajoled them. The credit lines were reopened and the halted stocks were reopened. Best of all, the market started to rally and closed higher on the day.
It was an incredible time and the financial system was within hours (and a few phone calls) of an absolute collapse.

This sounds familiar, but when there is already QEternity in effect, the only possible move left to the Fed to avert catastrophe is to simply increase the rate of QE (quantitative easing) flow. Of course, this strategy has not worked so far, as in 2012 we moved from $0 in new cash a month to $40 billion perpetually. But perhaps more flow, such as $80 billion to $85 billion a month will overcome the existing $50 billion a month in deflation, and have the expected positive effect on market prices?

This logic, combined with historic precedent, should give one pause when considering just how long the perceived value of stocks can tread water. Bill Gross was one of those who shared his concern with the public last week.
As he warned, there is a historic precedent for this mindset of complacency that ended in the most severe market crash… ever. The exact tweet in question:

The crash on Oct 19 1987 showed that portfolio insurance puts were dangerous.
R central bank “puts” in the same category? Very likely.

In addition to boosting stock prices directly and indirectly, central banks are “buying” other assets. Following the comments of one London trader, even in central banks, paper gold is being divested in exchange for the real thing.

With the recent gold acquisition by Mexico now revealed as merely a paper gold purchase, whether gold is actually owned becomes the topic of the highest relevance. As they say, possession is nine-tenths of ownership. Or, as we hear often around here:
“If you can’t hold it, you don’t own it.”

Venezuela’s Hugo Chavez gets it; now so does Germany.

As reported by Spiegel, the German federal court instructed the Bundesbank to repatriate 50 tons of gold annually back to Germany from the New York branch of the privately owned Federal Reserve Bank, considering written confirmation by custodians as insufficient. Google translated:

“decided to bring in the next three years to 50 tons each of the past at the Fed in New York gold to Germany to get it here to undergo a thorough examination.”

The court justices must have determined that the measured rate of repatriation would not put undue pressure on supply in the physical gold market, impacting prices to the upside, because, while very symbolic, requesting all at once could embarrass their international partners and further exacerbate the developing trend of dollar weakness and therefore relative strength in the euro currency. German policy makers prefer not to exacerbate this, considering their weak currency preference inherent in the euro project.

In closing, there is only one country building a serious supply of real physical gold rather than simply assisting in sequestering demand by purchasing paper promises (such as Mexico does), and that country is… China.

Okay, no surprise here, but considering the recent MarketWatch article claiming 53.5 tons imported in 31 days or less is somehow indicative of waning demand, we wanted to update our readers.

This quantity of gold, imported through Hong Kong alone, is quite a bit for annual acquisition, let alone as a part of consistent monthly purchases. China has now imported in 8 months more than the 502.1 tons the European Central Bank has in total. Even though it borrowed all of it from its Eurozone members (each entity claims ownership of the same gold bars).

We mention this not because demand is some critical metric dictating gold prices, because it is not, but rather to explain that there is a global realization ongoing that silver and gold are indeed modern money to citizens all around the globe.

And the demand for money… is infinite.

Make a conscious decision to accept it as payment in your life when the opportunity arises. To increase your future likelihood of gold and silver exchange, tell your friends of this “silly” fact… something along the lines of: “Hey, I’ll take payment in gold or silver coin!”

Then go tell your children the same.

Filling up the average 16 gallon tank for a grand total of $3.20 is pure heaven for those who know how to save – in silver and gold coin.

For more see The Critical Difference Between Currency and Money and don’t miss our free premium article, the Winter Outlook for Silver and Gold Price Action.

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