Paper gold, Metal gold – when worlds diverge.

The price of gold is going down. That is what the charts, newspapers and pundits are all saying. What I think they are deliberately not saying is that the value and desirability, as opposed to the price of gold, is going up and will go up further.

Make no sense?  Well I think it does if you remember there are two types of ‘gold’ for sale. One is metal, the other is paper. It is paper gold that is being dumped not the metal. The metal is being bought at a fair old rate. But because there is so much paper gold around and the major sellers and market makers in paper gold prefer metal and paper to be confused, even thought to be identical (their trade depends on this confusion), no one seems to be pointing out the very different dynamic happening in paper and  metal gold.

Paper gold is being sold. And those selling it are the likes of Soros Fund Management LLC and BlackRock Inc. As Bloomberg reports today,

Filings showed Soros Fund Management LLC and BlackRock Inc. (BLK) were among funds that cut stakes in the SPDR Gold Trust, the biggest gold ETP, in the first quarter.

Does that say Soros and BlackRock no longer want gold? No it does not. It says they don’t want paper gold. They don’t want paper claims of gold. For those that don’t know ETPs (Exchange Traded Products) are very similar to ETF’s (Exchange Traded Funds) and both a paper claims on something rather than the thing itself.

If you buy a gold tracking ETP you are NOT buying gold.If you by an ETF based on bank shares, for example, you do not own any bank shares. In both cases you own a piece of paper which says it will match the price of the gold or bank shares. It is these paper claims that big players seem to be selling as fast as they can without it looking like they are going for the exit. In fact, I think that is exactly what they are doing.

The fact is there is a vast pyramid of paper claims on gold which dwarfs the amount of actual gold avaialable. Since the trade in gold ETFs took off we have been living in a fiat gold world. There are as many claims on gold as there are bits of paper on which to print them. And this fact confuses a great deal of the punditry about gold as a safe haven.

In the Bloomberg piece we find Mr James Moore, an analyst at FastMarkets Ltd. in London saying,

The reasons for holding safe-haven assets have abated…Investors are looking again at stronger growth assets.”

I think he is wrong. 180 degrees wrong. I think the reason Soros and BlackRock are selling paper gold is because they know paper claims are not safe. Bits of paper with the word gold printed on them are not gold themselves and their claims in the metal are not safe. I suspect we will find they have sold paper and bought metal.

I think Soros and BlackRock have sold paper gold because, contrary to Moore, the reasons for holding safe haven assets have not abated but are getting stronger. I am not saying ‘buy gold’. I do not offer investing advice. I am not saying gold will save you. I am also not saying that people are not looking for higher yielding investments. Because they are. They are caught in a nasty trap of really needing yield in a world they can also see is getting more volatile and less safe. What is a thrusting city boy to do? Answer, invest other people’s money in risk and keep quiet about what you are investing in yourself.

Of course you cannot get around the fact that the price of gold is going down. Which would seem to make my argument ridiculous. But it doesn’t. The confusion is that the price and value of Gold backed ETF’s not only ‘tracks’ the value of gold but impinges heavily on it. ETF’s are sold as a way of ‘tracking’ the value of a kind of share or commodity of ‘getting exposure to it’. But the whole family of Exchange Traded products has become so large, in some cases much larger than the size of the underlying market they are just supposed to be passively tracking, that they are not longer just tracking they are having a decisive  influence upon it it.

Thus as people sell gold ETF paper, that is causing the price of not only paper gold but metal gold to decline as well. And what I think this is doing is creating a buyers paradise – if you have the pockets to take the risk. With one hand you sell paper claims on gold, let people confuse paper and metal and talk about how the price and desire for ‘gold’ is declining, and then with the other hand buy the metal. End result the amount of paper gold declines but along side that decline some people sell real gold which you buy. You end up, if the game holds together, being able to buy real metal as the price declines, knowing that the price of paper and metal will diverge, at some point, rather drastically.

