Will Paper Gold Go Up In Smoke?
There’s a reason savvy gold investors
say “if you can’t hold it, you don’t own it.”
By Fergus Hodgson
Gold Newsletter’s Roving Editor
Dear Fellow Investor,
Many people seek gold as a safeguard against inflation of fiat currencies, but they often forget how fiat currencies came to be in the first place.
This blind spot has permitted the very same deceit to play out in our time — but without detection in the major financial press.
The blind spot is fractional reserves. It is the holding of precious metals — the hard money — below the number of claims of customers. It was the precursor to modern fiat currencies, which now only have shadow “reserves” of more cash. Similarly, conventional banks now hold cash as “reserves” for check-book and digital money.
Who is the dummy in this situation? As Chris Powell of the Gold Anti-Trust Action Committee (GATA) says, “If you don’t know who … you’re the dummy.”
Powell, an editor and journalist by trade, began GATA in 1999 and spoke at this year’s New Orleans Investment Conference. He is also a longtime Gold Newsletter subscriber, and we sat down with him to get a better sense for the prevalence of fractional reserves. He laid waste to the corruption of central banks and to cowardly members of his profession when it comes to reporting on manipulation of the gold market.
LISTEN TO THE PODCAST HERE.
“Most gold buyers, for investment purposes, never take possession of the metal,” he explains. “That allows central banks and investment banks … to operate a fractional-reserve gold banking system. They sell certificates against gold that doesn’t exist, very confident that they’ll never be called on it.”
The scope of this is difficult to determine, and Powell cited one estimate with a ratio as high as 92-to-1 of paper gold to real gold. While that may not be the case, “even the gold merchants at the bullion banks would acknowledge that there’s a lot more certificate gold circulating than there is real metal backing it.” A “very conservative” estimate is that less than half the nominal gold has real backing.
There are other ways to inflate supply, often on a short-term basis, including gold leasing, but a more important question is how the everyday investor can avoid being the owner of a dud title. Those in the know will often say “if you can’t hold it, you don’t own it.” This, however, raises concerns over transportation and liquidity, and that’s why people often prefer to hold gold in secure vaults.
Powell likewise believes that one need not rely solely on physical possession. He recommends institutions “outside the banking system,” such as Gold Money, Anthem Vault or Bullion Vault, since they maintain their own vaults, and the gold is transferable. His warning is against commercial or investment banks, where you are “very vulnerable.”
What compounds the problem is that it is a no-go topic in major outlets such as the Wall Street Journal and the Financial Times. This absence of reporting has gone on for so long now that a widespread awakening would be a “deadly danger to the whole investment system.…If this issue [were] ever examined critically, you’d realize that the values that we are living with in the economy every day are totally false.”
This overlooking of fractional reserves also hints at collusion between major outlets and their key advertisers and partners. Governments, Powell claims, are striving to keep this a secret, as are “big financial houses.”
Reporters need to show some spine and report the evidence presented to them. Many are aware of the problem, yet remain silent.
“They know there would be hell to pay…[In the Wall Street Journal] on every other page in the A section every day there will be an ad from JP Morgan Chase or Goldman Sachs or Citigroup, or any of those investment banks that may be involved in the gold market.…The financial press is largely controlled by the financial industry.”
The big losers are regular investors, but you need not be one of them. As microeconomics tells us, though, prices send signals and allocate resources. That is why on a broader level market manipulation creates perverse incentives and rewards unproductive behavior.
“The destruction of the market economy is going on all around,” and Powell believes “all of civilization is the loser.…We’re also losing our democracy. A very small elite is benefiting from this — that is central banks and those who live off the patronage of central banks.”
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The Gold Newsletter Podcast
All the best,
Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference
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