From The Daily Star in Lebanon (next door to Syria), Time for Gulf economies to increase gold reserves
There are ample reasons for this (Gold) price hike: The U.S. trade deficit has spiraled out of control. Compared to its economic base, the accumulated debt in U.S. dollars has become too high to be effectively repaid; it will either default or will more likely be inflated to such an extent that it won’t hurt to “pay” it back.
The article goes on to say there is a gap between production of gold and demand and the central banks have filled that demand, which is what I’ve been saying for months.
Apart from scrap supplies, the most important filling of the gap comes from the central banks, which sell and lease gold into the market. The latter activity is especially tricky and has led to a huge derivative short position in the gold market: Western central banks mainly lease gold to commercial banks, which sell it into the market, the central banks earn a lease rate and the commercial banks invest the proceedings of the sales in higher-yielding assets like bonds, for example. Everybody could be happy, but there is one problem: the gold still exists as an asset on the books of the central banks and as a liability on the books of commercial banks or hedge funds, while the actual physical gold has left the vaults a long time ago and now hangs around the necks of the women of the world, who are the “ultimate longs” in the market without even knowing it. It is inconceivable that this short position can be covered at current prices and the market seems to reckon that at some point the central banks won’t be able to cover the supply gap because they will run out of gold or won’t be willing to sell more of one of their most valuable assets. (all emphasis added)
This is the future for those shorts
MMG Arrows, a Japanese broker of precious metals futures traded on the Tokyo Commodity Exchange, has defaulted on payment to Japan Commodity Clearing House for losses made on this week’s gold, platinum and silver trades.
Further on in the article is this bombshell:
Individuals in the Gulf countries seem to be well-prepared for these developments, as they are the second-most important buyers of gold in the world after India, but the central banks of the region have not shown the same amount of foresight yet. Their gold reserves are very low, both on an absolute and a relative level. Four countries – the U.A.E., Oman, Qatar and Bahrain – have sold out nearly all of their gold while Kuwait has leased out its complete reserves with uneasy prospects of return, should third parties default.
Gold Gold Reserves Trade Deficit USD Finance