While Soros and BalckRock have been selling paper gold China, Russia, India and Iran have all been buying it. Last year alone (2012) China bought more than 500 tons of gold which is more than the ECB owns.

I continue to believe as I have for several years now that China and Russia along with India, Japan, Venezuela and Iran are looking seriously at sharing a new reserve currency and have planned to be able to advertise it as being significantly backed by gold. In that article I linked to a series of articles I have written looking at various aspects of the idea. I think the idea looks more and more likely.

For those who wish I have written about ETFs as being the Next accident waiting to happen and a part two in which I looked at the inherent insatbilities of the ETF markets just waiting to blossom, espcially as they grow larger than the market they are ‘tracking’.

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32 Responses to Paper gold, Metal gold – when worlds diverge.

  1. Agog May 17, 2013 at 5:37 pm #

    …the reason Soros and BlackRock are selling paper gold is because they know paper claims are not safe

    Rather implies that they bought it believing they were/are safe claims. But of course these guys bought because they thought they could sell at a profit, and I’m quite sure they did.

  2. Jesse May 17, 2013 at 5:44 pm #

    I have cross posted this with attribution. I took the liberty of cleaning up a couple of typos, with which condition I am intimately familiar in my own work.

    http://jessescrossroadscafe.blogspot.com/2013/05/paper-gold-metal-gold-when-worlds.html

    People always ask when will something like this end? While it is hard, almost by definition, to predict when the black swan will come home to roost, I think it is safe to say that there will be a end to it, and a correction, and it could be quite noisy.

    • Golem XIV May 17, 2013 at 6:00 pm #

      Sorry about the typos. Would you believe I reaally do try to clean them up?

      I agree the end looks like it will not be controlled or pleasant.

      Glad you liked the piece and more than pleased you cross posted it.

      By the way I owe you a ‘thank you’ for jogging me back to work the other day.

      • Jesse May 18, 2013 at 1:57 am #

        Thank you David.

        Have a pleasant weekend.

        Jess

  3. Effem May 17, 2013 at 5:48 pm #

    I don’t agree that the physical market is somehow tighter. Take the ETF “PHYS” which owns physical gold, which you can actually redeem fairly easily. It currently trades at no premium to GLD, which is the lowest it has been since inception a few years back. If there were some physical scarcity this would be trading at a premium.

    • Golem XIV May 17, 2013 at 10:38 pm #

      Hello Effem,

      Well I couild certainly be wrong. I am not a trader and am certainly not familiar with the complexities of the precious metal trade.

      But I really do think there is something in what I have said both about the ETF versus underlying commodity value and about the nations buying gold as part of a new reserve currency. When I first started talking about the latter, a long while ago, people said I was crackers. Now quite a few seem to have come round.

    • Jesse May 18, 2013 at 2:04 am #

      This is about GLD from Forbes Magazine so you won’t think it is from some minor blog.

      “Even though GLD is “physically backed,” ordinary investors can’t just go to London and redeem their bullion. Only “authorized participants” are allowed to create or redeem shares. Authorized participants are registered broker-dealers or other securities market participants which have entered into agreements with the trustee and sponsor (these include major Wall Street names like Citi, Goldman Sachs, Morgan Stanley, JPMorgan Chase, and Merrill Lynch-Bank of America, among others), allowing them to deposit either gold or shares in exchange for the other at unallocated accounts until the operation is completed.

      Regular shareholders have no rights of redemption and the gold is not required to be insured by the Trust, which is not liable for loss, damage, theft, nor fraud. Shares are bought in the open market, only after Authorized Participants decide to place or sell them. Therefore a retail investors doesn’t actually “own” gold, but an asset that is backed by gold and represents a certain quantity of the yellow metal.”

    • Jamie_Griff May 28, 2013 at 10:03 am #

      According to the website the PHYS trust has about 1.6m ounces of gold. According to the World Gold Council ( via Wikipedia) the total amount of gold out there is around 171K tonnes.

      So PHYS accounts for a tiny percentage ( 0.029% by my calculation) of the physical gold market and since it’s exchange traded its price is much more easily led by the price of paper gold.

