Tag Archives: COMEX

Why the SEC keeps rejecting Bitcoin ETF listings

Last week the U.S. Securities and Exchange Commission (SEC) refused to approve nine different proposals for bitcoin exchange traded funds (ETFs). This comes on top of a number of prior SEC refusals of bitcoin-based funds, including the SolidX Bitcoin Trust and two separate denials of the Winklevoss Bitcoin Trust, the first in 2017 and the second this summer.

Why have so many other U.S.-listed commodity ETFs been approved over the years whereas bitcoin ETFs keep getting rebuffed? It is tempting to view the SEC smackdown of these bitcoin ETF proposals as a sign of distaste for this new and anarchic technology. But I don't think this reading is accurate. If anything, SEC vs Bitcoin is less about Bitcoin and more about the SEC's attempt to impose standards in an age where Wall Street is trying to package almost everything into a broadly-available security.

Precious metals buyers will of course be familiar with ETFs. The granddaddy of all commodity ETFs, the SPDR Gold Trust, or GLD, has been around since 2004 and is currently backed by around US$29 billion in physical gold, or 760 tonnes. All ETF units trade on a stock market. A peculiar set of mechanics ensures that they replicate the price of their underlying index or commodity. Using GLD as an example, if the price of the ETF is above the current gold price, then special institutions (otherwise known as authorized participants) can buy physical gold, exchange it for new units of GLD, and sell those units at a profit. If GLD is trading below the gold price, these same authorized participants can buy the underpriced GLD units, redeem them for gold, and sell the commodity for a risk-free gain. Competition among authorized participants for profit ensures that the two prices do not diverge by very much. Regular investors do not have the ability to convert units into gold, or vice versa. (For a more thorough explanation, see Bullionstar's introduction to gold ETFs.)

The SEC has approved ETFs that track gold, silver, platinum, palladium, copper, oil, natural gas, coffee, as well as broader-based ETFs that track baskets of commodities. Virtual currencies like Bitcoin, also known as cryptocurrencies, have been defined by the U.S. Commodity Futures Trading Commission (CFTC) to be commodities. The SEC's refusal to allow bitcoin ETFs thus has nothing to do with bitcoin's underlying nature: like gold, silver, and the rest, it is legally a commodity. Rather, the reason that the Winklevoss Bitcoin Trust, the first of the proposed bitcoin ETFs, has failed to make it through the SEC's doors is that the SEC doesn't like the way that the market for bitcoins is structured.

Cooperation from crypto exchanges - A tall order

Specifically, the SEC is unhappy with the inability of the the Bats BZX Exchange, the stock exchange on which the Winklevoss Bitcoin Trust is seeking a listing, to secure information sharing agreements (ISAs) with important bitcoin exchanges. An information sharing agreement between the Batz BZX exchange and, say, Chinese-based Binance, one of largest bitcoin exchanges, would obligate Binance to share relevant data about market trading activity and customer identities with Bats.

The SEC believes that information sharing agreements with significant exchanges are key to compliance with the Securities Exchange Act, the body of legislation that governs the SEC. Specifically, Section 6(b)(5) of the Act requires the SEC to ensure that the securities exchanges it regulates, including Bats BZX, are designed to prevent fraudulent and manipulative acts and to "protect investors and the public interest."

The SEC has chosen to take a very strict interpretation of 6(b)(5) when it comes to the listing of an overlying security, i.e. securities that derive their value from some underlying security or commodity (much like how units of the Winklevoss Bitcoin Trust overlie, or are underlain by, physical bitcoin). Not only must an exchange like Bats BZX ensure that it has controls to prevent manipulative behaviour of Bats-listed overlying securities, but it must also take reasonable steps to ensure that the underlying instrument to which it is linked is traded on an exchange that is held to the same standards. The SEC deems that an information sharing agreement between the relevant exchanges is sufficient to fulfill this requirement. That way, if there were to be suspicions of manipulation of bitcoin on the Binance exchange, Bats BZX would be able to get data from Binance and use it to conduct investigations into possible trading violations.

In its second refusal of the Winklevoss Bitcoin Trust, the SEC maintained that it has a long history of requiring information sharing agreements between SEC-regulated exchanges that list overlying securities and exchanges that list the underlying instrument. It points to a ruling it made in 1994 in which it required that the CBOE, which wanted to list equity options on American Depository Receipts (ADRs), would in certain cases be required to have a formal mechanism for getting information from the overseas exchanges trading the individual stocks underlying the ADR.

