Bitcoin’s value is not as much in the currency as it is the technology of instant value transport and public ledger

Back in Feb. I wrote that “Parking Value” may be the near future of Bitcoin.

Bitcoin is many things to many people, and because it is both currency and technology many are unable to separate the two from each other to understand the difference. I still believe that Bitcoin the technology is the most important invention here. The ability to move value from one party to another, instantly with no intermediaries and have it recorded publicly for the world to see, that record then stored on tens of thousands of computers globally and eventually in a network of low earth orbit geo-stationary satellites has the power to change the way the world transfers money, and even how it does business.

Many of my colleagues in the gold industry do not get my fascination with it. I get ribbed all the time, as many allude to bitcoin never holding value the way gold can. While I agree with this point, it illustrates what I said before, that few can separate the technology from the currency and therefore are unable to see how this technology is already impacting our reality.

My view is that the immediate use of the Bitcoin technology will be to temporarily “Park Value” in things like gold, or USD, or Euro, and use the technology of Bitcoin to transfer value between parties before it is then “Parked” again in gold, USD, or Euro (or any other form the customer wishes).

Apparently James Turk, founder of Goldmoney may think along similar lines, as he just sold Goldmoney to Bitgold, which is a company doing exactly as I described:

Update for clarity:

From my understanding (I am a US person so cant be a customer and test this myself, maybe one of you will tell me how it goes) Bitgold has developed a proprietary protocol for international payments among its own customers spending gold. While this may be similar to Bitcoin (The CEO has said in interviews that Bitgold is fully compatible with the blockchain and ripple), if it is developed in house it is clearly not Bitcoin. From reviews I have read you can apparently use Bitcoin to buy gold with them, and redeem the gold into Bitcoin when you sell it – thus parking the bitcoin in gold for a time.



China Gold – the show is just starting

During my last trip to China I spoke to the head of one of China’s most influential government agencies. One of the largest concerns the government has is the real estate market and stock markets being overvalued and having few options for Chinese to invest elsewhere. This is part of the huge push in China for gold by the Chinese government, and why there have been government sponsored advertisements encouraging Chinese to own gold.

With Chinese real estate markets popping and capital flooding into stock markets, I suspect the push for diversification into gold within China will only accelerate over the next few years.

I for one, am looking forward to expanding business operations in China and Asia in general, it is an amazing market.

Colonialism of the Modern Day


The policy or practice of acquiring full or partial political control over another country, occupying it with settlers, and exploiting it economically.

From the late 1500s AD into the 17th century, European ocean-going countries embarked on a long era of conquest distinguished by the subjugation of foreign powers and war over control of commerce. This was implemented by force of arms, mostly naval projection, with a primary intention of monopolizing global trade.

The main players in these events were the Portuguese, Spanish, English, French, and Dutch. Fortified seaports and fortresses were built as far and wide as the East Indies, throughout the Western Pacific, and ultimately ending in the Americas. This provided the ability to supply and act as staging points for projection of power in these regions.

This practice was originally driven by the desire to control the lucrative East Indies spice trade but had shifting commercial objectives as the preferred commodities available to the markets changed over time. One thing, however, remained consistent during this period in that no amount of brutality was spared in the name of control of the commerce. Greed superseded humanitarian considerations.

The Dutch East India Company (known as Vereenigde Oostindische Compagnie, or VOC, in Dutch) was founded in 1602 and granted a 21-year monopoly to carry out trade activities in Asia. The VOC had quasi-governmental powers including the ability to wage war, imprison and execute convicts, negotiate treaties, strike its own coins, and establish colonies.









Statistically, the VOC eclipsed all of its rivals in the Asia trade. Between 1602 and 1796 the VOC sent almost a million Europeans on 4,785 ships to work in the Asia trade. For their efforts they netted more than 2.5 million tons of Asian trade goods. By contrast, the rest of Europe combined sent only 882,412 people from 1500 to 1795. The fleet of the English (later British) East India Company, the VOC’s nearest competitor, was a distant second to its total traffic with 2,690 ships and a mere one-fifth the tonnage of goods carried by the VOC. The VOC enjoyed huge profits from its spice monopoly through most of the 17th century.1

An interesting correlation to today would be a military industrial complex that becomes intertwined with the economy and a necessary driver of it. A detailed analysis prepared by one of the Dutch East India Company’s senior merchants, Jan Pieterszoon Coen, for the Directors of the company held an illuminating note:

“Your honors should know by experience that trade in Asia must be driven and maintained under the protection and favor of Your Honors’ own weapons, and that the weapons must be paid for by the profits from the trade, so that we cannot carry on trade without war, nor war without trade.” – Coen2

The parallels are striking, notwithstanding some differences. While the Dutch East India Company was the leading entity competing with a handful of other nations to control global trade, today some view it as a single dominant power with many vassal states. This singular dominant power projects military naval might across the world’s oceans protecting ocean-faring trade rights of all nations and allowing global trade to flourish since World War II.