      Provided the guarantees that the trust makes are genuine, when the paper gold market does finally unravel you’ll likely see the price of PHYS and GLD diverge dramatically.

  4. bill40 May 17, 2013 at 6:02 pm #

    Hi Golem,

    I have still to send you my full story but here’s a thought for you. One banker in China describes the bancour idea of Keynes as an opportunity missed. I will flesh it out and send it.

    In China all the banks sell physical gold and ecourage you buy it. Strangely the price of physical has not gone down and I’ll bet it hasn’t in pawn shops and the like.

    A final thought is this. If we, as a society, are reduced to bartering gold is that sort of survivalist society worth living in? Do we want things to degenerate to that? Hope not.

    • Golem XIV May 17, 2013 at 8:45 pm #

      I’ll look forward to it. Thank you.

      No I don;t want to be reduced to bartering Gold or anytthing else. Money is not an evil. Hoarding it and the fears which cause people to hoard it are the evil.

      • guidoamm May 18, 2013 at 6:14 am #

        David,

        I must strongly object with your statement that hoarding money is evil.

        In a healthy monetary system, money is not only a medium of exchange but it is a store of value and it is an integral part of the pool of real funding.

        It is thanks to people that can save that the pool of real funding can be expanded
        thus productive investment can take place, thus the economy can be expanded.

        Hoarding money is saving. Saving constitutes the basis of a healthy economy. Saving is at the core of personal liberty and is the core of the concept of personal responsibility. Saving is at the core of our responsibility to other members of society. Saving is the core of collective conscience.

        In the absence of saving – i.e. when government aggressively and relentlessly devalues the medium of exchange (a medium of exchange that is imposed by forced by the way) you not only deliberately induce the hollowing out of the economy but you also foster dependency on government till, eventually, you debauch society.

        Saving is the productive output of one’s intellectual and material skills. Whether plumber, carpenter, seamstress or cardiologist, your ability to work productively is at the basis of the expansion of the economy.

        A Fractionally Reserved Monetary system is predicated on inducing spending. This causes the migration of profit towards those entities that are closest to the creator of the currency. This happens because money does not enter the economy simultaneously at all levels. Rather, money enters the economy through privileged gates so that it is at its highest purchasing power at the point of entry and it is gradually devalued as it makes its way through the economy.

        The “hoarding” you are talking about is a mathematical function of Fractional Reserve Banking. This is most certainly evil.

        But saving is not and cannot be evil because there can be no productive investment in the absence of saving.

        • Golem XIV May 18, 2013 at 9:06 am #

          Hello Guidoamm,

          Perhaps what I mean by hoard and what you mean are a little different. I, like you, have no problem with people saving. I, like you, see saving as a good thing. It underpins the idea that people should think ahead and provide against at least some of life’s contongencies and set-backs. Similarly saving in order to launch a business or social enterprise is also a laundible and necessary thing.

          What I meant by hoarding is the accumulation of wealth beyond those needs and aims. The hoarding of money as a means to power over others. The hoarding so as to perpetuate wealth and power from generation to generatoin.

          I accept that in an uncertain world it is a powerful desire to provide protection for one’s children. But there is a point, even if it is difficult to quantify it precisely, where that sort of care for your children grades into the maintneance of a rentier class. A class of people who inheret such benefits that it ‘fixes’ the fight.

          That is what I mean by hoarding.

        • Mike Hall May 18, 2013 at 5:05 pm #

          guidoamm

          What a complete pile of gibberish you write there. Sounds like all the usual Austrian small (no) gubbermint gobbldegook.

          Seriously, what on Earth is this supposed to mean?:

          “….money does not enter the economy simultaneously at all levels. Rather, money enters the economy through privileged gates so that it is at its highest purchasing power at the point of entry and it is gradually devalued as it makes its way through the economy.”

          Really, money has different ‘purchasing power’ at different ‘levels’ ? What are these levels? Where does different economic actors’ money in the same currency have different ‘purchasing power’?

