by Jim Clark
Both gold and silver experienced a rapid run up and equally rapid drawdowns this week. Gold has been locked in a trading range between $1150+/oz and $1215/oz and silver between $15.50 and $16/oz since February 2015. There is solid support at the $1175 area for spot gold and $15.50 for spot silver. These bids have held several times since the November 2014 lows when gold briefly dipped to $1145.
A long anticipated sale of $1 billion of gold bullion by Venezuela to Citibank has been overhanging the market, accounting for gold’s price weakness in recent weeks. This sale was closed early in the week and gold quickly rallied from $1175 up to $1214, only to retrace this rally back to the $1175 support price level.
Said Warren Buffet in a 1998 address at Harvard:
“(It) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
Well, we are not on Mars and had Warren bought gold in 1998 at its high, he would have paid $304.85. Based on $1175 gold, this is a 285% increase in seven years. Interestingly, Buffet, through his Berkshire Hathaway investment vehicle bought 130 million ounces of silver in 2014.
Noriel Roubini, economist and professor at the NYU Stern School of Business, recently called gold, “a barbarous relic”. For some reason, the large money center banks Citicorp and JP Morgan, Chase & Company seem not to agree. Citicorp just bought 1 million ounces of gold this past week and JP Morgan/Chase has accumulated 55 million ounces of silver since 2012.
Speaking of JP Morgan/Chase, in April, Chase sent a letter to safe deposit box holders announcing an updated safe deposit box lease agreement in which Chase limits items that may be held in the box.
From the Chase letter:
“Contents of the Box: You agree not to store any cash or coins other than those found to have a collectable value.”
Further in the letter, under “Right of Access”, Chase explains that the bank “can restrict access to your box for any reason, including but not limited to… our inability to obtain information that satisfies our ‘Know Your Customer’ requirements, and any unexpected circumstances (natural or manmade).”
In other words, you must disclose on demand, the nature of the contents of your safe deposit box to the bank.
Think about that for moment. The purpose of owning a safe deposit box is to secure your important documents and valuable personal property. It seems as though Chase is telling customers that the bank does not consider your cash and coins to be personal property. Coins, in case you are unaware, include gold and silver American Eagle bullion coins.
JP Morgan/Chase is a leader in the implementation of banking policy in the United States of America. Other banks, including Wells Fargo have this policy in place as well. I believe the other big banks will follow suit.
The value of bank deposit guarantees and the FDIC
Austria, in the wake of the October 2014 failure of its second largest bank- Hypo Alpe AdriaIt, and the recent subsequent failure of the Heta Asset Resolution GmbH, the government constructed bank charged with managing the assets of the failed bank, is planning to eliminate the government guarantee of deposits, their equivalent of the FDIC insurance in the US.
This is how it starts. Bail in legislation is in place in every major country in Europe and in the US. You do not own the cash in your bank account, the bank does. Perhaps this is why the FDIC is allowed to have less than 50% of the Designated Reserve Ratio (DRR), required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. This act requires the FDIC to retain 2% of its potential liabilities on hand. Currently the FDIC has approximately 0.84% DRR. Would you feel more comfortable at 2%?
I quote an internal FDIC Memorandum:
MEMORANDUM TO: The Board of Directors
FROM: Diane Ellis Director Division of Insurance and Research Division of Insurance and Research
October 2, 2014
SUBJECT: Update of Projected Deposit Insurance Fund Losses, Income, and Reserve Ratios for the Restoration Plan
Regarding the Deposit Insurance Fund (DIF) balance, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 provides the following:
…Each year, the FDIC sets and publishes the DRR for the following year. The DRR for 2015 is 2.0%
“The DIF balance has risen for the past four and one-half years and stood at $51.1 billion on June 30, 2014, resulting in a reserve ratio of 0.84 percent.”
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