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Old 03.08.2011, 14:56
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Re: Gold

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Why they do not require an independent audit or something? I mean, gold is a government (in some ways, it's "people's" gold).Tera Items Do not people in a certain degree of "right" to know that their gold even exist?
In the case of Fort Knox, the government says that an audit would be too expensive: http://www.cnbc.com/id/43391588/Is_G..._Wants_to_Know
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The Treasury document says it would cost about $15 million to conduct an audit. The process would take about 30 minutes to verify the gold content of each bar, or 350,000 man hours; to do that would would take 400 people working for six months, according to the document. The Mint is audited annually by the Treasury's Office of the Inspector General. An audit of the "Schedule of Custodial Deep Storage Gold and Silver Reserves" was published in September 2010.
The US gold reserves were reclassified fairly recently as 'deep storage'. Goldbugs assert that this is because much of it has been leased out to the bullion banks: http://www.gata.org/node/5275

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It is a simple, simple idea. Central banks have bars of gold in a vault. It's their own vault, it's the Bank of England's vault, it's the New York Fed's vault. It costs them money for insurance - it costs them money for storage--- and gold doesn't pay any interest. They earn interest on their bills of sovereigns, like US Treasury Bills. They would like to have a return as well on their barren gold, so they take the bars out of the vault and they lend them to a bullion bank. Now the bullion bank owes the central bank gold---physical gold---and pays interest on this loan of perhaps 1%. What do these bullion bankers do with this gold? Does it sit in their vault and cost them storage and insurance? No, they are not going to pay 1% for a gold loan from a central bank and then have a negative spread of 2% because of additional insurance and storage costs on their physical gold.

They are intermediaries---they are in the business of making money on financial intermediation. So they take the physical gold and they sell it spot and get cash for it. They put that cash on deposit or purchase a Treasury Bill. Now they have a financial asset---not a real asset---on the asset side of their balance sheet that pays them interest---6% against that 1% interest cost on the gold loan to the central bank. What happened to that physical gold? Well, that physical gold was Central Bank bars and it went to a refinery and that refinery refined it, upgraded it, and poured it into different kinds of bars like kilo bars that go to jewelry factories who then make jewelry out of it. That jewelry gets sold to individuals. That's where those physical bars have wound up---adorning the people of the world.

Now, this bullion banker is net short gold when he conducts this operation. Remember he borrowed gold and now he has a dollar financial asset. He is making a 5% return on the spread, but he now has a gold price risk. As a banker he is not normally in the business of putting on speculative positions like this. He is an intermediary, so what does he do? For the most part what he does is he hedges his gold price risk. He goes long the forward market to offset his physical short. Now if he goes long in the forward market someone else must go short, because every such contract in the forward market has two sides---a long and a short. In doing this he allows private market participants to go short the forward market. Who are those private participants who go short the forward market? They are producers hedging future production, they are jewelers who are hedging their inventory, and they are speculators who want to go short the gold market because they believe the price will go down and they earn a forward premium or 'contango' which happens to be, in this case, roughly equal (though not quite) to the difference between the rate of interest on the dollar asset held by the bullion bank and the rate of interest paid on the gold loans by the bullion bank.
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  #22  
Old 03.08.2011, 18:20
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Re: Gold

It's at the end of a rainbow guarded by an angry Swiss Leprechaun.
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