          Meaningless drivel.

          You write:

          “…Saving is at the core of personal liberty and is the core of the concept of personal responsibility. Saving is at the core of our responsibility to other members of society. Saving is the core of collective conscience….”

          Let’s replace the word ‘saving’ here & say what you really mean:

          ‘Life is about the accumulation of wealth in monetary terms, nothing else, & everyone should venerate it & aspire to it. Without the rich, no economic activity is possible. (Though of course the thing I’m not telling you is that by fallacy of composition, only an elite few can derive their livelihood from ownership of money).’

          Oh, and about all that gubbermint ‘debauching’ stuff.

          If the Government of a sovereign currency state did not accumulate debt in that currency, the non-government sector could not possibly have any net financial assets at all.

          • guidoamm May 19, 2013 at 4:55 pm #

            “What a complete pile of gibberish…”

            “Meaningless drivel.”

            “Let’s replace the word ‘saving’ here & say what you really mean:”

            Other than an ad hominem, you have singularly failed to build an argument. Unless of course you consider this:

            “If the Government of a sovereign currency state did not accumulate debt in that currency, the non-government sector could not possibly have any net financial assets at all.”

            … an argument… in which case, I beg you to flesh it out…

          • Roger May 20, 2013 at 5:05 am #

            Mike,
            Guido is more than capable of explaining his position and no doubt should you engage you may learn something from each other.
            I am surprised that you have dismissed the obvious point that those with first access to FIAT money are in a Much stronger position than those who rely on the Filter Down from the top.
            The filter down myth is dismissed by James Robertson rather amusingly as Horse Shit Economics.

            http://www.jamesrobertson.com/parallels.htm

            ´´the Chickens to thin and the Horses too Fat.´´

            The problem with the forthcoming revolution is separating the would be commissars from the Folk who simply demand a fair crack of the whip for all.

            It is doubtless in my own mind that the current money power will seek to undermine Gold whilst lining its own pockets with the stuff.
            It is also debatable that a system of money not backed by physical gold based on honest money can keep the game straight.( I happen to believe it could if held in the commons, others do not agree and haver genuine reasons for not agreeing,)

            I have been curious to see the main stream narrative against Bit Coin emerging, there really is rather a lot of it being such a haven for Pimps and drug pushers to launder their Ill Gotten Gains, highly amusing Pot calling the Kettle Black stuff , beloved of the Guardians of the Public morals. Bit coin seems to me to be backed by real Labour and FIAT, as Guido says( on his excellent Blog http://guidoromero.wordpress.com/background-of-my-contention-how-and-why/) is Backed by the Barrel of a Gun and coercion.

            On saving it is a disgrace what the Banks and Government have done in imploding the wealth of just about everybody else to save their own skins and the Very convenient system of money which has both blaming the other and neither claiming any responsibility or ability to do anything. Robert Maxwell was a choir boy by present day standards.

          • guidoamm May 21, 2013 at 5:02 pm #

            Mike,

            Accept my apologies for being snarky.

            The truth is that the creator of the currency does enjoy an arithmetic and asymmetric value advantage over anyone that comes further down the chain.

            New money is created by the Fed ostensibly on demand from the Treasury. We now know the Fed acts independently however.

            The money is then handed to the Treasury that in turn hands it to the Primary Dealers whom happen to be members of the same Fed that just created the new money in the first place.

            In turn the Primary Dealers hand multiples of the original sum to the Commercial Banks who then loan it out to corporations and other banks who then loan it out to you and me.

            Each new unit of currency is thus devalued at every step of this dynamic. But the real devaluation happens the moment Fractional Reserve Banking kicks in and at every single stage till the new money reaches our pockets.

            If more people understood the monetary (and debt) creation dynamic, we would not be in the situation we are in.

            The elite few you speak of, is none of us on this forum. We condemn this particular variety of ownership of money. Conversely, in a healthy economy where money becomes once again a store of value, ownership of money is interchangeable with ownership of productive goods and can be employed to expand the wider economy.

