Commodities Exchange Trade Steps Forward Towards Insolvency: More States Demand their Gold Back
Filed Under: Business | Posted: 11/14/2012 at 10:24PM
Comments | Region: United States
Venezuela was the first state to request back the physical gold it has stored outside of its borders, followed by Germany and Romania last month. Now, Ecuador is also requesting back its physical gold. What are all these states afraid of?
Officially, the two largest bodies in the world that hold the largest gold quantities are the Federal Reserve Bank of New York and the Bank of England, that store approximately 6,000 tons of gold. Most of the gold does not belong to these banks but to other external entities which are using the banks for storage services.
Today, much of the trade in gold is conducted through papers or documents that should be backed up by the physical gold. The idea is that instead of moving around with sacks of gold, it will be possible to obtain documents that guarantee the ownership of a certain amount of gold which can later be converted to the needed physical gold. The problem is that such a market is prone to tricks, fraud and all sorts of "magic" accounting. Without going into details on the reasons, today, we know that there are plenty of more "gold backed" documents (or papers) than physical gold. Some say that for each document that backs real gold behind it there are ten documents that are backed with nothing; some even say the ratio is 1:100. The issue is that the mainstream media began leaking information about this matter for the past two years, but it hasn’t helped sufficiently.
Venezuela is one of the countries that store most of its gold in those banks worldwide. President Chavez decided a year ago to restore to his country about 200 tons of gold stored mostly in the Bank of England; and therefore the question arises – who owns the 200 tons of gold? Obviously they belong to Venezuela, but if you consider that there is not enough physical gold to cover the gold-backed paper, there is a good chance that Bank of England used the gold as backup/pledge for further papers owned by other entities.
This entire system can continue to exist as long as there are banks that store enough physical gold for everyone. The problem, however, is that the number of those who require the conversion of paper with gold itself is only growing. The bankers’ nightmare is that more and more countries/organizations follow Chavez’s steps. According to most optimistic estimates today, it is enough that less than 10% would want to get the real gold back, that the banks that store the metal will not keep up with it and will go bankrupt. Yet, last month it seemed like the nightmare scenario has started be a real threat.
Last month, the lower house of the federal parliament of Germany (Bundestag) was required by the Constitutional Court, to audit the gold reserves of the central bank in Germany. For this purpose, the central bank will have to get back vaults of the Federal Reserve of New York on 150 tons of gold belonging to it and stored there. This was enough for some countries not to take part in this risky roulette.
A week later Romania rushed to demand the 93.4 tons of its gold, and two days ago Ecuador also joined the request of third of all its gold stored in New York’s Federal Reserve Bank. While we are talking about 25 tons, if the trend continues and more central banks are required to send back the gold to the demanding countries – this might quickly lead to the worst of all and the already known fate of this commodities market exchange.
For all of these reasons, if you’ve been trading gold recently you may want to step aside and wait to see how things will play out before making further investments. Instead, consider investing in other things such as currencies, which can be traded rather easily in the Forex market, and will likely provide excellent trading alternatives to gold traders who are already familiar with global market movements.