The Gold Repatriation Trend Congress Should Notice

Gold and silver have taken a pretty good beating over the past couple of days, with rising interest-rate expectations and still more turmoil in the Persian Gulf weighing on the metals.

Gold fell roughly 2% Thursday, while silver plunged more than 5%.

And the strange part is that the selloff comes as inflation appears to be heating up again.

Wholesale prices jumped 0.4% in August, and this morning’s consumer inflation report also came in somewhat hot beneath the surface. Energy prices are climbing, oil is back above $100 a barrel, and inflation remains stubbornly above the Fed’s target.

So naturally, traders sold gold and silver.

Why?

Well, because Wall Street is focused almost entirely on what the Federal Reserve might do next week.

The latest inflation numbers dramatically increased expectations for another Fed rate hike. That pushed the dollar higher and gave traders another excuse to dump precious metals in the short run.

But investors shouldn’t confuse the market’s knee-jerk reaction with the bigger picture.

Gold isn’t falling because the inflation problem has gone away. Quite the opposite.

Inflation remains elevated. Energy costs are surging amid Middle East turmoil.

Washington continues piling up debt. And the Fed is once again confronting the same ugly problem it has created for itself.

Raise rates to fight inflation, and the federal government’s enormous debt becomes even more expensive to carry. Back off, and inflation may get another lease on life.

That’s some choice.

For the moment, traders are concentrating on the first part of that equation. Higher rates can strengthen the dollar and temporarily make interest-bearing investments look more attractive relative to gold.

Silver, as usual, is taking the move even harder.

That’s just part of silver’s personality. It tends to exaggerate moves in both directions — soaring faster when metals are running up and getting smacked harder when traders head for the exits.

The $62.50 to $63 area now looks important for silver, while gold has fallen back and tested the low-$4,300s. Both metals are regaining some strength here today though, more on that in a moment.

But after the extraordinary run both metals have enjoyed late last year and early this year, a sharp correction shouldn’t exactly shock anyone.

The fundamental problems that helped drive this bull market haven’t disappeared.

America still has enormous deficits and debt. Inflation remains a problem. Geopolitical risks are intensifying. Central banks around the world continue questioning their dependence on the dollar and the Western financial system.

And that brings us to another fascinating gold story this week.

Spain is now debating whether it should bring home some gold reserves currently stored in the United States.

The Bank of Spain owns roughly 289 metric tons of gold. Most of it apparently is already held inside Spain, and exactly how much remains in New York isn’t publicly known.

But the important point isn’t the precise number of bars Spain might move.

It’s that Spain is asking the question at all.

And Spain isn’t alone.

As we reported on last week in this space, the Netherlands recently moved 86 tonnes of gold out of North America and into London, explicitly citing geopolitical uncertainty and the need to be better prepared for a crisis.

France has also completed a repatriation project involving gold that had been stored in New York.

One country moving gold might be a curiosity.

Several countries reconsidering where their gold is stored starts to look like a trend.

And frankly, their reasoning is pretty easy to understand.

If gold is supposed to be the ultimate reserve asset — the thing you rely on when currencies, governments, banking systems, or international relationships get into trouble — then where exactly do you want your gold sitting when trouble arrives?

Central banks are rediscovering an old lesson: possession matters.

And so does geography.

Which brings us directly to a problem here in the United States.

For years, America has allowed the physical infrastructure supporting our regulated gold and silver futures markets to become overwhelmingly concentrated in and around New York.

Virtually the entire COMEX delivery system for gold and silver depends on vaulting infrastructure clustered in one small part of the country.

Why?

There’s no sound risk-management reason for it.

Concentrating critical financial infrastructure in one geographic area creates a single point of failure. That should be obvious whether we’re talking about computer servers, military installations, banking operations — or vaults containing billions of dollars in precious metals.

That’s precisely why Congress should pass the bipartisan SILVER Act.

The legislation would promote a geographically diverse network of qualified precious-metals depositories, including at least two approved facilities in each of America’s four major time zones.

It doesn’t dictate which private companies win approval.

It doesn’t tell investors where they have to store anything.

It simply recognizes something that ought to be common sense: America’s precious-metals market shouldn’t depend almost entirely on New York.

And this isn’t merely an industry talking point.

CFTC Chairman Michael Selig has publicly backed the legislation and acknowledged the risk created by geographic concentration.

So, consider the irony here.

European central banks are looking at the world becoming more unstable and saying, “Maybe we shouldn’t keep so much of our gold so far away.”

Meanwhile, the United States continues concentrating much of the physical infrastructure behind its own gold and silver markets in one geographic bottleneck.
That makes very little sense.

A hurricane. A terrorist attack. A transportation shutdown. A communications failure. A financial crisis. Or some entirely unforeseen event.

You don’t have to predict which crisis comes next to understand why redundancy matters.

Banks understand that. Data centers understand that. The military certainly understands that. And European central banks increasingly seem to understand it too.

Congress should get the message.

The SILVER Act is straightforward, bipartisan market-structure reform. It would reduce geographic concentration risk, improve resiliency, and help ensure that America’s precious-metals markets remain functional when they are needed most.

Central banks are increasingly asking where their gold should be stored before the next crisis arrives.

Washington ought to be asking the same question about the infrastructure underpinning America’s gold and silver markets.

Congress has had ample warning.

It should stop waiting and pass the SILVER Act.

Well, finally, taking a look at the weekly price action specifics here before we get to this week’s exclusive interview. Gold is paring some of its losses from earlier in the week here with today’s bump. The yellow metal checks in now at $4,379 – down about $50 or 1.1% since last Friday’s close.

Similar story in silver, it’s moving up today to stop some of the bleeding. With today’s near $1 advance the white metal is now down just $1 for the week or 1.5% and currently trades at $65.23 an ounce.

A quick look at the PGMs shows platinum down 1.0% to trade at $1,806, while palladium is taking it on the chin – declining 4.4% this week with just a few hours left to go. The industrial metal comes in at $1,333 as of this Friday late morning recording.

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