|
Gold, the precious metal most often thought of as money, is in short
supply. In fact, the existing above ground horde is so small one has to
question whether it is realistic to think of it as having a serious role as
money in the future. The fact is there just isn’t enough of it
and - once institutional and private investors realize that the supply is so
disarmingly and alarmingly insignificant - prices are likely to go parabolic.
Which Countries Own Gold?
The top 8
countries owning gold are the United States, with 8,133.5 tons, followed in
descending order by Germany, Italy, France, China, Switzerland, Japan and the
Netherlands. None of these countries formally back their currency with this
precious metal so why do they possess such substantial quantities? One can
only speculate but it is probably because of their continuing belief that
gold is the only ‘real money’ compared to the coloured
paper and numeric symbols on computer screens that are the ultimate in
‘make believe’ fiat currency.
How Much Does the IMF Own?
The
International Monetary Fund (IMF) owns the third highest quantity of gold
with close to 3,000 tons. After selling some 200 tons from its inventory
earlier this year, and is making an increasing fuss over its desire to lead
in forming a new international ‘reserve currency’ based on its
(SDR’s) Special Drawing Rights.
What Quantity do the Various Gold
ETFs Supposedly Own?
The most
significant non-governmental holders of gold are the relatively new Exchange
Traded Funds (ETFs). These bullion ETFs are sold through stock
exchanges and can be bought (and sold) by retail investors through their
stock broker like most common stocks. In aggregate, these gold bullion
ETF’s ostensibly own more than 1,856 tons of gold, enough to rank them
as the sixth largest holders of gold bullion.
To What Extent Are the Various
Gold ETFs’ Holdings Backed By Physical Gold?
Unfortunately,
the rapid growth of the bullion ETFs raise serious questions concerning
exactly how much of their holdings are backed by metal in a vault and how
much is just another version of ‘paper gold’.
ETFs Lack Operational Transparency
Complexity
and opacity of their organizational structures and operating procedures leave
many questions unanswered. Their prospectuses merely add to the fog.
Most ETFs are layered organizations acting as trusts and repositories coupled
with unclear practices concerning audits, segregation and allocation of the
metals, unknown location of vaults and where the metals are sourced, and no
clarity as to what extent the metals are leased or owned outright.
What is the Value of Gold’s
Above Ground Inventory?
The total
value of all the gold that exists in the world is roughly US $5 trillion at
today’s price and, in terms of physical size, represents a cube
measuring 66.5 feet. That’s not that much from either
perspective.
What is the Value of the
World’s Annual Gold Production?
The
world’s annual gold production totals US $73 billion (silver is only US
$10.3 billion) at today’s price. Compare that number to the
projected United States budgetary deficit for fiscal year 2010 of US $1.6
trillion, the official U.S. accumulated debt of US $13 trillion and unfunded
contingent future liabilities and obligations of well over US $100 trillion.
One realizes just how infinitesimal annual gold production is. In addition,
in spite of a 400% rise in the price of gold over the past ten years, annual
production has not been growing. This has prompted some analysts to
conclude that ‘peak gold’ is now a reality, much like the
scarcity of new oil supply.
Phantom Gold?
The LME
(London Metals Exchange) based in the UK and COMEX (Commodities Exchange)
based in New York are the two principal markets for trading gold bullion
futures contracts. Frequently the huge volume of trades which take
place in these marketplaces are cited as evidence that there is plenty of
metal available to easily satisfy all central bank, industrial and investor
demand. But is that really the case? How large is the bullion market compared
to production? Annual global gold production amounts to about 2,200
metric tonnes which is about the volume traded
daily on the (LME) London Metals Exchange.
Associated bullion bank depository warehouse vaults are seemingly as
opaque in their reports as are bullion ETF’s. Use of a variety of
vague terms to describe the status of holdings such as
‘Registered’ and ‘Eligible’ are part of the
problem. Central banks are similarly guilty of obfuscation by using
terms such as ‘Bullion Reserve’, ‘Custodial Bullion
Reserve’ and ‘Deep Storage’ gold. Nor is there any clarity
in terms of how much is leased and from where?
Paper Gold
The
central point to be derived from an examination of futures trading in gold is
that it is principally a paper trading exercise. It is the ultimate in
‘paper gold’ in that less than one percent of all trades are
settled by taking delivery of the metal. Since most traders are more
than prepared to be paid out in cash, the metals exchanges have good reason
not to hold an inventory of the metal since it isn’t needed for the
settlement of trades.
Token Gold
Unfortunately,
most people not directly involved in the business assume that the vast
quantities of paper traded on the COMEX and LME is a proxy for the real
deal...gold bullion. Trades are not, and apparently never have been,
backed by the physical metal except in relative token fashion. Some
analysts may consider this reality an attempt at deception. This writer
takes no position on the issue, except to state unequivocally, that the
metals exchanges and their associated bullion banks and industry trade
groups such as the LMBA (London Bullion Market Association) do not
possess any meaningful inventory of gold bullion.
Where’s the Gold!?
Where’s
the Gold? Clearly, there isn't much of it. This is the central
question for all of us who consider ourselves investors in precious
metals, whether it be the bullion or mining company shares. All of
us need to ponder this question if for no other reason than to reflect
on the prospects for future capital appreciation.
Parabolic Gold
This
writer contends that, given the relative scarcity of gold and silver bullion
supply, prices will go parabolic once governments and institutional and
private investors realize supply is disarmingly insignificant.
Arnold Bock
Arnold Bock is a Canadian living abroad retired from
a career in government. He has a substantial background in partisan
politics and public policy development as well as in project and program
management within the public sector.
|
