Notes From Underground: Exchange Controls Building a Stairway to Haven?

Posted at 11:48 AM (CST) by & filed under General Editorial.

Jim Sinclair’s Commentary

Currency controls have never done anything but fail. Currency controls are quite bullish for gold.

Gold weakness is technical as people prepare for the EU to explode, not technical as in TA.

My Former Partner Yra Harris offers comments almost too smart for this market. Yra’s problem, if any, is that he is too damn intelligent.

Gold is going to Alf’s $4500 target.

Notes From Underground: Exchange Controls Building a Stairway to Haven?

There’s talk abound about the possibility of exchange controls. The ability to slow the inflow and outflow of funds is being discussed from Greece to Germany and Switzerland. It is no secret that many citizens in the peripheries are moving Euros out of their domestic banks and into German, Swiss and British domiciled entities. The German paper Handelsblatt had an article during the weekend suggesting that the SNB and Swiss government are readying a plan to undertake exchange controls and a true negative interest rate regime. The overly strong Swiss franc has placed a great deal of stress on the Swiss economy and the Swiss authorities want to head off any demand for francs if the euro were to fail.

As money flees the peripheries, that puts more pressure on the domestic banks in the pariah money centers to raise funds from their own central banks. The pressure ultimately makes its way back to the ECB as the individual banks receive their funding from the ECB and EFSF. Soon the Greek government will have to place restrictions on the outflow of Euros from its banks to the stronger money centers, especially Frankfurt. The same process is ongoing in Italy and Spain as its citizens are moving to safety in the stronger core-based banking institutions.

When exchange controls are implemented it will be a positive for gold as it will replace euro deposits as the ultimate store of value. Currently, gold is failing to rally. I have discussed this a being the result of a large holder of gold liquidating a massive position to raise cash for possible short-term liquidity needs.

It seems that another reason for gold’s recent lacklustre performance may be due to many banks in Europe increasing their gold leasing programs, which have put gold lease prices into negative territory. The need to raise dollars has led to many gold holders swapping their gold for dollars. The result is not gold sales by the lessor but just a short term financing arrangement to raise liquidity for immediate needs.(it is the ultimate pawning of the family silver.) There is so much gold for lease that borrowers can attain it and get paid for doing so, which removes potential buyers from the market.

A potential need for gold is averted by pushing the price higher and the borrower gets paid. This is just another element in the balance sheet recession plaguing the banks of Europe. The gold leasing factor is something to watch for an indication of continued bank stress. Also the gold/silver should turn to silver’s favor if this continues to hold up for European financing needs.