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So Little Gold, Why So Cheap?

Commodities / Gold and Silver 2010 Jul 06, 2010 - 03:23 AM GMT

By: Arnold_Bock

Commodities

Best Financial Markets Analysis ArticleGold, 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/..

Arnold Bock is a frequent contributor to both www.FinancialArticleSummariesToday.com (F.A.S.T.) and www.MunKnee.com (Money, Monnee, Munknee!) and an economic analyst and financial writer. He is also a frequent contributor to this site and can be reached at editor@munknee.com."

© 2010 Copyright Lorimer Wilson- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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