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As Emerging Market Currencies Collapse, Gold is being Mobilized

In recent weeks, global financial markets have been increasingly spooked by an intensifying crisis in emerging market currencies including those of Turkey and Argentina. Add to this the ongoing currency crisis in Venezuela and the currency problems of Iran. While all of these countries have economy specific reasons that explain at least some of their currency weakness, there are some common themes such as a stronger US dollar, high domestic inflation rates, economic mismanagement, reliance on foreign borrowing, and in some cases economic sanctions imposed by the US.

As one currency plummets, this intensifies emerging market risk across the entire asset class, and it’s not unreasonable at this time to at least speculate whether the contagion could spread. The Brazilian Real and South African Rand have come under pressure and in Asia, the Indonesian Rupiah and Indian Rupee are also now weakening against the US Dollar.

It is against this backdrop that physical gold is being increasingly mentioned within these emerging economies, with gold coming to the fore as it always does in times of crisis. It is for this reason that its interesting to take a look at a number of these currencies and examine how gold is playing the role of safe haven for these countries’ citizens as well as creating a challenge for these nations’ leaders and central banks.

Buying up Gold as the Turkish Lira Plunges

With ongoing currency and external debt problems, Turkey, with a population of 90 million, has played a central role in the current currency crisis and remains a catalyst for potential risk contagion across other troubled emerging market currencies.

Turkey’s currency woes come against a backdrop of a stronger US dollar, domestic inflation of 15%, increasing default risk, market skepticism about the independence of Turkey’s monetary policy, and a series of US sanctions against the Turkey economy.

Although the Turkish Lira was already weakening during the early part of the year (falling 6.4% against the US Dollar from January to April), things took a turn for the worse in May with the Lira falling by a further 9% against the dollar during that one month. Another 6% drop in the Lira followed during July. But it was in August that the Turkish currency crisis really accelerated, with the Lira depreciating 28% against the US dollar in an environment of US sanctions and rating agency downgrades of Turkey’s debt.

During the same time frame, the gold price in Turkish Lira rose by approximately 60%, from just under TRY 5000 per troy ounce at the beginning of January, to TRY 7860 per troy ounce at the end of August. This rising local gold price spurred an increase in physical gold demand in the Turkish Gold Market, as reported by Bloomberg at the end of May with “a jump in demand for gold coins” and Turks “buying up gold as the lira plunges in the latest currency crisis

“Gold priced in lira is more expensive than ever, that’s not deterring buyers, who are looking for a safe haven

“‘Turkish people have an interesting behavior – they buy gold when the prices are rising, they think it’s gonna rise more,’” said Gokhan Karakan who runs a gold exchange office in the heart of Istanbul’s Grand Bazaar. “People think there is a trend here and choose to buy gold until uncertainty is out of the way.”

Perversely, in August while the Turkey Lira was in free fall, Turkey’s president Erdogan (who is against raising Turkish interest rates) made a nationalistic call for the Turkey public to sell both gold and US dollars and buy Turkish Lira. In a speech to a crowd in the Turkish city of Bayburt on 10 August, Erdogan advised:

“If there is anyone who has dollars or gold under their pillows, they should go exchange it for lira at our banks. This is a national, domestic battle.”

Although not surprisingly the presidential bid to support the Turkish Lira by selling gold did not work (as the local gold price continued to rise), the lesson from Erdogan’s call is clear. Gold is a safe haven and retains its value in times of crisis. Unfortunately Erdogan’s motivations were political, with an irresponsible call to sell one of the only assets that can provide a shelter from the eroding value of the Lira.

Iran – Investing in Safety as the Crisis Intensifies

Iran’s currency, the Rial, has fallen heavily in value against the US dollar this year, losing approximately 60%, from an unofficial rate of about 43,000 Rial at the beginning of January to 110,000 to the US dollar at the end of August. The currency crisis even led to the head of the Iranian central bank, Valiollah Seif, being fired by the Iranian president during July.

This slow motion but steady collapse of the Rial had been ongoing for sometime due to a weak economy, inflation of more than 19%, and economic uncertainty brought on by the fear of US sanctions (such as in April), but accelerated in May when the US administration pulled out of a multilateral nuclear deal on Iran (JCPOA), and subsequently announced two new sets of sanctions against Iran.

