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Jay Taylor: Under “Basel III” Rules, Gold Becomes Money!

In his latest newsletter commodities analyst Jay Taylor notes that a very important date is approaching:

In 2018, central banks added nearly 23 million ounces of gold, up 74% from 2017. This is the highest annual purchase rate increase since 1971, and the second-highest rate in history. Russia was the biggest buyer. And not surprisingly, the lion’s share of gold is flowing into central banks of countries that are in the sights of America’s killing machine—the Military Industrial Complex that Eisenhower warned us about in 1958.

central bank gold buying

The Bank for International Settlements (BIS), located in Basal, Switzerland, is often referred to as the central bankers’ bank. Related to this issue of central bank hoarding of gold is the fact that on March 29 the BIS will permit central banks to count the physical gold it holds (marked to market) as a reserve asset just the same as it allows cash and sovereign debt instruments to be counted.

There has been a long-term view that China and other nations dishoarding dollars in favor of gold have been quite happy about western banks trashing the gold price through the synthetic paper markets. But one has to wonder if that might not change, once physical gold is marked to market for the sake of enlarging bank balance sheets.

This also raises the question with regard to how much gold the U.S. actually holds as opposed to what it claims to hold. James Sinclair has always argued that the only way the world can overcome the debt that is strangling the global economy is to remonetize gold on the balance sheets of central banks at a price in many thousands of dollars higher. This would mean a major change in the global monetary system away from the dollar, as China has been pushing for the last decade or so.

If banks own and possess gold bullion, they can use that asset as equity and thus this will enable them to print more money. It may be no coincidence that as March 29th has been approaching banks around the world have been buying huge amounts of physical gold and taking delivery. For the first time in 50 years, central banks bought over 640 tons of gold bars last year, almost twice as much as in 2017 and the highest level raised since 1971, when President Nixon closed the gold window and forced the world onto a floating rate currency system.

But as Chris Powell of GATA noted, that in itself is not news. The move toward making gold equal to cash and bonds was anticipated several years ago. However, what is news is the realization by a major Italian Newspaper, II Sole/24 Ore, that “synthetic gold,” or “paper gold,” has been used to suppress the price of gold, thus enabling countries and their central banks to continue to buy gold and build up their reserves at lower and lower prices as massive amounts of artificially-created “synthetic gold” triggers layer upon layer of artificially lower priced gold as unaware private investors panic out of their positions.

The paper concludes that,

“In recent years, but especially in 2018, a jump in the price of gold would have been the normal order of things. On the contrary, gold closed last year with a 7-percent downturn and a negative financial return. How do you explain this? While the central banks raided “real” gold bars behind the scenes, they pushed and coordinated the offer of hundreds of tons of “synthetic gold” on the London and New York exchanges, where 90 percent of the trading of metals takes place. The excess supply of gold derivatives obviously served to knock down the price of gold, forcing investors to liquidate positions to limit large losses accumulated on futures. Thus, the more gold futures prices fell, the more investors sold “synthetic gold,” triggering bearish spirals exploited by central banks to buy physical gold at ever-lower prices”.

The only way governments can manage the levels of debt that threaten the financial survival of the Western world is to inflate (debase) their currencies. The ability to count gold as a reserve from which banks can create monetary inflation is not only to allow gold to become a reserve on the balance sheet of banks but to have a much, much higher, gold price to build up equity in line with the massive debt in the system.

 

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8 thoughts on "Jay Taylor: Under “Basel III” Rules, Gold Becomes Money!"

  1. Virtually EVERY article about Gold for the past dozen years or so is pure propaganda being spread around to attempt to gain customers. And it doesn’t work. The public has fortunately caught on to the scams surrounding gold sellers and the tactics that they use. Virtually nobody needs it. It’s hard to get rid of. And must be converted into cash to spend. At current prices. It’s only a store of value for COUNTRIES, but not individuals (in reality). Gold will never be money again – not when fractional reserve banking is so profitable. Banks “print” money through fractional reserve banking whenever they want – they do not need gold in their vaults (or anywhere else in the world) to do this. This article is just garbage (they all are).

    1. I think your thinking too myopically. Sure physical gold is “impractical” as money when things are basically okay (still) but the purpose of owning physical gold is for when things – or at least the monetary system – break down.

      Furthermore, gold doesn’t have to be used as a transactional currency, say, to buy things. Instead it can be used as collateral. Nobody in Venezuela who has PHYSICAL gold is regretful. In a high inflationary environment one can borrow boatloads of paper currency using gold as collateral, then buy hard assets with it, and then sell them and pay the loan back with devalued currency even just months later, having both a lot of paper currency remaining AND the gold still intact. But without the gold collateral you couldn’t get the loan.

