It’s Not A “Conspiracy Theory”: Here’s How Central Banks Actively Suppress The Price Of Gold

Monday, March 5, 2018
By Paul Martin

by Tyler Durden
ZeroHedge.com
Sun, 03/04/2018

Alhambra Investment Partners CIO Jeffrey Snider returned to Erik Townsend’s MacroVoices podcast this week to discuss one of his favorite topics: How central banks’ use gold lending to manipulate their balance sheets, and also to manipulate the broader market for precious metals by sheer dint of their size, and willingness to buy and sell without any consideration for the price.

Their conversation begins with Snider explaining the history of “gold swaps” between central banks that helped birth the concept of fractional reserve lending.

The first “gold swap” conducted between the Federal Reserve and the Bank of England: The Fed handed the BOE $200 million in bullion through the New York Fed; in exchange, the BOE gave the Fed a “gold receivables” in the same amount. This is essentially an IOU that could (in theory, at least) be cashed in for gold, but allowed the Fed to keep the gold deep in its vaults. As Townsend explains, the gold is being taken out of the accounting for the balance sheet, but it’s not being removed from the accounting.

Again, in theory, one could argue that these gold receivables were, in fact, “as good as gold” because the default risk from a counter party central bank is, effectively, zero.

Essentially, what happened was the Federal Reserve Bank of New York on behalf of the Federal Reserve system made $200 million of gold bullion available to the Bank of England for its disposal in whatever transactions it might take in defending sterling at that pre-war parity price. What’s important about that is that it aids both sides of the equation.

Because the way a gold swap works is that, essentially, the central bank agent that is providing the gold exchanges it for what’s called a gold receivable.

If you look at Slide 5, for example, I’ve sketched out roughly what this gold swap meant. $200 million in gold was made available to the Bank of England, which it would then sell in the market for sterling at the price that it wished to defend. They put the sterling currency into an account in London on behalf of the Federal Reserve Bank of New York.

So what really happened was gold disappeared from New York and ended up as cash in the UK denomination in London. But, for accounting purposes, the Federal Reserve Bank of New York showed a gold receivable where gold used to be.

Because if (for whatever reason) the Federal Reserve Bank of New York needed its gold back, there was sterling in an account where it could theoretically buy it back. So the gold receivable was taken as equivalent to actually having bullion on hand in a vault in New York City.

So both parties were satisfied. The Federal Reserve Bank of New York got to continue reporting the same amount in its possession, while the Bank of England was supplied additional metal in order to help defend the sterling at pre-war parity.

As anybody who lived through the financial crisis would remember sometimes credit-risk analysts ignore have a tendency to ignore black-swan tail risks like the prospect of a central bank default. We delved into this topic in greater detail about a year-and-a-half ago when Carmot Capital’s George Sokoloff explained why even the most sophisticated hedge funds tend to get slaughtered during market shocks.

The way that the accounting works in the gold swap scenario outlined above is the central banks are basically pretending the Fed didn’t give its gold to the BOE…yet, there is still only the one $200 million slug of gold…it didn’t just magically double. In a way, this feat of financial engineering echoes China’s massive “rehypothecation” fraud which we’ve critiqued time and time again…

The Rest…HERE

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