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The Volcker Rule and its Effects on the Precious Metal Industry

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Before moving on into the topic of how the Volcker rule affects the precious metal industry, it is crucial that the Volcker rule itself be understood first. The Volcker rule is basically a reformation act that restricts the banks in the United States from taking high risk investments, especially high risk investments that do not benefit the customers of the bank. In view of the major scandals involving banks using people’s money to make short term gains that saw profit flow into the banks but not to the customers, but when things go wrong, the customers bear the burden of the loss.

In other words banks are prohibited from investing in short term or long term hedge funds, speculative markets that are highly risky and it also prevents banks from investing in the precious metals industry (gold bullion / silver bullion). Banks are currently actually looking for loopholes in the legislation rather than comply to it, but according to the legislators the loopholes do not exist. How this would affect the precious metal industry is multi tiered, as some analyst say that banks are the biggest buyers and sellers in the precious metal commodity trade industry and that they are the main ‘market forces’ applied through hedge fund managers and their absence would create a huge void in demand and drive prices down. On the other hand there are those who believe that the absence of these speculative strong forces would provide stability to the prices of gold as most of the trading done by these market forces are for short term gains and in retrospect most of the gold bought by them are never held fopr more than a few days.

Looking into the average investor who looks towards the shiny yellow metal as a safe haven to secure wealth, the absence of these speculative forces will actually bring about the true essence of the gold value and allow the average investor to sleep peacefully knowing that there are no hedge fund managers trying to manipulate the gold market prices. Many have applauded this move, especially the savers, as many have seen what has happened in recent years to big financial institutions that were financially ruined and in the process ruined many other lives of individuals who had trusted these financial institutions to keep their life saving safe.

The reformation brought about by the Volcker rule is expected to bring confidence back into the precious metal industry as smaller investors will no longer have to contend with big players who use other people’s money to fill their coffers. Nevertheless, prior to this there have been numerous other ‘so called’ rules that were supposedly supposed to protect the small people, however in light of what transpired during the global financial meltdown and other similar situations, how long this rule lasts before it is overwhelmed or manipulated by the powers that be would not be long, and those who want to place themselves within the safe zone amidst a financial crisis would typically be the ‘Average Joe’ with a fistful of gold.

Economic Financial System Gold & Silver Bullion Gold History Gold Standard World Currency

Golden Conflicts

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It is not new to the world when certain factions misuse natural resources to finance or advocate conflict which has become a common phenomenon over the last few decades: from crude oil in the Middle East, timber in Cambodia, blood diamonds in Sierra Leone and Angola and even gold in low income countries. Very often natural resources provide a means to finance as they are internationally tradable assets which are mobile and easy to dispose off. Without appropriate measures, these assets may find their way towards funding armed groups that are conditioned to overlook human rights and grossly neglect humanitarian laws.

The Democratic Republic of Congo for Instance was responsible for 0.8 % or 22 tonnes of newly mined gold, but because of the countries weak governance coupled with the fact that most of the gold mines are artisanal small scale mines, they are often subjected to the whims and fancies of armed groups who frequently extort them, therefore the possibility of the gold produced in the Democratic Republic of Congo getting into the gold supply chain is minimal. These are only some of the issues as incidences of forced labour by armed groups, low wages, adverse working conditions, negligent mining practices and conflicts continue to be highlighted and the only way to deter these incidences is by obstructing gold mined under these conditions to get into the supply chain.

However this is not an easy task as gold from independent small mines are usually melted down and mixed with gold from other sources (usually with recycled gold – 35 % of the annual gold supply comes from recycled gold) and sent off to end users through a complex transactions which make them virtually impossible to be traced back to its origins. It is largely due to the availability of ready buyers that these armed groups are brazen about their activities as once the gold artisanal and small scale mines reach a refinery, their origins cannot be traced and therefore refineries have become a strong element in the value chain of armed groups and establishing a relationship with a refinery that would accept their gold (knowingly or unknowingly) is all that they need.

Recently the World Gold Council has launched a ‘conflict free gold program’ which aims to stop or prevent gold from conflict zones or high risk areas from reaching refineries and subsequently end users as this would be an effective measure towards eliminating these conflicts and bring reprieve to those who bear the brunt of these armed groups.

However, it is undeniable that artisanal mining is a vital economic activity in some places and if it was not for the gold, the communities in these places would be left without nothing and based on the fact that a significant proportion of mining in these places are illegal and operate beyond government supervision it is prone to smuggling which is often backed by armed groups.

Proving that a gold batch is from these situations or sources is the first step, but a difficult one undeniably.

