Gold - The Reality
The Secret World of Gold, left - goes from the history of Gold centuries ago, the World Wars and up to modern times - today. It is a must starting point for anyone interested in learning about Gold
Gold and Precious metals
are a unique beast in the Investment World. It seems to attract all kinds of conjecture, good, bad,and ugly. There is a pile of misinformation and it seems investors either love it or hate it. Totally ignore it or are obsessed with it.
What I want to do here is look very objectively which I hope will explain and sort out the confusion, misinformation and the emotions about Gold.
- The first thing to understand is Gold is not another commodity – it is money or a currency
- Central Banks hold US$, Euros, Yen and Physical Gold, not Platinum, Oil, Corn, TVs or Blenders – because it is money
You don't have to believe me - listen to Allan Greenspan around the 23 to 28 minute mark who certainly holds more respect and esteem than I
It has a longer history as money than any paper currency that Governments support to their eventual demise.
That is why sometimes it is refereed to as the anti-currency and although they own it Central Banks hate it – or more accurately do not like it as much as their paper currency. It is well documented that Central Banks try to influence the price, in the downward direction. Probably the most famous quote is that of Alan Greenspan before the House Banking Committee in 1998 "Central banks stand ready to lease gold in increasing quantities should the price rise."
Greenspan was arguably the longest and most respected U.S Central Bank Chairman and knew all to well about the reality of Gold. This is from his October 2014 interview at the Council on Foreign Relation
“Gold is a currency. It is still, by all evidence, a premier currency, where no fiat currency, including the dollar, can match it.”
Gold is very durable and all the Gold ever mined is still in custody or circulation.
Although a fair bit is at the bottom of the Oceans because of the battles fighting for it and as recently as World War II and the Kuwait and Iraq/US wars. There is a lot of controversy on whether Iraq Gold was taken, was ever there or moved, but just all this attention proves the idea of fighting for it is alive and well. What we do know for sure is that Iraq returned the Kuwait Gold it seized but artifacts of Iraq, including those of Gold were taken during the U.S. invasion.
All the Gold ever mined would fit into 2 or 3 Olympic sized pools, depending on whose numbers you use
The Golden Rule – who has the Gold rules
In more recent times we know Britain and Europe had most of the Gold and dominated the world economy and a lot of that Gold moved to the U.S. in the World II era and the U.S. became the Global leader. Now questions have risen whether the U.S. still has all this Gold. There has been no audit of Fort Knox Gold since the 1953, and that was a partial one.
What has brought more attention to this question is the recent movement by a number of Central Banks to repatriate their Gold holdings back to their own soil.
This came to a head with Germany in 2013 who supposedly has a substantial amount of their Gold with the U. S. Fed, (reported at 1,447 tons) asked to repatriate just a portion. Germany has 69% of their Gold holdings abroad and wants to bring this down to 50% by repatriating 674 tons, about 307 from France and the rest form the U.S. The U.S. told them it would take until 2020 and when Germany asked to view or verify their Gold holdings they were basically told to 'get lost'
As of earlier in 2015 Germany has so far got back 157 tons of 674 requested.
- There is no evidence that the U.S. gold actually exists, other than the word of the FED.
What we do know there has been vast amounts of Gold moving into China, both as official reserves and into their General Banking system and Economy. And China is beginning to emerge as the World's dominate economy. More on this below
Gold has evolved into two markets, Physical and Paper
Originally, well at least up to the 1970s and 80s most of Gold trade was in physical metal. We seen that in the 1980/81 peak when there was line ups outside Bullion Banks and exchanges to buy physical.
Physical is dominated by the Central Banks, Jewelry, especially the East (India, China), some Investment Funds in physical like University of Texas Endowment, a few wealthy Investors and Gold bugs. For the most part there are 400, 100 and 33.3 ounce bars along with numerous smaller denominations in Coins, wafers and small bars, and various jewelry you are well aware of
The US went off the gold standard in 1971 and after that came about the 1st Comex Gold 100 ounce Future Contract. The U.S re-instated ownership of Gold certificates in 1975. Then in 2004 the CBOT offered a mini 33.3 oz future contract and in the 2000s a slew of Gold ETFs came about, probably the most widely followed is SPDR Gold Trust 'GLD'.
The paper market for Gold has literally exploded into bubble status starting in early 2000s. This chart of Comex Open Interest is probably the best picture or illustration. I simply looked at the open interest each year and picked an average, it is the trend that is important, not the number. You can see the Open Interest or number of Gold contracts has gone up 5 or 6 fold since the early 2000s. There was a small spike in the 1980 Bull market but nothing like today.