The SPDR Gold Trust as precedent

The SPDR Gold Trust (GLD) provides further precedent. When the SPDR Gold Trust was approved in 2004, the sponsoring exchange, the New York Stock Exchange (NYSE), was unable to establish information sharing agreements linked to spot trading. Securing agreements was deemed impossible since most gold spot exchanges occurs relatively informally via the London over-the-counter gold market.

In lieu of information about spot exchanges, the SEC decided that two factors were sufficient for the proposal to meet its requirements. First, it claimed that gold OTC markets are very liquid and thus difficult to manipulate. Second, the NYSE had an information sharing agreement with NYMEX, whose COMEX division listed the most popular set of gold futures contracts. Since the COMEX market is a regulated exchange that the SEC deemed "significant", the sharing of information between the NYSE and COMEX would help ensure that manipulation could be caught. The meaning of "significant" is sizable relative to overall trading volumes.

In the case of the Winklevoss Bitcoin Trust, the Bats BZX had entered into an information sharing agreement with the the Gemini Exchange, a New York-based bitcoin exchange that allows for spot trade. However, the SEC has decreed that this agreement is not sufficient to meet its requirements. The SEC maintains that bitcoin trading is dominated by unregulated non-US exchanges (like Binance). In this context, Gemini accounts for only a small fraction of global bitcoin trading, and therefore if a manipulation attempt were to succeed in causing a large change in the price of bitcoin, it would likely be carried out on a dominant exchange, like Binance, and not Gemini. Thus, an information sharing agreement with Gemini simply won't be effective for sniffing out manipulators.

A quick perusal of Coinmarketcap.com, a website that tracks bitcoin trading statistics, confirms that unregulated non-U.S. bitcoin exchanges dominate bitcoin trading (see screenshot below). On 31 August 2018, for instance, Gemini ranked 74th in terms of 24-hour bitcoin volume, at $18 million, whereas Binance clocked in near the top at $295 million.

Exchanges with the most bitcoin spot trading

Nor is the existence of information sharing agreements with a regulated bitcoin futures market sufficient to change the SEC's opinion. This is relevant because two large U.S. futures exchanges, the CBOE Futures Exchange (CFE) and CME, both launched trading of their bitcoin futures contracts in December 2017. Given that an information sharing agreement between the NYSE and NYMEX was sufficient to allow GLD to list, would an equivalent agreement between Bats BZX and either of these two futures exchanges constitute enough support for the Winklevoss Bitcoin Trust to proceed? Not so, says the SEC. In the case of other commodity ETFs like GLD, the SEC had sufficient evidence that the U.S. futures market for that commodity was large enough to be "significant." Regulated bitcoin futures still constitute a relatively unimportant part of overall bitcoin trading.

This logic used by the SEC needn't just apply to bitcoin. It might explain why there is no rhodium ETF in the U.S., for instance, whereas there is one in both Europe and South Africa. Since there is no exchange that offers rhodium futures and the spot market is relatively opaque, it would not be possible for an SEC-regulated exchange to set up the information sharing agreements necessary for SEC approval of a rhodium-based financial product. This echoes what I said at the outset: the SEC's decision is less about bitcoin and more about grappling with the complexity of market structure in an age in which financial magicians are trying to package everything into an exchange-traded product.

Dissent within SEC: underlying asset out of scope?

Interestingly, one of the four SEC Commissioners, Hester Pierce, dissented from the regulator's decision to disallow the Winklevoss Bitcoin Trust to be listed. Her reasoning is that a reading of Section 6 of the Exchange Act does not permit the SEC to focus on the underlying market for a proposed security, whether that underlying market be the bitcoin or gold spot market. Pierce believes the SEC only has the right to regulate the market for the overlying asset, i.e. units of a Bitcoin ETF or a Gold ETF. Pierce has previously advocated a Hayekian view of markets, in which the dispersed nature of information leaves no roll for a single "omniscient" regulator:

"Regulators are people, and they are people without great access to information, so we're asking them to do a task that they're destined to fail at... not because they don't have good intentions and not because they don't work hard... they do... they're hard working people but they're just not going to be able to succeed at the task."

