This is Where Gold is Really Going

The markets continue to soar into the summer. Gold and gold stocks are once again climbing, leading a strong surge on gold’s recent run. But what’s really happening to gold? The answer to this may shock you. Read on to find out.

This is Where Gold is Really Going


Dear Readers,  

The markets continue to soar into summer.

The Dow breached the unprecedented 17,000 benchmark, closing at a record 17,068.

The S&P also climbed to a new record with a close of 1,985.44.

The climb means (according to JP Morgan) that the current forward S&P 500 P/E is now 15.6x – just higher than the 15.2x of October 9, 2007.

That doesn’t mean we’re about to crash. Heck, the forward P/E back in 2000 was 25.6x.

We’ve been in a full-fledged bull market for some time now and the thoughts of a crash are no longer in the minds of investors.

But neither is investing.

According to ICI, the Investment Company Institute, investors pulled $2.19 billion from U.S. stock mutual funds in the week ended June 18, after pulling $2.8 billion the week before.

Over the last five weeks, retail investors have pulled $10 billion out of U.S. stock mutual funds.

$10 billion doesn’t sound like much, and precisely, it isn’t.

(Especially when we talk about the trillions of dollars of liquidity created by central banks.)

That’s because its not retail investors who are getting rich from the stock market, its the rich who are getting richer.

According to the ongoing Gallup Poll, stock ownership by household continues to decline.

So who is buying?

According to the Federal Reserve, 5% of Americans own directly 82% of U.S. publicly traded stocks.

Eventually, the richest 5% will cash out. And they will likely, or have already been, selling to the retail investors who are beginning to pour money back into the market.

After all, we are in a bull market.

This is Where Gold is Going

I couldn’t count the number of research articles I have read, nor the amount of advice I have been given, regarding which direction gold is headed.

In the end, the answer to this questions will come from what central banks, and other big banks, decide to do.

For the last few years, I have written about the outflow of gold from Western banking giants such as JP Morgan and Goldman Sachs. As their dump occurred, gold prices were hammered before it could reach $2000/oz.

Over the last few weeks, gold and silver have been gaining momentum and churning to climb higher.

Is this the result of technical patterns and traders? Is it the result of the geopolitical risk overseas? Or is it the result of a much bigger force (banks)?

Let’s see what the big banks are doing.

The Ultimate Trade

Just this week, Ecuador agreed to transfer more than half its gold reserves to Goldman Sachs Group Inc. for three years to give the government easier access to cash.

Via Bloomberg:

“The central bank said it will send 466,000 ounces of gold to Goldman Sachs, worth about $580 million at current prices, and get the same amount back three years from now. In return, Ecuador will get “instruments of high security and liquidity” and expects to earn a profit of $16 million to $20 million over the term of the accord. The central bank didn’t detail additional terms of the transactions, such as any fees or financing costs paid to Goldman Sachs.”

In other words, Ecuador will receive paper assets (high security, of course) in return for lending out its physical gold; thus, entrenching the world further into Fed dollars spread by Goldman.

While the details of the transaction are unclear, I am going to assume one thing: Goldman Sachs will not likely park this gold in a vault, but rather use it as leverage for other financial instruments.

And so the rehypothecation loop, Ponzi scheme, leveraged borrowing, or whatever you’d like to call it, continues.

This isn’t the first time Goldman has attempted to take control of a nation’s gold.

As I mentioned before, Venezuela – a country that has publicly announced the repatriation of its gold from abroad many years ago, almost struck a swap with Goldman to use the country’s gold as collateral last November.


“Venezuela’s Central Bank and Goldman Sachs are ready to sign an agreement to swap or exchange international gold reserves, with a start date in October, as stated in the contract, and until October 2020.

The negotiated amount, equivalent to 1.45 million ounces of gold, are deposited in the Bank of England and the transfers are made directly to Goldman Sachs once delivery times are stipulated.

The operation involves the delivery of gold from the central bank, which will receive dollars from the U.S. firm. The transactions are made through the creation of a financial instrument that is traded in the international market.

During the term of the instrument is an account called “margin,” in which the central bank agrees to deposit a larger amount of gold in the event that the price of gold falls or in which Goldman Sachs deposits a larger amount when gold increases. “At the expiration of the transaction the contributions are returned to their owners,” the document says.”

And of course, if any legal disputes were to arise from the proposed swap, it would’ve been settled in Western – ahem, English courts.

While the deal was never completed, we should note that if Goldman Sachs is willing to lend out billions of dollars for gold, then clearly the big bank sees value in the yellow metal.

In Ecuador’s case, if gold falls to Goldman’s predicted $1050/oz then the deal would mean Goldman would be able to accumulate more gold from the South American nation.

Ecuador just returned to the bond market last month, selling $2 billion worth of debt with a high yield of 7.95 percent. In case you have forgotten, Ecuador defaulted just five years ago.

If Ecuador defaults again, Goldman is going to end up with a lot of gold.

