Phil Davis (the options expert who runs a daily trading chat system) reports today that 1,625 tons of gold are mined on an annual basis but the LBMA is trading 20M ounces (625 tons) per day.
- That is 150,000 tons a year,
- this is the sum total of all the gold that has ever been produced in history
- it is roughly 100 times the actual physical float of gold and most of that float is being churned over and over by the various ETFs who have been doing 1/3 of the world’s buying for the past 5 years.
"Does the lack of actual gold make the bullion you hold more valuable? That’s an interesting question. Mortgage backed securities didn’t get more valuable as mortgages diminished in value but I suppose this gold scam can keep going as long as no one actually asks for their physical gold. I would advise having actual gold if you are using it as a hedge and not trusting your fate to contracts that may never be able to make good on the physical delivery they promise. Overall though, I don’t think much of gold as an investment. Gold historically had value because it was scarce, difficult to produce and easy to verify - I could make the same argument for old baseball cards or comic books and my daughter would trade them all for a "
Legendary" Pokemon she’s been looking for.
Where, ultimately does gold find value? It reminds me of something written a long time ago in Marginal Revolution about fiat currencies and Gilligan’s Island. "In early episodes, we see Mr. Howell hiring various services from other castaways. We eventually learn he’s been writing checks on a mainland (and therefore inaccessible) bank. This works while the group consider their condition temporary, but the checks are quickly devalued and eliminated when the castaways begin to prepare for the possibility of an indefinite stay on the island. In Episode 9, "The Big Gold Strike," Gilligan and Mr. Howell find a gold mine on the island, which Howell convinced Gilligan to keep secret from the others. By the time everyone learns about the mine, Howell has already taken the lion’s share of the most easily accessible gold. He’d like to hoard it for himself, but the other castaways begin charging him for their goods and services."
You may have your 8 pounds of gold ($150K) when the world falls apart (or whatever the fantasy end game is for gold bugs) and you may lug it over to the store to buy some clean water or use it to barter for medicine when you get sick but who’s going to set the price for you then? How much will be a " fair" exchange when the exchanges fail? That’s the real difference between gold and oil - gold can float to extremely unrealistic levels and then drop like a rock because - when push comes to shove - no one NEEDS it. Oil, on the other hand, must ultimately be consumed every day and raising the price can diminish demand and vice versa. Raising the price of gold, however, stampedes more and more people into ETFs that buy more and more gold (or at least contracts for gold as we have now learned) which raises the prices and brings more and more people into the ETFs, who order more gold, etc… What can go wrong with that?"