Pierce's criticism would constitute not just a roll-back of the SEC's bitcoin decisions, but would also throw out a decade or two of previous SEC decisions related to information sharing practices of proposed commodity-linked ETFs.

The next Bitcoin ETF - Further rejections likely

The next big bitcoin ETF that is slated for an SEC decision is the CBOE Exchange's proposal to list the VanEck SolidX Bitcoin Trust. Given that Pierce's dissent is unlikely to sway the three remaining SEC commissioners, I don't expect this ETF to be approved. Let's look at the part of the proposal that has to do with information sharing agreements:

From VanEck SolidX marketing material (source)

The creators of the VanEck SolidX Bitcoin Trust point to a number of information sharing agreements into which the sponsor, the CBOE, has signed (or expects to sign). We already know that those with the CME, which lists bitcoin futures, and Gemini will not be sufficient to establish significance. What about the agreements signed between the CBOE and Bitcoin over-the-counter trading desks? The creators claim that the relevant OTC markets account for around US$250–$500 million in trading per day. But with overall exchange-related bitcoin volumes said to come in at around $4 billion per day, it will be difficult for the creators to prove that OTC trading constitutes 'significant'.

Lastly, the creators of the trust point to "other USD-bitcoin spot markets." I interpret this to mean that they may succeed in getting other U.S.-based bitcoin exchanges to join Gemini in sharing information. But if it can't get some of the largest actors in the list above, say Binance, Bitfinex, or OKEx, all of which are based outside of the US, it's hard to see how the SEC will provide its stamp of approval.

The World’s largest Precious Metals Refineries

There are many precious metals refineries throughout the world, some local to their domestic markets, and some international, even global in scale. Many, but by no means all, of these refineries are on the Good Delivery Lists of gold and/or silver. These lists are maintained by the London Bullion Market Association (LBMA) and they identify accredited refineries of large (wholesale) gold and silver bars that continue to meet rigorous proficient standards of refining and assaying, and that are, at the same time, financial viable and stable companies. Currently, there are 71 refiners on the LBMA’s gold Good Delivery List and 81 refiners on its silver Good Delivery List, or which just over 50 of these refineries are accredited to both the LBMA’s gold and silver lists.

But within the top echelons of the world’s precious metals refineries, a number of names stand out due to their sheer scale and pedigree, as well as their global brand recognition in the production of a wide range of investment grade gold and silver bullion bars. These names include PAMP, Argor-Heraeus, Metalor Technologies, Heraeus, Valcambi, Tanaka Kikinzoku Kogyo, and Rand Refinery.

5000 Tonnes of Gold

Together these seven refinery groups have a combined gold refining capacity approaching a mammoth 5000 tonnes per year. And that’s not even taking into account their refining capacity for other precious metals such as silver and platinum. Valcambi has a gold refining capacity of 1600 tonnes per annum, Metalor 800 tonnes, Heraeus 400 to 500 tonnes, PAMP over 450 tonnes, Argor-Heraeus over 400 tonnes, Tanaka 500 tonnes, and Rand Refinery 600 tonnes.

Notably four of these refineries are based in the gold refining powerhouse of Switzerland, of which three, PAMP, Valcambi and Argor-Heraeus, are clustered literally within a few kilometres from each other in the golden triangle of Swiss refineries centred within the very south of the Swiss canton of Ticino near the Swiss-Italian border. Metalor Technologies is the exception, as its Swiss headquarters facility is based in Neuchâtel, in the north-west of Switzerland. Of the non-Swiss refineries, Heraeus, Tanaka and Rand Refinery, these are headquartered in Germany, Japan and South Africa, respectively.

crucible
Gold Refineries, Heraeus, PAMP, Valcambi, Metalor, Argor-Heraeus, Tanaka, Rand Refinery

International in Scale and Ownership

Although three of the four giant Swiss refineries have historically each been owned by a Swiss bank, and although groups such as Heraeus and Tanaka are still privately owned and controlled by founding shareholders, its important to note that none of these giant refineries are purely local concerns, so their headquarters locations are to some extent a secondary concern. From operating facilities, to metal supplier networks, to customer bases, all of these refineries are now absolutely global in nature.

