The most expensive investment anyone can buy
today is paper gold. For $1,260, an investor
will get a piece of paper saying he owns 1 ounce of gold. But he is unlikely
to ever see that gold. Firstly, most investors who buy paper gold have no
understanding of the real reason for holding gold and will therefore never
contemplate taking delivery. And even if he did understand the importance of
holding real gold, he is quite happy to hold the surrogate alternative which
is paper rather than physical. This is of course what the issuer of the paper
gold wants. He knows that paper gold buyers have no intention of taking
delivery. This is perfect for the seller because he has no intention of
making delivery either. And this is how paper markets function. Buyers and
sellers are willing to trade pieces of paper that are said to represent an
underlying instrument whether it is a stock, bond, currency or commodity.
Paper gold at $1,260 is worth ZERO
But paper markets are illusory. They give the impression that the buyers acquire a real share in
the underlying instrument. That would be the case if for each unit of for
example a currency or gold was backed by real money or real gold. But in
today’s false markets that is far from the case. We live in a world of the
Emperor’s New Clothes. The people is made to believe that the emperor is
dressed in a suit made of gold whilst in fact he is naked. And that is exactly
how the gold market functions today. Shorts are always naked which means that
there is never an underlying asset backing the gold short sale. What
the buyer is getting is a piece of paper with zero intrinsic value.
This is a perfect situation for central banks, banks and major trading
houses such as hedge funds. With sufficient capital, they can manipulate any
market without ever worrying about delivery. The result is markets which are
totally fictitious and bears no resemblance to the instrument that is traded.
The gold price is not the price of gold
That is why the price of a paper commodity has nothing to do with the
underlying instrument. Paper trading can be leveraged hundreds of times or
more and whatever the price the paper market trades at sets the price for the
actual commodity. Thus, the paper market sets the gold price. The gold price
is the paper price that the false gold market trades at. That has very little
to do with the price of gold which is what the physical market would trade at
if there was not a manipulated paper market. But buyers and sellers are not
concerned about the real price of gold. Because they have no intention of
owning the physical since they don’t understand its function.
But one day there will be this little boy who will shout out “The Emperor
is naked” and then all hell will break lose. At that particular point, all
holders of paper gold will ask for delivery and just like the Emperor, they
will find out that there is no gold left in the vaults. The manipulators have
then lost control of the market and the gold (and silver) price will
go “no offer”. This means that gold is not offered for sale at any price
because there isn’t any to sell.
Economic power will follow the flow of gold
The short sellers, mainly bullion banks and futures traders, will fail
since they can’t fulfil their contract and the buyers will receive no gold.
The market then becomes a physical market with price being determined by the
holders of physical gold. Economic power will then follow the same route as
we have seen physical gold travel in the last 10-15 years. The Silk Road
countries such as China, India and Russia will then gradually dominate the
financial system with their gold and their currencies.
China bought 171 tonnes in April. Total 727 tonnes for 2017. On
course for over 2,000 tonnes in 2017
The financial system of the debt laden West will implode and this is also
likely to bring an end to the current economic and cultural cycle in the West.
The time this will take depends on many factors and is hard to forecast. von
Mises expressed it very well:
“There is no means of avoiding the final collapse of a boom brought
about by credit expansion.The alternative is only whether the crisis should
come sooner as the result of voluntary abandonment of further credit
expansion, or later as a final and total catastrophe of the currency system
involved.”
We have already gone past the point when a voluntary abandonment is
possible. Therefore, a total catastrophe seems more likely. With the biggest
global debt bubble in history, it could go very fast. Global debt,
liabilities and derivatives of over $2.5 quadrillion can implode very
quickly. We must remember that global GDP is only $70 trillion and
total debt and liabilities are 35x greater.
So gradually economic power will be transferred from the bankrupt Western
economies to the countries that patiently have been buying major quantities
of gold over a long time. I am not saying that the Silk Road countries will
be without suffering during this downturn. The whole world will be severely
affected, including China with its massive debts and export dependent
economy. But the Silk Road countries will emerge as the dominant power after
the initial severe chock.
Switzerland – the foremost gold hub in the world
Coming back to the price of gold, I regularly meet up with our partners in
the gold markets, primarily the refiners and the vaults. It is good to be
reminded of the massive amount of work and the skill that goes into producing
and safekeeping every ounce of gold. But before that the gold must of course
be mined which in itself is a very labour and capital intensive industry.
Gold mining was up to 1970 dominated by South Africa which then produced over
3/4 of all gold or 1,000 tonnes p.a. Today South Africa only produces 5% of
global gold or 160 tonnes. The biggest producer is now China with 450 tonnes.
40-50 years ago, the average gold grade per ton of ore was up to 20 grams.
Today it is less than 0.5%. This together with higher energy prices has
increased the cost of producing gold dramatically. Refiners receive doré bars
from the mines which have an average gold content of anywhere from 10% to
70%. The balance is mainly silver.
Doré bars
The Swiss refiners produce 60-70% of the gold bars in the
world. There are four major Swiss refiners, Argor, Valcambi, PAMP and
Metalor. Three of these are in Ticino which is the Italian part of Switzerland.
The major reason for this location was the Italian jewellery industry which
used to dominate global jewellery production for a very long time. This is no
longer the case but Switzerland has continued to dominate gold refining. Gold
is today a major Swiss industrial sector and accounts for 29% of Swiss
exports. Combined with a number of very major gold vaults and a big domestic
gold trade, this is a very important industry. This is why Switzerland is
unlikely to ever confiscate gold. Why would they kill the Swiss Goose that
lays such valuable Golden eggs.
Gold refining is a precision industry. There is zero
tolerance to produce a 9999 (99.99%) content gold bar of exactly 1 kilo. Once
the gold has been refined and the bars cast and stamped, the final process is
to weigh each bar manually and shave off exactly the right amount of a gold
flake so that the bar weighs a very tiny fraction over 1 kg. To maintain
their reputation, Swiss refiners will always be slightly over. Anything that
is a fraction under is obviously rejected and recast.
Anyone who has visited a Swiss gold refiner will realise the amount of
work and precision involved in producing every single bar whether is cast or
minted. This is why Swiss 9999 gold has the reputation of being the
best in the world.
As I discussed above, the gold price is the paper screen price at which
paper gold can be traded, say $1,260. Depending on who the buyer is and the
quantity, the wholesale price for this kilo bar might be just $1-2 higher
than the paper price. This is just a ridiculously low price difference when
you consider the amount of work that is involved in producing this bar.
Switzerland also has a number of major private gold vaults. Being one of
the oldest democracies in the world and not having been in a war for 200 years
makes Switzerland one of the very safest countries. Politically Switzerland
is probably the best country in the world and the only true democracy. This
makes Switzerland ideal for vaulting gold and silver. There are a number of
secure private gold and silver vaults including the biggest and safest
private gold vault in the world which we offer to our clients. It is critical
to select the best vaults. The most important criterion is people,
owners and management. Then comes physical and financial security.
Bearing in mind the superior quality of refining and vaulting of gold in
Switzerland, it is not a surprise that the country has such a high reputation
in this sector. And the day the gold price reflects the real price of gold,
the Swiss gold industry can name their price for gold and vaulting. It is
certain that this price will be multiples of current levels.
