Saturday, April 16, 2022

Paper Gold

Paper gold has been a profitable activity for the US and the UK, but it could be problematic. Much of the gold owned by central banks all over the world is currently stored in vaults owned by the Federal Reserve and the Bank of England. These countries have been covering their storage costs and earning a profit by allowing the vaults storing their gold to engage in a variety of lease and swap agreements. The US Government has encouraged the growth of gold derivatives to absorb demand and suppress gold relative to the dollar.

Under the IMF’s accounting procedures, leased and swapped gold balances are recorded as if they were still under a central bank’s ownership and control, despite bullion being transferred to another party in unallocated accounts. This is morally wrong, because two entities cannot own the same asset at the same time.

The US and the UK have been undermining confidence in this process by confiscating gold reserves that they were storing for Venezuela, Libya, Afghanistan and Russia. Central banks with their gold reserves vaulted at Western central banks will now be pondering whether their reserves would continue to be safe if they upset US political leaders. Requests for repatriation of bullion are bound to follow.

Some countries that have made profits from their gold reserves will be unlikely to renew swap and lease agreements and will instead demand reallocation of their bullion into earmarked accounts. This could drain liquidity from bullion markets. A rising gold price will then be bound to ensue.

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