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.Â 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.