The USS John C. Stennis, Nimitz class (left), alongside the British HMS Illustrious (right)

The blue water navy of the Unites States of America is unmatched in tonnage and power projection. While other countries do possess air craft carriers, their size and ordnance delivery capabilities are dwarfed by American carriers. Russia has a single carrier that displaces a little over 55,000 tons at full load, and so does China. Comparing these single carriers to the ten nuclear carrier taskforces of the US is a stark contrast. Allies of the US also field some carriers but nothing approaching the size of US carriers as can be seen from the picture of the HMS Illustrious above.

The most recent of the US carrier fleet are the Ford class nuclear-powered “supercarriers” that displace approaching 100,000 tons of water, can carry up to 90 aircraft, and can operate for extended periods at sea without having to stop in a port. The dual nuclear reactors of the Ford class carriers can produce as much as 300MW of power each and propel the ship in excess of 30 knots.

These mobile “fortresses at sea” provide the United States unparalleled power projection through the world. In addition, the US has military personnel in over 130 countries according to former Congressman Ron Paul,3 and as of 2010 the US maintained 662 military bases in 38 foreign countries.4

Endless money forms the sinews of war.” – Cicero

A former US official from the Treasury office, who would have had a front row seat to help determine his perspective, claims that virtually all western nations are essentially vassal states to the United States. He also claims that the military industrial complex of the United States is the most powerful political lobby within Washington and has vast influence over American politics. If his assertions are correct, then the perpetual war – weapons manufacture – and more wars trade is as healthy now as it was at the height of the Dutch East India company’s rule, only today it is a vastly larger and more powerful empire.

Going as far back as 1776, if you were to pick any year since then, you would have a 91% chance that the US was involved in a war or other military conflict during that year.5 During the cold war, the Pentagon’s great enemy was the USSR, which justified annual defense budgets for defense spending. After the cold war ended, the Pentagon needed a new enemy, and a war on terrorism fit the bill nicely.

This has evolved into a continual state of warfare since the US presence in Afghanistan began in 2001.

Now US officials such as Secretary of State John Kerry claim that:

“We’re engaged in a major counterterrorism operation. I think war is the wrong terminology and analogy, but the fact is that we are engaged in a very significant global effort to curb terrorist activity…”6

Regardless of what name is used, the fact remains that the sinews of war are indeed still funding great pools of profit if you are a US defense contractor. In the last ten years there has not been a single year that the US has not spent at least a half trillion dollars of taxpayer money on lucrative payouts for the defense industry.


So how, one might ask, does this matter now?

For that we have to again look at history. The Dutch East India Company was unmatched in its time in terms of power projection and influence over the global economy. This obviously did not last, but the reasons for this are an interesting confluence of events.

There are three primary reasons for the decline of the VOC’s global military industrial complex-trade empire. The first is that due to rampant and systemic corruption within the company itself, there was a slow deterioration of coherence and motivation among the company’s trade officers overseas. This lead to a continual bleeding of company resources and the diminished loyalty of distant colonies. Second, major shifts in the geopolitics of Asia led to a loss of control of key military installations and prevented consistent power projection in the affected regions. Finally, in a mostly uninterrupted span of 70 years, the company paid out dividends in excess of its earnings which contributed to its final collapse and insolvency.

One could make similar connections today. The first is exemplified by the Chinese-led Asian Infrastructure Investment Bank (AIIB), which is expected to attract the membership of some 35+ countries by the deadline of March 31st.7 Much to the dismay and open rebuke of the United States, many of these are US allies including the UK, France, Germany, Luxembourg, New Zealand, and important Middle East countries. As of this posting, Australia, Isreal, and others have joined as well.


For major Asian geopolitical changes, one needs look no further than the continually growing relationship between China and Russia. An argument can be made that these two nations have moved beyond alliance to more of a symbiotic relationship. Looking at trade, energy, and military deals as well as coordinated military exercises, it is clear that these two countries are moving closer and closer to each other’s orbit. The new energy pipeline and rail networks currently planned are intended to physically integrate the two countries into a single massive network spanning all of Asia (and Europe).

iron silk road - russias dream

Finally, the fiscal house of the great empire of the United States is in terrible shape. The expenditures of what could be argued as several generations of government officials spending far more than is supported by tax receipts has placed the nation in a precarious position. With an estimated $18.163 Trillion in debt, this works out to an incredible debt per taxpayer of $154,109. I could go on and add all the ugly details about unfunded obligations that dwarf these figures, but I am fairly certain you are already aware of how bad this is.

Alas, the Dutch East India Company did enjoy almost undisputed hegemony for nearly 200 years, and its transition was not an overnight affair.

1 Dutch East India Company
2 A Splendid Exchange, William J. Bernstein
3 Ron Paul – US Military
4 Department of Defense Base Structure Report Defense Report
5 Wars – US
6 Wars – US (2)
7 Asian Infrastructure Investment Bank


“Parking” value may be the near future of the cryptocurrency ecosystem, at least for now

The power of the technology, for now at least, is not bitcoin as a store of value. The power of the technology is in the transport mechanism and the decentralized ledger, which is revolutionizing payments.