The first set of these sanctions, which came into effect on 7 August, included restrictions on Iran’s trade in gold and other precious metals and on Iran’s trade in US dollars. The run up to the first set of sanctions also saw heightened gold accumulation in Iran. The second set of sanctions, which come into effect on 4 November, focus on the Iranian energy and financial sectors, including doing business with the Iranian central bank.

Iranians rush to exchange the Iranian Rial for Gold Coins

Over the year-to-date as the Rial slid amidst fear of sanctions and then the subsequent reality of those sanctions, the Iranian public (Iran population 82 million) rushed to the safe haven of physical gold, hoarding gold coins and gold bars and pushing demand for physical gold to a 4 year high. As the World Gold Council noted in August when discussing second quarter Iranian gold demand:

“Faced with renewed economic sanctions and a collapsing currency, which caused a huge rise in the local price [of gold], demand for gold jewellery slumped. Instead demand was channelled into gold investment products (which, unlike gold jewellery, are VAT-exempt), pushing demand for bars and coins to a four-year high.

This was reiterated on the ground in Iran’s Gold Market, as Bloomberg noted at the beginning of August:

“Demand for physical gold is very high and has been as the currency’s been weakening,” said Massoud Gholampour, an analyst at Novin Investment Bank in Tehran. “People want to invest in something that’s safe if they think that a crisis may be on the way.”

Some of this physical gold demand was met by the Iranian central bank. Triggered by the currency collapse and a rising local gold price, the central bank decided to introduced a gold coin presales scheme designed to dampen down the local gold price, offering 7.6 million gold coins to applicants, over time horizons from 1 month to 6 month maturities. For example the delivery phase of the 6 month maturity presales scheme is active until November.

The Rial’s collapse and eroding value also brought gold to the fore for larger payment transactions in Iran, such as real estate rentals, where for example, one landlord was “asking prospective tenants to pay two gold coins to rent a 95 square metre apartment for one month.

“I know that many may not be able to afford it….but when I see that the currency I may get from my tenants would have less value compared to the previous month, then that leaves me with no choice. If I continue to rent out my apartment in return for rials, then I would face financial loss.”

Maduro plays the Gold Card as Hyperinflation Reigns

In the hyperinflationary economy of Venezuela, where inflation is now running at nearly 65,000% and is predicted by the IMF to reach 1 million percent before the end of the year, the Venezuelan currency in its various forms continues to hit the headlines.

On 20 August, Venezuela began the replacement of its existing fiat currency, the Bolivar fuerte (strong bolivar), with a new Bolivar Soberano (sovereign Bolivar) at a rate of 1 Bolivar soberano for every 100,000 Bolivar fuerte, effectively knocked five zeros off the fiat currency. This exercise is ostensibly meant to tackle hyperinflation but will, like all previous Venezuelan currency experiments, most likely not be effective and will probably exacerbate hyperinflation.

At the same time, the new Bolivar soberano was decreed to be linked to a murky and opaque state issued cryptocurrency called the Petro, at a rate of 3600 Bolivar soberanos to 1 Petro. This Petro is claimed to be backed by Venezuelan oil but there is scepticism that the Petro doesn’t really exist or at least doesn’t exist as a functioning currency.

All of the above sets the new official rate at 1 USD = 60 Bolivar soberano (or 1 USD = 6 million Boliar fuerte), and effectively devalues the Venezuelan currency by 95.8% since the previous official rate was 1 USD > 248,000 Bolivar fuente. The Bolivar fuente in its short life (launched in January 2008) itself had experienced many official devaluations against the US dollar, all the while trading on the black market at far lower values than the official rate. Even the new Bolivar soberano less than a few weeks old is already trading at 87 to the USD, far weaker than the official rate (see https://dolartoday.com).

It was into this tumultuous economic environment that Venezuelan president Maduro last week announced a national gold savings plan for workers, retirees and savings banks (Venezuela population 32 million) that will be launched on 11 September. Although the gold savings plan looked half-baked and flawed (as do most of Venezuela’s recent forays in economic interventionism), the fact of the matter is that yet again, physical gold makes an appearance in the midst of a currency crisis.