Economic Financial System Gold & Silver Bullion Gold Standard World Currency

Low Gold Prices: A Gift from the US to China

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We often hear the voices of near lunatics discussing conspiracies and plots between global superpowers that are aiming at gold, usually something to do with a new world order and all that kind of stuff. Themes and subjects like these are widely debated in online media, thanks to the internet and the appearance of obscure ‘truth’ somehow coming from this medium, has increased the efficiency of this type of media itself. Everyone has free access to it (technically not everyone, cases like China and North Korea must be considered) and anyone can publish his opinion on it.

Having this in mind creates misconceptions, mistruths, and false beliefs, a dangerous combination that leaves people naive to the real situation we are facing. We must think and hear some logical and rational ideas with an open-minded stance, not dribble with stories presented as facts with no real evidence behind it. To get a grounded understanding of the actual situation, it is well worth  reading about James Rickards’ worldwide scale economic plots. Mr. Rickards is a well-known American lawyer, finance academic who writes about the upcoming monetary disaster. He has a couple of really successful books published on the subject.

He wrote a really interesting article for The Daily Reckoning, titled “Why the U.S. is Letting China Accumulate Gold” and that’s what I want to talk about now. I really haven’t seen monetary events from this kind of a point of view. He really considers that there is a clear cooperative relationship between the People’s Republic of China and the United States of America.

In fact, China is the biggest and stronger US trading partner. Despite all the ideology differences, looks like this relationship are really valuable and both countries are interested to maintain it healthy and strong. Now, Mr. Rickards use a great example to explain the role of the massive gold demand by China the latest years.

“Right now, China officially does not have enough gold to have a ‘seat at the table’ with other world leaders. Think of global politics as a game of poker” he said. Having huge gold reserves gives you the power and relevance between international superpowers. The elite must hold gold in huge quantities. But when your reserves become technically “huge”?

He stated that “The U.S. gold reserves at the market rate is about 2.7 percent of GDP”. In the meanwhile “In China, that number is 0.7 officially”. Now we know for sure how many gold China has, and thanks to that, we also know that is not powerful enough yet. In comparison with other superpowers worldwide, China actually holds a little gold reserve if we consider the size of its economy.

The author determines that the gold prices manipulation is evident and it’s because the US wants to help China to avoid being left behind. “If you took the lid off of gold, ended the price manipulation and let gold find it level, China would be left in the dust. It wouldn’t have enough gold relative to the other countries, and because their economy’s growing faster and because the price of gold would be sky-rocketing, they could never acquire it fast enough. They could never catch up” he stated in the mentioned article.

So the actual gold prices depression is intentional? According to Mr. Rickards, it is. There is a cap on gold prices while China purchase the quantity it needs. After that, the mentioned cap will be eliminated. But why is this happening? China does not feel comfortable with its dollar’s reserves. Any FED decision on the monetary policies affect the Asian country and that escapes from its will. With a healthy balance of dollars and hard assets, like gold, in China’s reserves, the PBOC will sleep better.

Why the US is doing this for China? The relationship between these countries has become fundamental for the worldwide economy. China is the main manufacturing and exporting in the world. It is a well-known fact that biggest US companies have factories in the Asian country. They have to watch closely to the eastern ally and take care of him. China knows well about its relevance to the US and the rest of the world. This quid pro quo situation will be active for much longer.

Financial System Gold Standard

The Gold Standard – The Past, Present and Future

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Most people have probably heard of the gold standard and most are under the notion that the gold standard is a system whereby a country’s currency was backed by a certain amount of gold stored as reserves in each country’s respective central banks. Well, to an extent this is true however; the ‘gold standard’ is much more complex than money representing the amount of gold held in reserves.

To begin with, it must be understood that the gold standard was a monetary system whereby anybody in a country that uses this monetary system would be able to take a certain amount of money to a bank and exchange that sum of money into gold or vice versa, this however is only in theory as the main function or objective of the gold standard was to maintain economic stability due to the fact that when a currency is backed by gold unit for unit, it creates trust in the currency. Historically the gold standard had its genesis in Great Britain, when in 1694 the Bank of England issued bank notes that were back by gold and convertible back to gold by the bearer of the bank notes. As time went by, towards the end of the 18th century a surplus of paper currency was observed which caused the suspension of the convertibility of these bank notes to gold (basically there was more bank notes than there was gold – the first incident of money being overprinted – causing the notes to lose value as they had to be re-valued according to the amount of gold that was actually physically present in the vaults). The suspension was eventually removed and the gold standard was re-established in 1821 and most other countries realising that it was a practical way to place value on paper money soon followed suit – hence the gold standard became the monetary system that lasted until the advent of World War I when it was again suspended only to be reinstated soon after. However immense pressure stemming from the post war world and the dawn of the Great Depression fractured the system to a point that by 1933 both Great Britain and the United States of America exited from the gold standard and withdrew gold from circulation entirely (Elwell, 2011) only to be replaced by the Bretton Woods system in 1944. The Bretton Woods Agreement was a similar monetary system that was is generally described as the ‘gold exchange standard whereby the gold standard was maintained without domestic convertibility.