I predict that the ecosystem is going to continue to move in the direction of using Bitcoin to transfer value, and then “parking” it, until it needs to be moved again. I say continue, because this is already happening.

In my last entry, I wrote that Bitcoin has a huge hurdle to overcome. This hurdle is a general lack of trust. This is true for two primary reasons (not including fear of the unknown, and fear of regulatory response):

  • first is that bitcoin is currently volatile,
  • second is that bitcoin is not yet trusted as a form of money.

This is not to say that someday it will not be trusted, but it is going to require a what I am calling a trust-bridge.

Lets back up a bit so I can explain why.

Some cryptocurrency advocates argue that money has value because of its utility (cryptocurrency in particular). The argument stems from the idea that money has value because of the system that grows up around it. For example the USD has value because of banks, internet purchasing, stocks, bonds, credit cards, etc. If you compare this reasoning to the arc of history however, it does not stand up under scrutiny. How exactly is utility the reason Rai stones for example have value as money?

rei stones - yap

If you are not familiar with Rai stones (1), they are huge stone wheels weighing up to 4 tons that have been used by the micronesian people of Yap as money. They were quarried as far as Palau and transported back to Yap, over 2600 kilometers away by primitive sailing vessels. This is hardly good utility, in my opinion.

Some cryptocurrency advocates also argue that “hard money guys”, aka “metallists” declare gold has “intrinsic” value. Although I am probably a hard money guy, I dont think gold has any intrinsic value at all (as money). The reality is, gold, and every other thing from seashells to beads to rare feathers or cows, that have been used as money had value because people believed and agreed they had value.

The question is, why would people agree on this? The founder of Xapo Wences Casares touches on the reason when he says, “Look, what would you prefer — free access to information [which they’re getting now with their phones] or a secure place to store the fruits of your labor and to receive and make payment?”(2)

People want their labor to mean something. People toil, day in, and day out to earn a living, and they do not want it to be for nothing. This is the true essence of freedom, of capitalism, the opposite of slavery. Money is closely tied to mans labor, and every human on the planet, deep in their heart, knows it.


Some cryptocurrency advocates deny this, and claim that the “labor theory of money has been generally accepted as being false”(3). Generally accepted as false by whom, I would ask? Cryptocurrency speculators who have a financial stake in it being false? Economists espousing the conventional wisdom? The same economists who have pretty much made a mess of the entire global economy? Certainly not accepted as false by me?


To anyone who claims that money does not have value because it is linked to labor, I dare you to go to work tomorrow and tell your boss you will be working for the next five years for free. No, indeed, money is tied to labor, and that is in fact why gold has value, and every other form of money known to man for the last 5000 years. The argument that Warren Buffet uses to claim gold is a horrible investment, is the same reason that gold is actually money. It once took the labor of a man digging in the ground for many hours to produce a single ounce of fine gold. Today, it is done by machines hauling tons of rock and ore, but this is still a form of energy expended, and that energy is equivalent to many human hours of labor if there was no such thing as fossil fuels and the internal combustion engine. It is simply a measurement of stored labor, and thus, we instinctively know it has value. What is more valuable, a hand carved piece of furniture or a particle board item from Ikea? An excellent article which goes into the energy value in gold can be found here: . The common denominator of all forms of money that humans have believed have value, is that they require labor to produce.


“But the USD is practically free to make, all they have to do is punch some numbers into a keyboard!”, I am imagining some will say. Yes, this is true. But I would suggest that the USD is still a trusted form of money that most people believe has value. The critical question is, why do people believe it has value? If you were to go out into any-city in the USA and ask 1000 people why the USD has value, likely there will be a large number of them that say it has value because it is backed by gold, even if this has not been true since 1971 when Nixon severed gold convertibility to the dollar. My point is, people trust that the USD has value because gold has acted as a trust bridge. The system that grew up around the dollar inherited its trust from gold. Utility, therefore, had little to do with it. The trust of value was already baked into the cake.

If this is not true, then why does every single argument I have seen for bitcoin make comparisons to gold?

Which brings us to the current dilemma. Even if Bitcoin and related technologies are the money of the future, the fact remains that cryptocurrency is not yet widely trusted. It is going to require a bridge. A trust bridge.

I would argue that some of the sharpest start-ups in the space have already caught on to this fact, because they are allowing users to “park” their value in stores of value other than bitcoin.


1. Bitreserve

2. Bitgold

3. Vaultoro

4. Coinapult

And many more. By offering the ability to “park” bitcoin into another form of value storage, whether that be Euro, Dollars, gold, or silver, it mitigates volatility and allows users to feel more secure about where their money is. This is not a bad thing. This will fuel adoption, and when enough people are using it, maybe some day the volatility will reduce and people will feel more secure leaving it in bitcoin, or whatever the cryptocurrency is by then. Maybe this process takes 10 years.

