Friday, April 15, 2016

The Financial Markets 
Are Frightened On The Prospects 
Of Central Banks Losing Control
How Central Banks May Be Starving The Shadow Banking System
& Why This Means The Demand For Gold Will Escalate
GoldMoney's Alasdair Macleod essay highlights the feedback loop between the stumbling of the financial system & the response by central banks for greater control, regulation & liquidity back into the financial system - all to the detriment of the economy & to the financial markets .. on the critical role of shadow (outside the banking system) banking: "Shadow banking facilitates the creation of credit for the purpose of deferring settlement of transactions from the present into the future If a central bank starves the shadow banks of high-quality collateral against which it issues credit, the system’s ability to expand credit goes into reverse gear, restricting their ability to defer settlements. Demand for cash must therefore rise .. Restrictions on the creation of credit in the shadow banks are bound to reduce liquidity in futures, forwards and over-the-counter derivative markets, restricting synthetic supply of commodities. This could be a recent factor influencing commodity markets generally, and why they might continue to rise more sharply than underlying economic conditions suggest is reasonable. The gold price as a bell-weather seems to be defying the normal checks on its price, and appears to have entered a new bull phase. The Bank for International Settlements’ derivatives report confirms that the notional amounts outstanding of OTC gold contracts at the banks has contracted from $341 billion to $247bn between H2 2013 and H1 2015. The current position will only be revealed in about a year’s time, but it does indeed appear that the days of putting a cap on commodity prices by inflating outstanding derivative quantities is over. Given that this is the case, together with the growing risk of a second banking crisis, a future can easily be envisaged whereby perceptions of risk shift against bonds, equities, property and currencies, and in favor of commodities, particularly gold."
LINK HERE to the essay

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