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When all other options have failed, gold can be used as collateral

Today, desperate nations are likely to use gold in a ‘swap’ for foreign currencies in such extreme times, says Julian Phillips.

Gold Today – The New York gold price closed at $1,329.00 down $11.60 on Wednesday in New York. Asia took it slightly lower to $1,325 but London started to lift it back up ahead of the Fix. London Fixed gold at $1,331 down $9.00. In the euro, it Fixed slightly lower at €974.806 down €0.50, while the dollar stood at $1.3654, 0.8 of a cent stronger. Ahead of the opening in New York gold stood at $1,332.85 and in the euro at €976.13.

Silver Today – The silver price closed at $21.24 down 62 cents in New York. Ahead of New York’s opening, it was trading higher at $21.45. 

Price Drivers

There were no purchases of gold into the SPDR gold ETF [GLD] on Wednesday or into the Gold Trust, which left their respective holdings at 803.704 tonnes and 164.24 tonnes. The price fall back to $1,325 was not driven by physical sales, or by the absence of gold purchases in Asia. When such falls happen, without physical selling, the dollar exchange rate against the euro is usually the culprit. In the last day the dollar has strengthened 60 points or 0.5% or the equivalent of $6 on the gold price, implying the fall has been overdone. When this happens the gold price usually recovers quickly. This is why we are seeing a recovery which will continue, unless we see heavy selling from the gold SPDR gold ETF. Such a prospect is becoming increasingly unlikely too.   

It is traditional that speculators, dealers and traders move the gold price around with the euro. The developed world’s central banks, in particular Germany [whose past Central bank president have described gold as a ‘useful counter to the dollar”] retain gold in their reserves. So when the dollar loses value, so the theory goes, gold’s value [as a reserve asset] rises, leaving the total reserve’s value relatively intact. As the Central Bank Gold Agreements have stated repeatedly since 1999, “Gold remains an important reserve asset”. What does this mean? It means that gold is held by nations in case their currency, or that of another reserve currency [Pound Sterling, Yen, Euro or Dollar], loses value, eventually to unacceptability, gold will rise in value and act as money, to compensate. In such extreme times a nation’s gold reserves can act as collateral, or facilitate international liquidity.

Potential candidates for such extreme conditions include Argentina, Turkey, and Vietnam. However, gold will only ever be used when all other options have failed. Cyprus was a case in point. Even though the nation ‘went bust’ its gold was not used. Today, desperate nations are likely to use gold in a ‘swap’ for foreign currencies, where, if they don’t recover, the gold will be forfeit. That’s why so many nations hold their gold outside their borders, so it can be used as such. This is fine unless doubts are cast over the currency and nation where their gold is held. 

Silver – The silver price continues to move cautiously with gold.

Julian Phillips is the founder of www.GoldForecaster.com and www.SilverForecaster.com

 

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