            Of course, it could be argued that only the state should own productive capital. If this indeed was your position, then this should be your battle.

    • Gene May 17, 2013 at 11:59 pm #

      No we do not want to live in a survivalist society, of course.

      But if it ever came down to that, it is better to have physical GOLD than not.

      In that kind of scenario, anything tangible will be infinitely worth more than any of the paper instruments (currency, stocks, bonds, paper gold) being widely used today.

      Good luck.

  5. wasinga May 18, 2013 at 1:44 pm #

    Correct me if I’m wrong, but to me,paper gold is to real gold as hypothecated Collateralised Debt Obligations are to personal savings.One has apparent value and t’other real value.It seems to be the real savings/value of the population that are being swapped for the apparent value of the CDO’s as the government underwrites the banks with the present and future earnings of the taxpayers.Both appear to be the same but one has become untradable, resting in “bad banks” now owned by “the public”
    I was worried for a bit that we were about to lose you Golem. Delighted to see you back.on form.

    • Golem XIV May 18, 2013 at 1:56 pm #

      Glad to be back.

      I think your way of putting it is good.

  6. MickeysDad73 May 20, 2013 at 2:37 pm #

    Thanks for this article. I realise that some people may not agree with the conclusion of the analysis (I am in no position to comment), but I did not previously appreciate that paper gold existed.

    If I have understood correctly, this looks much like another form of leverage.

    Cheers

  7. Just me May 20, 2013 at 10:35 pm #

    “No Bear Market In Gold — Paul Craig Roberts”

    http://www.paulcraigroberts.org/2013/05/20/no-bear-market-in-gold-paul-craig-roberts/

    THE TIMES OF INDIA

    {http://timesofindia.indiatimes.com/business/india-business/Forex-reserves-down-616-4-million-to-293-69-billion/articleshow/20108894.cms}

    • Golem XIV May 20, 2013 at 10:40 pm #

      Thanks Just me,

      It would seem to back up what I was arguing 100%

      • Just me May 21, 2013 at 3:04 am #

        Thats OK Golem, glad to help you.

        I am telling you the truth when I tell you that I saw what was coming in 1964, I NEVER for one moment thought it would have come this early, I thought at the earliest it would happen after 2030, I tell you the truth, I wrote an essay in school in1964, we were told to entitled it…”What will the world be like in 2050″. I wrote that with the running out of global resources the USA would invade a middle eastern country, from there they would strike out to gain total control of all the oil in the middle east, I remember writing that the “Jewel in the Crown would be Saudi Arabia”.

        I didn’t know that as I was writing my essay plans had/were already been/being laid to start all this off by the end of the 1970s!!!. I wrote about the acceleration in world population and the effects that would have on global resources, and many other things. Everything I wrote has happened/happening, except one thing, that I fear is pending, you see Golem, there is no longer enough to go around and keep a capitalist system in place. What did anyone think would happen, did they think it would all be left to actual run out and then deal with that problem ?, seems many do/did think that!. I tell you all there is far, far worse to come.

        It was NOT an intelligent essay, it was totally based on having an understanding in the history of mankind and basic common sense, what do you or anyone else think was going to happen.

        Just my take on it all, strange though that all this is now happening, I put it to everyone that when they look back to 1981 the writing was on the wall, sadly only a few saw it.

        By the way, when I got my eassy back two weeks later it was marked 3/10.

  8. Aleph0 May 23, 2013 at 10:57 am #

    Re.: GLD

    I was surprised that the number “100,000″ wasn’t mentioned.

    IIRC, the “right” to demand physical Gold from your ETF GLD shareholdings, is when you have 100,000 or more shares.
    .. somewhere in the small print IIRC.

    WIKI : …. “If the share price differs from the gold market price, the fund’s manager exchanges blocks of 100,000 shares for 10,000 ounces of gold. The possibility of such exchanges keeps the ETF price roughly in line with the gold price, although the prices can diverge during each day.”….
    http://en.wikipedia.org/wiki/SPDR_Gold_Shares

    This excludes almost all the small players and of course makes easy meat for the big players like JPM etc.

    i.e. (Sell) Short the paper and collect ( buy to cover) the physical.

