The report begins thus:
'We are raising our mid-cycle gold price estimate to $900/oz from $750/oz and see the possibility of a spike to $2,000 or higher...'
'Covert selling (via central bank lending) has artificially depressed the price for a decade...'
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Say what?
'Central banks have 1015,000 tonnes of gold less than their officially reported reserves of 31,000. This gold has been lent to bullion banks and their counterparties and has already been sold for jewellery, etc. Non-gold producers account for most and may be unable to cover shorts without causing a spike in the gold price...'
Says who? Well, so says Paul Mylchreest, investment analyst at Cheuvreux. His team is ranked No.2 by Institutional Investor for its research in Western Europe. It's part of Credit Agricole, the largest bank in France. This is big news. The 'lunatic fringe' of GATA were right all along.
The Gold Anti-Trust Action Committee was founded in January 1999. Twice it has filed a lawsuit charging the Bank for International Settlements, Alan Greenspan, J.P.Morgan & Co, Chase Manhattan Corp, Citigroup Inc, Goldman Sachs, Deutsche Bank and others for illegally rigging the gold market. The Bank of England, the IMF and Barrick Mining are implicated in the scam. And now GATA's conspiracy theory has been vindicated by one of the world's biggest banks.
Let's be clear - Cheuvreux's report says little that GATA's not said over the last 7 years. And you may be suspicious of a French bank accusing the US of not playing fair over gold! But 'no financial house in Europe could be more part of the establishment than [its parent] Credit Agricole,' noted Chris Powell of GATA last night. Its endorsement is now being read at the big financial firms in London, Frankfurt, Tokyo and New York.
'The starting point for the real story on gold is the quantity of gold held by central banks and the financial derivatives related to part of this gold,' says Cheuvreux. 'According to the IMF the official figure for gold held by central banks in their vaults is 31,000 tonnes, but the reality is much lower...'
'The origin of today's problems in the gold market date back to the 1980s when central banks began to lend or deposit part of their gold holdings with leading bullion banks (such as JPMorgan Chase, Goldman Sachs, Citibank, etc) in return for a fee, the gold lease rate, typically about 1-2% p.a then (currently about 0.2%). This was seen as a sensible use for an asset that otherwise earned no income for central banks...'
'From the mid-1990s onwards, however, the nature of much of the central bank gold lending and sales changed,' says Cheuvreux. And here, we bring new readers up to speed with the story so far.
According to GATA and now Credit Agricole the central banks of the major Western governments have lent out a lot more gold than they've admitted to. Why not?
It was just sitting there...inert...at No.79 on the Periodic Table...racking up insurance and storage costs...a barbarous relic of a time before Mankind perfected the art of printing money with no other backing than the promise to pay with more paper.
It seemed like a no-brainer. The central banks got to squeeze a yield from their gold. The borrowers got to sell the gold on, and use the proceeds to fund more exciting investments like 10-year US Treasuries yielding 4% per year or so. Yes, these 'carry trade' returns were tiny. But the cost of borrowing gold was tinier still.
Of course, most of the gold has since wound up in necklaces and wedding rings. So it's unlikely to make it back into the global bullion market. And it's never going to see the inside of a central bank vault again.
But what's to worry about? So long as gold remains a mere relic...a yellow reminder of what used to be money...no harm done. Unless something absurd happens, that is. Something absurd like, say, gold doubling to $573 an ounce inside 5 years. If that happened, then the 'carry trade' of borrowing gold to invest in paper could become a very expensive way to bankrupt the entire global financial system.
Hence GATA's contention that Western central banks have sought to keep the price of gold down. Cheuvreux now cites the Bank of England's infamous fire-sale of mid-1999. Gordon Brown and the US administration had just failed to make the International Monetary Fund dump some of its gold onto the open market. So instead, Prudence sold half of our holding yours and mine, gentle reader at the bottom of gold's 20-year bear market.
'From the UK's standpoint,' says Cheuvreux, 'the handling of the sale was a fiasco. We believe the current loss to UK taxpayers of about $2bn makes a mockery of Tony Blair's comment to the House of Commons:
'It was carried through perfectly sensibly and we actually got the best deal for the country.''
New and 'unexpected' sources of gold supply also showed up at the turn of this century. In October 1999, for instance, the Bank of Kuwait offered to lend the UK its entire 79-tonne holding of gold. 'Additional US military spending for Kuwait was announced shortly after,' notes Cheuvreux...which is some kind of accusation, right?
Chile then sold 34 tonnes in 2000, and Uruguay moved 57 tonnes to London for lending. Most of the cash realised from these transactions as with most other gold carry trade deals - found its way into government bonds. So here too, the central banks distorted the market, pushing up bond prices...pushing down yields...and helping pump up the bubble in debt.
'Our suspicion is that Bernanke will try to keep the US credit expansion going as long as possible (probably with the inevitable consequences). A further leg in the current credit expansion and inflationary boom in assets (with hyperinflationary risk) seems most likely outcome at this stage. At the same time, the heavily debtladen US economy is also at risk of a deflationary slowdown.'
And guess what - only one asset class will perform under both of these extreme scenarios, says Cheuvreux.
So do like the big French bank says! Start hoarding gold!
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