Plenty of Gold?
Don StottLast week, I attended the annual Eris Society get together, which is a libertarian think tank. One of the featured speakers, was Jim Rogers, a TV star on some show or other, and a superb speaker. He and his wife had just completed a 3 year, 156,000 mile trip around the world in their custom Mercedes. The rich can afford it. In the question segment, someone asked him about gold. He said that the world's governments had a lot of it, and he didn't think it would go up too much. I disagreed, and gave my reasons, but they were ignored, and other questions answered. I say, so what? So what if governments do have thousands of tonnes of gold in their vaults? Does this mean gold will stay down, because they will keep selling, to keep it so?
No, and the reason is simple. First of all, these so called smart bankers and bureaucrats, have been selling and leasing their gold for years now, and they are now beginning to realize that their paper currencies are just that, and have no tangible value. The selling and leasing, have virtually stopped, and the banks and governments are keeping the gold, because they want something of value. It is estimated that governments, central banks, etc, hold about 16,000 tonnes of gold in their vaults, which is about half of what they held a few years ago. (A metric tonne is 32,150 troy ounces.) This means that there is in the various vaults, about 514 million ounces of gold. Mine production around the world, is about 2,600 tonnes (83 million troy ounces) a year. Consumption is very close to mine production. Not only are central banks and governments selling and leasing very little, or none, but they will eventually want their gold back.
Those who borrowed gold at 1% interest, promptly sold it and re-invested the proceeds in 5% bonds or other paper, thereby making a 4% profit. As long as gold didn't go up in price, the gold could be re-purchased to repay the loans, and all would be well. That leased and sold gold, is un-recoverable, as it is in private hands. When repayment is demanded by lenders, it will have to be bought from the marketplace, and the more purchased to fulfill the lease obligations, the higher it will go. If I borrowed some gold from you, would you want me to pay you back in greenbacks?
I do not think there is any question as to whether there is anything in Ft, Knox, or any other U.S. Government vault, other than storing it for someone else, with someone else's name on it. This has been proven over and over again, so I will not rehearse it here. Uncle Sam has none. He buys it on the open market every month, to make Gold Eagles. The UK was selling 25 tonnes a month, till the populace revolted, and threatened to throw the bums out of office. Switzerland was supposed to sell, but I am not certain it happened. Portugal supposedly sold 25 tonnes. In other words, the idea that all the gold will be liquidated from government vaults or central banks, is highly unlikely. For decades, gold was earning no interest in central bank and government vaults, and was looked on as being a dreg. Now, magically, those bankers and bureaucrats have discovered that this is real money and important to have. They sold and leased something of real value, and will want it back. It isn't around, but will have to be bought at whatever the market price is, by the borrowers, when demand is made.
India still consumes the most gold, last year buying 547 tonnes. America is second, buying 410 tonnes, with the middle-east third, consuming 370 tonnes. Southeast Asia fourth, using 256 tonnes, and Europe fifth, buying 236 tonnes. China used 238 tonnes, Japan 141 tonnes, and Turkey 128 tonnes. Lots of gold, huh?
True, there is a lot of gold in the world, but the supply of paper currencies is increasing every day, by millions of pieces, thereby driving the price of everything, "up." Just last week, the fed increased the dollar supply by $50 billion! Just because there is a lot of gold, it doesn't mean that those holding it want to sell, or will forgive the debts of those who borrowed. Jim Rogers said he would rather invest in zinc or lead, than gold. I think this is wrong, because the only use for lead is in storage batteries, and zinc is good for galvanizing. Big deal. Bought a new battery or galvanized bucket or gutter pipe recently? Not many have. If one did invest in lead or zinc, where would one store it? Who would want it? Zinc and lead are not historic money. Prices are low, because of low demand, and zinc and lead are not in much demand of any kind, so their prices are low, and likely to remain so. Want to fill up your safe with zinc or lead? Not many do.
Now think of what will be the mindset of those lenders of gold, when prices go up, and the dollars continue to increase at astronomical rates, as they are now. "Hey, we want our gold back," will be the norm. The higher gold goes, the greater will be the demand. That is always true, just like the stock market. When the NASDAQ hit 5,000, the phones were ringing off the hooks. When gold hit $850, the phones were also ringing madly. If you have loaned hundreds of thousands of ounces to someone at a 1% interest rate, and the gold is going skyward, you will want your gold back, and the hell with the 1% interest. The borrowers sold it, and no longer have it. Gold is going to go up far faster than any interest earned, and this places the borrowers in a deep hole, and they are already in one, I believe. To repay the loans, they will simply have to buy it on the market and at current market prices, and this is why they try so hard to keep the price down.
Unlike silver, gold never disappears, be it in King Tut's Tomb, at the bottom of an ocean, or in a bank vault. So, in spite of the fact that gold is being continually mined, it is also being continually bought and used for jewelry, coins, or bullion bars. When the demand for gold becomes more than is being mined or sold, the price will go up. As the price goes up, a certain number of mines will re-open and people will sell, because higher prices places them in a profit position. When gold was being sold and leased by the hundreds of tonnes, this kept the price down to $260, or thereabouts. Now, with gold at $365, this is a sure indication that the leasing and selling has virtually ceased. The demand is increasing, and soon will surpass the supply. This means the price can go to? Some say gold will go to $3,000, and pass the Dow as it goes down. I don't know, but I do admire Richard Russell, who made the prediction.
I only know that the world is being flooded with worthless scrip, and it is losing value. For the first time in history, there is not a single currency in the entire world, which is backed by anything. In other words, there is no refuge in paper money denominated things. The only refuge, is to get into different measurements, such as ounces, gallons, acres, square feet, or whatever turns you on. The dollar is a decreasing measuring device, which makes it silly to measure one's wealth in it. They keep talking about preserving the dollar's value and status. What value and status? It has already lost 98% of its value, and the nation that issues them, America, has more debt than any nation on earth by a long shot. I'd rather be in ounces. Protect yourself.
We are leaving on vacation Saturday, till Sept 15th, but all calls will be forwarded to my cell phone, which I will keep with me at all times. I cannot maintain my web site, but can service my customers while cruising on the Mississippi Queen!
August 22, 2003
Don Stott has been a precious metals broker since 1977, has written five books, hundreds of columns, and his web site is www.coloradogold.com
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