In the mean-time, adopters of Bitcoin will be migrating towards using the tech primarily as a freeway to move money from place to place, but once it is done moving it might just get parked in gold until it needs to drive someplace again.

Bitcoin, for now at least, needs a trust bridge. I think gold fits nicely. So any of you huge startups (Xapo?) that wants to provide parking in gold to your customers, please say hi, I am happy to assist you with a superior turn-key institutional gold custody back-end ;).





More convinced by the day Bitcoin (the technology, not necessarily the currency) is going to change the world

Every day I read more about how the amazing technology which underlies Bitcoin works. For most people who have gone down this road far enough, there comes an “aha” moment when you realize this technology has the power to change, well, everything.

All technologies with the power to disrupt society on a global scale are met with incredible resistance. To quote Marc Andreessen of silicon valleys renowned VC firm Andreessen Horowitz in response to the point that Buffet sees little value in Bitcoin, “The historical track record of old white men who do not understand technology crapping on new technology is about 100%”. For context, here is a video of the Coinsummit fireside chat where he said it: (42:20)

This resistance to new technology manifests itself in debates and argument, and especially around technologies which change how humans globally interact even more so when it intersects with how we do business and when it involves money. There are many passionate debates about money in all its incarnations whether it be dollars, gold, or Bitcoin. Humans are deeply entwined with it, because it represents their labor, their sacrifice, their hopes and dreams. Money makes the difference between freedom and slavery, the difference between life and death in many cases globally for billions of people, so it is no wonder people are so passionate in their discussion of it.

Let me present some foundational information to support my posts title.

1. There are currently as many as 2.5billion un-banked people globally. This means that this huge portion of the worlds population does not have access to banking, and frankly are not likely to get it. In many cases they are simply not able to get it. If a person in Afghanistan for example (or even America) has zero credit history, no passport or drivers license, no banking or professional references, and may not even have a copy of a birth certificate (and cant get one), they are not going to be opening a bank account under the worlds current AML/KYC requirements anytime soon. If there were a way however to add 2.5billion people to the worlds economic ecosystem by granting them instant access to financial transactions and a way to store the fruit of their labor, it could create a surge of economic activity never before seen on earth.

2. People in places like Afghanistan do not go to their neighborhood super-mall and buy laptops, ipads, and desk computers. Much of the developing world does, however have ever growing access to smart/feature phones, with market penetration reaching as much as 4.55 billion consumers worldwide in 2014. (1) Developing countries are skipping the entire computer/laptop/tablet phase and moving straight into much more affordable smart/feature phones with internet access. In the Middle East and Africa, nearly ALL internet users are mobile. (2) According to IDC, global shipments for smart phones has exceeded 1 billion units in a single year, and the numbers are only rising. (3) “In a remarkably short period of time, internet and mobile technology have become a part of everyday life for some in the emerging and developing world” (4)

3. In time, all of these smart devices may be linked to the internet and the rest of the global economy via satellite networks which offer blanket coverage to every inch of planet earth. Elon Musk and Richard Branson are currently backing an initiative to create the worlds largest ever geo-stationary satellite constellation providing internet service. (5) This will only serve to magnify the penetration and accessibility of crypto-currency to the worlds un-banked billions.

virgin satellite constellation







4. (Update) The use of digital currencies is already a well established trend in some developing economies. By some estimates, over 50% of the GDP of Kenya is conducted in a homegrown created digital currency called M-pesa which was introduced by Kenyan Posts & Telecommunications in 2007. Today “people now make about 80 billion shillings in monthly M-pesa transactions and move more than 130 billion shillings in and out of the mobile system via 45,000 independent agents throughout the country. ” (6)

So why does all this matter?

It matters because when 2.5billion un-banked people gain access to interact economically with the rest of us, it is going to change everything about everything. Population-wise, it is the equivalent of adding another China + India to the global economy.

Perhaps even more importantly, this technology does away with the need for a centralized banking system which acts as a rent-seeking parasite on the back of humanity. It creates a means to achieve what the entire banking system does for us today, which is to provide a system for tracking transactions, debt, and other financial constructs between people, only banks wont be needed to do it anymore, because the entire world will have transparent access to that transaction record in the form of a public ledger backed by cryptography (blockchain) technology. The absolutely critical and pinnacle aspect of blockchain technology is decentralization, it will take the power out of the hands of the banks and give it back to the people, where it arguably belongs.

Imagine a world where a teenage girl in India can start a business, sell her wares or services, and then through her phone, internet, and crypto-currency technology then store the fruit of her labor. She can then buy an item on Amazon and have it shipped to her half way around the world without ever having to open a bank account. This is the future we are looking at, and it is coming faster than you think.