For example, Metalor operates four precious metals refineries globally, in Switzerland, Hong Kong, Singapore and Massachusetts (US). Heraeus runs gold refining and gold bar production facilities in Hanau (Germany), Hong Kong, and Newark (US). In addition to its Swiss refinery, PAMP, part of the Geneva-based MKS PAMP group, runs a joint venture refinery in New Delhi, in conjunction with MMTC, a large state-owned Indian trading company.

In many cases, the ownership of these refineries is international and cross-border in nature, and increasingly so over the last few years. Agor-Heraeus is owned by the Austrian Mint and two German entities Commerzbank and Hereaus. In 2015, Valcambi was acquired by Indian jewellery producer Rajesh Exports, with one of the selling shareholders being US-based gold mining giant Newmont. Indeed, just last month, Tanaka announced the acquisition of Metalor Technologies, a development which has initiated an upcoming major Japanese - Swiss precious metals refinery combination. Metalor was already international in ownership, as its controlling shareholders are French and Belgian private equity companies. While Rand Refinery of South Africa is  exclusively owned by five of the largest South African gold mining companies, some of these owners, such as Anglogold Ashanti and Goldfields, are vast international concerns. Rand Refinery has also increasingly had to cast its new wider for sourcing gold to process in its refinery as South African gold mining output has declined. Rand Refinery now refines over 75% of the gold mined on the African continent (excluding South Africa), and is also increasingly tapping into gold mining output from the US and Asia.

The World's Refinery Referees

Another indicator of the esteem within which these select refineries are held is their membership of the exclusively small panels of good delivery list referees which have been appointed to run the LBMA’s good delivery lists, and similar good delivery lists maintained by the London Platinum and Palladium Market (LPPM) for platinum and palladium bars.

The LBMA’s good delivery referee panel is a five refinery member panel made up of Argor-Heraeus, Metalor Technologies, PAMP, Rand Refinery and Tanaka Kikinzoku Kogyo. The LPPM’s referee panel also comprises five refiner members, namely Metalor Technologies, PAMP, Valcambi, Tanaka Kikinzoku Kogyo and platinum specialist Johnson Matthey. So not only are these refineries listed on these LBMA and LPPM good delivery lists, they actually help run the entire set of good delivery standards and processes. With the upcoming acquisition of Metalor by Tanaka, these LBMA and LPPM referee lists may need some adjustment, since Tanaka and Metalor are members of both referee panels.

Overwhelmingly, the gold and silver bars of these refiners are all also accepted as good delivery for the COMEX gold 100 oz and gold kilo futures contracts, the gold contracts of the Tokyo Commodity Exchange (TOCOM), the Dubai Good Delivery gold list maintained by the Dubai Multi Commodities Centre (DMCC), and the good delivery standards of the Shanghai Gold Exchange.

Investment bullion bars

Although all of these precious metals refineries, to various extents, supply semi-fabricated precious metals, alloys and industrial precious metals suppliers to a diverse set of industrial and jewellery sector clients, it is perhaps the investment grade bullion products of these giant refiners that they are best known to a global audience.

PAMP fabricates a vast range of cast and minted gold and silver bars which are extremely popular across Asia and the Middle East, in fact, the premier brand in those regions. Valcambi manufactures a wide range of gold, silver and platinum / palladium investment bars, as well as precious metal coins and medals, and has become well-known as the international supplier of Combibars. Heraeus, Metalor and Argor-Heraeus produce a wide selection of gold and silver bars ranging from large wholesale (good delivery) bars through to smaller cast and minted gold and silver bars. Tanaka’s gold bars dominate the Japanese market and notably, Tanaka is also the sole distributor in Japan of gold and silver bullion Maple Leafs coins from the Royal Canadian Mint and gold and platinum Philharmonic coins from the Austrian Mint. Tanaka's acquisition of Metalor will be interesting in terms of how the combined group markets and distributes its investment bullion products going forward.

It's also not widely appreciated that Rand Refinery has refined over 50,000 tonnes of gold since it first opened in 1921, which is a staggering nearly one-third of all the gold ever mined. Rand Refinery large gold bars are held widely by central banks across the world. Rand Refinery’s flagship gold bullion Krugerrand coin is also held very widely, with over 60 million Krugerrands minted since 1967.

This article has not touched on the Perth Mint, Royal Canadian Mint or Royal Mint, which its important to remember, each operates its own precious metals refinery facilities in addition to being a sovereign national mint.

In summary, the seven refineries featured above are truly giants of the industry, and their longevity and customer trust attest to the authenticity and quality of their investment bullion products.