    JMHO FWIW

  9. Ambrosius May 27, 2013 at 7:28 pm #

    It appears that Western scholarship does nothing nor sees anything , when staring at the interest bearing IMF demands for their twenty five percent of Gold , that member states must contribute, if they need to receive loans . That is how it started. In this darkness and drooling corruption of a monetary system who doesn’t need loans ? Does England escape their talons?
    Now it’s ” Give us your gold in exchange for worthless unbacked paper,” central bankers salivate. Prime ministers comply.
    No port in these storms . It is always difficult to know who to trust , n’ est ce pas ? Germany cannot get her bars and tomorrow no one will get theirs either. Who calls them haircuts? Used to be called scalping. It’s fashionable again.
    Our new normal is everybody on the edge.
    So Why GOLD?
    Could it be that this barbaric relic is of staggering intrinsic value, and is opposed to all faith-backed currencies, of whatever denomination, and especially now that they are all on the once mighty U.S dollar….. which is beyond saving ?
    Could it be also that when push comes to shove, only those who own the gold can slam their Ominous fists on the face of mankind? Is there discordance planned? As one of their agenteurs so threateningly stated:
    ” Today there are only hard choices left. ” [Olli Rehn, European Union Economic and Monetary Affairs Commissioner .]
    Judging from their fruits , it certainly will surpass one’s worst predictions. But by then
    ” Regrets are illuminations come too late”.
    For how many hundreds of years have the key financial powers, always at the centre of Empires, concentrated more and more wealth, and thereby power, in fewer and fewer hands always backed by gold.
    Today you can count the Families with ten fingers and two toes.They are the visible ones who control but do not own this monopoly of monopolies: The Central Banking Cartel BIS Basel.
    But who is it for? For You? To do You service?
    In this our final stage of terminal cancer, given that what most innocent or not are holding in their empty pockets is a debt that Central Banks call their franchise, are you seeing the larger picture?
    Who are their entschlossener eating now ?
    Those few countries left without a Central Bank are being pulverised as I write.
    I am spelling absolute domination. When it grabs you by the throat you yield or you die.

    And why are they all buying GOLD and more Gold and with such alacrity, stepping over each other in their haste. Insatiable and
    most strange, given what their manipulated media calls it. Maybe not so strange. You are here to believe in their force and make belief . You are here to comply. . .
    Why was the use of Gold prohibited in the articles of agreement of the IMF ? Why no longer legal tender?
    Could it be because only when transferred through their IMF into their hands, (all of it and APPROPRIATION takes the rest when the time is right, ) can they impose it as legal tender once again; only you won’t have any. Countries will have only worthless paper and Debt. Through their banksThey will own the largest chunk. And thus they have a plague to offer. Perspectives startle. So do their schedules. A new Empire is afoot, slithering on the ashes of the previous one.
    Are you seeing the larger picture? Not large enough? It is their Gold. Their universal despotism. Haven’t sold yours yet? More looting the ETF’s of their gold basis and
    price will keep on dropping. They want your crust. They are coming for your savings too. Your Cyprus. Any law to protect you?
    You thought their mesiah would be mild….entertaining? He delights in defilement and humiliation. Is a consummate abuser. His servants draw his cards. But do not despair love is in the air.

  10. Just me May 30, 2013 at 12:57 pm #

    “Corbett Interviews Roberts on the Economic Dissolution of the West”

    http://www.paulcraigroberts.org/2013/05/29/corbett-interviews-roberts-on-the-economic-dissolution-of-the-west/

  11. You could certainly see your skills within the paintings you write. The sector hopes for more passionate writers like you who are not afraid to say how they believe. At all times follow your heart.

  12. shahshah December 16, 2014 at 9:21 am #

    The sector hopes for more passionate writers like you who are not afraid to say how they believe. At all times follow your heart. google

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