I am not suggesting there will be no future need for banks, nor am I suggesting that they are all of a sudden going to just fold up and disappear. They will fight, tooth and nail, kicking and screaming, every step of the way. And they will get governments involved as much as they possibly can to slow, stop, hinder, and derail its progress. But in the end, just like distributed file sharing, they will be utterly powerless to stop it. In the end we may have something like a hybrid system where banks serve the banked, and brilliant tech startups bridge the gap between the banking world and the non-banked crypto-currency world. The signs of these new companies are already there, with tens of millions in funding for these startups and backed by people who are not stupid.

I will write more about the current biggest hurdle that crypto-currencies today face versus established means of transacting such as the USD in a future post.








Round Table Interview w Philip Judge, Simon Heapes, Alex Stanczyk

Audio of our recent round table discussion after the most recent trip to Switzerland for the annual gold audits has been posted.

At the PGF website (Flashplayer only):

At the AFE website (downloadable MP3):

Topics covered:

* Summary of physical gold flow 2014
* Chinese gold demand
* Price of gold has dropped below cost of production
* Gold in Backwardation
* Negative Gold Forward Offered Rate
* LBMA will no longer report GOFO as of Jan. 30th 2015
* The refineries are the core of the industry
* Difference in market today vs 90?s
* Potential for mining companies to start shutting in production
* Structual problems with physical gold supply
* Demand by country
* Difference between the physical and paper market
* Swiss refinery running 3 shifts, 24/7
* Currently delivery delays of up to 6 weeks due to physical scarcity
* Mis-match between physical tightness and pricing will result in dramatic price change to clear
* Premiums for rapid delivery
* The mindset of the eastern versus western investor
* New generation of futures traders are unaware of the physical industry
* Focus on the physical as derivative reference indicators may no longer be accurate
* Market narrative and sentiment by demand spheres or regions driving price

There is no such thing as a “Gold Shortage”

As part of my (affliction?) area of interest, I read a great deal about the gold market daily, and one thing that I think is confusing people is this consistent dialogue of there being a gold shortage. Combined with my observations over the years in this industry and a recent insightful chat I had with Bron Suchecki of the Perth Mint, I felt compelled to pen this entry.

There can not be a gold shortage because it is one of the few things on earth still referred to as a commodity that does not get used up as part of an industrial process of some type; the majority of it is still with us. Sure, like many who write/speak/study gold, I have used that word in the past, but I am now repenting of my sins because it does not accurately describe reality.

How much gold is there, really

There is, by some estimates, as much as 175,000 tons of gold above ground, mined since antiquity going back thousands of years of human history. If you consider the tiny amount of gold used each year in electronics applications, medical, and microscopic coatings on the visors of astronauts, virtually all the gold ever mined is still in existence today.

If we subtract from that an estimated 30,000 tons known to be held by Central Banks/IMF/Etc (being generous), another approx 16,000 tons in China, another 15,000 tons in India (all rough guesstimates), there is no doubt some lost which is sitting at the bottom of the ocean in the belly of a ship, but for the most part it leaves us with more than 100,000 tons conservatively speaking that someone, somewhere owns. All of this gold is available for sale, the only question is at what price, and that depends primarily on one thing: The narrative. The narrative is the story people are telling themselves, and each other, about what gold is worth, or what it is about to be worth at some point in the future.

It is my opinion that this narrative is occurring in three major separate  demand spheres, these being

  • China and other Asian countries
  • India
  • The west, which would include primarily the United States and every country whose narrative relies on US based financial “experts” for their cues into whether the building is actually on fire and they should be running for the exits, or if the party will continue on and its ok to have another drink

Yes, there are other demand spheres besides these (such as Germany), and while they contribute to the overall picture they are not market moving from my observation as these 3 major spheres are.

There are other major (and a plethora of minor) factors which affect the price of gold as well such as

  • Geo-political events – examples include US gold confiscation in 1963, gold ownership being against the law such as it was in China until recent times, India imposing import taxes and import export ratios on gold, the recently failed Swiss Gold Initiative, the failure of Bretton Woods convertibility
  • Deflation/Inflation, expectations of inflation
  • Interest Rates
  • Basic supply and demand of physical gold availability in the “float”, or what is for sale immediately in the institutional market depending on the current price
  • Central bank purchasing/sales

Ultimately all of these factors feed back into the narrative.

I have read a lot of what seems like gold haters (or maybe just gold bug haters? I wont name any names ) who appear to like to troll the idea that China is playing any kind of major role in the market. This is clearly untrue as anyone who bothers to do any research on physical demand compared to mining / scrap / etf / central bank sales supply will find out. What this does tell me however is a great deal about their narrative.

Just as so-called “gold bugs” can adopt a narrative so strong that they are unwilling to look at the facts because it conflicts with what they wish to believe, so too does many a western minded trader construct a narrative about the markets which at times cannot be shifted with facts, because the trader in question is falling victim to his own worst enemy of confirmation bias. This my friends is how bubbles are formed, and no amount of reason/logic/facts is going to change the minds of people caught up in it.

