I wanted to ask you something," said my roommate late in the evening aIter we had just had a sumptuous Chinese

meal.
"Not now. Let me just listen to the rain," I replied.
"You have been listening to the rain Ior the last three days now."
"Have I?"
"Yes, m'am," she sneered.
"Okay, so what do you want to ask?"
"Where do you see the price oI gold going in the days to come."
"On a very broad level, the price will keep moving up," I replied.
"Broad level?"
"The prices oI any commodity do not move in a straight line. What I mean by broad level is that the prices will keep moving up,
but in between they may Iall as well. . . but they will go up again."
""Well, I was just reading through some material and I realised that there is another solid reason Ior gold prices to go up," I
told her.
"Other than all the money printing that is happening and is likely to happen in the days to come, all around the world?" she asked.
"Yes."
"So what is this new reason?" she asked.
"Ever heard oI Hugo Chavez?"
"Nope. Who's he?
"He is the President oI Venezuela."
"Venezuela?"
"A country in South America."
"I know that. But what's that got to do with the price oI gold?" she asked.
"You see, Venezuela has the 15th largest gold reserves in the world amounting to 401.1 tonnes," I inIormed her.
"So?"
"A lot oI this gold is lying abroad in banks in New York, London and Zurich."
"But why will a country keep its gold overseas?" she interrupted.
But what makes you so conIident?"

"A part oI the reason comes Irom history. Till August 15, 1971, the world was on a gold standard. Paper currencies were
ultimately convertible into gold. This meant that countries had to settle their deIicits in gold."
"What are you talking about?"
"Let's say England and France are exporting and importing
stuII Irom each other. At the end iI France exports more to England than England to France, there is a deIicit."
"And. . .?"
"This means that England had to pay France. This payment was to be made in gold."
"Oh, I see."
"Now this meant that gold had to be physically moved Irom England to France, which oI course was a pain. Movement meant
cost oI insurance as well as security."
"So what was the way out?"
"A lot oI this gold was simply stored overseas at the Federal Reserve Bank oI New York (a part oI the Federal Reserve oI the
United States, the Central Bank oI the US)."

"As Peter Bernstein writes in The Power of Gold, 'For example, iI England lost gold to France, a guard at the Federal Reserve
had merely to bring a dolly to England's closet, trundle the gold to the French closet, and note the change in the bookkeeping
records.'
"I guess, that explains it."
"So let's get back to Hugo Chavez," I said.
"Okay."
"Estimates suggest that nearly 211 tonnes oI the 400-odd tonnes oI gold that Venezuela has are with banks abroad. Chavez has
asked this gold to repatriated back to
Venezuela."
"Oh. But why would he do that?"
"Chavez has had an anti-US stance Ior years and may Ieel that because oI that Venezuela runs the risk oI its gold being seized."
"Seized? Is that a possibility?"
"It sure is. Libya's Ioreign exchange reserves were seized aIter war broke out there earlier this year."
"But what has all this got to do with the price oI gold? To me it's as simple as me wanting to have gold in my own locker rather
than the bank locker."
"Fair point. But there is a link."
Please explain."
"See out oI the 211 tonnes lying abroad, 99 tonnes are with the Bank oI England in London. Repatriating that back to Venezuela
would be a straightIorward process."
"So?"
"Well, a lot oI the gold lying abroad is with what are known as bullion banks. J P Morgan is one oI them. Estimates suggest that
Venezuelan gold worth $807 million (or around 450,000 ounces oI gold) is lying with it."
"So what? Even that would be a straightIorward transaction? Wouldn't it?"
"Not really. Estimates suggest that the total amount oI physical gold with J P Morgan currently stands at around 338,303 ounces
troy ounce equals 3 grams)."
"Where did the remaining gold go?" she asked.
"Central banks around the world had a huge amount oI gold lying in their vaults, not earning any return. By the end oI 2007,
central banks around the world had 32,000 tonnes oI gold."
"What are you driving at?" she interrupted.
"Just hold on. Out oI the 32,000 tonnes they had, they lent out 14,000 tonnes to bullion banks like J P Morgan. As James Turk
and John Rubino explain in The Collapse of the Dollar, 'Lending, Ior instance, involves the central bank transIerring gold to a
major private bank, known as bullion bank, which pays the central bank a small-but-positive interest rate, then sells the gold on
the open market'," I quoted.
"How did that help?"
"Central banks could convert the gold into cash and then deploy it somewhere to earn some return."
"Makes sense."
"The operative word here is lending. The gold has been lent, and so central banks can demand it back."
"And which is what Venezuela is doing right now," she pointed out.
Yes, it is. As the authors write, 'Because the bullion banks have promised to eventually return the borrowed gold to the central
banks, they are, in eIIect, 'short' gold. That is, at some point in the Iuture they are obligated to buy gold in order to repay the
central banks'."
"So which eIIectively means that the likes oI J P Morgan will now have to buy back gold in order to repay the Venezuelan
government given that Venezuela has around 450,000 ounces oI gold with J P Morgan, whereas J P Morgan has only 338,303
ounces on its books," she said, getting the gist oI the issue.
"Right! And this buying will lead to the price oI gold rising Iurther. But that's just one part oI it. As a recent report titled Thing
That Make You Go Hmmm points out, 'Chavez's move could set in motion a chain oI events whereby Central banks who store the
bulk oI their gold overseas in 'saIe' locations scramble to repossess their country's true 'wealth'. II that happens, the most high-
stakes game oI musical chairs the world has ever seen will have begun'," I said.
"That sounds very scary."
"Yes, it does. The report Iurther points out, 'Any delay in repatriating Venezuela's gold could potentially start a Irantic scramble
by central banks to claim their physical gold
That sounds very scary."
"Yes, it does. The report Iurther points out, 'Any delay in repatriating Venezuela's gold could potentially start a Irantic scramble
by central banks to claim their physical gold and, iI that happens, you can be assured that a Iire will be lit under the gold price the
likes oI which we haven't yet seen."
"So gold is ready to kick some serious ass in the days to come," she said.
"Yes, it is," I replied.