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Euro Evaporation Leading To Credit Default Swaps And IMF Gold

by Casey Research on March 11, 2010 · 7 comments

Reading time: 6 – 10 minutes

The IMF gold has serious geo-political ramifications in the background because of the nature of foreign exchange reserves, credit default swaps and gold.  Wikipedia:

South Korea and Japan are both home to large numbers of United States troops and neither are going to invite a nuclear attack.  The Kuomintang, which the US backed, retreated to Taiwan when they lost power and China still asserts their ownership over the tiny island and the US continues to honor their agreement to defend Taiwan.  Russia has been discharging dollars and acquiring gold while Brazil is bucking the buck.  Neither China nor India have significant reported physical gold holdings; they need a hedge to the major currency illusions.  In my book The Great Credit Contraction the liquidity pyramid represents the FRN$ will be the last major currency to evaporate.

liquidity pyramid

The Euro’s evaporation has increased and ultimately has only one outcome.  Sure, Germany wants to retain its voice on the world stage and is faced with a Hobson’s choice of bailing out Greece and eventually the other unproductive free-riding members of the Euro or let the Euro evaporate and lose their relevance on the world stage because Germany only matters if Europe as a whole matters.


But the Damocles sword of credit default swaps, which is falling toward’s Greece, can, ultimately, be measured only against gold because gold is no-one’s liability.  Just like the Chinese have feigned their interest in acquiring gold; many sophisticated investors have feigned ignorance of gold’s monetary role.  Many sophisticated investors, like George Soros who broke the Bank of England doubled his gold position in Q1 2010, Paul Tudor of Tudor Investments, John Paulson, David Einhorn, Eric Sprott, Jim Rogers, Peter Schiff, John Embry and many others are likewise allocating their capital based on the premise that gold is a major world currency.

Even Janet Tavakoli, a former adjunct associate professor of derivatives at the University of Chicago’s Graduate School of Business, and author of six books on derivatives recently wrote:

U.S. credit default swaps currently trade in euros. After all, if the U.S. defaults, who will want payment in devalued U.S. dollars? The euro recently weakened relative to the dollar, and market participants are calling for contracts that require payment in gold. If they get their way, speculators on the winning side of a price move will demand collateral paid in gold.

The market can create an unlimited number of these contracts very rapidly. The U.S. wouldn’t have to ever default to trigger a major disruption in the gold market.

The fiat currency and fractional reserve banking system is merely a confidence game built on an illusion and fraud.  Fiat currency is to be valued like the common stock of a government and in gold.  As such the current system will end and holder’s of capital will demand to be shown the money.  Just ask Harry Reid about karma or learn some real Abraham Lincoln facts.

The price of gold in evaporating currencies would not so much create a disruption in the gold market as cause a serious loss of confidence in the current system which would result in a tremendous increase in gold’s liquidity, hopefully through use by individuals in ordinary daily activities like what happened in Zimbabwe last year.  After all, who really needs to use fiat currency illusions and why?  In this case, we are seeing both China and India demanding to see the IMF’s gold, the Damocles sword jitters and there is only one protection.  Assets with intrinsic value.

DISCLOSURES: Long physical gold, silver and platinum with no interest in the problematic SLV, Streettracks Gold ETF Trust Shares or the platinum ETFs.


By Jeff Clark, Senior Editor, Casey’s Gold & Resource Report

On February 24, Reuters reported that the Reserve Bank of India was “set to be a buyer” of the 191.3 tonnes (6.74 million ounces) of gold the IMF is selling. Although the bank wouldn’t comment directly on the possibility, they did say, “We are closely looking at the gold market… gold is a safe bet.”

The article then quoted an unidentified official from the China Gold Association as saying, “It is not feasible for China to buy the IMF bullion, as any purchase or even intent to do so would trigger market speculation and volatility.”

But the next day, Finmarket news agency in Russia reported that China “confirmed its intention” to buy the IMF gold. “Chinese officials have confirmed previous announcements from IMF experts and said that the purchasing of 191 tons of gold would not exert negative influence on the world market.”

While they’ve been silent since, both India and China have publicly hinted they want this latest batch of yellow bars from the IMF. There’s no way to know if a competitive bid would spring up between these two countries, but…can you imagine the ramifications if one did?

When India bought 200 tonnes of IMF gold last November 3, it set off a buying spree that saw gold rise 14.2% in 4 weeks. What if this time around, a couple central banks both want the gold for sale? What if China says to India, “Not so fast, guys. We’d like to bid on that, too…” and word of that clash leaked out?

Pure speculation, of course, but competing for gold purchases isn’t a far-fetched idea. This sale is not pre-arranged; it’s an open market sale. Also, there’s only so much to go around. These two countries have only a tiny amount of their reserves in gold. Throw in the fact that central banks worldwide are already net buyers.

A pretty delicious thought, wouldn’t you say?

The gold price dropped a tad on the IMF announcement, but is up 1.1% since then. It’s pretty hard to make a case that IMF sales will hurt the gold price. As I said a few weeks ago in another column, IMF sales tend to mark bottoms in the price and not tops. The World Gold Council reported that floor traders now consider $1,054 as a floor in the market. Why? That was the average price India paid for the 200-tonnes they bought from the IMF last fall.

