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.
Also refer to my previous
article on the future parabolic rise in the price of gold as posted on munKNEE.com at: http://www.munknee.com/2010/06/gold-going-to-...r-good-reasons/
