Bank balances and gold

There has been a growing shift in favour of assets relative to bank deposits. This was initially encouraged by zero interest rates, but more recently there is little doubt that Cyprus’s bail-in has accelerated the trend. This explains the bull markets in bonds and equities, which conveniently underwrites the entire banking system. It is however too early to offer evidence of falling deposit balances held by non-banks and the general public because depositors as a whole have been remarkably complacent, but there is ample evidence that liquidity from monetary expansion is inflating financial assets faster than bank deposits.

This helps explain why, for example, Italian 10-year bonds are on a 4% yield. The reason, doubtless reaffirmed by the Cyprus bail-in, is that investors with cash balances think over-priced sovereign debt is less risky than adding to their euro deposits. However, the central banks are relaxed because weakness in deposits at any single bank is easily covered through the banking system, insulating individual banks from depositor-withdrawal systems. Presumably, banking counterparties are also complacent because they can be reasonably sure to be exempt from any bail-ins. They have the comfort of knowing the banking system is underwritten by all those complacent enough to leave money on deposit beyond the insured level.

However, some of depositors’ cash balances post-Cyprus will have gone into physical gold and silver, which explains why the bullion banks operating in the futures markets and the central banks behind them are so keen to dissuade us that gold and silver is a safe haven. I recently interviewed Ronnie Stoerferle, the Vienna-based analyst, who put his finger on it: since Cyprus, there has been a sharp rise in European demand for physical gold, with the pressure being felt by the bullion banks unable to deliver bullion.

At least one bank was recently reported to be only prepared to settle bullion liabilities in cash. Therefore the price knock-down in April was a logical response by the bullion banks, which had to defuse customer demand for physical delivery. But given that the driving factor was not speculation but a reluctance to add to deposits in the banking system, the jump in demand for bullion at lower prices was inevitable.

Where does this leave things? The crisis in bullion markets is worse than it was before. A good example of how little physical stock there is can be gained by tracking bullion deliveries on the Shanghai Gold Exchange. In the last few weeks they have dwindled to virtually nothing, having been a truncated 190 tonnes in April and 297 tonnes in March. Yet we know from reports that retail demand in China has taken off; so it is only a matter of time before prices are bid up on the Shanghai Gold Exchange enough to replace lost inventory.

It will be interesting to see how many more bullion banks are forced to admit the fiction behind their customer accounts in the coming weeks. For the moment the temporary solution amounts to rationing bullion supplies to the public.

This article was previously published at GoldMoney.com.

3 Comments

  • Paul Marks says:

    None of these markets are real.

    The stock markets are Central Banking produced bubbles.

    The bond markets are just govenrments buying their own bonds(indirectly via Central Banks producing credit money for the purpose of buying debt).

    And the “gold market” is NOT about gold.

    People (backed by governments, Central Banks and the rest of the establishment elite) who DO NOT HAVE GOLD have been “selling gold” to force down the price.

    Everyone should demand PHYSICAL gold in order to bring this vast fraud to an end.

    People who have “sold gold” and can not physically produce the gold they have supposedly “sold” should not be allowed to “ration gold” – they should be sent to prison for fraud.

  • Fred says:

    I agree with Mr. Marks, and as always, the wise words of Mr. Macleod. We unfortunately have two distinct markets sharing one spot price index: physical gold and paper gold, or what I like to call: “fiat gold”. A divergence of these markets is beginning to appear in the form of premiums paid for actual bullion but this is unofficial. The true bullion bull market will not be able to fully take hold until after the paper market unravels and this could be several months if not years away.

  • Paul Marks says:

    Fred your last words depress me – “if not years away”.

    I am not young or healthy – and I want justice done (the fraud smashed) now, not years away.

    But if that is the way it will be – then that is the way it will be.

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