Thursday, August 8, 2013

Peter Schiff Borrows a Meme: Audit the Vaults

Peter Schiff of Euro Pacific Capital is out with a new letter in recent days and it centers around a very odd phenomenon. The pace of physical gold demand compared to the outflows of gold ETFs and its corresponding effect on gold price.

So Schiff would like to know, what’s in the vault? The major banks, or the too big to fail institutions of TARP have managed to get themselves in into the commodities storage game. Speculation has started to run rampant that gold held in storage has either been lent out, or even sold on a fractional basis far in excess of what is on the books.

Of course what major bank would do such a thing? Not like one was just fined for manipulating energy market in California, or others being sued for manipulating the aluminum market. Oh wait.

Why Fractional Gold?

One reason behind the fractional gold is that creates a market of more gold than there actually is and will work to depress prices. Schiff maintains that such an action would be used as cover for central banks so they can avoid the embarrassment of depreciating their respective currencies.

Peter Schiff thinks a majority of the chatter originated from the January announcement out of Germany. Internal politics in the country has them wanting to return the country’s wealth to the homeland so to speak. Currently, the German government holds about 300 metric tons of gold in the NYC Federal Reserve vaults. Or about 5% of the official holdings.

When the request came in from the German government to inspect its holdings at the Fed, it was promptly denied. Repatriation of all German gold holdings at the vault is still expected by 2020.

Of course when you say it will take seven years for something that is only supposed to take up 5% of your holdings, out come the theories. Do you actually have the gold? Are you using fractional gold to bolster the amount of gold in circulation? Needless to say, it gave people pause and plenty to think about.

Bernanke’s Testimony

During his July 18, 2013 testimony, Fed Chief Ben Bernanke claimed that nobody really understands gold prices, and he doesn’t pretend to either. Find it interesting that that the head the head of the Federal Reserve has no understanding of gold prices. That’s just like the DNI saying he forgot about Section 215 of the Patriot Act. We get you are paid to lie, but at least make it convincing.

Schiff’s best part of the letter was his what if question. Granted he’s talking about Congress, so Schiff should probably use flashcards, but it still would have been entertaining:

“Likely, Mr. Bernanke would have been shocked utterly had any Congressman had asked him to explain why the Gold Forward Offered Rate (GOFO) had dipped into negative territory. GOFO stands now below both the U.S. Federal Funds Rate and the London Interbank Offered Rate (LIBOR). Investors should appreciate two vital factors. First, gold prices may have been suppressed for years by central banks and could be set to respond as physical shortages and fiat currency debasement become clearer. Second, the enhanced value of physical possession of precious metals could be about to become manifest.”

The main goal of Schiff in this letter is like that of Ron Paul with a slight difference, audit the vaults. Lets all take a look inside.


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