Some very disturbing revelations from CLSA’s Chris Wood who in his latest Greed and Fear note discusses an event that may be all to prevalent within the central banking community: the less than overt lending out of central bank gold (NYSE:GLD) to “other entities” in return for picking up nickels in front of a steamroller. In this case, the central bank of governmentless Belgium, which had 41% of its gold out at the end of 2010 on loan.
Naturally, the lent out gold (NYSE:GLD) is being used by some other key entity, potentially to mask its own inventory deficit, in exchange for the paltry sum of 0.3% on the total loan. Wood’s conclusion: “This is a reminder that the paper gold market is significantly larger than the physical market. Just like a run on a bank in a fractional banking system, GREED & fear suspects it will be very hard to settle all the paper claims to gold physically in a real scramble for the metal. This is why in a parabolic spike physical gold (NYSE:GLD) is likely to trade at a significant premium to paper claims.” We couldn’t have said it better ourselves.
From CLSA’s Greed and Fear:
Belgian central bank Vice Governor Francoise Masai reportedly told shareholders that about 41% of the central bank’s 216 metric tons of gold was on loan at the end of last year, and that the central bank earned a 0.3% return on its loans of physical gold (NYSE:GLD) to commercial banks last year. There are two points to note about this. The first is the puny annualised return earned on the gold leasing market. The second is the significant percentage of the central bank’s gold lent out. This is a reminder that the paper gold market is significantly larger than the physical market. Just like a run on a bank in a fractional banking system, GREED & fear suspects it will be very hard to settle all the paper claims to gold physically in a real scramble for the metal. This is why in a parabolic spike physical gold is likely to trade at a significant premium to paper claims. On this point GREED & fear should make it clear that the 25% of the global portfolio for a US dollar-denominated pension fund allocated to gold bullion is in physical gold.
Meanwhile, it is an interesting note that more than a dozen state legislators in America have now seen bills introduced that would make gold (NYSE:GLD) and silver (NYSE:SLV) coins legal tender in the respective states. Thus, gold and silver coins minted by the US government are now considered legal tender in Utah. Much of this activism is coming from Tea Party supporters. Financial sophisticates will scoff. But to GREED & fear it is a healthy sign that some people in America are thinking. For more on this popular movement to return to the monetary role of gold read an article published last week by the Los Angeles Times (“Pushing for a return to the gold standard”, 3 June 2011 by Nathaniel Popper).
Tyler Durden is the founder of Zero Hedge.