To learn more about the world's top precious metals refineries featured in this article, please see the full refinery profiles which have now been published on BullionStar's Gold University pages:

Heraeus: https://www.bullionstar.com/gold-university/heraeus-refinery

PAMP: https://www.bullionstar.com/gold-university/pamp-refinery

Valcambi: https://www.bullionstar.com/gold-university/valcambi-refinery

Metalor: https://www.bullionstar.com/gold-university/metalor-refinery

Argor-Heraeus: https://www.bullionstar.com/gold-university/argor-heraeus-refinery

Tanaka Kikinzoku Kogyo: https://www.bullionstar.com/gold-university/tanaka-refinery

Rand Refinery: https://www.bullionstar.com/gold-university/rand-refinery

In addition, the refining activities of the Royal Mint, Royal Canadian Mint and Perth Mint can be consulted in their respective profiles, also on BullionStar's Gold University pages:

Royal Mint: https://www.bullionstar.com/gold-university/the-royal-mint

Perth Mint: https://www.bullionstar.com/gold-university/perth-mint

Royal Canadian Mint: https://www.bullionstar.com/gold-university/royal-canadian-mint

 

Gold Price: USD 65,000/oz in 5 years?

16 June 2021 is exactly five years from today. What will the gold price be on 16 June 2021?

Currencies are Worthless

As the world’s fiat paper currencies have lost 99% or more of their purchasing power over the last 100 years, its critical to understand that fiat paper currencies are not a suitable unit of account for accurately measuring prices.

In fact, gold is a far superior measuring stick of value than paper currencies.

A paper currency doesn’t measure anything. It merely has an arbitrary value placed upon it by the population using it. It’s not backed by anything and it can fail at any time. From historical experience, we know that the unbacked fiat paper currencies used today will ultimately destruct and become worthless. All unbacked fiat currencies throughout human history have failed.

A more accurate measurement would be to measure fiat currencies in gold. If we look at the US Dollar measured in gold, we can see that the US Dollar has utterly failed in retaining its value, as its value has plunged about 98% over a mere 50 years. It cannot therefore be seen as a store of value.

Chart of US Dollar measured in Gold. USD price instead of Gold Price.Source: Gold Price Charts, BullionStar

Extrapolating into a likely future, a future in which you will need a stack of USD 100 bills to buy a carton of milk and a couple of eggs, underlines that the US Dollar gold price is meaningless as an indicator of value. When discussing the price of gold, the key is to recognise that gold retains its purchasing power over time. If a 1 oz gold coin can buy an exclusive men’s suit today at USD 1,300 and the same 1 oz gold coin buys an exclusive men’s suit at USD 2,600 tomorrow, this only means that gold is still reflecting USD 1,300 in today's purchasing power and hasn’t gained in value. It’s the US Dollar that has depreciated vis-à-vis gold. Similarly, if the gold price goes to USD 650 and it can still buy the same suit, then it’s merely the US Dollar that as appreciated vis-à-vis gold.

With a gold price of USD 65000, what will the USD be for Milk, Egg and Bread

As a society, we should by now have transcended the idea of measuring value in fiat currencies. Currencies are not a reliable measuring stick. Just imagine if the centimeter, meter, yard or foot were to fluctuate in length.

100 cm 100 years ago has become 2 cm today. Think about it. This is what has happened with our currencies.

The Gold Price                                  

The gold price is an interesting term because the gold price doesn’t reflect what’s happening on the physical gold market whatsoever.

In today’s marketplace, a lot of things are regarded as “gold”. On the London Gold Market alone, there’s 600 times more gold traded each day than there is gold mined globally on that same day.

All sorts of paper gold passes for “gold” on the financial markets. The vast majority, certainly more than 95%, and likely more than 99% of this paper gold is not backed by any physical gold.

“Gold” is created out of thin air as paper obligations. The demand for and supply of this paper gold has little to do with the physical gold market.

During the last couple of year, demand for real physical gold has been insatiable , however the price of gold has not reflected this huge demand. Physical gold has been flowing from the Western vaults to Asia. The Chinese in particular have been vacuuming the London vaults for gold. However, this substantial physical demand hasn't been reflected in higher gold prices because whereas Easterners have been buying physical gold, Westerners have been selling paper gold.