These actions suggest that real hard gold is being moved back into unaudited Western vaults.

But the control of hard assets doesn’t stop there.

The Indian Swap

Just recently, the world’s once largest consumer of gold announced that it is swapping its own gold for “paper” gold.

On Wednesday, India’s central bank said it has looked for quotes from banks to swap gold in its own vaults for international-standard gold, aiming to improve the management of its reserves.

Via Reuters:

“The Reserve Bank of India said the operation would “standardise the gold available with RBI in India with respect to international standards” and the gold acquired would be delivered to its overseas custodian, the Bank of England.

By holding gold reserves in London, the RBI would gain flexibility to mobilise them if needed to defend the currency. It shipped some of its gold holdings to Britain in 1991 as part of a series of emergency measures to tackle a financial crisis.”

Translation: We’re going to sell our gold and use the proceeds to buy gold; only the gold we buy will be held at the Bank of England – the central bank to a country that has been under tremendous scrutiny for the manipulation of gold and silver prices.

This brings me once again to why I said gold and silver prices would climb a few weeks ago: rehypothecation.

Rob Peter to Pay Paul

If you missed the letter from last month, here’s a reminder on rehypothecation:

“In short, banks and brokers lend money to their clients using assets that have been posted as collateral. These assets can be anything from currency to hard assets such as gold or other base metals.

The banks/brokers can then take these assets and use them for their own purposes to create other financial instruments; metal-backed currency, so to speak.

This is called rehypothecation. And yes, it sounds almost like a Ponzi scheme.

Many times, these assets are “supposed” to be sitting in a vault or storage facility somewhere but because the “rehypothecation” process is often repeated many times over, no one really knows where the assets/metals/commodities are – if they exist at all.”

Since that letter, the “unwinding” of China commodity finance deals have continued.

As Bloomberg notes:

“Decheng Mining pledged the same metals stockpile three times over to obtain more than 2.7 billion yuan ($435 million) of loans in China’s Qingdao port, a person briefed on the matter said, citing preliminary findings of an official investigation.”

So it’s no surprise that Gold ETFs have seen the biggest inflows since September 2012 in the last few weeks.

My point here is simple: gold – the most liquid of assets amongst central banks (but not so much for countries) –  is now once again going back into the hands of Bankers.

Once in their hands, it will likely be used many times over as leverage for financing deals (as Goldman has done with Ecuador).

But that’s not all.

Moving gold out of a country and into the vault of a foreign nation means that the true amount of available gold supply will likely be hidden from the world. It could also mean that the true holder of the gold may never get it back.

Just ask Germany.

We’re Not Giving it Back

Remember a few years back when I talked about Germany’s plans to repatriate its gold held in France and the U.S. – long before the mass media covered it?

Then remember when I wrote about how long it was taking for Germany to actually get its gold back from the United States?

After all of this talk, it seems that Germany has decided not to repatriate its gold back from the U.S.

As Bloomberg kindly put it:

“Germany has decided its gold is safe in American hands.

Surging mistrust of the euro during Europe’s debt crisis fed a campaign to bring Germany’s entire $141 billion gold reserve home from New York and London. Now, after politics shifted in Chancellor Angela Merkel’s coalition, the government has concluded that stashing half its bullion abroad is prudent after all.

“The Americans are taking good care of our gold,” Norbert Barthle, the budget spokesman for Merkel’s Christian Democratic bloc in parliament, said in an interview. “Objectively, there’s absolutely no reason for mistrust.”

Here’s the same story from the eyes of the East, the Voice of Russia:

“After two years of diplomatic struggles and scandals involving the US Federal Reserve, Germany gave up on its attempts to repatriate its gold. In order to save face, Bundesbank issued an official statement that underscores its “trust” in its American partners.

The saga of German gold repatriation started in the aftermath of the European debt crisis, when a grassroots campaign began pressuring the government in Berlin to bring the gold home from New York and London. After a long and difficult media campaign, Bundesbank overcame its initial reluctance and demanded a full repatriation of the Germany’s entire $141 billion gold reserve.

The Fed’s reaction was extremely irritated and the issue of “German gold” became one of the most difficult diplomatic problems in the US-German relations. Every delay and every excuse cooked up by the US Federal Reserve made the campaign for repatriation even stronger, leading to an even deeper mistrust between the parties involved in the conflict.

Finally, Bundesbank was told that it will get its gold back in seven years, clearly showing that the US central banking cartel did something nefarious with the metal it has been entrusted to safeguard. Most likely, the gold has either been sold long ago or “hypothecated” to American banks trading in gold derivatives. According to Bloomberg, after repatriating just 5 tons of gold, Germany gave up.

Bloomberg quotes Norbert Barthle, the budget spokesman for Merkel’s Christian Democratic bloc in parliament, who said that “the Americans are taking good care of our gold. Objectively, there’s absolutely no reason for mistrust.” Critics point out that there are a number of objective reasons for mistrust. One of such reasons is that there never was a German or an independent audit of the German gold store in New York or London. Moreover, the Bundesbank was never able to provide a reason for the lack of audits, claiming that it stores gold “only at central banks of the highest international reputation” and therefore an independent audit is not required.