Maduro explains his ‘Lingotico’ Gold Savings Plan at a party conference 26 August: Source: EL PAÍS

Maduro’s new plan, known as ‘lingotico’, aims to issue gold backed certificates, backed by small gold bars of 1.5 gram and 2.5 gram weights. The gold will be available for ‘purchase’ by Venezuelans at 3,780 bolivars for the 1.5 gram gold bars and the 2.5 gram gold bars will sell for 6,300 bolivars. However, according to Bloomberg, buyers will receive gold certificates, not the actual gold bars.

Maduro said that the gold for this saving program is sourced from the eastern Guayana region of Venezuela (not to be confused with the neighbouring country of Guyana), which he said the BCV, Venezuela’s central bank had sourced from local gold mines. Interestingly, the gold for this scheme is not being sourced from Venezuela’s central bank gold reserves, as they have either been most likely already sold off are under claim in various gold loans / gold swaps.

In the two short videos below (in Spanish), Maduro, with small gold bars in hand in sealed packaging with the BCV central bank logo, outlines how the scheme will allow Venezuelans to save in gold, and to protect their savings from inflation. The first video was filmed at a Maduro party conference on Sunday 26th August.


Maduro launches the Gold Savings Plan at Casa de la Moneda in Aragua, Venezuela: Source Venezolana de Televisión (VTV)

The second video, the official launch of the gold savings plan, was filmed at the Casa de la Moneda in Aragua, Venezuela (a BCV banknote and coin facility) and again shows Maduro with a gold bar in hand and ironically is set against a backdrop of huge quantities of Bolivar bank notes, and in the background somewhat bizarrely BCV employees paging through huge quantities of printed banknotes.

The Contagion Spreads

Staying in South America, the emerging market currency crisis has now rippled through to Argentina and to a lessor extent Brazil, with the Argentine Peso plummeting in double digits last week against the US dollar on news that the Argentine government had requested an early activation of an IMF loan, fanning market fears that the Argentine economy will have imminent problems repaying foreign denominated debt.

The Argentine peso has lost more than 50% against the US dollar during 2018 and is now 2018’s worst performing currency. The peso’s plummet during the week forced the Central Bank of Argentina (BCRA) to hike official interest rates to 60% to try to stop the peso selloff, and Argentina,where inflation is running at over 25% per annum, now has the embarrassing distinction of having the highest interest rates in the world.

Elsewhere in South America, the Brazilian Real and Chilean Peso have also begun declining notably in value against the US Dollar, with the Real down more than 20% against the US dollar year-to-date. Further afield, other emerging market currencies are now experiencing possible contagion effects, with the Indonesian Rupee now at its lowest level against the US dollar since the Asian crisis of 1998, and the Indian Rupee now below 71 to the US dollar for the first time ever. Expect to see gold linked to currency stories in these economies as the emerging market crisis continues to brew.

Physical gold takes centre-stage in times of crisis precisely because it has tangible value, is not issued by any central bank, monetary authority or government, cannot be debased and has no counterparty or default risk. The fact that sophisticated physical gold markets exist in most if not all of the economies currently stricken by currency weakness also allows gold, with its deep liquidity, to be quickly harnessed.

Central Banks Care about the Gold Price – Enough to Manipulate it!

In early March, RT.com, the Russian based media network, asked me for comments and opinion on the subject of central bank manipulation of gold prices.

The comments and opinion that I supplied to RT became the article that RT then exclusively published on its website on 18 March under the title “Central banks manipulating & suppressing gold prices – industry expert to RT“.

This article is now transcribed below, here on the BullionStar website.

Central bank gold price suppression is a well-documented fact. Central banks have a long and colorful history of manipulating the gold price. This manipulation has taken many shapes and forms over the years. It also shouldn’t be surprising that central banks intervene in the gold market given that they also intervene in all other financial markets. It would be naive to think that the gold market should be any different.

n fact, gold is a special case. Gold to central bankers is like the sun to vampires. They are terrified of it, yet in some ways they are in awe of it. Terrified since gold is an inflation barometer and an indicator of the relative strength of fiat currencies. The gold price influences interest rates and bond prices. But central bankers (who know their job) are also in awe of gold since they respect and understand gold’s value and power within the international monetary system and the importance of gold as a reserve asset.

So central banks are keenly aware of gold, they hold large quantities of it in their vaults as a store of value and as financial insurance, but they are also permanently on guard against allowing a fully free market for gold in which they would not have at least some form of influence over price direction and market sentiment.