Meanwhile, what is our government doing?


You’ll recall that that big spike in the U.S. monetary base in late 2008 was never before seen in history. The Federal Reserve basically doubled it overnight. Our economist Terry Coxon described it as “beyond unprecedented.”

So, they stopped that insane activity, right? Since December 2008, the monetary base has swelled from 1.69 trillion to 2.18 trillion, a 29% increase and another new record.

Printing paper money vs. buying physical gold. I don’t know about you, but I think I’ll follow China and India’s lead here, even if I have to compete for the price I pay for my gold.

For those interested in additional analysis from Casey’s Gold & Resource Report click here.

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ABOUT THE AUTHOR: Casey Research has been making money for subscribers for 30 years. We do it by spotting trends in a market or the economy early — way ahead of the crowd. The Casey Research staff includes geologists, economists, seasoned business analysts, and experts in precious metals, energy, technology, and natural resources. This is merely one article of 7 by .
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{ 6 comments… read them below or add one }

1 Robert Happek March 12, 2010 at 5:25 pm


to claim that the Euro is evaporating is a gross misrepresentation of the actual reality.

Take a look at the long term exchange rate of the Euro against the Dollar. Ten years ago, at its introduction, the Euro was worth (if I remember correctly) $1.17. Today, despite the temporary weakness due to Greece and other European countries, the Euro is trading at $1.37 – an increase of almost 20%.

Any floating currency will experience fluctuations in value of +- 50% over time. That is true for the Dollar as well as the Euro or any other major currency like the Yen. In order to judge the value of a currency, we need to filter out these cyclical fluctuations and look at the long term trend. That trend, in the case of the Euro is definitely up, not down as you claim, against the Dollar.

It is easy to accuse fiat currencies of losing value over time. In this generality, that is also not a fair statement. The truth is, that the value of a currency can not be viewed independently of the taxation policies prevailing in the currency area. If people pay all the taxes so the government does not have to go into debt, then there are no government debts. Hence, the central bank can maintain a zero percent inflation policy making the fiat currency as strong as gold if not stronger.

In reality, people cheat on taxes and refuse to pay for all the expenses of the government. The result is that the government needs to go into debt in order to balance the budget. Over time, in order to reduce the burden of that debt, the central banks are forced to inflate the money supply in order not to suffocate the underlying economy from the burden of excessive debt buildup.

The inflation of fiat currencies is just part of the general taxation. People do not like to pay taxes. So they prefer to be fooled via nominally low tax rates and then do not notice that they are being taxed by the continous loss of the purchasing power of their money. We vote constantly for lower property taxes. This leads to poorly maintained roads with plenty of potholes. Which in turn results in higher expenses for tires, suspension repairs, wheel adjustments etc. We rather pay the higher car maintenance costs than higher property taxes.

To sum up, the call for lower taxes or lower inflation of the currency is a call for free lunches. Unfortunately, free lunches are an illusion. The price for a civilized society is taxation. If we do not pay these taxes fully, we will be punished in the long run by a loss in a purchasing power of our money. If we do not pay our property taxes fully, we will pay later on higher bills for the maintenance of our cars.

The real question is not how to maintain the purchasing power of money (gold or paper). The real question is: What price should we pay for a civilized society? What is the true sum of all taxes to be paid? That question should be discussed in public. It is actually never addressed fully.

2 David Hawkins March 12, 2010 at 5:34 pm


There are roads that don’t rely on taxation or inflation. typically, those are the best kept roads too…. hmmm maybe we are onto something here!


3 Robert Happek March 12, 2010 at 11:49 pm

Feldstein – professor of economics at Harvard and former advisor of president Reagan – had the following to say about the evaporation of the Euro:


4 dan March 13, 2010 at 1:03 pm

In general, US politicians like to appeal to folks who want something for nothing. It is human nature to want something for nothing and it is human nature to want to be liked. It takes, however a culture of wisdom rather than a culture of indulgence to elect leaders who know how to manage government within its means. The US culture of “something for nothing” and political culture of “promise the moon” go hand in hand, dragging us all down the stinking road.

…Govern least, govern best. The more government intrudes, the more it distorts. The more it distorts, the more of a mess things become. The more of a mess things become, the more need for government intervention etc. It is like taking too many drugs to cover the side effects of the first drugs…at some point you just throw the whole medicine chest into the trash, and you know, “I’ve never felt better in my life!”….

5 Steve March 16, 2010 at 9:12 pm

Heavy commercial dollar shorts will weigh it down against gold in the near term.

6 Tony Lewis Jr. March 18, 2010 at 9:50 am

Based on failed montary policies of the past and current monetary policy, I believe significant transfers of wealth, life-style, government, etc is in everyones very near future. Men and women can speculate all they want but speculation in and of itself is nothing.

If you have asked yourself “based on what you think you know” what is the worst that can happen and have prepared for it, then you can rest easy modify your plans accordingly. If you have not prepared based on what you think you know, you are dangerously subjecting yourself to the mercy of a world in economic chaos.

Economically and financially speaking, prepare for the worst of times and you will only know the best of times…

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