Zoltan's Gold-mageddon Deconstructed

How it Could Happen. The mechanism of Gold's Full remonetization

Housekeeping: We have several pieces to put out the next few days and so are posting this whole thing, (intended as a 3 parter) all at once.

Overview

[B]anks have been managing their paper gold books with one assumption, which is that [Nation] states would ensure gold wouldn’t come back as a settlement medium. -Zoltan Pozsar

The above statement is arguably the most important sentence in Zoltan’s recent post entitled: Oil, Gold ,and LCL(SP)R. It is how he closes that note. (Full note at bottom as well)

If you have read his letter (see below) you may prefer quotes pertaining to Gold’s price jump from $1800 to $3600 or Pozsar’s follow up statement to the price of Gold potentially doubling: Crazy? Yes. Improbable? No.

Those statements certainly are nice to read for real-money advocates; especially coming from one of the most respected economists on the street these days.

However, for anyone with precious metals exposure, like a bank or presumably you reading this piece (thank you for that), the quote at top should rule them all.

Here’s why…

Why Banks Short Gold

He gives the reader the rationale by which banks have been profitably shorting Gold since futures were invented. Here is our translation of that same sentence at top.

Translated from the original Zoltanese:

Banks have been using rehypothecation for decades fearlessly with approval of global governments who in turn promised them Gold would never be used as a settlement medium—i.e. have a practical use — again.

Stated as a bank trader once said: Gold? We can short it until the cows come home. Why? Because not only is it unconsumed/indestructible, it isn’t used for anything anymore. Its price is how much more USD money we have to pay you to delay delivery. It’s a collectible, a pet rock, and nothing else. Short it. Government¹ can’t let it back in as an MOE. If they did it would destroy them. If we go under, they go under. ²

Zoltan is telling us indirectly what Banks and Nations fear about this Gold-as-settlement-medium concept.