Gold Demand Spheres

To dive a bit deeper into the narratives in play in these demand spheres:

China (and other Asian countries)

  • Gold is a long term way to store wealth
  • Have long histories of experience in failures of fiat (paper) based money
  • Desperately need additional investment vehicles to diversify their portfolios
  • Government advocates gold ownership


  • Gold is culturally imbedded and a deep part of the psyche
  • Gold is a trusted long term means of storing wealth
  • Gold represents prosperity, honor, and station in society
  • Gold makes an excellent gift, and holds special religious significance


  • Gold is a barbarous relic which earns no yield, is dug from the ground and re-buried at great cost. An excellent example of this narrative can be found in this recent segment on Bloomberg, in which one of the people being interviewed has obvious emotional disdain for gold and anyone idiotic enough to consider it valuable
  • Has no redeeming investment qualities
  • Is going to continue to fall in value
  • The world economy is getting better with the US leading the charge

Measuring the narrative

To measure the narrative occurring in each of these demand spheres, I pay attention to import/export statistics for China and India, and for the west I keep track of daily inventory tonnage in the wests flagship gold proxy GLD ETF. I also pay attention to headlines and commentary from media in all three demand spheres which gives some indication of sentiment.

So why do these three spheres in particular matter? For me, its because the portion of measurable annual gold demand that they represent.

If we start with a rough annual supply (mining, scrap, etf sales, excluding float) of 4250 tons in 2013 (updated thanks to a reader),  China by some accounts ate half of it at over 2000 tons, India another fourth with 1018 tons, roughly three fourths of our narrative demand is from the China and India demand spheres. This leaves one fourth (half if you want to use the conservative figures of Chinese gold imports) of available supply to satisfy physical demand for the rest of the world which happens to mostly align with the western narrative.

It is a pretty well accepted and understood process at this point that since gold’s price peak in 2011, a substantial amount of physical gold is being sold by western investors, converted into “four nines” kilo bars and shipped off to eastern buyers.

We can substantiate this if we choose to use the GLD inventory as a proxy for the western narrative, and observe that at its 2014 peak of 818.77 tons back in March, the physical stocks have been drawn down and are now sitting at 717.63 tons, which jives with my general western narrative above. If we look back, the record holdings for GLD came in at 1353.3 tons and has been drawn down on since then as western interest and narrative in gold shifted to negative.

From my professional experience and sources within the industry, we know that a substantial amount of gold flowing through the worlds largest refineries is coming out of the UK which is where the inventory for GLD is warehoused. How much of the GLD bars are actually shipped out versus put aside to be re-added to GLD stocks is not clear, and cannot be determined until GLD adds a large chunk back to its inventory, but I think it is safe to say that some (alot?) of this inventory of 12.5 kilo good delivery bars have been melted, re-refined and cast into kilo bars and is now sitting somewhere in or very close to China.

A Simple Equation

So here is a very basic summary of my thoughts on this:


Annual Supply (AS) = mines, scrap, etf sales, central bank sales
Float (F) = gold that becomes available for sale from existing above ground stocks as the price rises

Simplified Equation

Gold price is primarily determined by  AS and F minus demand by the three demand spheres. If that number goes substantially negative, we are going to have a rising gold price.

There seem to be many who have been scratching their heads over how there can be such incredible physical demand from Asia (historically speaking it is off the charts), and yet have a sinking to flat gold price.

The key narrative here, if you haven’t figured it out by now, is the west. Assuming the current demand levels from each narrative remain the same, the price will likely bounce around in the same range. What will shift this up or down is contingent largely upon what western investors/traders are telling themselves (and each other) about the future for gold.

It is possible that these demand spheres can change, they certainly did when China stepped onto the scene. It would however take a really significant buyer or seller to enter the picture.

Extreme Tightness in Physical Supply

I will add, before I conclude this post that it is definitely possible for there to be extreme tightness in the physical gold market, which is measurable both by data and by anecdotal experience of myself and colleagues in the industry who have authoritative visibility into significant portions of the market. There is extreme tightness now, worse perhaps than at any time in the last 30 years or so in the physical gold market on a global level.

I am aware there are alot of traders out there who think the idea of a physical and paper price dis-connect is conspiracy theory. I also know authoritative people in the industry with more than 100 yrs of combined experience that think todays young gun futures traders have no clue what is truly happening in the physical market. If the movement of COMEX physical inventory (or I should say lack of it, compared to how GLD inventory moves based on price) is their lens on physical realities they might as well be holding a stethoscope to a corpse, IMHO.

Should anything occur which changes the general narrative of the west such as a roll over of equities or other substantial sea-changes in the markets which causes the west to adopt a negative view of economic recovery and shift the narrative on gold, the combined pressure of western buying and the other demand spheres will exacerbate the current physical supply tightness and force dramatically higher prices to clear this situation. That will only feed on itself as investors come back to GLD which will act as an accelerant on a brushfire.

Watch for the shift in the western narrative, and watch GLD inventory. These canaries in the coal mine will signal change is in the air.


