The World Will Never Be Free If It Believes Official Gold Data

Headlines like this have been pummeling the monetary metals sector in recent days: "Gold Is Getting So Expensive That Even China's Central Bank Stopped Buying."

According to this particular report:

China's central bank gold-buying streak has been a major driver of prices that hit record highs recently. However, it looks like gold has gotten so expensive that even the People's Bank of China is taking a break.

On Friday official data showed China's gold holdings were unchanged in May from the prior month -- which means the central bank did not buy gold.

The PBoC's pause has left gold 'vulnerable to more downside pressure,' wrote Ewa Manthey, a commodities strategist at ING Bank, on Monday. ...

China's central bank gold buying had actually started to slow in April when it bought just 60,000 troy ounces of the precious metal. That was down from 160,000 ounces in March and 390,000 ounces in February.

Before its pause in purchases last month, the PBoC had been snapping up gold for 18 straight months, making it the world's largest institutional buyer. ...

Mainstream financial news organizations don't yet seem to notice that official statements about gold reserves are, to put it politely, not reliable.

That the People's Bank of China did not report acquiring gold in May does not mean that the bank or the Chinese government did not actually acquire gold in the month. It meant only that the central bank did not report acquiring gold in May. The bank or other agencies of the Chinese government could have acquired huge amounts of gold in May and simply not reported them -- perhaps because China wanted to knock the price down abruptly to make acquisitions easier and less expensive, or wanted to oblige pressure from the United States not to push the gold price up so fast.

We have been here before.

In April 2009 China caused a sensation by announcing that its gold reserves had increased by 76%, from 600 tonnes to 1,054 tonnes. For the previous six years, China had been reporting to the International Monetary Fund, the compiler of official gold data, only 600 tonnes. Had China acquired those 454 new tonnes only in the year prior to the April 2009 announcement?

That's unlikely. That much official buying in a year or less almost certainly would have manifested itself in price action or comment by market participants. It's far more likely that China acquired the 454 tonnes reported in April 2009 over at least several years, largely by purchasing the production of China's own fast-growing gold mining industry, but didn't announce it or report it to the IMF. The metal may have been in the solid possession of the Chinese government but kept on the books of state-owned commercial banks or government entities other than the central bank. That would have been easy to arrange.

So for as many as six years, the official gold reserve data about China was way off.

The next year, 2010, the same thing happened in Saudi Arabia. In June 2010 the World Gold Council reported that Saudi gold reserves had increased by 126%, from 143 to 323 tonnes, in just two years. That the world's top oil exporter had made such a new commitment to gold in its foreign exchange reserves also caused a sensation. It implied a reduction of Saudi loyalty to the petrodollar.

But a few weeks after the announcement of the spurt in Saudi gold reserves, the governor of the Saudi Arabia Monetary Authority, Muhammad al Jasser, insisted to news reporters in Kuwait that Saudi Arabia had not recently purchased the gold cited in the June reports but rather had held that extra gold all along in what he called "other accounts. " That is, held the metal in accounts not reported officially -- just as the true status of China's gold accounts had not been reported officially for six years.

Official fudging about gold reserves continued this year as Federal Reserve Chairman Jerome Powell refused to answer the question posed by U.S. Rep. Alex Mooney, R-West Virginia, as to whether any foreign custodial gold recently had been repatriated from the Federal Reserve Bank of New York.

Powell ignored Mooney's letter for a while. Eventually, the Fed chairman was compelled to acknowledge it but he simply ignored the question about repatriation.

The secret IMF report establishes not only that central banks are surreptitiously intervening in the gold market through swaps and leases but also that no official central bank gold data is any good. The IMF allows its members to count their leased and swapped gold as if it is still sitting in their vaults, unencumbered, when the gold may have left the vaults or have multiple claims on it.

That is, the secret IMF report shows that central bank gold reserves are double-counted or worse.

The exaggerated response of the gold price to the recent reports that China had stopped buying gold in May showed again that while central banks and governments have the power to create and deploy infinite amounts of money, this is not their greatest power. Their greatest power is their command of mainstream financial news organizations, which never pose or press the most obvious critical questions about gold but report only what central banks and governments want reported.

Maybe those news organizations sense, or maybe they have been frankly told, what central banks and governments know: that the true size, location, and disposition of national gold reserves are secrets far more sensitive than the true size, location, and disposition of nuclear weapons. For nuclear weapons can only destroy the world, while the control of gold means the control of all financial valuations everywhere -- the value of all capital, labor, goods, and services – since the value of gold is the inverse of the value of government currencies.

If it ever knew where all the official gold really was and how it was really being deployed, the world would be nearly free. Not even nominally democratic governments want that.

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