Gold Shorts – Always
Naked Like The Emperor by Egon von Greyerz - Gold Switzerland
| May 22, 2017
The most expensive
investment anyone can buy today is paper gold.
For $1,260, an investor will get a piece of paper saying
he owns 1 ounce of gold. But he is unlikely to ever see
that gold. Firstly, most investors who buy paper gold have
no understanding of the real reason for holding gold and
will therefore never contemplate taking delivery. And even
if he did understand the importance of holding real gold,
he is quite happy to hold the surrogate alternative which
is paper rather than physical. This is of course what the
issuer of the paper gold wants. He knows that paper gold
buyers have no intention of taking delivery. This is perfect
for the seller because he has no intention of making delivery
either. And this is how paper markets function. Buyers and
sellers are willing to trade pieces of paper that are said
to represent an underlying instrument whether it is a stock,
bond, currency or commodity.
Paper gold at $1,260
is worth ZERO
But paper markets are illusory. They give
the impression that the buyers acquire a real share in the
underlying instrument. That would be the case if for each
unit of for example a currency or gold was backed by real
money or real gold. But in today’s false markets that is
far from the case. We live in a world of the Emperor’s New
Clothes. The people is made to believe that the emperor
is dressed in a suit made of gold whilst in fact he is naked.
And that is exactly how the gold market functions today.
Shorts are always naked which means that there is never
an underlying asset backing the gold short sale. What the
buyer is getting is a piece of paper with zero intrinsic
value.
This is a perfect situation for central
banks, banks and major trading houses such as hedge funds.
With sufficient capital, they can manipulate any market
without ever worrying about delivery. The result is markets
which are totally fictitious and bears no resemblance to
the instrument that is traded.
The gold price is not the price
of gold
That is why the price of a paper commodity
has nothing to do with the underlying instrument. Paper
trading can be leveraged hundreds of times or more and whatever
the price the paper market trades at sets the price for
the actual commodity. Thus, the paper market sets the gold
price. The gold price is the paper price that the false
gold market trades at. That has very little to do with the
price of gold which is what the physical market would trade
at if there was not a manipulated paper market. But buyers
and sellers are not concerned about the real price of gold.
Because they have no intention of owning the physical since
they don’t understand its function.
But one day there will be this little boy
who will shout out “The Emperor is naked” and then all hell
will break lose. At that particular point, all holders of
paper gold will ask for delivery and just like the Emperor,
they will find out that there is no gold left in the vaults.
The manipulators have then lost control of the market and
the gold (and silver) price will go “no offer”. This
means that gold is not offered for sale at any price because
there isn’t any to sell.
Economic power will follow the flow
of gold
The short sellers, mainly bullion banks
and futures traders, will fail since they can’t fulfil their
contract and the buyers will receive no gold. The market
then becomes a physical market with price being determined
by the holders of physical gold. Economic power will then
follow the same route as we have seen physical gold travel
in the last 10-15 years. The Silk Road countries such as
China, India and Russia will then gradually dominate the
financial system with their gold and their currencies.
China bought 171 tonnes in April.
Total 727 tonnes for 2017. On course for over 2,000 tonnes
in 2017
The financial system of the debt laden West
will implode and this is also likely to bring an end to
the current economic and cultural cycle in the West. The
time this will take depends on many factors and is hard
to forecast. von Mises expressed it very well:
“There is no means of avoiding
the final collapse of a boom brought about by credit expansion.The
alternative is only whether the crisis should come sooner
as the result of voluntary abandonment of further credit
expansion, or later as a final and total catastrophe of
the currency system involved.”
We have already gone past
the point when a voluntary abandonment is possible. Therefore,
a total catastrophe seems more likely. With the biggest global
debt bubble in history, it could go very fast. Global debt,
liabilities and derivatives of over $2.5 quadrillion can implode
very quickly. We must remember that global GDP is
only $70 trillion and total debt and liabilities are 35x greater.
So gradually economic power will be transferred from the
bankrupt Western economies to the countries that patiently
have been buying major quantities of gold over a long time.
I am not saying that the Silk Road countries will be without
suffering during this downturn. The whole world will be
severely affected, including China with its massive debts
and export-dependent economy. But the Silk Road countries
will emerge as the dominant power after the initial severe
chock.
Switzerland – the foremost gold hub in the world
Coming
back to the price of gold, I regularly meet up with our
partners in the gold markets, primarily the refiners and
the vaults. It is good to be reminded of the massive amount
of work and the skill that goes into producing and safekeeping
every ounce of gold. But before that the gold must of course
be mined which in itself is a very labour and capital intensive
industry. Gold mining was up to 1970 dominated by South
Africa which then produced over 3/4 of all gold or 1,000
tonnes p.a. Today South Africa only produces 5% of global
gold or 160 tonnes. The biggest producer is now China with
450 tonnes.
40-50 years ago, the average gold grade
per ton of ore was up to 20 grams. Today it is less than
0.5%. This together with higher energy prices has increased
the cost of producing gold dramatically. Refiners receive
doré bars from the mines which have an average gold content
of anywhere from 10% to 70%. The balance is mainly silver.
The
Swiss refiners produce 60-70% of the gold bars in the world.
There are four major Swiss refiners, Argor, Valcambi, PAMP
and Metalor. Three of these are in Ticino which is the Italian
part of Switzerland. The major reason for this location
was the Italian jewellery industry which used to dominate
global jewellery production for a very long time. This is
no longer the case but Switzerland has continued to dominate
gold refining. Gold is today a major Swiss industrial sector
and accounts for 29% of Swiss exports. Combined with a number
of very major gold vaults and a big domestic gold trade,
this is a very important industry. This is why Switzerland
is unlikely to ever confiscate gold. Why would they kill
the Swiss Goose that lays such valuable Golden eggs.
Gold
refining is a precision industry. There is zero tolerance
to produce a 9999 (99.99%) content gold bar of exactly 1
kilo. Once the gold has been refined and the bars cast and
stamped, the final process is to weigh each bar manually
and shave off exactly the right amount of a gold flake so
that the bar weighs a very tiny fraction over 1 kg. To maintain
their reputation, Swiss refiners will always be slightly
over. Anything that is a fraction under is obviously rejected
and recast.
Anyone who has visited a Swiss gold refiner
will realise the amount of work and precision involved in
producing every single bar whether is cast or minted. This
is why Swiss 9999 gold has the reputation of being the best
in the world.
As I discussed above, the gold price is
the paper screen price at which paper gold can be traded,
say $1,260. Depending on who the buyer is and the quantity,
the wholesale price for this kilo bar might be just $1-2
higher than the paper price. This is just a ridiculously
low price difference when you consider the amount of work
that is involved in producing this bar.
Switzerland also has a number of major private
gold vaults. Being one of the oldest democracies in the
world and not having been in a war for 200 years makes Switzerland
one of the very safest countries. Politically Switzerland
is probably the best country in the world and the only true
democracy. This makes Switzerland ideal for vaulting gold
and silver. There are a number of secure private gold and
silver vaults including the biggest and safest private gold
vault in the world which we offer to our clients. It is
critical to select the best vaults. The most important criterion
is people, owners and management. Then comes physical and
financial security.
Bearing in mind the superior quality of
refining and vaulting of gold in Switzerland, it is not
a surprise that the country has such a high reputation in
this sector. And the day the gold price reflects the real
price of gold, the Swiss gold industry can name their price
for gold and vaulting. It is certain that this price will
be multiples of current levels.