Normally I can tolerate the echo chamber that we call the “free press,” even though that term seems to persist solely due to tradition.
When it comes to financial news though, it is often too much to bear. In the worst cases, it comes of as a disgraceful puppet. The rest of the time, it is a disservice to readers by selectively ignoring evidence that contradicts the official, collective narrative.
Reminders of both have been rampant in recent weeks.
Perhaps the most egregious disgrace was how the Council on Foreign Relations essentially censored Alan Greenspan.
In a talk he was invited to give, he advocated renewed attention to gold as a backdrop to fiat currencies and as a hedge or alternative to government-boosted stocks and bonds.
The official transcript did not include it and only hints of the editing are coming up on alternative news web sites.
Sure Greenspan isn’t the untouchable wizard behind the curtain anymore, but purposefully omitting the opinions solicited from him is absurd.
So is failing to report that the CFR meddles with the opinions of experts to keep them in line with the official narrative.
As for a perpetual disservice to readers, the focus on gold in mainstream media outlets is perpetually on hedge fund flows and similar angles that put the sole focus on speculators and short-term investors.
However, news of some of the largest and most important gold investors is severely muted, along with how they will influence the gold market going forward.
From ex-Fed head Greenspan at a podium in New York to central bankers in Geneva, Beijing, and Moscow, gold is getting a lot of attention and demand is poised to surge.
You won’t hear it in the domestic news echo chamber, so here you go…
Switzerland’s Vote
Coming up at the end of this month, a referendum in Switzerland has the potential to boost gold demand for years to come.
It has received little attention so far, to the point that even JPMorgan is noting that markets are significantly under-appreciating the situation.
The whole idea is to boost gold up to 20% of Swiss foreign reserves. At this point, gold only accounts for about 7.6% of the total central bank holdings.
Right now the polls slightly favor a no vote, but public sentiment, especially as the eurozone falters, could quickly change.
A triple dip recession in some European countries, a broad economic decline overall, and the specter of euro deflation should only bolster support over the next couple weeks.
And a quick note on deflation. While the rise in value in the euro would bolster the paper value of Swiss reserves, all bets are off as the deflation rapidly destabilizes and crashes the European economy.
At the end of this hypothetical situation, there is pure uncertainty on where the euro will end up, assuming the euro survives at all. This is just about the worst thing for foreign reserves designed to stabilize a domestic currency.
The plan, if passed, would compel the Swiss National Bank to increase gold reserves by about 1,500 tonnes over five years.
The 300 tonnes per year would account for 7.5% of annual gold demand, which is estimated at around 4,000 tonnes per year.
Russia Breaking Free
The next big central bank gold story that is seeing little press ties right into the universal acceptance of the official government narrative surrounding the proxy conflict with Russia.
Sanctions are indeed hurting Russia, along with weak oil prices. But the echo chamber doesn’t include news coming out about how Russia is adapting to make Western economic manipulation toothless.
With limited abilities to close transactions in dollars or euros, which make up a large share of foreign reserves, Russia is moving on to gold and the Chinese yuan.
In an ongoing economic struggle, delinking from the dollar and euro only makes sense. What good is hitting Western Europe where it counts when it just undermines your holdings?
Gold purchases by the Russian central bank ramped up alongside the Ukraine debacle. As of August, Russian gold reserves surged 7% year-to-date.
Another 200 tonnes of gold are expected to add to the total of 1,112 tonnes in reserve. At a total of 273 tonnes purchased in 2014, this would account for 6.8% of world demand.
The other part of delinking from the West comes with expanding trade with China. A second major energy deal is now in place, bringing the total, so far, for oil and natural gas deals to $800 billion.
Quoting the value in dollars is a bit absurd though, since the transfers will be in rubles and yuan.
China will secure nearly a fifth of the natural gas it will demand by the end of the decade, and Russia has a friendly and committed buyer for energy that doesn’t fall under the sway of the West.
Ascendant China
That brings us to one of the most powerful drivers of gold demand. Unfortunately, it is also one of the most mysterious.
China doesn’t really care to tell people how much gold it has or is adding to its foreign reserves. The People’s Bank of China might, in a particularly candid decade, update official gold reserve data twice.
The last update came in 2009, which put official reserves at 1,054 tonnes. However, anecdotal evidence and discrepancies in official demand hints at purchases that are twice as large as China admits.
For example, official demand in China was 1189 tonnes in 2013. Yet at the London Bullion Markets Association, Xu Luode, Chairman of the Shanghai Gold Exchange, stated Chinese consumption hit 2000 tonnes in 2013.
Regardless, we do know what the ultimate target is for the PBOC. In a series of articles over the last several years by party officials, state-run papers have consistently cited a need to raise central bank gold reserves to 8,500 tonnes.
Once again, a reason is to lessen dependence on dollar and euro reserves., but the big reason is catapulting the yuan to international reserve currency status.
Securing massive deals with Russia that do not use Western currencies only accelerates the process.
The Smart Money Long Position
Add up the projected demand between Russia and Switzerland, if the referendum passes, and you’re already looking at new demand equivalent to 14.3% of current worldwide demand.
China has no timetable, but making some conservative assumptions puts this goal in perspective.
Even if it was secretly halfway to the 8,500 tonne reserve goal, and the purchases took place across a decade or two, this plan will account for an extra 5 to 10% of current demand.
Given the fragility of debt-laden Western nations, I’d assume China will want to get this done sooner rather than later, as long as it doesn’t drive up prices too much.
These three central banks are hardly alone. Worldwide, central banks have been net purchasers of gold for 14 straight quarters.
The echo chamber in domestic media isn’t covering this, and isn’t connecting the dots. Instead, the push to bring all money off the sidelines and into equities marches along with unanimous support.
The fundamentals are in place for gold, and they are supported politically and economically from the individual investor up to massive central banks.
Add in the start of a bullish gold cycle, and it is clear that gold is amongst the best long positions you can take.