Notes and updates:

1. Just found this regarding estimated gold in India of approx 22,000 tons:!market-development-en

2. To clarify a bit, I think it makes sense to not ignore mining supply, scrap sales, and etf sales sales as a source of consistent supply. This offsets global demand to the degree of tonnage provided by these supply sources. Gold in the float tends to increase at times based on the price of gold and more-so when the price rises versus when it falls.

3. Expanded commentary on the current supply tightness in the market at our recent PGF round-table discussion:

Media Spin on Swiss Referendum over Gold Reserves Getting Ridiculous

If you do not know already, the Swiss are voting on a referendum which will force its government to pass legislation to the following effect:

  • Back 20% of its reserves in gold,
  • Repatriate the gold that Switzerland owns from abroad,
  • Prevent the Swiss National Bank from selling off any more gold.

The Swiss have a very interesting form of government, where the people can vote directly to force their government to create legislation. A majority of more than 50% of the Cantons must agree.

The reason this is so important, is that if this measure passes, it will force the Swiss National Bank to purchase gold from the market, which is already stretched thin on the supply side. According to a note from the SNB, they would have to buy roughly 10% of annual mining supply each year through 2019. Some estimate this to be over 1700 tons of gold, over a 5 year period.

This is where it gets dicey. Since gold dropped below the average global cost of production in June ( ) , the amount of gold available in the supply pipeline has been getting tighter. To make matters worse, according to the CEO of the worlds largest mining company, because the price has dropped so low mining exploration has taken a huge hit and will result in less gold production moving forward. He claims the industry will hit “Peak Gold” in 2015 ( ).

I have read a few articles which claim that if the physical supply was tight, then the price would reflect that because as we all know, traders who deal in these markets are efficient, and above all very smart, therefore gold should be priced in a way that reflects its true market value…kind of like triple A rated mortgage backed securities….right?

Just in case anyone has forgotten what financially incentivized traders are willing to do, I present without comment the following recent articles:

1. Regulators in US and UK mete out record fines after finding a ‘free for all culture’ on currency trading floors at RBS, HSBC, Citibank, JP Morgan and UBS

2. Six Banks to Pay $4.3 Billion in First Wave of Currency-Rigging Penalties

3. Swiss regulator finds “clear attempt to manipulate fixes in the precious metal market

4. UBS agrees to settle charges in gold and silver manipulation

5. Reuters: EU fines JPMorgan, UBS, Credit Suisse for taking part in cartels

6. SEC charges High Frequency Traders with Fraud manipulating prices

There are many more recent examples in this fact freight train, but I am sure you get the point.

Vote Yes Argument

The group that wants this initiative to pass says that if it is not passed, then Switzerland’s economy will be dictated by the EU, the Swiss Franc will (continue to be) tied to a weak Euro, inflation will increase dramatically, the Swiss National Bank will print hundreds of billions of Francs (to maintain the Euro/Franc 1.2  peg), the Swiss Franc will weaken, and the Swiss citizens will be stuck with hundreds of billions of devaluing Euros.

A few comments:

  • Even if the measure passes, the SNB might still print hundreds of billions of Francs to retain the Euro 1.2 peg, it will just have to buy an amount of gold equal to 20% of the Euro’s it buys. This shouldnt be that much of a problem, they do have a printing press, they could just do what my friend Jim Rickards says and print fiat / buy gold. It would of course create other problems, explained below.
  • Yes, if it doesn’t pass, the Franc will weaken, but that is the entire point of currency wars and the reason the SNB (and the government) hates this idea, aside of course from the fact that it destroys the credibility of the Central Bank (not just the SNB, but globally).
  • What will happen if this measure passes is the Swiss Franc will be reinforced as being a safe haven currency with real value, and that will cause a massive inflow into the Swiss Franc in times of fear, which does indeed create problems – the Swiss have experienced this in the 1970’s and were forced to resort to negative interest rates (charging you to hold your money instead of paying you interest) to discourage capital flow into the Franc. The amounts of Euros the Swiss would have to buy to maintain order could end up being …I have no words for it…huge…and therefore also force them to be big buyers of gold. In time, this could erode confidence in the entire system as the pressure could cause the price of gold to skyrocket which would cause people to start asking questions.

Vote No Argument

For this section, I am going to reference an article in Yahoo today which closely reflects the attitude and presentation of other articles I have read regarding this subject.

For starters it says “economists warn a ‘Yes’ vote could wreak havoc in financial markets” – but then conveniently fails to reference those economists or why they think this.

“Industry organisations have also warned that the move would tie the central bank’s hands and damage its credibility” – With the loss of credibility part I agree. After all, if the central bank itself starts buying gold to support its currency as demanded by the citizens, then it messes with their job stability doesn’t it? Are central bankers really needed if all you have to do is buy gold and call it good? This may be why the Fed has tried to convince the world that gold has no monetary use for the last 45 years. It would not, however “tie their hands”. They could still print up all the Francs they wanted and buy Euros to maintain the Euro peg, they would simply have to buy more gold when doing so, which comes back to that destroying their own credibility thing again.

