ABN Amro Defaults on Their Gold Contracts
As we all know by now, the price of gold collapsed over a week ago. I haven't had much to say about this. It caught me by surprise in one sense; in another it didn't. The timing - when it happened - surprised me. Then again, I'm not one to even try to predict these sorts of jarring events in markets; I just try to be prepared at all times. That's the sense in which it didn't surprise me. I had anticipated the possibility of the price of gold falling between 20% - 50% from its high of $1,914 in September 2011. Still, when it fell, my being prepared didn't make it "feel" any better.
So I, like many others, read various explanations of what happened. Some make more sense than others. But the one thing that really struck me was the fact that despite the falling price of gold, there is apparently a shortage of the actual physical metal. Indeed, shortly before gold's price plunge, I found this interesting tidbit about ABN Amro announcing they would not honor contracts where they promised to deliver gold. While this raises ethical issues in my mind, it also makes you wonder how gold's price can go down the way it did in the face of a supply crunch - one that made it impossible for this bank to get the gold it needed to honor its commitments.
Anyway, if you have a contract with ABN Amro - the largest Dutch bank - to deliver gold bullion, forget it. They've announced they won't honor their end of the bargain. Instead, they'll pay you off in some form of paper.
Along with other evidence, this confirms a pattern that seems to have developed in recent months in the gold market: the increased demand for the actual metal (vs. owning a futures contract or any other "paper" form of gold) has so depleted the existing reserves that counter-parties (in this case the largest bank in The Netherlands) cannot come up with the gold they promised in the contracts they've signed. By not upholding their end of the bargain, they've defaulted on their promise.
They know that the price activity is strictly based on paper transactions, not on the law of supply and demand. That's why we've seen the recent long correction in gold, even as the demand for the physical metal has increased. (In fact, we can expect that, over time, the ability of traders - especially those working for hedge funds, governments, and central banks - may not be able to push the gold price down for much longer, as the demand for actual physical bullion increases.)
Question: What was the bank doing making promises it cannot keep?
It would seem that this is another unfortunate example of a major financial institution reneging on a promise. But, as opposed to the Cyprus banks who simply stole money from their customers, at least these customers will get something "equivalent" to the actual price of gold. And one assumes that - unless the paper they receive is illiquid - they will simply go out and obtain their gold elsewhere. Of course, you can be sure that it will cost them more than they would have paid had ABN Amro honored their original contract. But since when do bank customers matter in the end?
A just society cannot continue when people do not do all they say they are going to do. Bad enough when individuals don't live up to their express commitments, but when institutions like major banks behave in this manner, we're looking at an example of the complete breakdown of a just social order.
So I, like many others, read various explanations of what happened. Some make more sense than others. But the one thing that really struck me was the fact that despite the falling price of gold, there is apparently a shortage of the actual physical metal. Indeed, shortly before gold's price plunge, I found this interesting tidbit about ABN Amro announcing they would not honor contracts where they promised to deliver gold. While this raises ethical issues in my mind, it also makes you wonder how gold's price can go down the way it did in the face of a supply crunch - one that made it impossible for this bank to get the gold it needed to honor its commitments.
Anyway, if you have a contract with ABN Amro - the largest Dutch bank - to deliver gold bullion, forget it. They've announced they won't honor their end of the bargain. Instead, they'll pay you off in some form of paper.
Along with other evidence, this confirms a pattern that seems to have developed in recent months in the gold market: the increased demand for the actual metal (vs. owning a futures contract or any other "paper" form of gold) has so depleted the existing reserves that counter-parties (in this case the largest bank in The Netherlands) cannot come up with the gold they promised in the contracts they've signed. By not upholding their end of the bargain, they've defaulted on their promise.
They know that the price activity is strictly based on paper transactions, not on the law of supply and demand. That's why we've seen the recent long correction in gold, even as the demand for the physical metal has increased. (In fact, we can expect that, over time, the ability of traders - especially those working for hedge funds, governments, and central banks - may not be able to push the gold price down for much longer, as the demand for actual physical bullion increases.)
Question: What was the bank doing making promises it cannot keep?
It would seem that this is another unfortunate example of a major financial institution reneging on a promise. But, as opposed to the Cyprus banks who simply stole money from their customers, at least these customers will get something "equivalent" to the actual price of gold. And one assumes that - unless the paper they receive is illiquid - they will simply go out and obtain their gold elsewhere. Of course, you can be sure that it will cost them more than they would have paid had ABN Amro honored their original contract. But since when do bank customers matter in the end?
A just society cannot continue when people do not do all they say they are going to do. Bad enough when individuals don't live up to their express commitments, but when institutions like major banks behave in this manner, we're looking at an example of the complete breakdown of a just social order.
In investing circles there is an adage which says, if you don't hold it, you don't own it. Whether it is land, metals, or other hard assets, if it is held in a bank, in a paper instrument, or in a paper currency, the documented owner has management control, but not physical control. And as the world saw last month in Cyprus, the government, or even a major bank like ABN AMRO, can change the terms of a contract at any time, and return to investors asset values set by the bank, and not the customer's intention.More...
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