GOLD
So You Think You Own Gold?
Erik Townsend
The principal contention of this article is that most investors who think they own gold or silver bullion really don’t. Most precious metals investments – including many touted as physical – are nothing more than paper promises. Townsend discusses the details of counterparty risk in precious metals investing, and evaluates ‘paper’ vs. ‘physical’ bullion investments, as well as allocated vs. unallocated bullion accounts. The executive summary: 1) The rationale most commonly cited for investing in precious metals is wealth preservation: precious metals provide a durable store of value that eliminates counterparty risk inherent to other investments; 2) Counterparty risk is only eliminated if the investor actually owns the precious metals he invests in free and clear of any encumbrances; 3) Most precious metals investments, including many touted as ‘physical gold’ do not actually convey legal ownership of precious metals to the investor. As a result, the elimination of counterparty risk rationale for the investment is defeated! 4) You do not own gold unless you have taken delivery of coins or bars personally or have received legally binding documentation showing you to be the legal owner of specific coins or bars (identified by bar serial numbers) stored with a bullion bank in an allocated account that is allocated in your name; 5) The physical gold vs. paper gold debate is revisited with an emphasis on counterparty risk. It turns out there are many layers of both ‘physical’ gold and ‘paper’ gold and these are explored; 6) Critics of ‘paper gold’ ETFs are sometimes guilty of scaring investors away from the ‘paper’ aspect of the ETFs, only to go on to sell the investor a competing ‘physical gold’ investment that is really nothing more than another form of paper promise; 7) The LBMA chain of custody system (and other similar systems worldwide) provides a way to own physical bullion stored in a commercial vault without the need to re-assay the bars each time the bullion changes hands.
Gold is Back as Money
Julian Phillips
In its 2010 annual report, the Bank for International Settlements (BIS) said that “gold, which the bank held in connection with gold swap operations, under which the bank exchanges currencies for physical gold, stands at 8,160.1 million in special drawing rights, equivalent to 346 tonnes this year, up from nil in 2009.” Apparently the amount has climbed to 382 tonnes since the report was issued. This is the best news gold has had in 30 years, writes Phillips. He discusses what swaps are and who does them; the significance of the transactions; and why this means that gold is back and alive in the monetary system. In short, it seems that a country (or countries) needed foreign exchange to counter some shortfall in its accounts and raised these funds as a short-term liquidity measure, believing it would be able to return the currency and receive its gold back. The gold would then be returned at the conclusion of the swap period in return for the currencies swapped. If it failed to return these funds to the BIS, then the BIS could discreetly place the gold with another central bank, should it not want to keep the gold. If it did so, the BIS would simply report its disposal of the gold, the originating central bank would report the drop in its gold reserves and the gold buying bank would report its increase in the reserves. This puts the transaction into an entirely different category. It seems that the credit of one or more of the world’s central banks is not good enough for other governmental institutions. If word got out as to which this country is, then the financial markets would go into a tailspin, shaking the global financial system to its core. No wonder the BIS is keeping a low profile.
Irrational Gold Selling
The Mogambo Guru
The shrewd, funny and irreverent Mogambo was surprised by gold’s recent dramatic correction, since it indicated gold sales even in the face of the Fed’s dollar destruction through excessive money printing. “Apparently, these market-timing geniuses have failed to understand that that this is the Perfect Freaking Time (PFT) to buy gold, because here they are, selling!” he writes. Selling gold right now is such a ridiculous notion that Mogambo was dumbfounded. He is of the “buy and hold gold” camp, not the “trade gold” camp, having discovered the many downsides of trading stocks, bonds, commodities and their derivatives. He could have avoided all the negative experiences had he read Nassim Taleb’s The Black Swan and thus discovered that the bell-curve of normal probability is not how things really work over the long term. However, buying gold, silver and oil as a defense against the horrific inflation in prices that lies ahead, thanks to the Federal Reserve creating too much money so that the Obama administration can deficit-spend the US into bankruptcy and utter destruction, is the Mogambo solution. “I got the idea from 4,500 years of historical precedents of one moronic country after another doing this same, stupid ‘spending oneself into bankruptcy’ thing,” he writes; “all you can do is say, ‘Whee! This investing stuff is easy!’”
Will Economic Austerity Kill Gold’s Bull Market?
Dominic Frisby
On 21 June gold broke out to new all-time highs above $1,260 per ounce, but then made a dramatic correction to around $1,190. That's quite a correction and it concerned a lot of people, so Frisby addresses whether this is anything more than a healthy pull-back. First of all, a summer pull-back for gold is normal, and consequently the June-August timeframe is usually one of the best times to buy. Secondly, gold's June high above $1,260 was a function of US dollar weakness. Against the euro and the pound, gold made its high on June 7, exactly in accordance with a chart of the metal’s seasonal pattern, and then made a lower high on June 21. Is the case for gold weakening? The ECB has effectively tightened monetary conditions recently, and this has been responsible for some of the euro's strength in recent weeks. Meanwhile the pound, under the UK’s new austere government, has been strong. This semblance of fiscal sanity returning to both sides of the Channel may have weakened the case for gold. But are we really at the dawn of a new age of austerity? How will Europe react when push comes to shove, as it surely will. The UK still has gigantic debts to overcome; the day of reckoning still lies ahead. Meanwhile, in the US there is no sign of any attempt to get spending in check. Money that people don't have is still being recklessly spent. 'Helicopter' Ben Bernanke still believes in his printing press. Judging by the ever-increasing deficit, President Obama seems bent on trying to spend his way out of trouble. The US will have a much greater impact on the gold price than the UK and, since there is still so much uncertainty and profligacy, the gold bull market has further to go.
So Little Gold
Arnold Bock
There isn’t much gold around, and this is a key issue for those who invest in precious metals. Bock contends that, given the scarcity of gold and silver bullion supply, prices will go parabolic once governments, institutional and private investors realize supply is alarmingly insignificant. The top 8 gold-owning countries are the US, followed by Germany, Italy, France, China, Switzerland, Japan and the Netherlands. None of these countries back their currency with gold, so presumably they own the yellow metal because they believe gold is the only real money, not the coloured paper and numeric symbols on computer screens that are the ultimate in make-believe fiat currency. The IMF owns close to 3,000 tonnes of gold, while the most significant non-governmental holders of gold are the bullion ETFs. They are said to own more than 1,856 tonnes of gold, but their rapid growth raises serious concerns over exactly how much of their holdings are backed by metal in a vault and how much is just another version of ‘paper gold’. In addition, ETFs lack operational transparency. In all, the total value of gold that exists in the world is roughly $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. Meanwhile, annual gold production totals $73 billion (silver is only $10.3 billion) at today’s price. Compare that to the projected US budgetary deficit for fiscal year 2010 of $1.6 trillion, the official accumulated debt of $13 trillion and unfunded contingent future liabilities and obligations of well over $100 trillion. This illustrates 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 stalled. This has some analysts concluding that ‘peak gold’ is now a reality, much like peak oil. Bock discusses phantom gold, paper gold, token gold and parabolic gold.
