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overselling gold


I know you have little interest in gold, but I have recently read various claims of paper gold to physical gold ratios from 500:1 to as much as 62,000:1.  Even a 500:1 ratio seems like an insane number to me.  How could this possibly be good for an already dismal economical future?  What would the result be if there were a "cash-in" of gold?


Hi Troll,

What do you mean by "paper gold"? Do you mean securities that reflect a certain amount of gold?


"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

I mean any gold that is not physically held in some manner.  By "cash-in", I mean a demand for physical gold by those who hold gold only on paper.

Is this a boring subject, or are you doing research?

Sorry, been busy traveling these past few days....A bit behind on the site.

Paper vs real isn’t the right way to think about this. For instance, when a company issues shares of stock they are issuing a synthetic form of ownership of a real company. You don’t get pieces of the actual company. You just have a paper claim on the asset. This doesn’t mean the price of the company will go up or down because the financial claim is both an asset and a liability. There are two sides to its existence and it requires both a seller and a buyer. The better indicator of future price is not the quantity of synthetic financial claims, but how the demand for those claims will evolve over time.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Apology is understood and not even necessary........If I buy stock, I expect the company to return production value that will give me a return on what I have invested - an asset upon which I can depend if the company's production is worthwhile.  In buying paper gold for gold which is not in existence, the production value is nil (if not already in the negative).   You can't get what ain't there, and what won't ever be there via current or future mining.  To me this seems fundamentally different from investment in a valid corporation.   The ratios I listed are for paper ounces owned to total, actual ounces mined.  And these are ratios, these are not the actual ounces of either paper or physical gold - the larger ratio would easily surpass the 100 quadrillion dollar amount of unsupported product (or assets, if you please).  This is my concern.

Yeah, so when you buy GLD you are buying a synthetic claim on a certain amount of gold. You won't actually ever take hold of the physical, but you have a claim on a certain amount and the ETF is structured in such a way that it will almost always accurately reflect the ratio of gold you would own. So, when the price of gold falls traders are incentivized to make sure that the ETF reflects the real price of gold because the ETF is structured to provide an arbitrage opportunities for traders who buy and sell the ETF so it reflects its real price.

So, I don't see that this is much of an issue. The synthetic gold is structured so that it actually reflects the real thing. It's not the real thing, but it almost perfectly reflects the performance of the real thing.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche








Are you saying, then, that a 100 quadrillion dollar difference between actual product and  investment in that ("synthetic") product isn't a problem?  If so, I am confused about investing.  I thought that is what we call a "bubble".  [I apologize for my economical ignorance, but I'm not paying $5 for 10 pounds of potatoes that don't - and won't ever - exist.]

Well, it only becomes a problem if everyone wants to redeem for the real thing. Which they won't. So, it's kind of like credit. So long as everyone doesn't redeem their deposits for physical dollars then the synthetic thing is just as good as the real thing. Of course, we can't even redeem all our credit for physical dollars so it's the same basic point.

So, you have all these instruments trading as synthetic versions of the real thing and it all works because no one wants the real thing. Which, weirdly, makes the fake thing as good as the real thing.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

....and hence the phrase "pragmatic capitalism".   Your blog offers a precise  point of view.  Let's hope we don't drink one too many malts (i.e. garner too much credit) and get sick to our stomachs.  Thanks for your thoughts.