      As far as the current fractional reserve system is concerned, yes you’re basically right but remember it’s a FRACTIONAL reserve system, meaning that a fraction of all loaned/printed money must be backed by something tangible. Allowing gold to be counted as a bank asset – marked to market no less – means that their reserves will increase allowing them to loan/print more paper currency. If the value of gold owned by banks is now counted at only, say, $42 per ounce because of previous rules, after March 29 it possibly may (and probably will) be “revalued” at $1300 per ounce thus effectively increasing their reserves by a factor of roughly 30. If that isn’t going to happen then why would the central banks bother with the change of rules? Why would central banks have bought – and are still be buying – gold at prices well over $1000 per ounce if it’s worth only $42 on their balance sheets. And why did the CBs of the world buy more gold in 2018 than at any time since 1971? My answer is that they intend to increase their reserve assets by revaluing the price of gold on their balance sheets, so the more gold they have the better.

      Now, for you and me the effect would be that gold would move from being the “useless relic” that it is currently claimed to be to an OFFICIAL monetary metal valued even by banks. That’s a game changer because it will have same the effect as what happened in the late 60’s when the global market for gold (in dollars) exceeded the EXCHANGE rate of dollars for gold that existed at every US bank, including the US Federal Reserve Bank (“the gold window.”) Because the Fed/US gov. was “printing” (borrowing) so many dollars by selling Treasury bonds that exceeded – or at least threatened to – its GOLD reserve requirements, the “value” of 1 oz of gold was believed globally to be worth more than $42 US dollars, and so countries began to demand gold (instead of dollars) as interest payments on their “foreign exchange” US Treasury bond holdings. That dropped the gold reserves in the US from about 25,000 tons to about 8,000 (that the Fed still claims “we” have today), which is why Nixon closed “the gold window” and would no longer send gold instead of dollars.

      Now, that did a couple of things. Firstly, it officially made gold a NON-monetary metal because only dollars were then considered “legal tender” – legally mandated to be acceptable as payment (fiat.) Secondly, the US dollar price of gold – according to the Fed – was not changed so any gold one had could only “buy” dollars at the old exchange rate of $42 per ounce. That effectively suppressed the price of gold globally, and still does.

      Therefore, if the gold holdings as of March 29 become official assets (which they already are but only at the price of $42/oz) then the next step will be to revalue them at the market price of, say, $1300 per oz. But if that happens the reverse of what happened when Nixon removed the dollar from the gold standard would occur – the demand for gold would increase because “everyone” would want gold instead of paper. Clearly that would mean the banks would consider gold more valuable than paper currency because the purpose of it all would be to “print” even more paper currency – about 30 times as much, in fact. You may think “everyone” means only central banks but I don’t agree. I think individuals will too. Gold would then “appreciate” in price and at the very least maintain its purchasing power.

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  2. I was talking to a (best) friend recently and we sorta concluded that things are going to go socialist/money-printing soon for a myriad of political and fiscal reasons (and that means the stock market and PMs is still the place to be since it’s – politically – a proxy for the economy writ large, regardless of “fundamentals”.)

    Take advantage of the CB manipulations. We, or at least I, missed the free-for-all in government bonds , but don’t be stupid again despite the grotesqueness of it.

    Although this time mat be different (NOT) in that crypto currencies will “save the day,”
    Like networks. etc. will still exist when the SHTF? (NOT!) Just what does “SHTF” mean to you? Will America/USA prevail or is it brought down?

    What goes around comes around. History is cyclical. For all of you “trekkies” out there who think “relics” like gold will be passe I say that even “the Federation” respects it, or something like it.

    1. Excellent observations, Bruce thanks. To answer your question on what happens when the SHTF, Dr Tim Morgan has a very good book on the question written in 2013 but very prescient:

      https://surplusenergyeconomics.wordpress.com/

      https://www.amazon.co.uk/Life-After-Growth-global-economy-ebook/dp/B00F3D8M2C

      And you might have seen this anyway:
      https://ourfiniteworld.com/oil-supply-limits-and-the-continuing-financial-crisis/

      I agree with you and your friend that gold is the place to be. The governments and elite will fight tooth and nail to keep the status quo – to no effect. MMT here we come – USA will go on printing until the dollar collapses, then SDRs come to the rescue with the IMF global currency – for a while that is.

      I have written a book about all this and more: Free pdf on request to
      peter@underco.co.uk

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