The Bretton Woods Agreement

Without doubt the Bretton Woods agreement was the first completely negotiated monetary policy that was agreed by independent industrial nations collectively that was proposed in order to govern financial transactions. The system was conceptually sound when it was imposed as each participating nation was obliged to adopt a monetary policy that would bind the exchange rate of its respective currency to gold which would facilitate the International Monetary Fund (the IMF) to bridge the imbalance between trading nations temporarily, this system also addressed the need to keep competitive devaluation of currencies in check. This system effectively governed the global financial system for almost 3 decades by stemming destabilizing speculation and competitive depreciations which were rampant in the 30’s. The US dollar under the agreement will remain as the only currency that would retain convertibility to gold and since gold reserves in most countries were limited, countries with payment surpluses stabilized their exchange rates by purchasing dollars which were almost ideal surrogates for gold (Cohen, 2010). However the system was only optimal between 1959 up to 1968 (full convertibility) after which both official and private liquid dollar claims that were being held by foreign entities coupled with the lessening of official gold holdings especially the US gold reserves steered the system towards inevitable collapse (Garber, 1993).

Present Global Financial System

The global financial system that is currently in place is a labyrinth of legal frameworks that are ‘patch ups’ of a seriously flawed design that has been constructed on a fragile foundation to facilitate investments, trade financing and financial capital flows. The complexity of the banking systems that are currently in place make it virtually impossible to continue ‘patching up’ the global financial portrait into something that is acceptable, the recent reforms imposed via the Basel Committee and other governmental regulations have actually made assessing systemic risks even harder and financial risks continue to tear the seams of the financial system at different ends relentlessly. The collapse of Lehman Brothers and AIG and the current financial reforms that involve ring fencing, counter-cyclical capital buffers, and contingent convertible debt are complicated equations that even those who devise them are not able to provide explanations on how they will perform in different scenarios. As markets bubble and fluctuate and nations head towards insolvency, the complications of their implications become shrouded with more reforms that only manage to provide temporary relief. Eventually the rickety financial system is bound to collapse and a complete overhaul of the global financial system will be necessitated and the only system that is known and viable is the gold standard.

Economic Financial System Gold & Silver Bullion Gold Standard World Currency

Gold and the Feds

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Everybody knows that federal banks have a lot of ‘pull’ on the state of the economy, however how these institutions affect the prices of gold is an entirely new paradigm. Federal Banks or central government controlled banks and the International Monetary Fund (IMF) are major forerunners that determine the prices of gold despite the daily London Gold Fix that takes place daily in London. According to statistics released by the World Gold Council at the end of 2004 19 to 20 percent of all the gold above ground was held by Federal Reserve’s through the world. Central banks as well as official government sanctioned organizations held the official role as official gold reserves.

The decade long Washington Agreement on Gold (WAG), which was put into effect since September 1999 to 2009, limits the sale of gold at a ceiling benchmark to 500 tons or less. The members of this treaty were comprised of Europe, United States, Japan, Australia, and Bank for International Settlements and the International Monetary Fund. During the tenure of this treaty over the decade European central banks mainly banks such as the Bank of England and The Swiss National Bank, were the primary gold sellers to eager gold buyers. The viability of this treaty caused it to be extended to a further five year period beginning in September 2009 up to September 2014. However the extension also saw the further reduction of the limit of gold sales by twenty percent to 400 tons of gold that was sell-able.

Although huge amounts of gold reserves are stored in these vaults, most of the gold does not belong to them. The gold is tangible assets that are owned by corporations and foreign governments. The Federal Reserve Bank of the United States of America and Ford Knox collectively is said to have 50,000 tons of gold stored in their vaults. Of these 50,000 tons of gold only 10 percent of it belongs to the government of the United States of America, the rest yet again belongs to foreign governments and huge private corporations. Gold is the safest way to secure assets of any form. Be it property, cold had cash or stocks of goods and services, none of which are as tangible as the precious metals that include primarily gold, silver, bronze and copper.

The economy of the world depends on the stability of gold prices to be able to function in a healthy manner. Erratic and irresponsible speculations are the sole reasons for the prices of gold to become volatile and drive its value up and leave inflation in its wake.