For my final week writing for Bleyer, I’d like to round off by focusing on two internal factors currently affecting precious metals. Firstly, what really matters – you (your gut, your decisions, your investments). And secondly, the actual qualities and inherent issues (fundamentals) within Gold and Silver markets themselves, regardless of the other economic and market forces that are at work.
Last week, I wrote about the geopolitical and external factors to keep on your radar over the coming months and onwards into the future. After I stop writing for Bleyer, the short-term news and price moves will continue to come and go. If I leave you with one thing, it’s my hope that it will be a vision to look at the big picture and know your financial goals and what you can do to securely safeguard your finances.
The main characteristic of some customers that I’ve had the pleasure of meeting is independent thought. They don’t assume their life, especially financial, has to follow a pre-ordained path mapped out by the product leaflet stand in the banks. Stay independent in your thinking. In order to get the fullest picture and make the best decisions, look at independent commentary sites, investment blogs and a bredth of news sources from left, centre, and right-leaning media outlets. Keep Gold and Silver investment the right size in comparison to your other investments and store how you want. Trust your gut. Keep reviewing. What worked for you before in your investments may not work for you now.
Timing is Everything
Buy when you need or want, sell when you need or want. Buy the products that work best for you at the time, if they're new, popular, or on special offer. For your financial health, physical Gold and Silver may not be the right investment metal for you, if you feel an attraction to alternative metals such as palladium or rhodium. Listen to yourself more than the mainstream media articles. They follow the price trends, you can be one of the few creating them.
No Name, No Ownership
Always make sure – if you choose not to store it yourself – that your physical Gold and Silver is held in a named allocated account. “The rationale most commonly cited for investing in precious metals is wealth preservation: precious metals provide a durable store of value that eliminates counter-party risk inherent to other investments. Counterparty risk is only eliminated if the investor actually owns the precious metals he invests in free and clear of any encumbrances. 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! 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,” (Financial Sense).
Gold and Silver 'Consumption' is a Misnomer
I liked this clear distinction I found highlighted in Wolf Street: “The term 'consumption' is used a lot in gold-and-silver lingo, but it’s a misnomer for gold. When investors buy gold, they’re not consuming it - they’re hoarding it. Same principle applies when investors buy silver to hoard it.” So, as a top tip, get to know your fellow physical gold and silver ‘consumers’. They are probably thinking just like you. Online forums are a good resource for late night opinions that are gutsier than the ones expressed in the tabloids and are more ‘independent’ regarding the pros and cons of physical ownership than the dealers.
And Finally, Keep an Eye on the Paper to Physical Ratio
This figure will vary depending on where you look. But the issue remains the same. Along with many other differences between paper and physical contracts, one point to raise with paper contracts is that there are far more paper ounces of Gold and Silver than there are physical. The numbers are staggering. In 2009, Adrian Douglass – an individual at the forefront of this issue – wrote a key article which explains so clearly how this could be so. For example, as you would expect, only a fraction of the hours I spend in reading and research make it to each final shorter piece. And this concept is identical to the fraction of actual physical Gold actually available to the plethora of paper ‘ounces’. But his article is so good I’m going to quote a substantial part of it this final time, because it explains how the Physical to Paper ratio works. It’s probably the most crucial internal concept between ‘real’ and ‘fake’ Gold to grasp before even thinking of investing in Physical Gold:
“The unique characteristic of gold is that about 50 percent (80,000 tonnes) of the above-ground stocks are held as a store of wealth (investment). The other 50 percent exists as jewellery. When gold is bought as a store of wealth it can perform that function for you wherever it is in the world. Given this unique characteristic many large investors in bullion prefer to leave their gold with the bullion dealer from whom they bought it so that it can be stored in their vault and easily resold. This is identical to the situation with stocks, where most stock certificates are held by brokerage houses, not by individuals.
That people are buying and selling gold without ever taking delivery means that there is the opportunity for bullion houses to sell gold that doesn't exist.
Now the bullion houses probably don't view this as illegal or dishonest because they will operate a fractional reserve type of system, just as the banks do with fiat currency, and will make sure they have enough gold on hand for what would be the maximum estimated volume of gold that could be called for delivery. After all, trading is done with unallocated gold, so how much more unallocated can it get if it doesn't exist at all?
This is what caused bank runs in the days of the gold standard. People would deposit gold in a bank and receive bank notes (dollar bills) in exchange. At any time the depositor could return and hand over his bank notes and receive from the bank the same quantity of gold he deposited. The banks realized that under normal circumstances a maximum of about 10 percent of the gold deposited could be requested. So the banks saw an opportunity. They could issue up to 10 times as many bank notes in loans as there was gold in the bank and they could earn interest on the bank notes. The system worked until there was difficulty meeting withdrawals. Then word spread quickly that the bank was insolvent, and as holders of the banknotes rushed to the bank to redeem them for gold, the bank would admit it had insufficient gold and would declare bankruptcy.
The origin of the word "bankruptcy" is from the Latin words "bancus" and "ruptus," which means literally that the bank is broken. Banks have gone bust frequently enough to have earned themselves the ownership of the word to describe the phenomenon. Isn't that ironic when banks are meant to be a safe store for money?
This basic scam is at the center of modern gold market manipulation. Instead of real gold, paper substitutes for gold are sold through derivatives, futures, pooled accounts, exchange-traded funds, gold certificates, etc. I estimate that each actual physical ounce of gold has multiple ownership claims to it.
For the scam to be sustained there must always be plentiful physical gold for those who want it. The market is, in effect, a giant inverted pyramid with a huge paper gold market being supported by a small amount of physical gold at the tip of the inverted pyramid. The scam can continue until there are indications of a shortage of physical gold. If all the claimants of each ounce of real gold demand their gold, then there is the potential for a squeeze such as has never been seen before.
To lend support to the idea that all the gold in the world has been sold several times over I cite the case of Morgan Stanley, which was sued in 2005 for selling non-existent precious metals. Morgan Stanley even had the audacity to charge storage fees. The firm settled the class-action lawsuit out of court but no criminal charges were ever filed. If Morgan Stanley was doing this, you can bet that it is the tip of the iceberg.
Paul Mylchreest has done fabulously detailed research into data on the daily trading of gold on the London OTC market. He concludes that 2,134 tonnes of gold are traded each and every day. That is a shocking number because this is 346 times larger than all the gold that is mined in the world each day.” (Gold Anti-Trust Action Committee, G.A.T.A.)
In 2016, these figures were updated to around 233:1 for Gold and 250:1 for Silver, (Zerohedge). Keeping an eye on this ratio is key because it tells you how over-inflated or ‘fake’ the price of a paper ounce of ‘gold’ really is.
Call a member of the Bleyer team now (01769 618618) to chat through your current investment choices, or email the team [email protected]. I wish you the very best in your future decisions in physical Gold and Silver investment.