Buy Physical Gold, the Rest is Just Paper

by | Mar 9, 2010 | Precious Metals | 7 comments

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    We often discuss gold as a long-term wealth preservation tool and prepping investment. For those who find gold to be a little bit out of their price range, substitute silver for gold in this article, as the machinations behind the scenes are fairly similar.

    We have, on occasion, suggested owning stocks in certain gold companies or Exchange Traded Funds like the Market Vectors Gold Miners ETF, which holds shares in over 30 of the top gold producing companies in the world. In addition to holding the stocks of actual companies that produce gold, there are exchange traded funds that allow you to trade the actual gold commodity, such as the SPDR Gold Shares ETF, which just received a substantial investment from financier George Soros.

    There are also gold exchanges like the Comex and organizations like the London Bullion Market Association (LBMA) made up of large member banks that include well known institutions like JP Morgan Chase, HSBC, Barclays and Deutsche Bank.  These organizations allow traders and investors to buy gold 1-for-1 or leverage their purchases by putting up just a portion of the money needed to buy the precious metal.

    The use of leverage allows so much gold to be traded on the markets that, according to Oikonomika, over “25 percent of global annual gold production changes hands each day on the LBMA.”

    The question of how this is possible is addressed on Oikonomika:

    I estimate that as much as 50,000 tonnes of gold have been sold that do not exist. That is equivalent of all the gold reserves in the world that are yet to be mined — or, put another way, 25 years of gold production.

    That is the granddaddy of all short positions.

    The fractional reserve operation of the LBMA is likely to be the next Madoff scandal, except multiplied by 100 — a $5 trillion fraud as opposed to a $50 billion fraud.

    Like all financial scandals before it, this one will be exposed just as surely as night follows day. Gold is unique among all commodities. It is the only commodity that is not bought to be consumed. Rather, it is purchased as a store of wealth. Because it is not consumed, the buyer does not need to take possession of his gold but can be persuaded to trust the seller to store his gold on his behalf.

    This unique wrinkle allows bullion bankers to sell gold that does not exist. This allows them to make huge profits, since they have very little cost, as they don’t have the inconvenience of actually having to purchase the gold before they sell it.

    The consequence of this illegal activity is that it suppresses the price of gold because the “paper gold” supply has the same effect on prices that would happen if real gold had actually been supplied to the market.

    Such racketeering is extremely beneficial to the central banks, which are hostile to gold because a free-market gold price would blow the whistle on their perpetual inflationary actions. A suppressed gold price makes fiat currencies appear to have higher purchasing power.

    The obvious problem with paper-gold is that there are more pieces of paper indicating gold ownership than there is actual physical gold available. In the event of a serious global down-turn or a period of instability, holders of those pieces of paper will start trying to redeem their coupons for real metal. But there will not be enough to go around to cover the promises made by paper gold dealers on the ComEx and LBMA.

    Those holding real bullion will see the price multiply many times as the price adjusts to the supply and demand fundamentals of real metal.

    There is only one way to protect yourself and to profit. You should own physical bullion. Simply don’t trust intermediaries like the LBMA that purportedly sell you gold but label you an “unsecured creditor.” Anyone who thinks he holds gold at the LBMA should demand delivery.

    The major desirable and unique characteristic of gold is that it is no one else’s liability, unlike almost every other financial asset. If you own a credit risk, like IOU gold, you have not achieved the principle objective of owning gold.

    Are you a gold owner or an “unsecured creditor”?

    You cannot be both.

    Read the full article at Oikonomika…


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      1. Comments…..If you’re going to hold paper gold, you might as well just hold dollars, at the end of the day it’s stiil paper. It seems paper will always be in use, I have seen this happen in other countries, when their currency collapsed those who had gold exchange it for another currency they didn’t buy and sell in gold. Example Zimbabwe, the currency crashed,hyperinflation, people exchanged their gold into dollars, those who didn’t have gold suffered. When the dollar crashes you might be exchanging for Euro’s. The difference between those countries and the US, they reamained someone civil, in the US there is going to be a lot of shooting, who knows bullets and food might have much more value.