The decision to halt the repatriation attempts bear the hallmarks of a political concession to Washington. It is very likely that in the long war Berlin will regret this decision because its chances of ever regaining control of its gold are now close to zero. However, there is still some hope left for the German gold. Hours after Bloomberg ran the story about Germany giving up its repatriation attempts, Peter Boehringer, the leader of the “Repatriate our gold” campaign, issued a statement, calling the Bloomberg piece “a ‘non-news’ article with a wrong headline, strange interviewees, old news, and with a clearly apologetic ideological approach.” He also said that the fight to bring the German gold back will continue.”

Interesting to see the stark difference between Eastern and Western media on the same subject, no?

Here’s the read-between-the-lines bottom line: Gold is once again going back into the hands of Western Bankers, who will likely continue to use the yellow metal to create financial instruments of leverage. Oh, and the gold that is supposed to exist in certain vaults, probably doesn’t.

This is my reason for why gold prices have moved higher, and may move higher in the near future.

That, along with my forecast of the TSX and TSX Venture performance, is precisely why we should continue to look at junior gold stocks for some easy short-term gains.

Here’s a chart of the GDXJ and the GDX over the last few weeks:


Until next time,
Ivan Lo

The Equedia Letter

Comments 7
  1. Dear Mr. Lo,
    Thank you much for your insights. With all due respect allow me to state that you are very knowledgeable, smart, wise, sarcastic, and your “specialized literary” demeanor cracks me up. You are funny alright. Too bad that I am a broke and humble layman on the above topics of such essential importance. I learn a lot reading your great lines. All I have invested in the stock market is a handful of diversified shares that in theory amount to a “cash” value (as of 07/03/2014) of $32,000.00 U.S. Cy. I sincerely have no clue as to what to do with “my assets”.
    Anyway, the purpose of this note is just to congratulate and thank you for your refreshing style and guidance.

    Sincerely and respectfully yours,
    Roberto J. Navarrete

  2. Good, insightful and thorough write-up, Ivan. Thanks for sharing it. Interestingly, we now have a golden cross on the gdxj. Indeed, very good short-turn up moves to come.

  3. What is the news that China bought the USA Gold Vault next to the US Treasury in New York City,was that true and if so was that just a real estate transaction, or was there Gold involved in that as well hearing that China bought the old Rockefeller Building with 90% of the building pre sold to Chinese/Hung Kong residents and where turning this Landmark and remodeling it all to Condo’s. Is there truth to this as it would be like a gift us giving them a present from the interest on the man with the PEN AND PHONE + THEY BOUGHT WHO KNOWS ALL THE DIFFERENT RESOURCES IN CANADA OUR GREAT NEIGHBOR GETS THROWN UNDER THE BUS, DO WE KNOW IF ALL THIS IS TRUE? Thank You!

  4. Thank you four letter, All this means is that physical gold is going to be a lot valuable in the future, and those who have along gold don’t know how to make money from it.

  5. Looks like a P. T. Barnum moment, “There’s a sucker borne every minute”, the hand is quicker than the eye.

    If the US can’t or won’t return the gold it holds already, what do these clowns think is going to happen at the end of the agreement.

  6. Leveraging of assets that is not yours is illegal. Where is the NATO International Law agency. Bottom line is the bloodline feud will continue as they think that they are above the law. Gold could possibly be the replacement of the US dollar as other countries have waken up to the fact of having their own monopoly currency to phase out US influence and FED.
    Right now we are seeing the accumulation of gold by the US. They will correct this move up to be able to attain more gold in ex-change for paper currency. Never fails their habits are written in stone.
    Metals season is between January and May..
    Follow the chart and smart money and play safe (stoploss).
    Why Germany and others send their gold to US is false information. ASk yourself why would you send your asset overseas for others to use to rehypoticate, why not do it yourself.
    These bloodlines keep on confusing the public for that is their way form antiquity.
    Read between the lines and ask your conciousness super-intellengence for the answers.
    this intelligence lays on your Aura field.

  7. Thank you for responding, we have been hearing that get some of your savings in various investments in different countries, so the US Govt. could not touch or take, My wife has a 401 where she works where they match up to 6%, she has only been there 3 years and has accumulated a nice small sum around $8,500.00 is there a way to get that into precious metals and keep the 401 going she expects to stay there for another 10 years , she will be 65 then, but all we have been hearing is to get some of this into another country, is there a way to make all the peaces fit in this puzzle so she keeps getting matched and gets some safely into like Canada Gold and Silver. Or is the safest way to keep it like it is, and hope the USA does not have a crash in the markets. Like the CEF or the Gold Trust Funds where the us Govt. can’t confiscate it. Just want her to have the safest best way for her being that

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