Attention Gold Bulls, Dollar Bears

FT reports: EU Banks step up gold lending for dollars.

If you are a raging gold bull, this is probably one of the most important news items in the past 10+ years. (emphasis mine)

A dash for cash by European banks in a little watched corner of the gold market has accelerated this week, highlighting the continued scarcity of dollar funding even after a co-ordinated intervention in the market by the world’s largest central banks.

Gold dealers said that banks – primarily based in France and Italy – had been actively lending gold in the market in exchange for dollars in the past week.

It is very important to understand that until excess debt is cleansed from the worldwide monetary system, gold will be vulnerable to dollars during periods of deleveraging.

Recall 2008. It was not the perceived safety of gold that made it fall 65% during the Lehman disaster. It was not the perceived safety of the US dollar that made it go sky high during the same period. It was supply and demand. Investors sold gold to raise cash.

The massive overhang of dollar credits versus the amount of actual dollars is staggering. Widespread margin calls and debt deleveraging cause the value of actual dollars to rise with ferocious rapidity.

By way of explanation, consider MF Global and the great Wall St re-hypothecation scandal by Christopher Elias at ThomsonReuters. (again, emphasis mine)

With collateral being re-hypothecated to a factor of four (according to IMF estimates), the actual capital backing banks re-hypothecation transactions may be as little as 25%. This churning of collateral means that re-hypothecation transactions have been creating enormous amounts of liquidity, much of which has no real asset backing.

If you are a long-time reader of this blog, the quote above should not surprise you. If you are considering putting on long gold and short dollar positions targeting $3,000 gold and "the death of the US dollar," you may want to read the excellent article by Mr. Elias and consider it carefully.

Enormous amounts of liquidity with very little real asset backing cause markets to magically levitate.

It is not real. It is slight of hand.