The Central Bankers’ Central Bank

The Bank for International Settlements (BIS) crops up frequently in gold price manipulation as the central coordination venue and the guiding hand behind a lot of the gold price suppression plans. This is true in all decades from the 1960s right the way through to the 2000s. If you want to know about central bank gold price manipulation, the BIS is a good place to start. Unfortunately the BIS is a law onto itself and does not answer to anyone, except its central banks members.

In the 1960s, central bank manipulation of the gold price was conducted in the public domain, predominantly through the London Gold Pool. This was in the era of a fixed official gold price of $35 an ounce. Here the US Treasury and a consortium of central banks from Western Europe explicitly kept the gold price near $35 an ounce, coordinating their operation from the Bank for International Settlements (BIS) in Basel, Switzerland, while using the Bank of England in London as a transaction agent. This price manipulation broke down in March 1968 when the US Treasury ran out of good delivery gold, which triggered the move to a “free market” gold price.

Central banks continued to suppress gold prices in the 1970s both through efforts to demonetize gold and also dump physical gold into the market to dampen price action. These sales were unilateral e.g. US Treasury gold sales in 1975 and over 1978-1979, and also coordinated (and orchestrated by the US) e.g. IMF gold sales across 1976-1980.

Gold Pool 2.0 – Force it Down Quick and Hard

Collusion to manipulate the price also went underground, for example in late 1979 and early 1980 when the gold price was rocketing higher, the same central banks from the London Gold Pool again met at the opaque BIS in Switzerland at the behest of the US Treasury and Federal Reserve in an attempt to launch a new and secretive Gold Pool to reign in the gold price. This was essentially a revival of the old gold pool, or Gold Pool 2.0.

These meetings, which are not very well known about, were of the G10 central bank governors, i.e. at the highest levels of world finance. All of the discussions are documented in black and white in the Bank of England archives and can be read on the BullionStar website.

Gold for Oil: A Novel Twist to the Gold Pool Operation

The wording in these discussions is very revealing and show the contempt which central bankers feel about a freely functioning gold market.

Phrases used in these meetings include:

there is a need to break the psychology of the market” and “no question of any permanent stabilisation of the gold price, merely at a critical time holding it within a target area” and  “to stabilise the price within a moving band” and “it would be easy and nice for central banks to force the price down hard and quickly“.

And these meetings of top central bankers were in early 1980, 11 years after the London Gold Pool and 8 years after the US Treasury reneged on its commitment in August 1971 to convert foreign holdings of US dollars into gold.

Whether this new BIS gold pool was rolled out in the 1980s is open to debate, but it was discussed across the board for months by the Governors at the BIS, and may have been introduced in a form which would provide physical gold to the oil producers (gold for oil trades) without putting a rocket under the gold price. Their main worry was to allow the Middle Eastern oil producers to acquire some gold for oil without pushing the gold price up.

The Bank of England was also involved in the 1980s in influencing prices in the London Gold Fix auctions, in what an ex Bank of England staffer described euphemistically as ‘helping the fixes’. And the Bank of England has even at times used terminology in the 1980s such as “smoothing operations” and “stabilisation operations” when referring to coordinated central bank efforts to control the gold price.

This article first appeared on RT.com on 18 March 2018

Paper Gold Ponzi

Probably two of the most influential changes on the gold market in the modern era are structural changes to the gold market which channel gold demand away from physical gold and into paper gold. These two changes were the introduction of unallocated accounts and fractionally backed gold holdings in the London Gold market from the 1980s onwards, and the introduction of gold futures trading in the US in January 1975.

In unallocated gold trading in the London OTC market, gold trades are cash-settled and there is rarely any physical delivery of gold. The trading positions are merely claims against bullion banks who don’t hold anywhere near the amount of gold to back up the claims. Unallocated bullion is therefore just a synthetic paper gold position that provides exposure to the gold price but doesn’t drive demand for physical gold.

When gold futures were launched in the US in January 1975, the primary reason for their introduction, according to a US State Department cable at the time, was to create an alternative to the physical market that would syphon off demand for gold, creating trading that would dwarf the physical market, and which would also ramp up volatility which in turn would deter investors from investing in physical gold. Gold futures are also fractionally backed and overwhelmingly cash-settled, and their trading volumes are astronomical multiples of actual delivery volumes.

