Gold in Short Supply as Desperate Governments Scramble for Access
The sight of hundreds of workers jamming themselves into cage-like elevators at Harmony Gold’s Moab Khotsong mine, which was featured recently on 60 Minutes leaves one uneasy.
The fact that businesses and society would send workers for long days in 100-degree heat more than two miles below the South Africa surface dramatically illustrates continued demand for the yellow metal.
According to World Gold Council data, gold bar and coin demand rose by 28% during the third quarter, compared to the same quarter the previous year.
But the stunning 22% increase in demand by world central banks, struggling to maintain credibility in the midst of what author Mitch Feuerstein calls “Planet Ponzi,” is raising particularly hard questions.
Governments are desperate
On the surface the global economy remains calm, despite increasing warnings of an impending 2008-style financial crisis.
Investors today, most of whom have never seen a crash which governments haven’t bailed them out of, remain confident that if the current stock market correction accelerates, that central banks will once again step in.
But while investors trust governments to bail them out, there is increasing evidence that those governments don’t trust each other. US debt held by China, Japan and Russia is particularly suspect.
Bond markets are also increasingly leery of the boatloads of money that central banks have printed up during the past decade to finance growing public sector expenses.
One key metric: according to the Institute of International Finance global government, business and personal debts rose to $247 trillion in Q1 2018. That’s more than triple annual economic output.
Governments know that when inevitable defaults begin –through inflation or outright debt write-offs - that the most attractive paths will be to stiff each other, rather than voters.
But governments, particularly non-G7 nations such as Poland, Hungary and Turkey, are also gradually realizing that they need to maintain at least the appearance of fiscal responsibility.
That means owning at least some gold.
Central banks increasingly holding gold
Reintegration of gold into the global monetary system – which followed a long period during which governments gave the impression that they were phasing it out – began gradually.
The first major step occurred in 2014 when the European Central Bank and 20 member states agreed to stop selling off existing reserves for the next five years.
That measure did not appear significant in itself.
However comments later that year by Alan Greenspan, the Federal Reserve Chairman most responsible for the recent debasement in the US dollar removed all doubt.
“Gold is a currency,” Greenspan told an audience at the influential Council on Foreign Relations. “It is still, by all evidence, a premier currency. No fiat currency, including the dollar, can match it.”
Since then, a slew of major global central banks, ranging from Russia, to China and Germany have been visibly stocking up their reserves, or repatriating them to their home territories.
Did the Bank of England default on its gold obligations?
Western central banks for their part are looking increasingly suspect. For example the Bank of Canada holds no gold.
Worse, reports that the Bank of England is refusing to return gold that the Venezuelan government was storing in London, have raised considerable doubts as to the safety of reserves that other countries such as Australia hold there.
(The BOE did not respond to a request for comment about whether its refusal to return Venezuela’s gold may affect derivatives contracts tied to UK debt).
The Bank of England’s quasi-default on its international obligations, comes on the heels of foot-dragging by the Federal Reserve when Germany asked to have some of its gold holdings returned. The US central bank has not been audited in decades, a factor that makes claims about its holdings particularly suspect.
Western governments are forced to pretend to trust each other, in order to keep the financial system functioning.
However ordinary folk increasingly smell a rat.
For example John Adams, a blogger with Good as Gold Australia, has started a petition asking that country’s central bank to repatriate its holdings.
Even the widely respected Bank of Canada has taken to banning bloggers and economists who do not toe the party line from covering its events.
Getting it out of the ground
All this comes during a time when businesses are having increasing difficulty in finding gold and in getting it out of the ground.
For example a report by S&P Global Market Intelligence shows that while gold exploration budgets increased during 2017, following several years of decline, they remain far below historical highs. Indeed gold is currently being mined faster than new reserves are being discovered.
Even the South Africa region where Moab Khotsong is located, has been pretty much worked over. As the 60 Minutes piece notes, only 3 of 11 mines there are still in operation.
This suggests that pricing pressures will remain towards the upside during the coming years.
Brandon Green oversees business development and economic research at Strategic Wealth Preservation.