Given that the price of “gold” is set on the OTC paper market in London and on the COMEX futures market in New York, the US Dollar denominated gold price continued to fall between 2012 and 2015 despite the massive physical demand, and instead, it created a physical shortage of gold.

Whether physical demand is up or down 5 tons in China or India matters little when there’s 5,500 tons of paper gold traded each day in London  as visualized in this infographic. London, and to a lesser extent COMEX in the US, are the price discovery markets for gold. However, paper gold on these markets is almost exclusively cash settled with less than 1% of the contracts/futures settled with delivery of physical gold.

The gold price is therefore not dependent on the market fundamentals of physical gold but this may very well change in the future.

With China picking up all physical gold available every time the price slides, widespread shortages are a likely outcome if the gold price ever were to decrease significantly again. Given that the historic vaulting capital of the world, London, has already been running out of stockpiled gold, there just wouldn't be enough physical gold to satisfy demand if the price were to ever plunge significantly again.

It's actually been a healthy development for the physical market’s demand/supply balance  that the gold price has increased 22% in USD Year-to-Date 2016. However, we have to understand that the largest potential for a revaluation of the gold price paradoxically may be preceded by a decrease in gold prices.

When trend seeking Western investors sell their paper gold and the price slides, Easterners take the opportunity to buy physical gold at bargain prices, thereby stressing the physical market with shortages as a result. Such shortages may very well be what ultimately breaks the neck of the paper markets. Because when there is no longer any physical gold available at the price dictated by the paper markets, there will be a disconnect between the price of paper gold and the price of physical gold. Paper gold will go towards zero whereas the price of physical gold will skyrocket.

Such a revaluation of physical gold will bring the fiat paper currencies to their knees as their worthlessness as a store of value will become clear to all.

USD 65,000/oz

What will the price of gold be in 5 years’ time?

Gold is savings - Gold is wealth, and as such, the price denominated in something as inferior as the US Dollar isn't very important.

For the sake of reflection, we can play with the idea of what the price of gold would have to be if the US Dollar were to go on a fully-backed gold standard.

The US gold reserve officially stands at 8,133.5 tons although it has never been properly independently audited. At USD 1,300/oz, this would be equivalent to 340 billion dollars. The total US money supply is about 17,000 billion dollars. For each "gold backed" dollar today, there are therefore 49 unbacked dollars. The gold price would thus have to increase 50-fold to USD 65,000 if the US Dollar were to be fully gold-backed by 16 June 2021.

 

Infographic: COMEX Gold Futures Market

This COMEX Gold Futures Market infographic guides you through the largest gold futures market in the world, COMEX.

Did you for example know that only 1 in 2500 contracts on COMEX goes to physical delivery whereas the other 2499 contracts are cash-settled? This corresponds to a delivery percentage of 0.04% of all gold contracts.

The US government claims to hold a fair bit of gold in reserves but how much is it really holding?

In this infographic you will learn more about the COMEX gold futures market considering

  • COMEX Trading Volumes
  • Fractionally Reserved Futures Trading
  • Cash-settlement of COMEX Gold Futures Contracts
  • Eligible and Registered Gold on COMEX
  • US Treasury Gold Reserves
  • Location of US Treasury Gold Reserves
  • Foreign Gold at the Federal Bank of New York
  • US Gold Mining

You can learn more about the US Gold Market at the BullionStar Gold University.

COMEX Gold Futures Market Infographic

Infographic on COMEX gold futures market, the world's largest gold futures market

To embed this infographic on your site, copy and paste the code below

The Real Ponzi Scheme

BullionStar was founded on the belief that precious metals generally, and gold specifically, has a central role in the monetary sphere.

Gold is rare, beautiful and has superior metallic characteristics to other metals. Furthermore, gold is durable, portable, divisible, fungible and possesses intrinsic value.  This has led to gold being used as money throughout most of recorded human history. One of the strongest historical value propositions of gold as money is that gold naturally emerged as money in different civilizations and continents worldwide, without the civilizations being aware of each other.

Unbacked fiat/paper/credit, and nowadays electronic currency, has a poor track record. Every time it has been tried historically, it has vanished through hyperinflation, war or political decrees. The fiat currencies of today actually have comparatively good track records, but even so, most currencies in circulation a century ago are no longer in existence today and the ones that are have lost 99% or more of their purchasing power.

