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How Much Gold Has Been Sold That Doesn’t Exist? — Part 2

On October 16, 2009 I wrote “HOW MUCH GOLD HAS BEEN SOLD THAT DOESN’T EXIST?” which you can find here. This article looked at how much gold the London OTC market should be holding in order to be able to trade 2,134 mt each and every day. The conclusion was that the exchange should have at least 64,000 mt. From GFMS data it can be deduced that the London OTC market only has a maximum of 15,000 mt because this is the estimated total existing London Good Delivery (LGD) bars in the world. This means that there are at least 49,000 mt of ‘imaginary” gold that have been sold that do not exist. This scam is unlikely to be discovered unless the owners of the “imaginary” gold actually request delivery. The bad news for the Gold Cartel is that this is beginning to happen.

I have written this follow up after some e-mail exchanges with some readers and with Bill Murphy. I think additional text may add some clarity to the original article.

First of all I would like to emphasize that there are various reports of difficulty meeting deliveries in London. This has been described as a “lack of liquidity”. If there is a “lack of liquidity” in the London gold market then there is fraud. There is no other explanation possible. If the OTC only traded gold that was in the vaults on a 100% reserve ratio there could never be a lack of liquidity. Recent information indicates there is a lack of liquidity so there is a fraud. Period. …now all we are trying to do is to estimate the scale of it.

Gold has been “blamed” for not keeping up with inflation. That is the most ridiculous thing I have ever heard. This is basic economics. The relative supply and demand of gold with respect to US dollars determines its price. Inflation is a monetary phenomenon. If the supply of money is increased without increasing the supply of goods the result will be an increase in the price of goods. If the money supply is doubled and the supply of goods is doubled there will be no change in the price of goods.

In the last 14 years the supply of dollars has increased from $4 Trillion to $15 Trillion (+275%) while the gold price has risen from $400 in 1995 to $1000 in 2009 (+150%). How could this happen? The demand for gold must have gone down. Wrong! It has gone up. So supply must have gone up. Wrong! Mine supply has been decreasing. There has to be an alternative MASSIVE supply of gold to make the price rise slower than the influx of dollars. Enter the sale of “imaginary” or “paper” gold that makes up the imbalance. In 1995 the world stock of real gold metal was 140,000 tonnes for 4T$ of money stock. Let’s assume the amount of imaginary gold was small at that time as this was before Rubin’s strong dollar policy. If the price of gold had remained at $400 the gold stock would have to match the rise in the dollar stock (it grew 3.75 times) and be 525,000 tonnes (140,000 x 3.75). But the price didn’t stay static it went up 150% (an increase of 2.5 times) so the gold stock should be 140,000 x 3.75/2.5 = 210,000 tonnes. The gold stock is actually 160,000 tonnes. The difference must be imaginary gold = 210,000 - 160,000 = 50,000 tonnes.

That is quite astonishing because this is almost EXACTLY the same number as calculated in my previous article. However, in my previous article I calculated it by using the GLD ETF trading characteristics to determine what the daily trade volume to inventory ratio should be for unallocated gold. When the GLD trading characteristics are applied to the OTC daily trading volume it gives an implied minimum inventory stock level of 64,000 tonnes. Given that the actual inventory can not be more than 15,000 tonnes this tells us that 49,000 tonnes of imaginary gold has been sold. That is to say “unallocated gold”…but it’s not just “unallocated” it is also non-existent! This is quite amazing that this in depth analysis of the OTC market gives almost the same result as a back-of-the-envelope calculation of money supply.

This lends credibility to at least the ball-park level of our estimate. It means that about 50,000 t of gold has been sold that is in excess of actual real stocks. This does not include all the replicated look-alike scams of pool accounts, gold certificates, unallocated brokerage sales, ETF etc which might be another 10,000t. So the order of magnitude of the net short position of gold in the world is 60,000 tonnes. This is against a total possible claimed gold supply of 30,000t from all Central banks which GATA believes is now less than 15,000t. Of the 15,000t perhaps, at a maximum, the Central Banks would be willing to part with only 7,500t.

So there is imaginary gold sold of 60,000t and only at an absolute maximum 7,500t that can be mobilized to meet it. Of course, when the squeeze comes the demand from fresh buying is going to sky rocket to pile even more misery on to the Gold Cartel.

I don’t think it is melodramatic to say this is likely to be the biggest short squeeze ever in history. What price will be needed to bring this into equilibrium? I don’t know; but it will have to have a lot more zeroes on it than $1000/oz has!

Anyone who suggests gold is in a bubble at $1000/oz does not have a clue what he is talking about!

If 60,000t of “imaginary” gold has been sold in a market that has a total stock of 160,000t there is no question of doubt the gold price has been suppressed as a consequence, as long stated by GATA. There is no further debate required on the subject. If the OTC market has 100% reserve ratio let them publicly state it under oath and agree to an audit. Let them also explain how recent transactions could not be met without Central Bank leasing and why cash settlement with generous premiums was offered instead of physical gold delivery.

As Warren Buffett famously said, “When the tide goes out you get to see who was swimming naked!” The tide is going out on the Gold Cartel.