Wednesday, August 3, 2011
Go Go South Korea
The Bank of Korea released its new foreign reserve statement yesterday, which can be downloaded from its website here. In it the BoK disclosed the purchase of 25 tonnes of gold in July (or possibly June and July as reported elsewhere). It also reported a $6.55 billion revaluation gain which it attributed mainly to dollar weakness as reflected in its yen and pound-denominated reserves. Its "deposits" line shows an increase of $6.45 billion, which appears to correlate with the $6.55 billion gain.
Likewise, the $1.41 billion decrease in "securities" appears to correlate with the $1.24 billion gold purchase. The BoK describes its "securities" as "including government bonds, government agency bonds, international financial institution (IFI) bonds, financial debentures, MBSs, ABSs, and others." It also points out that "securities" make up a whopping 88.5% of its reserves.
Since the BoK reports its reserves in their dollar-denominated value, changes in the value of the dollar will affect its yen and pound reserves, but not its dollar reserves. So I feel it is fair to surmise that its yen and pound reserves reside primarily as "deposits" (which rose) while its dollar reserves are held mostly in "securities" (which fell, probably because of sales). Furthermore, it would appear that the BoK decided July was a good month to sell some US dollar bonds and use the proceeds to buy gold for the first time in more than a decade.
I know a few of you were incensed by parts of the news reports, particularly the part that said the BoK "entrusted all of its gold holding to the Bank of England for possible use in gold lending and other related transactions in future." I actually think this makes perfect sense in the context of the BIS that I learned from ANOTHER. I'll get into this a little more below. But first, a bit of Korean history is in order.
A part of the news reports that I found quite misleading was this: "During the 1997-98 Asian financial crisis, patriotic Koreans collected the precious metal as part of a campaign to boost the country's foreign reserves, when it was on the verge of a sovereign default."
I'm sure many people that don't remember the real story read this part to mean that patriotic Koreans hoarded gold during the Asian financial crisis. But actually it was quite the opposite.
The Asian financial crisis spread via contagion from Thailand to Malaysia, to Indonesia, to The Philippines and ultimately to South Korea. As the crisis reached Korea, the currency markets put downward pressure on the won in the bet that the BoK wouldn't have enough foreign reserves to defend its currency. The bet paid off.
In 1997 it was believed that South Korea's $25 billion in foreign reserves was enough to defend the won. Even Alan Greenspan thought so, as he wrote in his book The Age of Turbulence: Adventures in a New World:
"Korea's central bank was also sitting on $25 billion in dollar reserves- ample protection against the Asian contagion, or so we thought."
But as it turned out, only about $9 billion of the $25 billion was liquid enough to be deployed in defense of the currency. The rest was tied up in, among other things, government guarantees on foreign debt lent to Korea's debt-addicted industrial titans—family-owned companies like Hanbo Steel, Daewoo and Kia that soon went bankrupt and were dismantled or sold off. So, finding its foreign reserves sorely lacking, the government asked its citizens to chip in and defend the won with the last line of defense, their gold jewelry!
As my regular readers know, any gold inside a currency zone, public or private, is a viable reserve. And as the won was tumbling on the foreign exchange market, gold priced in won was rising. So the desperate government implored its citizens to dig out their gold and sell it into the rising price. Millions of patriotic Koreans literally lined up around the block to sell their rings, necklaces and other gold trinkets which were melted down and sold into the international gold market in defense of the won. Some even turned in their gold for free, in support of their country. Here's a poignant quote I found:
"I sold two gold rings and one necklace", said Lee Suk-ja, a housewife. "It was a small amount, but I take a great pride in taking part in helping the country in time of need."
In all, the people of Korea spewed around 250 tonnes of gold to the outside world, about a quarter ounce for every adult in Korea. But it did no good other than to rid Korea of her reserves. That's ten times the amount of gold the BoK just purchased last month. But at $300/oz. in 1998, it was barely a drop in the bucket. That was a mere $2+ billion in US dollar value to add to the $9 billion in foreign currency the BoK was able to deploy.
Here are some quotes from ANOTHER during the Asian crisis:
Date: Fri Dec 12 1997 21:33
ANOTHER (THOUGHTS!) ID#60253:
Even Korea will find out that oil is all that counts. Their paper will die! Gold would have helped them in a different world, but for now gold is in the background as the IMF tries to add more paper to this inferno. If one owns real gold, it will be with ease to view the world currency developments. They will be truly of biblical proportions!
Date: Wed Feb 04 1998 23:23
ANOTHER (THOUGHTS!) ID#60254:
Mr. Studio. R.,
Will several ( or many ) bullion banks fail?
"when one cannot repay a loan, it is done" !
Are the bullion banks bonded?...
In the real national/ world there is no such thing as "bonded".
Look to Korea for proof!
Date: Sat Apr 18 1998 19:18
ANOTHER (THOUGHTS!) ID#60253:
But, how can this be, you ask? It is done, "right before your eyes" and we see it not! I ask you, if you have one ounce of gold, and sell it on the market for $300, it is worth $300, yes Now, what if CB hold one ounce of gold, and sell it twenty times, that one ounce is now worth $6,000, no? The difference between you and CB? The persons that hold "interbank" IOU for gold, value it at the multiple of leases/sales made against reserves. This leverage, it is held for performance on bank part. The BIS, it force performance, on any economy! You ask Korea about gold, yes?
I hope these quotes from ANOTHER make a little more sense now that you have the context in which they were written. And now back to the BoK gold purchase.
