Dear Friend of GATA and Gold:
Along with mining entrepreneur Pierre Lassonde and professional nihilist Doug Casey, some bigshots in the monetary metals sector still contend that central banks don't care much about gold.
These guys might do well to read the address given last month by Peter Zollner, head of the Banking Department of the Bank for International Settlements, to the Global Precious Metals Conference of the London Bullion Market Association, held in Lisbon, Portugal. (Thanks to GATA's consultant about the BIS, Robert Lambourne, for calling attention to the address.)
Of course the BIS is the central bank of the central banks and the broker that long has provided camouflage for central bank interventions in the gold market.
Zollner told the LBMA conference that he had been asked to address "the macroeconomy, central banks, and gold." He showed that central banks are actually intimately involved in the gold market.
Zollner said: "From time to time there are opportunities to take advantage of price differences between trading centers or bar sizes or the fineness of bars. For example, there was big scarcity in Comex bars during the first part of the pandemic due to reduced refining capacity. It can be very beneficial for central banks to remain active in the gold market even if they are not buying or selling outright."
He continued: "Compared with my early days on the gold desk at the Austrian central bank in Vienna (in the early 1980s), I see a reduced number of big commercial and investment banks active in the gold market. Some bank mergers have taken place, of course, but some banks have decided to withdraw. For the future, it would be beneficial for the central bank community to see more institutions back in the gold market."
Zollner did not explain why central banks would benefit from an increase in the number of banks dealing in gold, but such an increase certainly would provide the BIS and its member central banks with more agents to help camouflage interventions.
In any case even the most fanatic gold bug might not be able to describe gold's virtues as money as well as Zollner did at the conference.
Noting that he was drawing on "recent research in the BIS Banking Department," Zollner said, "Gradually increasing the share of gold in reserve portfolios from a starting point of zero will bring clear diversification benefits. However, gold's market risk profile is not to be neglected and this puts a limit on the target allocation of gold in any given portfolio.
"This calls for the qualitative angle. Widely accepted reasons for holding more gold include:
"-- Gold is durable and largely imperishable, and nobody's liability if you hold it physically in your vaults, which frees it from default or counterparty risk.
"-- Unlike currencies and debt instruments -- which are claims on foreign governments or institutions -- gold kept in your vaults isn't subject to political manipulation or monetary and fiscal policies.
"-- Gold has been empirically proven to serve as an inflation hedge, although only over the long run.
"-- Most importantly, it is widely recognized for its potential value in highly adverse scenarios. This is the so-called 'war chest' value or 'tail risk hedging' value of gold, which is difficult to capture in standard quantitative analyses.
"However, gold should not be seen just as a dormant asset in a vault for the rainy days. Gold is an asset which offers opportunities in the financial markets. It can be used to create liquidity via gold/currency swaps or as collateral, often more cheaply than using other assets. Sometimes using options or placing deposits to enhance the return can be an appropriate strategy."
Spoken like someone whose institution has been secretly intervening in the gold market for many years, even as some supposed experts still deny that central banks meddle with the monetary metal.
Zollner's address to the LBMA meeting in Lisbon is posted at the BIS internet site here:
https://www.bis.org/speeches/sp171022.htm
And at GATA's internet site here:
https://gata.org/sites/default/files/ZollnerAddress-LBMA-Lisbon-October2022.pdf
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
CPowell@GATA.org
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