Why Owning Gold Is Twice as Profitable as Stealing It
Your editor went to a university financed by and named after Alan Bond. And received a scholarship from an infamous investment bank to do it. That makes us uniquely qualified, unqualified and disqualified from discussing the matter plastered all over Australian TV lately - the 'Great Mint Swindle'.
This new TV show is about 'the most daring heist Australia has ever seen', according to the ad. The story goes that three brothers manufactured a (fake) gold nugget and then fooled Alan Bond into paying more than double the true value for it. The nugget was known as 'the Yellow Rose of Texas', presumably because they claimed to have found the nugget near the Queensland town of Texas, where (although it has no bearing on this story) your editor nearly froze to death on a camping trip. Anyway, the three brothers then got framed for a robbery of the Perth Mint as well - a robbery of 68 kg of gold in the form of 49 gold bars.
Now, according to Wikipedia, the value of the gold at the time of the mint swindle was $653,000. Not a bad heist. $653,000 in today's money, according to the Reserve Bank of Australia's surprisingly user-friendly inflation calculator, is $2.02 million - a difference of $1,367,000.
And so we ask you, dear reader, which is the bigger heist? Stealing $653,000 worth of gold, or stealing $1,367,000 worth of purchasing power? It sounds to me like the inflationist RBA managed to rip off whoever stole the gold twice as much as the thieves managed to rip off the Perth Mint. (And nine times as much as the three brothers managed to rip off Alan Bond.)
Unless the Perth Mint thieves didn't actually sell their gold for cash. Perhaps they held on to it because they were aware of the 'Great Inflation Swindle'. Unfortunately, Channel 9 turned down the opportunity to air a TV show about the 200% inflation that has occurred since the robbery their new TV show is about. Perhaps because it's boring. Perhaps because we know who the culprits are already. Back to that in the moment.
So what would have happened to the thieves who stole the 68 kg of gold from the Perth Mint if they hadn't sold their gold because they knew the inflation thieves were out to get them? Their profit on the gold would have been double the value of the gold they actually stole in 1982. That's right, owning gold is more profitable than stealing it. The 49 stolen gold bars would be worth more than $3.5 million based on Wednesday's Perth Mint prices. That's a gain of more than $2,847,000. A 436% return in the face of 209% inflation.
We don't know what happened to the 49 gold bars, so we don't know if the thieves ended up with a losing proposition because of inflation. But one thing is clear. Whoever does have the gold is sitting pretty, even if they paid the market price for it.
The Greater Swindle
So what's going on when $1,367,000 of purchasing power can be stolen without anyone going to jail, while three brothers who supposedly didn't steal gold, just fooled Alan Bond, are sentenced to more than 10 years each? Well, the 'Great Inflation Swindle' is taking place out in the open. It's sanctioned by the Commonwealth Government of Australia and its agent the Reserve Bank. Between the two of them, Julia Gillard and Glenn Stevens are silently in the night sapping a few per cent of your savings out of your bank account. Last year it was about 3%. According to the RBA's Inflation Calculator, it's been an average of 5.6% since 1966. That adds up to a heck of a lot over time.
But how is Julia Gillard implicated in the Great Inflation Swindle? Well, the way the RBA injects more money into the economy is by buying government bonds. In an indirect way (via their friends, the banks) the government gets the freshly printed money. That means they get to spend it at prices which haven't adjusted to the new money. It's the same free lunch counterfeiters get. The only difference is that the government and the RBA are allowed to do it.
Of course, Julia and Glenn aren't actually robbing banks in the middle of the night. They need the banks on their side to pass on the RBA's cash. The banks are the middleman. What's actually happening is that the inflation tax is making itself known to you and me in higher prices. We have to pay the prices that have adjusted to the levels of inflation instigated by the central banks.
The Greatest Swindle
It's quite impressive to get away with theft of 5.6% of every single dollar held by the public year after year. But that's nothing compared to what certain dodgy participants in the gold market get up to. You see, physical gold is only a tiny portion of what passes for gold in the financial world. Nobody has accurate figures, but there is a heist going on in the gold market that would make the great mint swindlers blush. Unless they've become investment bankers themselves.
In the gold market, people can buy and sell gold without the gold they are buying and selling actually being real. The idea is that (almost) everything is settled in cash, not physical gold. People who want the physical gold use the cash from the paper gold market to buy the physical gold.
Here is a simplified example. You buy a 'gold future' today for June delivery. Rather than taking delivery in June, what you do is use the profit or loss on the future to offset the change in the price of gold when you actually buy the physical stuff itself from somewhere else. If the gold price goes up between now and June, the gold future should have paid you enough cash in settlement to offset this increase. In effect, you are buying the gold at a fixed price. The profit, or loss on the futures contract offsets any change in price. If the price of gold falls by the time you get to actually buying the physical stuff, the future would have created a loss, leaving you in the net position of paying a higher price for gold.
The problem with all this is that someone can profitably trade gold futures without ever having anything to do with physical gold. This activity has grown so large that the physical price of gold is dominated by futures (and other derivatives) trading, by people who never intend to have anything to do with physical gold. They can now move the price of gold simply by entering the futures market with big buy or sell orders. And the big investment banks seem to have a habit of selling them in vast amounts. This has the same effect as selling vast amounts of physical gold - it reduces the price.
If that kind of manipulation isn't bad enough, consider that central banks add fuel to the fire by leasing the vast amounts of gold they hold to people who trade these futures. People selling gold through futures do have to have some gold on their books to appease regulators and clearing houses. This is a rather piddling effort to include at least some physical gold in the futures market.
The central banks supply the futures trades with gold in a loan agreement, further fuelling the fire by allowing them to create even bigger selling positions. Neither the central bank nor the investment bank selling the gold futures ever intend to sell actual gold. They just intend to make money on a falling gold price. And the price is falling because of the size of the futures sell order completely overwhelming the buyers and the tiny physical market.
Of course, it's no coincidence that central banks are involved in all this. They want to hide the inflation they create, and the gold price is the giveaway that it's more than government statistics say. They are quite happy to suppress the price.
So when you look at the gold price and the gold market, remember that many of the main participants in that market manufacture fake gold all the time, just like the three brothers did with Alan Bond. And this depresses prices.
Is Now the Time?
There are rumours of a fully backed gold futures exchange in the making. The idea being that if you hold a position in this particular futures market, the gold must exist to back up the contract. In fact, specific pieces of gold must be specifically allocated to the contract. If this comes off, investors in gold futures will have to ask themselves whether they want to trade on exchanges with very small amounts of real gold behind each contract, or the same amount of real gold as the futures contract stipulates.
Hopefully, investors will turn to the fully gold backed futures, creating vast amounts of gold demand which currently doesn't exist. That could send gold prices soaring very rapidly.
Gold investors aren't supposed to be big on timing or trading their investment. It's a buy and hold argument. But a revelation in the futures market could be what really lights a fire under the gold price. If the rumour is true and this futures exchange makes it off the ground, gold could very quickly go through the roof.
The Daily Reckoning