      2. I don’t totally agree with gold.  You should also hold silver, brass, welding material and copper.  LOTS of copper!  Copper is at this moment one of the most avalible metels to aquire and one of the easiest to mold into what ou want, besides silver or gold.

        Now if you are going to go gold and silver… raw is the best.  Gold nuggets and silver mining cuts are the easiest to smelt besides copper with just a fire rather then iron, steel, nickel and so on.

        Be selective… don’t scrap everything.  Also aluminum would be idea if you could find it in the whole piping…. but that is another story.

      3. I believe that both gold/silver and basic necessities will be important. There will be opportunities/needs to purchase things such as generators or vehicles as an example…. how many light bulbs, beans or ammo as an example would it take to buy an adequate generator or a car?? Chances are that you wouldn’t want to part with large quantities of these commodities and there would equal chances the person you are bartering with might not want to deal this way either. Those with gold or silver will be able to make such a trade more easily. Based on what I understand, ETFs such as GLD and SLV use derivatives and have no guarantee that the physical metal will be or can be delivered to you.  Beware of these kind of  ‘investments’… take physical ownership of the metals not as an investment but as a hedge and as ‘purchasing power’ you will need to secure important items for you and your family.

      4. Gold if you can afford it. Silver if you can’t afford gold.  Both as a store of value for some of your wealth, if you have wealth, until we emerge on the other side of the Changes.  Make sure it is physical gold that YOU control. In TEOTWAWKI, both gold and silver may be too valuable to barter for small purchases. How will you make “change” during the CHANGES?

        Bank accounts may not be readily accessible in a meltdown, crisis, or natural disater. And keep in mind that there may be limits on cash withdrawals, depending on the nature of the emergency.

        I believe metal money will work too, once the SHTF. I have all of the silver and gold I need, still, I save quarters, and halfs, and have 2000 gold clad dollars in a 64 oz Tide plastic bottle to grab and go for small purchases on the fly.

        Its my mad money. You should have some too.

      5. Zukadu:
        Gold and Silver…..yes!  But gold clad dollars???  I don’t get it.  When the SHTF, our monetary system will either be intact….or it won’t.  If hyperinflation devalues the dollar to nothing, gold clad dollars won’t be worth anything either.

        I believe in keeping a nice amount of cash on hand (at least a few months of expenses)……but a few thou in paper money is much easier to carry around than a thousand gold clad coins or thousands of quarters.

      6. RickyGee:  The purchasing power of the Greenback has declined about 95% since 2000. That has been the pattern since the oil embargo of 1973. Recent strengthening on the Forex is a blip. Once the EU recovers from its current crisis, the EURO will become the dominant world currency.

        Metal will always have value, and government coins of any nation will retain some intrinsic value. More than that they will maintain their value as a medium of exchange within that country, because of their “standard value”. What that standard value may be then, I don’t know. Gold-clad dollars may be worth a “dime”, or they may be worth “ten dollars” as a medium of exchange. But they will have some value. And they will work as a medium of exchange. Script, I believe, will be worthless, except as tinder to start that wood on fire in the cold and dark.

        Remember, I have all of the gold and silver I will ever need (because I own a precious metals mine), and I own quarters, halfs, and 2000 gold-clad dollars because I believe they will be useful when the SHTF: If only to buy some twinkies on the way out of town. 🙂

        You should too.

      7. @zukadu
        “The purchasing power of the Greenback has declined about 95% since 2000”

        Oh really?

        Price of 1/2 ton pickup truck in 2000 vs 2010?
        Price of a gallon diesel fuel in 2000 vs 2010?
        Price of 1000 rounds 45 ACP in 2000 vs 2010?
        Price of Big Mac in 2000 vs 2010?
        The list goes on and on.

        I think you’re wrong.

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