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Why Store Gold Outside the Banking System?

There are many risks associated with storing gold in the banking system, notably the risk of bankruptcy or government confiscation. But there is also a more complex risk, related to price manipulation.
Whether one’s gold is “allocated” or not, to understand the amount of risk associated with storing gold within the banking system, one has to grasp the mechanism of price manipulation occurring through the sale of previously leased physical gold.

Traditionally, the central banks have leased physical gold to investment banks that specialize in gold trading, which helps them make a profit on their idle gold, while keeping the price low.

Price manipulation can only happen in two ways (often combined): with the sale of (previously leased) physical gold on the market, or with a massive sale of virtual “paper” gold.A unique and safe way to invest in gold and silver

In both cases, the sheer mass of “supply” helps keep (manipulate) the price low.

Let’s start with the “physical” part (as documented by GATA)

These last few years, central banks have stopped leasing their gold; after having leased quite a bit in the past, they are now holding on to their reserves.

When leasing gold, the rate is determined by the Gold Lease Rate.

This rate is extremely low, being based on LIBOR (Gold Lease Rate = LIBOR- Forward Rate). And we now know, with the LIBOR scandal, that it has been manipulated to the down side. And we now see the scope of that scandal when we relate it to gold price manipulation.

Who will lease physical gold to a bank for such a ridiculously low rate now?

Nobody. Central banks have done it for years, but that trend is over, due to their low reserves.

Central banks own 10% of existing gold, and the rest is in private hands.

Which begs the question, since physical gold leasing hasn’t stopped, where does the physical gold come from, knowing that the central banks have stopped leasing it?

One is left to wonder if that gold might not come from some private accounts of “allocated” gold, ETFs or futures contracts gold stocks…

The physical gold would be recuperated by certain banks without the consent of its clients (via rehypothecation) and then leased to the commercial banks who then turn around and sell it on the market. What this accomplishes is that, by keeping the price of gold low, trust is being maintained in the actual fiduciary system.

Read a definition of the rehypothecation mechanism here.

Risk of bankruptcy, risk of confiscation, inter-connectedness of the banking system, rehypothecation, price manipulation… Those are real risks that must be considered before deciding where to store one’s physical gold.

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