Submitted by Taps Coogan on the 12th of August 2019 to The Sounding Line.
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Luke Gromen, founder and president of Forest for the Trees, recently spoke with MACRO Voices’ Erik Townstead about the recent decision by central banks not to renew a previously little know 20 year old ‘Central Bank Gold Agreement’ and what that means for surging soveriegn debt levels around the world. The punchline is that, in a world with a supposed ‘risk free asset shortage’ leading to trillions of dollars of negative yield sovereign bonds, there is a solution hiding in plain sight and central banks are already buying it in record amounts: gold.
Some excerpts from Luke Gromen:
“The original CBGA (Central Bank Gold Agreement) was basically a promise by signatury EU central banks not to sell more than 400 tons of official gold per year and as a practical matter, sales had tapered over the past decade to near zero anyways. So, there’s an element of (not renewing the agreement) that just being a formality, but this announcement made it official when they said this “Singatury central banks confirm gold remains an important element of global monetary reserves and none of them currently has plans to sell significant amounts of gold.”
“Since 2013, global central banks have bought around $150 billion in gold while selling about $8 or $10 billion in treasuries on net. But up until this point, the foreign central banks buying this gold have been ‘rouge nations.’ It’s been China, Russia, Kazakhstan, Turkey, Venezuela, etc… We think there is a real chance that the non-renewal of this CBGA that EU nations may be about to join the list of ‘rouge nations’ in reserving increased amounts of gold going forward…”
“On July 19th, the World Gold Council wrote that central banks bought more gold in 2018 than at any time since the early 70s… In total, central banks bought a record amount of gold in the first half of the year (2019), which is a very curious thing to do in the midst of a dollar shortage.”
“When the tech bubble burst (in 2000), those problems were kicked upstairs to the housing bubble and, by extension, to the US banking system. Then in 2008 when the housing bubble burst, we kicked that upstairs to the sovereign level with all the bailouts. So the question then is: ‘Where do you kick a global soveriegn debt bubble when it bursts?’ When you have some $14 trillion sovereign debt at negative nominal yields, I don’t think that many investors would argue that we are not in a global soveriegn debt bubble of some description. But when it burst, where do you kick the problems up to? …The last time the world was moving towards a recession with advanced economy soveriegn debt levels as a percent of GDP as high as they are today was about 100 years ago, and that time around the sovereign debts of the six biggest industrial nations all collapsed on a real basis. So whether it was the UK, the US, or Germany, or Japan, or France, or Russia, the real value of the sovereign debt of those six nations anywhere from 75% to 100% on a real basis over time horizons ranging from just a couple of years, to a decade, to a little over a decade. The academic research on this clearly shows there’s really only a few ways out the situation we find ourselves in… It’s either default or it’s inflation and default is not really an option because the soveriegn debt, and in particular treasuries, underpin the entire financial system structure… A western sovereign debt problem is considered every bit as inconceivable as home prices falling nationally was considered prior to 2005… Where do we kick a sovereign debt bubble up to? And the only possible answer is the currency… or put differently, it gets kicked upstairs to gold…”
There is much more to the interview, so enjoy it above.
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