Most observers expect the Swiss to snub the motion, and low global gold prices indicate investors agree – Some facts here would be nice.

According to the Swiss Central Bank Chief Thomas Jordan, if the measure passes then “The central bank’s capacity to take action would be weakened. This would also lead to higher unemployment”. – Not weakened, again it would reduce credibility because actions taken to devalue the currency intentionally by printing and buying other currencies would force them to buy gold.

He has appealed to Swiss voters to pay attention, warning that if the gold initiative passes the consequences could be disastrous. – Yes, for the credibility of the central bank.

However, “if the ‘Yes’ side wins, gold risks reacting strongly, since the market is not expecting that result,” Nannette Hechler-Fayd’herbe of Credit Suisse. – I also think the gold market will react strongly, but not because an affirmative vote is unexpected, further explanation coming up.

Strategists at Commerzbank (Xetra: CBK100 – news) said the ban on selling gold would put the very credibility of SNB at stake. – Near the end of the article, and there we have it. Economists are heralding doom, but cant seem to be found in the article after that. This whole thing about concern over a loss of credibility is pretty consistent though. If people start looking at gold as money, then that paper becomes less important, and if that happens then so does the role of the paper printer.

If SNB’s gold “reserve can no longer be sold in the event of a crisis it no longer constitutes a reserve in the stricter sense,” they said, stressing that “if the gold reserves cannot be sold they are ‘lost’ for the Swiss.” – You can always take one last swing at this issue with a straw man. This is complete non-sense. Central Banks have been using their gold reserves in a leasing capacity for decades, it serves as collateral of the highest caliber bar-none and can be put to use as such without being required to sell it.

Talking to the Swiss

Last night I was having dinner with a Swiss client and the subject of the gold initiative came up. He said that in the early part of the month it did not seem anyone was taking it seriously. Since then, there has been alot of debate, and the issue is gaining more awareness to the point that his feeling is the Swiss Government and SNB are now panicking. They are advertising in the trains to vote no, while the group that wants the measure to pass had its donation accounts frozen.

You have to know a Swiss to understand this. They are a stubborn and fiercely independent people. The idea that they are becoming lackeys to the Euro is disturbing to them. His comment to me was that if the people think the government is panicking, they will vote yes by instinct, even if they do not fully understand the underlying issues.

Gold Physical Supply

Once a year (or more often as needed) AFE travels over to Switzerland to participate in the audits of the gold in custody, as well as handle other administrative work and meet with our strategic partners. Each time we do this we are able to talk to key people within the industry.

One of the gentlemen we regularly meet with is a Director for one of the largest refineries in the world. He has perhaps one of the best views into global physical gold flows from a practical hands on perspective than any other I am aware of, and has more than 30 yrs experience under his belt. The way he puts it, paper trading in gold (on exchanges such as COMEX) is being done by young men who have no interest in the physical fundamentals, and have very little concern nor care about physical movements. My thought is he may be right, after all despite what is happening in physical flows, reservoirs of gold such as COMEX which should act as a gauge on available physical don’t seem to move much, regardless of moves in the price.

We will be doing a round table interview soon with the Board of Directors of AFE where we go into more detail about this, but I will make a few comments about the available physical gold float now.

In October, backwardation re-entered the gold market

The best explanation of backwardation in gold I have found is this, hat tip to Bron Suchecki of the Perth Mint (from ) :

Negative gold forward rate (GOFO) is a true backwardation of gold prices.  It means participants can sell physical gold now and instantaneously buy it for delivery in 2 months time at a 0.145% discount.  Not only that, but the entrepreneurial arbitrageur can also invest the proceeds from the spot sale in risk-free securities over the period.  In two months time, they will have their gold back, have banked 14.5 basis points profit, have banked the risk free security return and will have save on 2 months storage and insurance of the physical gold.

This is why backwardation of gold is so fascinating, it just should not happen.  The arbitrageur may not be so smug if the future delivery never occurs (in trying to make 0.145% he has lost 100% of his gold), and that is the risk which backwardation effectively prices in.

It implies a very tight physical gold supply in what we call the “float”, which is gold available for sale. It is important to bear in mind that the amount of gold in the “float” changes, based on the price of gold and if owners of existing gold turn into sellers. Float gold consists of gold from mines, gold outflows from ETF’s such as GLD if they are selling, scrap, and also from an estimated 165,000 tons of gold above ground which was mined since antiquity, all of which can come available for sale if the price is high enough.

A point some of you may find interesting is that the LBMA has decided to stop reporting GOFO as of Jan. 30th 2015, claiming banks do not want to report rates dues to increased regulatory scrutiny ( ).

I will not say more on this topic at this time as we are reserving some important information we have to share for the upcoming round table interview, but I will say that if the current situation in the physical float continues and then this referendum passes, it will have a substantial impact on price and it will not be because “it was not expected”, but because the float is so tight right now.