“How much imaginary gold has been sold?”

December 21, 2009 by Infowars Ireland

By Adrian Douglas for Gata.org

On October 10 I published an article that postulated that the gold market is a Ponzi scheme because it sells gold that doesn’t exist by implementation of the principles of fractional reserve banking. (See http://www.gata.org/node/7887.) Since writing that article further information has come to light that supports this claim and allows an estimate of how much gold has been sold that doesn’t exist if the owners of the gold ask for it.

In other words, there are several owners for each ounce of physical gold.

By complete coincidence Paul Mylchreest of The Thunder Road Report has just written an in-depth study into the daily trading volumes of gold on the London over-the-counter market, which can be found here.

The London OTC market is where most physical gold is traded. This market is a wholesale market where trades are conducted only between the bullion trading houses on behalf of their clients. About 95 percent of the trading is by way of gold that is held in unallocated bullion accounts.

The unique characteristic of gold is that about 50 percent (80,000 tonnes) of the above-ground stocks are held as a store of wealth (investment). The other 50 percent exists as jewelry. When gold is bought as a store of wealth it can perform that function for you wherever it is in the world. Given this unique characteristic many large investors in bullion prefer to leave their gold with the bullion dealer from whom they bought it so that it can be stored in their vault and easily resold. This is identical to the situation with stocks, where most stock certificates are held by brokerage houses, not by individuals.

That people are buying and selling gold without ever taking delivery means that there is the opportunity for bullion houses to sell gold that doesn’t exist.

Now the bullion houses probably don’t view this as illegal or dishonest because they will operate a fractional reserve type of system, just as the banks do with fiat currency, and will make sure they have enough gold on hand for what would be the maximum estimated volume of gold that could be called for delivery. After all, trading is done with unallocated gold, so how much more unallocated can it get if it doesn’t exist at all?

This is what caused bank runs in the days of the gold standard. People would deposit gold in a bank and receive bank notes (dollar bills) in exchange. At any time the depositor could return and hand over his bank notes and receive from the bank the same quantity of gold he deposited. The banks realized that under normal circumstances a maximum of about 10 percent of the gold deposited could be requested. So the banks saw an opportunity. They could issue up to 10 times as many bank notes in loans as there was gold in the bank and they could earn interest on the bank notes. The system worked until there was difficulty meeting withdrawals. Then word spread quickly that the bank was insolvent, and as holders of the banknotes rushed to the bank to redeem them for gold, the bank would admit it had insufficient gold and would declare bankruptcy.

The origin of the word “bankruptcy” is from the Latin words “bancus” and “ruptus,” which means literally that the bank is broken. Banks have gone bust frequently enough to have earned themselves the ownership of the word to describe the phenomenon. Isn’t that ironic when banks are meant to be a safe store for money?

This basic scam is at the center of modern gold market manipulation. Instead of real gold, paper substitutes for gold are sold through derivatives, futures, pooled accounts, exchange-traded funds, gold certificates, etc. I estimate that each actual physical ounce of gold has multiple ownership claims to it.

For the scam to be sustained there must always be plentiful physical gold for those who want it. The market is, in effect, a giant inverted pyramid with a huge paper gold market being supported by a small amount of physical gold at the tip of the inverted pyramid. The scam can continue until there are indications of a shortage of physical gold. If all the claimants of each ounce of real gold demand their gold, then there is the potential for a squeeze such as has never been seen before.

To lend support to the idea that all the gold in the world has been sold several times over I cite the case of Morgan Stanley, which was sued in 2005 for selling non-existent precious metals. Morgan Stanley even had the audacity to charge storage fees. The firm settled the class-action lawsuit out of court but no criminal charges were ever filed. If Morgan Stanley was doing this, you can bet that it is the tip of the iceberg.

Paul Mylchreest has done fabulously detailed research into data on the daily trading of gold on the London OTC market. He concludes that 2,134 tonnes of gold are traded each and every day. That is a shocking number because this is 346 times larger than all the gold that is mined in the world each day.

But this on its own is not sufficient evidence to indicate that the market is fraudulent. For example, if I have a 1-ounce gold coin and I have a hundred friends I could sell the coin to a friend and then he could immediately sell it back to me or sell it to one of my other friends, who could sell it back to me. If I were to transact with all my friends in the same day in this way, I could have turned over a volume of 100 ounces in trading transactions but no fraud would have occurred because the last friend I traded with owns the 1-ounce coin, even though it went through a hundred sets of hands before it got to him. There are no multiple ownership claims to the coin because the trades were sequential, not simultaneous.

But if I were to sell 1 ounce of gold to all my friends and promise I would keep the gold for them, the trading for the day would be 100 ounces but now fraud has been committed because I have a liability of 100 ounces while I have possession of only 1 ounce. If they never ask for the gold and I can pay them cash when they want to sell their gold, then there is a good chance my friends would be none the wiser … until the day when at least two friends insist on receiving the 1-ounce coins they each supposedly own.

The daily gold trading in London is simply humongous. We talk of the gold market being a tiny market. It is anything but. It has a daily turnover of $70 billion. To put this in perspective, the world consumes 86 million barrels of oil each day. The total cost of the global daily oil consumption is a mere $6 billion! Read more…