The news reports said the BoK "entrusted all of its gold holding to the Bank of England for possible use in gold lending and other related transactions in future." That sounds like an "interbank IOU for gold" doesn't it? Perhaps it's even in a BIS sight account!
Now, what if CB hold one ounce of gold, and sell it twenty times, that one ounce is now worth $6,000, no? The difference between you and CB? The persons that hold "interbank" IOU for gold, value it at the multiple of leases/sales made against reserves. This leverage, it is held for performance on bank part. The BIS, it force performance, on any economy! You ask Korea about gold, yes?
Aww gee, do you think maybe there's a difference between you and the CBs when it comes to gold? Could it be? I wonder why the CBs call their gold "monetary" gold while your gold is commodity gold or non-monetized gold.
Physical gold is different than modern currency. At the CB level, it rarely gets moved. This was a big reason for the creation of the BIS in the first place. If you think about the purpose of the BIS as a clearing system or gold broker for interbank sales, it makes perfect sense that most of the gold deposited with the BIS would be sight or unallocated.
The purpose is so that CBs can transfer gold around the world without having to physically ship it. Avoiding the cost and risk of physically shipping a heavy metal is an important service provided by the BIS. And it does this mostly in unallocated form. When the BIS physically moves gold, the risk is shared, i.e. the risk is on the BIS.
The BIS is owned by its customers, the CBs. They set it up and subscribed to it (bought in) so it could provide services like this. The BIS's own gold is still owned by the CBs because they own a proportional share of the BIS.
Say you want to give me a hundred dollars. You go into your bank and deposit a hundred dollar bill. Then you fund your Paypal account and send me $100. Then I send that $100 from my Paypal to my bank and I can walk in and take out that $100 bill. You’ve just sent me a $100 bill but no one actually physically shipped it across the ocean. It was an unallocated deposit in one location and an unallocated withdrawal in another. This is what the BIS does with gold.
Out of practical necessity, privacy and security, most BIS gold activities are with unallocated gold. The main difference between the BIS and private bullion banks being that BIS sight accounts are fully reserved. Being "reserves" is the very definition of CB gold.
Date: Thu Oct 09 1997 19:00
ANOTHER ( THOUGHTS! ) ID#60253:
Background; to understand the following you must rethink your basic knowledge of money and investments. Get your aspirin ready.
Some time ago gold not only was used as money but also circulated as currency. It had always been money and people had no use for a separate currency to represent "gold money" so they stamped the gold itself and used it as circulating currency. From the start, one thing most thinkers can't quite grasp is that "money does not have to circulate"! The first "world money", gold money that is, could stay locked up and still represent value and wealth. People had but to agree on who owned it in exchange for goods and services. You have all read the articles about how paper receipts for "gold money" were later circulated and became paper currency receipts, then paper currency, then just currency.
The western world today, as we know it does not use money! They use "paper currency". To fully understand what that really means you must come to terms with this fact. "When you use paper currency you are placing a value using another persons concept of value" You are using a thought as a means of value!
5/5/98 ANOTHER (THOUGHTS!)
Question: **Along these lines, I too believe that currency movements will flow through Europe because the Euro currency will be gold backed. Where does that leave Japan with over $200 billion in dollar reserves, let alone its massive U.S. Treasuries' holding? **
ANOTHER: Perhaps, they be like Korea? Rich in paper until the world says, "this paper, it is not good"!
Question: ***Your associate says that BIS helped China increase its gold holdings. Please tell me what the source of that information is, or is it simply a speculation on his part. ***
ANOTHER: The BIS is the gold broker for all interbank sales / purchases. Bullion Banks are for sales to other entities. I think, at first, China was leverage against the oil producers. Then Arabia was allowed into BIS for Euro.
5/26/98 ANOTHER (THOUGHTS!)
Understand, all value judgments today are as subject to "exchange rate competition"! It is in "this exchange rate valuations" that the private citizen does denominate all net worth! A safe way to hold the wealth for your future, yes? You should ask a Korean or the Indonesian ?
One should grasp that "today, your wealth, is not what your currency say it is"! In this world, paper currency is for trade, only! It is for the buying, selling, earning and paying, not for knowing the value of your family holdings! Know this, "the printers of paper do never tell the owner that the money has less value, that judgment is reserved for the person you offer that currency to"! Again, I ask, how can we know a true value for our assets, when they are known only in currency that finds it's worth, as in the exchange rate for another currency?
8/10/98 Friend of ANOTHER
Also, as gold begins to rise against the dollar, the local gold reserves are seen as assets of increasing value, backing the local currency. Under these conditions, with a stable currency, citizens will purchase more gold as it is seen as a positive asset. Not unlike a rising stock, everyone wants an increasing investment. Contrast this action against that in Korea, where everyone sold gold as it increased in an unstable currency!
Basically, this is the direction the Euro group is taking us. This concept was born with little regard for the economic health of Europe. In the future, any countries money or economy can totally fail and the world currency operation will continue. What is being built is a new currency system, built on a world market price for gold. Michael, you are absolutely correct in that the USA will see a hyper inflation of its currency and a gold price in dollars that reflects it. Unfortunately, for most investors, the gold price rise will be sudden and also hyper fast. as it will occur just after a rapid plunge in dollar based assets including, stocks, debt and the entire banking system. This action will destroy virtually all gold based paper assets as they are also dependent on a functioning economic system.
Looks to me like Korea learned a lesson. BTW and FWIW, the popular name that caught on in Korea for the 97/98 crisis is "The IMF Crisis". If you'd like to learn more about the Korean crisis and the IMF involvement in it, there's a great series of blog posts here, here and here.