Oct 10, 2019
In last week's silver update we talked about the Central Bank
Gold
Buying Agreement that was originally signed in 1999. It was up for
renewal this year and the Central Banks that signed the original
agreement decided not to renew it. The reality is Central
Banks are no longer selling gold but reading the world situation,
the stability of fiat currencies, and today's realities they are
gold buyers.
Central Banks collectively hold a huge hoard of gold and their
actions can have a substantial effect on the price of gold.
It's important for precious metals investors to understand what the
Central Bank Gold Buying Agreement was and what the motivations
were for this agreement. If you understand those motivations it
will help guide your precious metals investing philosophy.
Although when originally signed in 1999 it was called the Central
Bank Buying Agreement it more correctly should have been called the
Central Bank Selling Agreement. Why? Because it was really designed
to prevent another disastrous Brown's Bottom decision. This
decision has gone down in history as one of the most financially
disastrous decisions in history achieving fame as Browns Bottom.
Gordon Brown, Britain's Prime Minister sold half of Britain's gold
reserves 20 years ago at the absolute bottom of the market when
others were also selling their gold.
Make no mistake about it, this agreement was designed to serve
the best interests of the central banks. They didn't want to be
caught selling cheap again. They wanted to coordinate and limit the
amount of gold selling at any one time.
I know if you go to the organization that formed and promoted this
agreement they will go on about how the did it to stabilize the
prices and markets.
If it was done for our sakes to stabilize the markets why was it
just formulated and signed 20 years ago? Remember Brown's Bottom
occurred about 20 years ago too. Coincidence? I don't think so.
Central Banks were burned selling cheap and didn't want it to
happen again.
So what does this mean for the precious metals investor? Let's
first look at one other decision the Central Banks recently
made -the Basell III agreement which raised gold from a tier
3 asset to a tier 1 asset. What exactly does that mean for banks
and what benefit is to them? Banks make their money by lending it
out. The amount of money they can lend out is based on the reserves
they hold. So when an asset is a lesser tier 3 asset like
mortgages, the banks can only lend about 50% of the value of that
asset. With a tier 1 asset, the banks can loan 100 percent of the
value. So with Basell 3 in raising gold from a tier 3 asset to a
tier 1 asset the asset valuation has doubled the amount of money
banks could lend. In effect very significantly increasing the
amount of money banks can make by greatly increasing the amount of
mortgages they can make and money they can lend.
So for the precious metals investors basically what this means is
that the central banks, who, because of their huge catch of gold
have a significant influence on the price of gold can now make a
lot more money. Can you ever imagine that once they are given this
huge gift that doubles their gold asset base enableing them to
double the amount of money they lend and very very significantly
increasing the money the banks can make that this decision raising
gold to a tier 1 asset will ever be reversed? Can't you just hear
the howls from banks who suddenly had their profit potential halved
by moving gold back to a tier 3 asset?
The precious metals update is a new shorter version of the Precious
Metals Investing podcast. It usually focuses on one issue. I would
appreciate your comments and feedback. Send your thoughts and
recommendation for future updates to
ted@preciousmetalsinvesting.com
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