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Lambourne and Powell: If China forces gold reset, ETF gold may be most vulnerable
By Robert Lambourne and Chris Powell
Sunday, December 22, 2024
Anyone who has read the reports published by GATA over the years will understand that owning physical gold and silver is the preferred way to hold monetary metals.
No history of gold ownership in the United States would be complete without reference to Executive Order 6102, issued by President Franklin D. Roosevelt in 1933 and meant to confiscate gold owned by the public:
https://en.wikipedia.org/wiki/Executive_Order_6102
Amid the relentless growth of federal government deficits and debt, physical metal remains the best form of ownership.
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China also has economic problems related to high debt, principally because of property speculation and overbuilding. At the end of the second quarter this year, China had a reported non-financial debt-to-gross domestic product ratio of 292%. The U.S. ratio is 249%.
Both countries are in a position where currency devaluation and debt write-offs may be politically attractive options. A gold price reset is one way to achieve this, and in theory either government could decide to make such a move unilaterally.
If relations between the new Trump administration and China become strained, a gold price reset might form part of a response to substantial tariffs being imposed on Chinese imports to the U.S.
Based on remarks made so far, it seems unlikely that the new Trump administration is ready to launch a gold price reset. Talk of creation of a U.S. government bitcoin reserve suggests that a gold price reset might be considered, but it doesn't appear imminent.
The situation with China is more opaque, especially as moves are underway there to refinance local government, banks, and property businesses. Recently Chinese authorities announced, as part of refinancing local government, that this included previously unrecorded debts.
Admission of unrecorded debts is rare.
A signal of a forthcoming gold price reset might be found in the timing of this admission together with the announcement of a major refinancing being carried out by new government borrowing being used to replace existing debt.
Hence there appears to be a chance of a gold price reset occurring in 2025. There also seems to be a chance that this reset will be driven by China rather than the Trump administration. Hence there could be a financially chaotic period when a gold price reset is forced on the West by China.
So the need to hold gold and silver directly in physical form seems stronger than ever, just as holding a claim on gold or silver by owning shares in an exchange-traded fund carries increasing risk.
As is well known by followers of GATA, there is considerable reason to be suspicious that Western governments and central banks may not hold all the physical gold they claim to have. This report by gold market analyst Frank Veneroso, published by GATA in 2007, is a reminder:
https://www.gata.org/node/5275
So is the March 1999 secret report of the staff of the International Monetary Fund to the IMF board, which says central banks don't want the world to know that much of the gold they claim to own is actually impaired by leases:
https://www.gata.org/node/12016
In the same vein, GATA also reports on gold swaps arranged by the Bank for International Settlements for one or more of its central bank members whereby gold is swapped for dollars, with bullion banks being the source of this gold. It has long been conjectured by GATA that the gold in the BIS swaps is sourced from exchange-traded funds (ETFs).
It is also conjectured that the swaps might be a mechanism to return double-counted gold to a central bank that had leased or loaned it to a bullion bank acting as custodian for an ETF. The absence of clear reporting on gold transactions makes it impossible for outsiders to confirm or refute these conjectures.
The recent disclosure that the main custodian of the SPDR Gold Shares exchange-traded fund (GLD) is now JPMorganChase rather than HSBC, with possibly more of the ETF's gold being vaulted in the U.S., is further reason to consider whether gold or silver held in ETFs might be an easier target for confiscation, especially if the U.S. government is forced into a rapid gold price reset after unilateral Chinese action.
Owners of monetary metals should reflect on these developments.
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Robert Lambourne is a retired business executive in the United Kingdom who consults for GATA about the involvement of the Bank for International Settlements in the gold market and about U.S. government debt. Chris Powell is GATA's secretary/treasurer.
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