Over the last week I’ve introduced the concept of collateral: the little
known basis for the entire financial system. We’ve also addressed why
any EU sovereign default would bring about an epic meltdown as EU bonds,
particularly those of Spain and Italy are the collateral underlying hundreds of
trillions of Euros worth of trades for EU banks.
Again, the most important issue for the financial system is the search
for high quality collateral.
Indeed, it is the search for high grade collateral that has caused such
periodic spikes in Treasuries, German Bunds, French sovereign bonds, and
Japanese bonds (all of these have yielded 0% or even negative yields in the
last five years). Big banks are moving away from PIIGS bonds into safer havens.
This is also why the Fed isn’t touching Treasuries with QE3 and
why it won’t touch short-term Treasuries with Operation Twist 2 (this program
sees the Fed selling short-term Treasuries to buy long-term Treasuries): the
Fed wants to keep as much good quality collateral in the system as possible
(long-term Treasuries are problematic because institutions know it’s highly
likely the US will default within the next 30 years).
However, even this move is problematic because much of the Treasury
market is locked up with governments both foreign and domestic.
|
Total US Sovereign Debt |
$16 trillion |
|
Foreign Nation holdings |
$5 trillion |
|
Intergovernmental holdings |
$4.8 trillion |
|
US Federal Reserve |
$1.5 trillion |
|
Remaining |
$4.7 trillion |
Again, this is why clearinghouses (which oversee the derivatives markets)
are now allowing Gold as collateral: they know that eventually sovereign bonds
will be worth less or even worthless. And they want access to their clients’
Gold for when this happens.
With that in mind, the countries that will ultimately be considered safe
havens when the BIG collapse starts are those with the largest Gold reserves.
|
Country |
Gold Holdings |
% of Foreign Reserves in Gold |
|
The US |
8,133 tonnes |
75.1% |
|
Germany |
3,395 tonnes |
71.9% |
|
Italy |
2,451 tonnes |
71.3% |
|
France |
2,435 tonnes |
71.6% |
|
China |
1,054 tonnes |
1.6% |
|
Switzerland |
1,040 tonnes |
14.2% |
|
Russia |
918 tonnes |
9.2% |
|
Japan |
765 tonnes |
3.1% |
|
Netherlands |
612 tonnes |
60.2% |
|
India |
557 tonnes |
9.8% |
I’m not going to get into the issue of whether this Gold exists still
(many commentators claim that Central Banks have in fact sold much of this) as
I have no way of proving it. The key issue is that the financial elite are now
trying to get their hands on Gold as collateral because they realize that
sovereign paper based collateral from the EU will soon be worth much less or
even worthless.
It is no coincidence that Germany floated the idea of accepting other EU
nation’s Gold in exchanged for bailouts back in May 2012 when Europe
teetered on the brink of collapse:
Europe’s debtors must pawn their gold for Eurobond Redemption
Southern Europe’s debtor states must pledge their gold reserves and
national treasure as collateral under a €2.3 trillion stabilisation plan
gaining momentum in Germany.
The German scheme — known as the European Redemption Pact — offers a form
of “Eurobonds Lite” that can be squared with the German constitution and breaks
the political logjam. It is a highly creative way out of the debt crisis, but
is not a soft option for Italy, Spain, Portugal, and other states in trouble.
It’s also not coincidental that Germany is performing an audit of its
Gold holdings today, either.
Bundesbank Says NY Fed to Help Meet Gold Audit Request
The Bundesbank said the Federal Reserve Bank of New York will help it
meet auditing requirements related to its gold reserves that were demanded by
Germany’s Audit Court.
“We have been in discussions with the Federal Reserve Bank of New York
about the Bundesbank’s holdings of gold,” the Bundesbank said yesterday in a
letter to the German parliament’s budget committee. “The discussions have been
fruitful and the Federal Reserve has expressed a commitment to work with the
Bundesbank to explore ways to address the audit observations, consistent with
its own security and control processes and logistical constraints.”
The agreement is part of a compromise between the German central bank and
the Audit Court, which has called on the Bundesbank to take stock of its gold
holdings outside Germany, saying it has never verified their existence.
The Bundesbank distributed the letter to reporters after board member
Carl-Ludwig Thiele and the Audit Court’s head Dieter Engels testified to budget
committee lawmakers in the lower house of parliament in Berlin.
I realize that the last few essays have been pretty dense. So I’ll
summate everything here:
1) The #1 issue for the financial world is too little quality
collateral backing too many trades.
2) The search for good collateral has lead investors to seek
high grade sovereign bonds (Treasuries, German bunds, French bonds, Japanese
bonds) as a safe haven between 2008-the present.
3) The folks who monitor the derivatives market (the large
clearing houses) realize that sovereign bonds are not going to be a safe haven
for much longer and so are looking at Gold as a new form of collateral for
trades (this has NEVER been the case before).
4) Germany and other nations will be increasingly looking to
audit and accumulate their Gold holdings.
Keep all of this in mind at all times going forward. This is the BIG
picture for the financial world.
This is why I’ve been warning that 2008 was just the warm-up. What is
coming will be far far worse: the collateral crunch that will ensue when Spain
or Italy defaults (they have €1.78 trillion and €1.87 trillion in external
debt respectively) will be absolutely massive. At a minimum it will be
multiples of times larger than what followed Lehman’s bankruptcy.
If you’re looking for someone who can help protect yourself from this
mess and even profit from it, I can show you how. My
clients made money in 2008.
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Indeed, during that entire time we saw 73
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To find out what they are, and take steps to protect your portfolio from
the inevitable collapse…
Graham Summers