Still, there's a lot of gold bashing in the mainstream media as the gold price has fallen slightly over the last couple of years when priced in some of the fiat currencies. Measuring gold in something worthless (fiat currency) is upside down though. Gold has maintained and even increased its purchasing power in the last century, whereas all fiat currencies have lost 99% - 100% of their purchasing power.

Why are there no fiat currency bashing articles in mainstream media? 99% - 100% lost in a century - What a fraud!

Governments are keen, and rightfully so, about going after companies setting up Multi-Level Marketing (MLM) and Ponzi schemes, but always exempt themselves, and their buddies at the central bank, from the rules.

In an MLM scheme, the idea is to recruit downstream marketing participants, known as ‘downline’, so as to generate multiple levels of compensation for the recruiter. This form of pyramid scheme is exactly what we have today with our fiat currencies. Early receivers of newly printed money i.e. governments, central banks and commercial banks are gaining purchasing power, whereas late receivers, read: most normal people, are losing purchasing power.

Today's monetary system, built on the fragile basis of fractional reserves, is a system that is doomed to go bust. You just can't borrow forever and in the process create the money out of thin air with no intention of paying anything back.

For the last four decades, we have experienced tremendous monetary inflation and money printing. The worst villain, the United States, has hyperinflated its currency, and although we've seen substantial price inflation, it hasn't been as high as the monetary inflation. The reason for this is the exorbitant privilege the US is holding in terms of printing the reserve currency of the world, the US Dollar. The only reason the system is holding up is the promise of more and more easy credit to infinity.

However, in the end, the problem of too much debt can't be solved with more debt.

What we are witnessing now is the USD quickly losing structural foreign support as a reserve currency. This is one of the topics I recently covered at BullionStar's 3 year anniversary.

Governments and central banks around the world are no longer interested in increasing their holdings of US Dollar denominated debt. China, the largest sovereign holder of US debt, has not increased its holdings of US debt for four years and the pattern is the same for other surplus countries.

USBonds

The only reason the system is still holding up is due to the increase in private non-US demand of US Dollar denominated debt. With many developing markets and their currencies crashing, and with people being conditioned to run to the US Dollar as a safe haven in the short-term, this is the savior for the time being.

The US has a national debt of USD 17,000,000,000,000 and unfunded liabilities of USD 100,000,000,000,000 - USD 200,000,000,000,000. How's that for a safe haven?

In reality, everyone knows that the US has no credibility, but it's when people start to act on the knowledge that the US has no credibility that we will see a loss of confidence triggering an avalanche of deleveraging. In previous instances when private support for US debt decreased, there was always foreign government support, but that's no longer the case.

We are at the beginning of the end. Everything today is pointing towards a deflationary depression, but it's when, in a deflationary depression, the government starts to buy debt/credit with cash at all costs coupled with a loss of confidence that we arrive at the end stage - hyperinflation. Policy has never and will never allow for deflation.

Why is the government protecting the most fraudulent schemes?

The Monetary Authority of Singapore recently announced plans for enhancements to its regulatory framework for safeguarding investors' interests.

This is likely an effect of several large MLM/Ponzi gold schemes, like those offered by Genneva Gold, The Gold Guarantee and Suisse International in Singapore, failing during the last 3 years. It's startling that people still fall for scam after scam with guaranteed interest payouts of 20 plus percent and/or guaranteed gold buy-back prices.

One of the suggested measures in Singapore to be tabled in Parliament during 2016 is that buy back schemes where a seller sells gold with a guaranteed buy-back at an agreed price will be regulated as debentures. This is a very good measure which will hopefully clear the Singaporean market from the scammers for good as it will then be clearly illegal to run unlicensed MLM gold schemes.

At BullionStar, we support these steps taken by the MAS.

A larger question however, is whether government authorities around the world are missing out on the really big Ponzi schemes.

The world's largest wholesale gold market is the London Gold Market. The London Gold Market is generally very opaque in nature and there isn’t any trade turnover data published, only net clearing volumes. The trend is unfortunately that transparency is decreasing as the London Bullion Market Association (LBMA) forward market makers have stopped publishing the interest rate for lending gold (GOFO), have ceased supplying data on gold forwards, and has chosen not to be transparent about the process used in the LBMA gold price auction.