What is more astonishing is when you consider price. In early 2000s Gold was about $300/oz
150,000 – 100oz contracts X $300 = $4.5 Billion
500,000 – 100oz contracts X $1100 = $55 Billion
Now add on the CBOT mini contract that started in 2004, add on the increase in Gold certificates and while I mention that. The U.S. Fed holds no Gold, they sell it to the U.S. Treasury at $42.22/oz and get a certificate in return, also see video at top
Add on the ETFs and the Call Options. Than there is the London market with a enormous amount of Gold derivatives and a few other ETFs and such around the world.
The vast majority of this Paper Market all spawned in the last 10 years or so
Warren Buffet says Financial Derivatives are Weapons of Mass Destruction
- The ingenuity of the Investment Banks and Wall Street to create financial instruments to profit from is nothing short of astounding. We don't know exactly how this one in Gold will end - until it happens.
However we know what happened with the Housing Bubble and financial instruments created for Mortgages and can draw some assumptions from that.
Creative instruments for Mortgages caused an unprecedented demand for housing that would not normally exist. No money down, liar loans, low interest rates to start that ballooned later. There is all kinds and I am sure you heard plenty, it is all history. There was also a fair bit of legislation around mortgages and what a Bank could loan. To get around that they created Mortgage derivatives that were basically bundled mortgages with some crappy ones included but good enough for high AA ratings and such. They sold these off to Investors (many overseas) so they could create more and keep repeating the process.
When it ended the fake demand created - imploded - and housing prices and real estate markets crashed.
The Huge Paper market in Gold that has been created will cause a different effect. It basically squashes demand away by creating excessive supply.
- The Investment Banks have basically created a fractional reserve Gold system, with the belief that not many investors will ever want the real metal.
You can search the internet and find many articles and estimates on the fractional reserves in the Gold market. This article talks about 120 to 1 on Comex and many authorities have admitted to numbers of 100 to 1.
To left Kyle Bass on Gold fractional reserve and taking delivery. He is founder of Hayman Capital and predicted the Mortgage crisis and profited from it. His 2 cents should be noted!!
To relate again to the mortgage scandal. The Gold market is far less regulated than Real Estate and Mortgages and there is also the secrecy about it. It is difficult to know who actually has how much Gold and where, as Germany found out - and the question of no audits at Fort Knox etc.
Lets say instead of a mortgage scam, the Bankers sold the same house to 100 would be owners. They got a good deal because they bought from a fancy presentation etc. and guaranteed the home was what was expected by the reputable Investment Bank. However on closing day 100 owners showed up to move into the house.
Obvious that could never happen, or if it did probably just once. There is too much visibility in the Real Estate market but with the obscurity of Gold here it is. As Kyle Bass found out the exchange simply thinks price will fix that outcome if ever needed.
However, I don't think the price of houses would fall in this instance. Some of the other 99 people are going to bid up that house higher or find another one. Some will harm the Bankers or Real Estate agent. Now imagine that happening to 10,000s of houses at once.
You see a picture???
The Gold market is much larger than the US $18 trillion housing market, A World Council recent study demonstrates the financial market in Gold is greater than all but the two largest debt markets in the world, surpassing the size of all individual European sovereign debt markets
The World Council estimates the size of the Gold market by just valuing the 36% of the known physical Gold, that is deemed official holdings and private Investment. In 2010 this number was almost $2.5 trillion.
BTW, the Gold Vault video on left is fascinating, either because of all the Gold or the guys hair?
More fascinating is the video Inside the Federal Reserve 7 football fields it dwarfs the Gold Vault. It is so massive large robots must move cash around. They can fly out tons of paper bills a day but takes 8 years to get 340 tons of gold to Germany? For some strange reason that video is gone - too revealing, I hope to find it again
And remember this is just money they print, not what is created with key strokes or log entries to some account. And forget about passing it down, on average a $100 bill lasts 17 years and the amount of paper money destroyed by Katrina was about $190 million, what I mean is waterlogged paper bills.
- We know the Gold market is probably leveraged 100 to 1 so using the WGC's figure for Physical Gold only , we are talking about $250 trillion when we consider the Financial Instruments dreamed up by the Banksters.
It is simple to conclude this will be a far bigger mess than the mortgage crisis.
And I know it will happen
- There has already been at least 3 major warning shots fired across the Bow
The 3 samples I will mention here is
1 - The first was Morgan Stanley who settled out of court because Investors accused them of selling them Gold and charging Storage fees when there never was any physical Gold to Store. There was the visit in 2010 to Canada's largest Bullion Bank Vault, ScotiaBank that held very little Silver or Gold
2 – The discovery by Germany trying to get their Gold. Germany will never get their Gold, if lucky maybe the 50%. There simply is little Gold left in the U.S.
3 - There are fraud investigations against Major Banks in the Gold market in four jurisdictions now, While these may take 1 to 3 years to conclude, the Fractional Reserve Gold scheme may not survive that long.