Click here to register!

2017
2016
2015
2014
2013
2012
02/29/2012
02/22/2012
02/15/2012
02/08/2012
02/01/2012
01/25/2012
01/18/2012
01/11/2012
01/04/2012
2011
12/21/2011
12/14/2011
12/07/2011
11/30/2011
11/23/2011
11/16/2011
11/09/2011
11/02/2011
10/26/2011
10/19/2011
10/12/2011
10/05/2011
09/28/2011
09/21/2011
09/14/2011
09/07/2011
08/31/2011
08/24/2011
08/17/2011
08/10/2011
08/03/2011
07/27/2011
07/20/2011
07/13/2011
07/06/2011
06/29/2011
06/22/2011
06/15/2011
06/08/2011
06/01/2011
05/25/2011
05/18/2011
05/11/2011
05/04/2011
04/27/2011
04/20/2011
04/13/2011
04/06/2011
03/30/2011
03/23/2011
03/16/2011
03/09/2011
03/02/2011
02/23/2011
02/09/2011
02/02/2011
01/26/2011
01/19/2011
01/12/2011
01/05/2011
2010
12/29/2010
12/22/2010
12/15/2010
12/08/2010
12/01/2010
11/24/2010
11/17/2010
11/10/2010
11/03/2010
10/27/2010
10/20/2010
10/13/2010
10/06/2010
09/29/2010
09/22/2010
09/15/2010
09/08/2010
09/02/2010
08/25/2010

The Bullion Report

RSS

Adjust Text Size: AAA

RSS Feed RSS


July 13, 2011 in 'The Bullion Report'

Gold Sales for Solvency Remain UnlikelyGold Sales for Solvency Remain Unlikely

Greece, Portugal, Italy, Spain, and the US – the list of places grappling with current or forthcoming debt issues seems to be growing. Is this a roll-call for another financial disaster? If these nations can’t come to some kind of productive fiscal agreement debt ratings will be downgraded and default around the corner. Does this mean a fire sale might be around the corner for gold?

Past performance is not indicative of future results.
***chart courtesy of Gecko Software

One of the recent headlines I saw was exploring the potential of a gold sale from central banks as a way to deal with government debt. I know I explored the idea of whether or not the US would do this, but I think it is worth looking at again. Debt issues are weighing heavier on the equity markets lately, and investors are pumping a lot of fear premium back into the markets. If governments and central banks get desperate to put things on an even keel, how likely is it that they may liquidate their assets? From where I am sitting, the chance is close to zero.

There are a couple of factors that will inhibit the sale of gold holdings. The first is the agreement that many central banks in Europe are signatories on – the Central Bank Gold Agreement. This was a commitment from signatories to limit the amount of gold they would sell in a set time period. Now, this does not mean that banks like Banco do Portugal, Banco de España, Central Bank of Ireland, or any others can’t sell any gold, but it does put a damper on all of them liquidating indiscriminately and collectively. The IMF and Federal Reserve are also loosely associated with the gold agreement although they are not formal signatories.

The collective ceiling on sales is 400 metric tons this year. Of that, the current report shows just over 53 tons sold as of the beginning of June. 0.2 tons of that came from Greece. In keeping with their sales in previous years, that is about par for the course. If they did need to empty their gold holdings, the debt-troubled Mediterranean nation is only officially holding about 111 tons. Compare this to the 8,133 that the US has or the 2,451 Italy officially keeps. Even Portugal has just over 382 tons according to the official gold holdings found on the World Gold Council’s website.

The other element I see that makes this unlikely is the current global economic condition. Selling an asset preservation tool like gold (or any other precious metal) in the throes of such uncertainty is not a move I expect any bank to make any time soon. More banks have recently become buyers of gold assets. Mexico and Russia are among the names that spring to mind. No one can predict how far or wide the debt problems will spread before the recession is really over. That bolsters the idea of finding something as an alternative investment. Don’t forget that the financial fitness of each nation can impact their bonds and currencies. Right now, too many credit rating outlooks have been adjusted to assume that any place is under an iron-clad guarantee.

Another thing to keep in mind is the inflation issue in India and China. These two nations were already cited as a major hotbed of potential precious metals demand and that has not ebbed in recent years. Instead, there has been an uptick in the investment appeal of gold and silver as domestic inflation issues come to a head. China has already raised its interest rates three times this year – how might that impact the investment side of gold, considering its appeal as an inflation hedge?

Summary

The simplest truth as I see it is that there is no way for some of the debt-heavy nations to off-load their gold to try to set things right. It is likely that the Central Bank Gold Agreement will hold them back from this kind of action. Besides, the root of the problem is much larger than a simple fire-sale on the most valuable assets. The balance sheets need to be set right, and until there is a true economic recovery to support nations, it will be hard to stop the debt contagion from spreading. The recent support of gold prices despite a higher US dollar suggests that investors are still keen on what they see as a haven. Calling a top in precious metals right now seems as unfathomable as predicting recovery. 

Call us for your FREE gold trading kit.


Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.