To give a hint of the trading volumes at the London Gold Market, the most recent data available is from a survey conducted by the LBMA in the first quarter of 2011. 36 of LBMA's 56 participating members submitted trading statistics for the quarter in question. The average daily trading volume reported, after adjusting for double accounting, turned out to be 170,195 tons of gold for the quarter or 2,700 tons of gold per day. Albeit a staggering number, it's likely that the real volume is even higher as only 64% of the LBMA’s members participated in the survey.

In the survey, the LBMA stated that "it can also be seen that there is an approximately ten to one ratio between the turnover figures and the clearing statistics". 

Using the approximation that trade volume is approximately 10 times higher than net clearing volume (which is conservative as mentioned above) and looking at the LBMA clearing statistics since 2011, there was a slight surge in volume in 2013 inferring a daily average about 3,413 tons of gold traded per day after adjusting for double-accounting. For 2015, volumes have decreased slightly to 2,756 tons of gold traded per day equivalent to about USD 100 billion per day based on the current gold price.

Let's put this into perspective.

According to the World Gold Council's report on Gold Demand Trends for the second quarter 2015, the annual global gold mining production for 2014 was 3,133 tons.

The volume traded during one day on the London Gold Market is thus at least 88% of a whole year's gold mining production. Assuming about 250 trading days in a year, the volume traded solely on the London Gold Market is about 22,000% higher than the world's annual mining production. And this is a conservative estimation.

The clearing and turnover volumes are nothing short of shocking.

As the London Gold Market, together with the New York market, is the global price discovery market for gold, it's apparent that physical supply and demand of gold has nothing to do with the price of gold.

Which do you think carries a higher weight when it comes to influencing the price of gold; An increase or decrease of 10 tons of physical gold demand for the Indian wedding season in a quarter, or the 170,195 tons of paper gold changing ownership each quarter in the London Gold Market?

Factors like Indian wedding demand are often cited by media as a cause of price movements, whereas the London Gold Market volumes are never mentioned. Whether demand is high during the Indian wedding season or not does not matter one ounce in terms of price fluctuations. It totally misses the point as the London Gold Market, together with the US/New York market, dominates price discovery.

Physical demand matters in stressing and ultimately breaking the market structure but it does not matter for the (paper) price of gold today. The fundamentals for physical gold are completely separated from the paper price of gold. The paper price of gold has nothing to do with the physical market whatsoever.

The price for physical bullion products is never traded at parity with the paper price. There is always a price premium. When demand for physical gold is increasing, as we have seen over the last couple of months, price premiums are shooting up, diverging the physical price from the paper price even further.

BullionStar deals only in physical precious metals

When putting the above in perspective, it's clear that the paper trading of precious metals is irrelevant to physical gold and that it is unsustainable in the longer term.

That's why we at BullionStar have a strong aversion to all forms of paper trading of precious metals.

At BullionStar, we don't engage, trade or speculate on any paper markets, financial markets, commodity exchanges, commodity platforms or anything similar. We don't engage in forwards, futures, spot commodity trading or anything of the kind. We never in any capacity work with brokerages of any kind.

BullionStar merely purchases fabricated precious metals items, and to a smaller extent numismatics and jewellery, from wholesalers, mints and refineries and retails these items.

Physical precious metals decoupling

Prices for physical precious metals are in the process of decoupling from the paper price.

The first phase, in which we are now, is that we get shortages of physical bullion.

The second phase is that the physical flow completely dries up and the physical price resets based on physical supply and demand at a higher level few people can imagine today.

Paper gold trading needs to have a functional physical market in the background for keeping up the confidence in the paper trading. When gold supply dries up on the physical market, there will no longer be any confidence in the paper market as everyone will realize that the paper market consisted by nothing but paper gold created out of thin air. As a result the paper gold market will crash and the price of physical gold will reset higher.

When this happens, it's important that you deal with a bullion dealer without any exposure to paper commodity markets that only deals in physical precious metals.

BullionStar operates with the ideological belief that physical precious metals have important monetary properties and that paper trading is inherently risky. That is why we refrain from participating in the paper trading casino style market. The bullion we offer is physical in nature. We have never and will never offer any unbacked metal, collateralization of customers’ physical bullion, forwards, futures or leveraged trading. All bullion you buy from BullionStar is fabricated, unencumbered, and fully physically allocated bullion.

By Torgny Persson, CEO BullionStar