Physical Gold Withdrawals from the Shanghai Gold Exchange and The New Silk Road Jesse

I would add to government accumulation the likelihood that as incomes rise in the East there will also be increased demand from households. There already is. 

In the West, physical gold is mostly bling, with much of the saving in gold held largely in derivates as financial saving. And, as Jesse observes, the "paper gold" — "digital gold" really — is an issue owing to hypothecation and re-hypothecation.

In the East physical gold doubles as ornament and real saving. In addition, in Hindu India physical gold serves as a temple token. Some of the great temples have enormous stores of gold.

With global turmoil extending to the money system governments, especially in the East, and rising incomes there, with people traditionally desiring to hold physical gold, physical gold is being accumulated in that part of the world more than others.

While the gold bugs may be over the top in their assessments, demand for physical gold seems to be strong, it seems to me, for some of these reasons.

I don't want to get into the controversy over whether gold is "money," but a whole lot of people treat it as "money," and central banks have traditionally dealt in it and vault gold is considered the foundational real reserve. So, while there are many technical reasons for not considering gold to be "money," there are also a lot of practical reasons that many people do view it as "money." 

More precisely, physical gold is the historical numéraire, along with silver as secondary and copper third. For example, in the Bretton Woods system, the value of the dollar was fixed by a conversion rate into gold. Gold ceased to be the de jure numeraire when Nixon ended international settlement in gold, but many still view gold as the de facto numéraire.

Economists don't put much emphasis on the monetary significance of gold – with silver and copper now being chiefly industrial commodities, especially copper. However, conventional economists still tend to assume a gold standard and they reason "as if" on a gold standard. 

The financial world is much more focused on precious metals as not only commodities but "an asset class" that serves as a saving vehicle that can be the basis for derivatives. Thus, this asset class includes both the physical metal as real saving and derivatives based on it as financial saving.

If one wishes to integrate economics and finance, then the gold becomes important as a bridge concept.

Jesse's Café Américain
Physical Gold Withdrawals from the Shanghai Gold Exchange and The New Silk Road

Jesse

On re-hypothecation and shadow banking

Interesting article on financing credit creation through re-pledging loan collateral aka re-hypothecation. Banks generally finance loans by obtaining deposits to obtain needed reserves for their reserve account at the central bank since it is the least expensive financing. "Shadow banking" uses re-pledging of collateral, called "re-hypothecation." Since the financial crisis, shadow banking and re-hypothecation are  being explored key factors, the significance of which has previously not only gone largely unrecognized but also has been unsupervised and unregulated. Now experts are beginning to look into this.

Read it at Vox.eu
The (other) deleveraging: What economists need to know about the modern money creation process
Manmohan Singh, Senior Economist at the IMF, and Peter Stella, Director of Stellar Consulting LLC

For background, see The Financial Time | FT Alphaville
When safe assets return
by Cardiff Garcia

Does the shadow banking system’s relationship to monetary policy have any implication for the Smithian/neo-Wicksellian view, which awaits the natural rate of interest imminently rising to and exceeding the federal funds rate? Is there an equivalent for the shadow banking system — perhaps something related to collateral haircuts? What about the NGDP guys? The MMTers? The John Carney?

MMR's Mike Sankowski comments.