ML-Implode News - Rickards: Fed Should Monetize Gold On Its Books; "Something is Going to Break"

...I have been very involved in the physical side of the business as much as the paper side of the business. These stories will make your hair stand. I mean there are shortages. They cannot meet the demand. There is a waiting list of buyers, shortages of sellers. One of things a gentleman told me what that if you have seen a 400 ounce gold bar, I mean I have kind of physically handled them and been in these vaults. They have got stamps all over them. It is almost like a dollar bill. It has got a serial number. It has got a date. It has got a stamp for the purity; is it two nines? is it three nines? meaning 99.9% pure. The refinery stamp is there. There is an assayer who certifies it is not counterfeit. In other words there has got a lot of stamps on it. But one of them is the date. Well, gold warehouses are managed on a last in, first out basis, so I fill it up with gold and then when the gold goes out I am going to take the bars closest to the door. In other words the ones that I put in last they are the ones I am going to ship out.

What my friend at the refinery told me was he is starting to see bars that are stamped from the 1980s, bars that had been in storage for 30 years or more. That tells him that they scraping the bottom of the barrel. If you have a 2006 or 2007 bar and you send it out that means you have a pretty full vault. But if you are sending out bars from the 1980s that means you are back at the far end of the warehouse, scraping the bottom of the barrel. That is what is going on in the physical market.

We have our friends at JP Morgan selling paper gold 100 to 1, but we got people on the physical side of the business who say the shortages are scary. How is that going to end? It was very apparent that at some point something is going to break, someone is going to fail to deliver. There is going to be an exogenous shock. China is going to get their full fill of gold. The manipulation is going to end. Something is going to happen. It almost does not matter what it is. The set up for a buying panic and skyrocketing prices in gold is there. The setup is there. The catalyst is irrelevant. It could be a war, a national disaster, an assassination, a financial failure. It could be a lot of things. But it does not matter because the result is going to be the same.

See also Rickards' spot in the WSJ:

The Fed official pointed out that when Franklin Roosevelt called in the nation's monetary gold in 1934, the Treasury gave the Fed, in return for the bullion, gold certificates last marked to market at slightly more than $42 an ounce. If you marked those certificates to the 2013 market price of around $1,200, their value would exceed $315 billion, far more than enough to keep the Fed fully capitalized. From this riposte Mr. Rickards infers that, in a dollar crisis, the Fed itself still believes that the dollar is backed up by Treasury gold. "Another name for an implied obligation to support the Fed with gold is a gold standard," he asserts.

... Gold is the foundation, the real underpinning, of the international monetary system." His assertion may come as a shock to economists who thought the dollar-gold exchange standard was ended by Richard Nixon in August 1971.

China publicly reports ownership of only 1,658 tons of gold. But Mr. Rickards scoured purchase and shipping records and estimates that the real amount is much higher, perhaps more than 4,000 tons. That's a large share of the 35,000 tons officially held by all central banks. Why? Mr. Rickards believes that China wants a hedge against a price drop in its huge holdings of U.S. Treasurys. If the world monetary system threatens to collapse and has to be reformed, China will thus "have a prime seat at the table."

Gold is good insurance, whichever way things go, writes Mr. Rickards. Inflation will send the gold price up, if not to $10,000 then to a level that reflects gold's historical role as a stable measure of value. If deflation wins, the dollar price of gold will go down, but its constant real value means that other asset prices will likely fall more. "The New Case for Gold" reminds us that wayward policies bring about a search for money that is good as gold. What better than gold itself?

Relevant:

Rickards: Fed Should Monetize Gold On Its Books; "Something is Going to Break"