|
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 will go parabolic.
Which
Countries Own Gold?
The
top 8 countries owning gold via their central banks 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 ‘real money’
compared to the coloured paper and numeric symbols on computer screens that
are the ultimate in ‘make believe’.
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 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 gold 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 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 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 (and silver only
US $10.3 billion) at today’s price. Compare that with 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 and one
realizes just how infinitesimal such 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 which has prompted some analysts to conclude that
‘peak gold’ is now, in fact, a reality, much like the scarcity of
new oil supplies.
Phantom
Gold?
COMEX
(Commodities Exchange) based in New York and the LME (London Metals Exchange)
based in the UK are the two principal markets for trading gold futures
contracts. Frequently the volumes of trades which take place here 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? 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.
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 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 do
not possess any meaningful inventory of gold bullion.
Where’s
the Gold!?
“Where’s
the Gold?” is a valid question for all of us who consider ourselves
investors in the precious metals sector whether we own bullion and take
possession or not or whether we invest only in precious metals mining
companies. All of us need to ponder the same question if for no other reason
than to question our 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 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-parabolic-top-of-10000-by-2012-%e2%80%93-for-good-reasons/
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.
|
