October 28, 2012
Weekly Market Outlook
By Keith Schneider
The world's second largest holder of gold bullion, the Bundesbank (the German Central bank) has asked for an accounting of its holdings by the Federal Reserve Bank in New York. Currently, The New York Federal Reserve is custodian for much of the world's central bank gold reserves and now houses about 45% of the almost 3,400 tons that the Germans currently hold. The German banks can't even identify specific gold bullion bars they own.
When central banks buy and sell gold bullion, Bernanke goes downstairs to the basement of the Fed and moves unmarked bullion bars around, re-allocating the yellow relic to various countries' vaults as needed. Years ago when we had the Cold War, the Germans, afraid of a Russian invasion, asked the US to hold on to most of its gold reserves when nothing was considered more secure than the NY Fed. How times have changed.
One might think with the Fed printing so much money, our German friends are getting a little antsy. They are asking for 150 tons of metal to come home and be tested for "quality". This means they are not only nervous about the Feds selling their gold, but also concerned with the Feds replacing real bullion with tungsten - which because of its density being close to that of gold, is often used to create counterfeit gold bars. What is the world coming to? Is fraud occurring on a Global Scale? Should we run and buy GLD, the gold ETF? I think not, as it's only a piece of paper that represents Gold. It's not like you can go visit JP Morgan, have lunch while admiring your gold hoard, or even come home with some yellow stuff.
The actual amount of gold being physically held by JPM backing the Gold ETF is unclear as they can lease, loan it out, or trade against it. GLD tracks gold bullion on a 1 to 1 basis; but if everyone called in their paper gold for physical, it's not clear that JPM is holding enough of it. So, Even if you are not prone to paranoia, it does seem strange that according to recent independent research that if you bought the Gold ETF in NY every day on the open and sold it on the close you would be a net loser in a period where gold has risen almost 400%. JPM are the custodians for the GOLD ETF and also one of the biggest players along with the central bank both of whom certainly have a vested interest in keeping a lid on gold prices. A huge run up in bullion prices would prompt widespread calling in of paper gold for the real thing, exposing the shortfall.
Of course all this could be a big nothing and just a case of the Germans being overly cautious. Either way, this has a long fuse but merits a careful watch as any real foul play regarding central bank or JPM handling of bullion could destabilize the whole monetary system.
The key US stock indexes are now all trading at or below the September levels when Draghi's comments and QE3 were announced. The indexes are trading in a downward choppy fashion, awaiting the outcome of the US presidential election. However, the market internals are indicating that the 5% to 7% move to the downside might have run its course. Don't miss this week's video as we are going to cover AAPL in detail. The technical setup has 4 indicators converging, a most interesting development in this bellwether stock.
Have a Great Weekend and Stay Safe.
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