Gold is not a commodity. Gold is money. Gold is mined from the ground like other commodities and it is traded on commodity exchanges, but it’s not a commodity. The definition of a commodity is a generic and fungible input used with other inputs in a manufacturing or other processing activity. Copper, Coal and Corn, for example, are commodities used to make wire, steel and for food processing. But Gold is not used much, except as money. There are some specialized applications, but that’s about it. Jewellery is just bullion that you can wear. It’s not a generic input. Gold is only good as money, but it’s the best form of money.
That has led to “paper gold” contracts that offer price exposure, but are nothing more than hugely leveraged bets on the price of the underlying metal. The paper gold market is now so big that, in effect, the paper gold markets dictate the physical gold price rather than the other way around. That won’t last. Sooner than later, physical gold prices will soar and paper gold markets will collapse. The paper gold panic won’t happen tomorrow, but it is on the horizon.
Vaults in London and New York have been juggling physical gold back-and-forth to back up gold futures in New York and gold forwards in London. No one really knows where all of the gold is. The London vaults in particular are non-transparent and their inventory figures don’t add up. If all were well, it would not be necessary to be so opaque.
Also the bullion dealers don’t want you to know that all physical gold available is about 1% of all paper gold outstanding. Gold in vaults has been leased, pledged or rehypothecated. When the physical gold buying panic hits, paper traders won’t to get their hands on enough physical gold. There is simply not enough around, not even close. Smart investors will acquire their physical gold now, while it’s still available and the price is somewhat suppressed by the paper traders.
Sven Franssen