August 20 (USAGOLD) — I can’t help but think that the recent news about Venezuela has had something do with gold’s rise late this past week. And it may have had something to do with the strong run-up over the past few weeks.

When Venezuela first made its intentions for gold repatriation public, the press reports indentified the Bank of England as the depository for 211 tonnes of its gold. Later, it came out that 99 tonnes were on deposit at BoE and the rest sprinkled among JP Morgan Chase, Barclays, Standard Chartered, and Bank of Nova Scotia — gold bullion banks all.

It was the addition of the bullion banks in press reports that sent off alarm bells in the gold market. We were no longer talking simply about gold under a depository arrangement at the BoE (a rather benign proposition), but metal that had been committed to various lending operations. The inclusion put a whole new light on the Venezuela matter in that it suggests a short position in the physical metal that would need to be filled. Financial Times called the Venezuela withdrawal “one of the largest transfers of physical gold in recent history.” When the news sunk in, gold promptly rallied — trading at $1850 as this is written and trading as high as $1875 overnight Thursday/Friday. Too, and overlooked, Venezuela’s repatriation effort might have been one of the chief driving factors for gold’s strong rally over the past several weeks. The bullion bank scramble, in other words, may have started weeks ago long before Venezuela went public with its intentions.

In plain terms, it is unlikely that Venezuela’s gold is sitting prettily in the above named bullion banks just waiting to be loaded on a cargo plane and sent to Caracas. It was probably loaned out long ago, and then perhaps, redeposited at some other bullion bank and loaned out again, etc. on down the line until it was fractionalized, atomized, and otherwise depleted from its unified whole. In short, it will not be easy for the bullion banks to reassemble this golden Humpty Dumpty.

In turn, failure to materialize the physical metal could prompt similar demands from other gold-depositing nation states and private funds and individuals alike. Moneyed interests globally, as reported extensively in the mainstream press, are on a hair trigger, and ready to move defensively at a moment’s notice. At the whiff of trouble, the equivalent of a bank run could develop in the bullion banking sector. (It is interesting to note that a similar circumstance 40 years ago, almost to the day, forced the United States to close the gold window.)

At the very least, some depositors might be prompted to move their gold into allocated accounts thus removing it from the lending pool. In other words, a great deal more incipient demand may be bubbling beneath surface of the gold market than we presently know.

Michael J. Kosares

http://www.usagold.com/cpmforum/2011/08/20/not-easy-for-bullion-banks-to-put-golden-humpty-dumpty-back-together-again/