India's gold big move

     On September 18, the IMF announced that it was going to sell 403.3 metric tons of gold (approx. 1/8 of its holdings) to fund its operations. Now we learn that from October 19-30, the Reserve Bank of India (RBI) bought half of it, 200 metric tons, for $6.7 billion, raising its gold holdings by 55%.
     India clearly wants to diversify their reserves out of a sick-man currency (and out of paper fiat currencies generally -- but that is another discussion). The question becomes, where is China? After all, China has even worse dollar indigestion ($2.27 trillion in mostly dollar-denominated reserves) and wants to accumulate gold despite being the world’s number one producer of the yellow metal. Many traders assume that China (if it has not already) will move to take down the other half.

     A second possibility suggests itself: Maybe India simply got the jump on China and the IMF is selling the rest in smaller tranches. I would discount this because China and India have bid cooperatively to secure energy supplies for years and the idea that India would risk a relationship that has saved so many billions (by avoiding planet-spanning bidding wars as they secure energy they need to fuel their economic growth) seems unlikely.
     A third possibility is that the IMF has blocked out China, which has been buying gold and loudly calling for a new global reserve currency to replace the dollar.

     While it would not be surprising in the least to see that China negotiated to split the 400 tons with India, neither would it be stunning if it turns out the IMF boxed them out under heavy pressure to do the impossible -- protect the dollar.

It's a solvency crisis

Banking activity indicates the economy is mired in a solvency crisis, not a liquidity crisis, according to John M. Mason in a piece at Seeking Alpha. A solvency crisis, he argues, takes much longer to work through.

To me, this has been the evolving picture of the economy, both in the United States and in the world, for the past year. We had our liquidity crisis and then we moved into the solvency problems phase. The system is working things out in an orderly and controlled way.

Yet, the Federal Reserve (and the Treasury) has stayed with the interpretation that the problem continues to be a liquidity one. That is why all the innovative facilities were created by the Fed. That is why the Fed supports the mortgage-backed securities market and the federal agency market. Their “Fed speak” is couched in the terms of the “liquidity needs” of the system.

By now the public thinks the Fed operates like a squid: When danger approaches, it ejects liquidity, ends transparency, and escapes.