Central banks as regulators of financial markets are therefore ultimately responsible for allowing the emergence of fractional reserve gold trading in London and New York. This trading undermines the demand for physical gold and allows the world gold price to be formed in these synthetic gold trading venues. Price discovery is not happening in physical gold markets. Its is happening in the London OTC (unallocated) and COMEX derivative markets. So this is also a form of gold price manipulation since the central banks know how these markets function, but they do nothing to crack down on what are essentially gold ponzi schemes.

Imagine, for example, that central banks were as tough on paper gold as they seem to be now on crypto currency markets. Now imagine if central banks outlawed fractional gold trading or scare-mongered about it in the same way that they do about crypto currencies? What would happen is that the gold market participants would panic and unwind their paper positions, precipitating a disconnect between paper gold and physical gold markets. So by being lenient on the fractional structure of trading in the gold markets, central banks and their regulators are implicitly encouraging activities that have a dampening effect on the gold price.

Gold Lending – A Riddle wrapped in a Mystery inside an Enigma

The gold lending market, mostly centred in London, is another area in which central banks have the ability to cap the gold price. Here central banks transfer their physical gold holdings to bullion banks and this physical gold then enters the market. These transactions can either be in the form of gold loans or gold swaps. This extra supply of gold through the loans and swaps disturbs the existing supply demand balance, and so has a depressing effect on the gold price.

The gold lending market is totally opaque and secretive with no obligatory or voluntary reporting by either central bank lenders or bullion bank borrowers. The Bank of England has a major role in the gold lending market as the gold used in lending is almost all sourced from the central bank custody holding in the Bank of England’s vaults.

There is therefore zero informational efficiency in gold lending, and that’s the way the central banks like it. furthermore, freedom of information requests about gold lending are almost always shot down by central banks, even sometimes on ‘national security’ grounds.

Many central banks have lent out their gold long ago, and just hold a ‘gold receivable’ on their balance sheet, which is a claim against a bullion bank or bullion banks. These bullion banks roll over the liability to the central bank for years on end and the original gold is long gone. Since central bank gold is never independently audited, there is no independent confirmation of any of the gold that any central banks claim they have.

Gold receivables are another fiction that allows central banks to fly under the radar in the gold lending market, and central banks go to great lengths to make sure the market does not know the size and existence of outstanding gold lending and swapped gold positions.

In Febuary 1999, the BIS was again the nexus for secretive discussions about the gold market when a number of the large powerful central banks basically ordered the IMF to drop an accounting change that would have split out gold and gold receivables into two separate line items on central bank balance sheets and accounting statements. These discussions are documented in the IMF document which is available to see here.

This accounting change would have shone a light on to the scale of central bank gold lending around the world, information which would have moved gold prices far higher.

Gold Price Manipulation Hub at the BIS: the Central Banker’s Central Bank

Gold Loans and Gold Swaps – Highly Market Sensitive

However, a group of the large central banks in Europe comprising the Bank of England, the Bundesbank, the Bank de France and the European Central Bank (ECB) applied pressure to torpedo this plan as they said that “information on gold loans and swaps was highly market sensitive” and that the IMF should “not require the separate disclosure of such information but should instead treat all monetary gold assets including gold on loan or subject to swap agreements, as a single data item.” 

Central banks also at times sell large quantities of gold, such as the Swiss gold sales in the early the 2000s, and the Bank of England gold sales in the late 1990s.While the details of such gold sales are always shrouded in secrecy, and the motivations may be varied, such as bullion bank bailouts or redistribution of holdings to other central banks, the impact of these gold sales announcements usually has a negative impact on the gold price. So gold sales announcements are another tactic that central banks use to at times keep the pressure on the price.

There are many examples of central bankers discussing interventions in the gold market. In July 1998, former Federal Reserve chairman Alan Greenspan testified before the US Congress saying that “central banks stand ready to lease gold in increasing quantities should the price rise.

In June 2005, William R. White of the BIS in Switzerland, said that one of the aims of central bank cooperation was to “joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful.

In 2008, the BIS at its headquarters in Switzerland even stated in a presentation to central bankers that one of the services it offers is interventions in the gold market.

In 2011, one of the gold traders from the BIS even stated on his LinkedIn profile that one of his responsibilities was managing the liquidity for interventions. After this was published, he quickly changed his LinkedIn profile.