The most expensive investment anyone can buy today is paper gold. For $1,260, an investor will get a piece of paper saying he owns 1 ounce of gold. But he is unlikely to ever see that gold. Firstly, most investors who buy paper gold have no understanding of the real reason for holding gold and will therefore never contemplate taking delivery. And even if he did understand the importance of holding real gold, he is quite happy to hold the surrogate alternative which is paper rather than physical. This is of course what the issuer of the paper gold wants. He knows that paper gold buyers have no intention of taking delivery. This is perfect for the seller because he has no intention of making delivery either. And this is how paper markets function. Buyers and sellers are willing to trade pieces of paper that are said to represent an underlying instrument whether it is a stock, bond, currency or commodity.
Paper gold at $1,260 is worth ZERO
But paper markets are illusory. They give the impression that the buyers acquire a real share in the underlying instrument. That would be the case if for each unit of for example a currency or gold was backed by real money or real gold. But in today’s false markets that is far from the case. We live in a world of the Emperor’s New Clothes. The people is made to believe that the emperor is dressed in a suit made of gold whilst in fact he is naked. And that is exactly how the gold market functions today. Shorts are always naked which means that there is never an underlying asset backing the gold short sale. What the buyer is getting is a piece of paper with zero intrinsic value.
This is a perfect situation for central banks, banks and major trading houses such as hedge funds. With sufficient capital, they can manipulate any market without ever worrying about delivery. The result is markets which are totally fictitious and bears no resemblance to the instrument that is traded.
The gold price is not the price of gold
That is why the price of a paper commodity has nothing to do with the underlying instrument. Paper trading can be leveraged hundreds of times or more and whatever the price the paper market trades at sets the price for the actual commodity. Thus, the paper market sets the gold price. The gold price is the paper price that the false gold market trades at. That has very little to do with the price of gold which is what the physical market would trade at if there was not a manipulated paper market. But buyers and sellers are not concerned about the real price of gold. Because they have no intention of owning the physical since they don’t understand its function.
But one day there will be this little boy who will shout out “The Emperor is naked” and then all hell will break lose. At that particular point, all holders of paper gold will ask for delivery and just like the Emperor, they will find out that there is no gold left in the vaults. The manipulators have then lost control of the market and the gold (and silver) price will go “no offer”. This means that gold is not offered for sale at any price because there isn’t any to sell.
Economic power will follow the flow of gold
The short sellers, mainly bullion banks and futures traders, will fail since they can’t fulfil their contract and the buyers will receive no gold. The market then becomes a physical market with price being determined by the holders of physical gold. Economic power will then follow the same route as we have seen physical gold travel in the last 10-15 years. The Silk Road countries such as China, India and Russia will then gradually dominate the financial system with their gold and their currencies.
China bought 171 tonnes in April. Total 727 tonnes for 2017. On course for over 2,000 tonnes in 2017
The financial system of the debt laden West will implode and this is also likely to bring an end to the current economic and cultural cycle in the West. The time this will take depends on many factors and is hard to forecast. von Mises expressed it very well:
“There is no means of avoiding the final collapse of a boom brought about by credit expansion.The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
We have already gone past the point when a voluntary abandonment is possible. Therefore, a total catastrophe seems more likely. With the biggest global debt bubble in history, it could go very fast. Global debt, liabilities and derivatives of over $2.5 quadrillion can implode very quickly. We must remember that global GDP is only $70 trillion and total debt and liabilities are 35x greater.
So gradually economic power will be transferred from the bankrupt Western economies to the countries that patiently have been buying major quantities of gold over a long time. I am not saying that the Silk Road countries will be without suffering during this downturn. The whole world will be severely affected, including China with its massive debts and export-dependent economy. But the Silk Road countries will emerge as the dominant power after the initial severe chock.