Real Gold vs Paper Gold

Jim H
By Jim H on Wed, Jun 8, 2016 - 1:38pm

Days like this help point us to the difference between Gold derivatives that can be printed (like GLD shares) vs. real physical Gold which is ultimately scarce, like shares in the PHYS Sprott trust.  

As I write;

PHYS + 1.93%

GLD + 1.24%

Why the discrepancy?  In order to get a share of PHYS, you have to find a seller.  'They only print new shares when the trust makes a buy.. which it has not.  Realize how this is also different vs. the Comex futures market where the bullion banks can and do print contracts at will to dilute out demand.  

What would the price be for Gold moving forward were it priced like PHYS is today?  What if you had to actually induce a party that owns physical Gold to sell it to you via the price offered?          

    

4 Comments

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2385
Real Silver vs. debt paper

A thought provoking piece surfaced on the SRSRocco website recently.  It really helps put into perspective the insanity of the expansion of paper debt based products for use as, "investments" vs. the true scarcity of physical investable Silver.  We have been conditioned to think of these debt instruments as safe products.. even though most of them offer almost no yield these days.  How tiny is the Silver market?  Read on.. 

  https://srsroccoreport.com/titanic-math-101/

Just for fun, lets assume total above ground silver is in the range of 4 billion ounces.  Furthermore, say 3 billion ounces represent actual physical bars and coins while the balance of 1 billion ounces is represented by market traded products, like SLV.  At $16 silver total above ground silver value would be $64 billion.  Is that a lot? Nope.  You could do any ONE of the following:

  • Eliminate the unfunded pension liabilities of New Jersey and Connecticut
  • Finally, why not use that $64 billion to extinguish roughly 18% of all publicly traded energy company debt, leaving just over 300 billion of energy debt outstanding
  • Pay off most of Apple’s debt leaving just $5.3 billion outstanding.

The math is just stupid, but stupid has been working for a long, long time.

Finally because municipal bonds occupied far too many of my working days, I just wanted to share a true story.  A dear friend, highly respected New York City attorney with an IQ multiples of mine shuns risk.  His dad shunned risk twice as much.  For years I offered to assist my buddy with his Dad’s muni portfolio.  “Nope”, “but thanks, he does all his own stuff”, “He’s extremely conservative, wants his triple tax exemption and has to be able to sleep at night!”  Pop recently passed away, he never owned stocks, or packaged products.  But Pop did place the majority of his holdings in Puerto Rico municipals.

My buddy just sold the last one at 16 cents on the dollar.

So there you go.  Someday most investors are going to awaken to the meaning of primary wealth... which Silver is.. vs. tertiary wealth, which these paper debt products are.  If you don't front run this process, you won't have any savings at the end.      

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5418
the silver market

Silver is indeed a tiny market.  And there's an overabundance of COMEX paper.  OI is 178k contracts, or about 890 million oz of paper silver.  That vs an above ground supply of (estimated) 2.3 billion oz.  That's quite the ratio.  Mine production is about the same - 886 million oz.  Again, quite the ratio.  It would take a full year of production to satisfy all the open long contracts out there at just the COMEX.

So with that situation in play, how come we haven't we had a "silver bank run" yet?  We've had warnings of imminent silver bank runs for literally a decade from our friendly goldbug writers - and so far, they've been wrong every single time.  Certainly every now and then we get an event where the supply of Silver Eagle coins runs out, but the supply has always come back.

What do you think will need to happen to cause a real "silver bank run" to actually occur?

Or a regular bank run, for that matter.  The M2:CURRENCY ratio is about 15:1...

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2385
Silver Bank Run..

Dave said,

So with that situation in play, how come we haven't we had a "silver bank run" yet?  We've had warnings of imminent silver bank runs for literally a decade from our friendly goldbug writers - and so far, they've been wrong every single time.

What you describe is the genius of price manipulation.  Since most investing entities don't understand it, they simply see Silver as a scary thing that can lose you lots of money fast.  They have no idea the true value of Silver relative to other investable assets.  I don't know when it breaks.  

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5418
true value of silver

Hmm, so then for the break to occur, some number of investing entities must discover the true value of silver relative to other investable assets?  Certainly, I think the "investing entities" have figured out that silver can go nuts in both directions.  The move up to 50 definitely caught some attention.

I'm trying to sidestep all the goldbug writer stories that talk about conditions that have been in play now for years, with no ill effects.  Stuff like huge COMEX open interest, a tiny market, prices lower than cost of mining, etc, etc.  If any of those things were decisive forces, we'd have blown up long ago, so clearly those things in and of themselves don't matter.

And also, plenty of investing entities like silver just fine when it rallies - but that by itself won't cause the silver bank run either.  At least, it certainly didn't do it during the last run up to 50.  Or the one before that.  And so presumably during the next run up to 50, silver probably won't run out then either.

So rather than trying to figure out when things break, I'd like to know what must break instead.  What is it that must change for it to be "different this time" and for the silver to finally run out?

 

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