While there are a number of specialist companies such as BullionStar servicing Singapore’s retail gold bullion market, the most unusual place to buy gold bars in Singapore must be the Mustafa Centre in the Little India neighborhood.
Located in a building on Syed Alwi Road, and part of another adjacent building on Serangoon Road, the Mustafa Centre is a cluttered haphazard department store and arcade that seems to sell everything from clothes to electronics, from perfumes to gold jewelry, and everything in between. It is also known as being one of the biggest gold jewelry outlets in Singapore.
Crowded and Congested
The Mustafa Centre itself is frequently crowded, often congested, and stays open 24 hours a day. Even trying to approach one of the entrances to the Mustafa Centre can be a stressful experience, and this is after navigating through a maze of often crowded streets if you find yourself approaching from the nearest MRT Station, which is itself a 15 minute walk from Mustafa’s premises.
Once you do happen to find Mustafa’s gold jewelry section, which is located in the basement 1 level of one of the centre's buildings, you will have to navigate past a floorspace crammed with clothes displays before stumbling upon a series of interconnected aisles assigned to gold jewelry.
While this jewelry space is about the size of a basketball court and stacked full of counters displaying gold earrings, gold rings, and gold chains and necklaces, the gold bar and gold coin display is relegated to a tiny rectangular counter, as if it was an after-thought among the masses of gold jewelry being hawked. This small gold bar and coin counter is itself cluttered, and badly presented, and is reminiscent of the display cases of a second-hand IT equipment shop.
The advertised prices for the limited selection of gold bars and gold coins that are on offer at Mustafa consists of a partially typed and partially hand-written price list page that sits on top of the counter. When this correspondent visited on the Sunday afternoon of 29 October, the price list strangely had the dates 28 - 29 October scrawled at the top, as if it had just been written one time that weekend on the Saturday and then not updated over the weekend.
The accuracy of the prices on that particular price list are therefore called into question. Where the Mustafa Centre sources its gold prices or 'Gold Rate' from is also not clear. In India and India's expat communities, 'Gold Rate' is a term often used to refer to the gold price.
Mustafa's bullion products and their prices, although typed, are squashed on to the list, with various hand-written notes along the left and right side margins. Strangely, parts of the list are highlighted in yellow highlighter marker. What this signifies we do not know, but perhaps it refers to the products that are in stock as opposed to out of stock.
Within the actual display cases of Mustafa's gold bar display cases, the gold bars are very much crammed into the display area as if everything in stock is actually on display. The old adage of "more is less" as regards presentation and visual display seems to have been lost on whoever lays out the Mustafa display cases.
Disappointingly, there is also a very limited range and brands of gold bars and gold coins actually offered by Mustafa's gold bullion counter, with nearly everything in the bar section being of the PAMP brand, and with very few gold coin types at all.
A number of precious metals research consultancies regularly do field trips to bullion markets around the world, including Singapore, so as to gauge at first hand the level of retail demand for bullion in a particular market. As regards Singapore, some anecdotal evidence we have heard from these consultancies is that it is virtually impossible to calculate the level of gold bullion demand in the Little India area.
Some of the reason for this is because gold bars and gold coins regularly arrive into Little India that have been hand carried from countries such as Dubai or other regional markets. And so this gold would not be reflected in the Singapore supply statistics of, for example, the Swiss refineries or the Canadian and Australian mints.
There are also a lot of resales of gold bullion in Little India, such as a parent swapping gold bars for gold jewelry to give to a sibling as a wedding present. It is therefore difficult to estimate where the gold bullion sold in Little India comes from. Not Mustafa specifically, but this issue must be borne in mind as regards Little India in general.
BullionStar's Spacious Shop and Showroom
In contrast to Little India's Mustafa, BullionStar could not be more different. BullionStar's shop and bullion showroom in central Singapore is located in an easily accessible and well-known section of New Bridge Road across from Clarke Quay Central Shopping mall. BullionStar's premises is also adjacent to the Clarke Quay MRT station. Those working in the Central Business District (CBD) will find that BullionStar is just a short lunchtime walk from the CBD. And from Chinatown, BullionStar's showroom is less than a 10 minute walk.
All of the gold bars and gold coins in the extensive range of gold bullion stocked by BullionStar are sourced either directly from the world's most prestigious precious metals refineries and mints such as Argor-Heraeus, PAMP, Heraeus, Valcambi, and the Royal Canadian Mint, or are supplied directly to BullionStar by the world's most renowned precious metals wholesalers such as Dillon Gage and A-Mark. BullionStar staff are also knowledgeable about all aspects of the range of gold and silver bullion stocked.
In BullionStar's shop and showroom, the floor-space is generous, the design calm and ergonomic, with many display cases devoted to gold bullion and silver bullion. Nothing is cluttered, and visitors and customers entering the air-conditioned showroom will be able to browse and view a huge range of gold bars and gold coins, and silver bars and silver coins, with every product type stylishly and spaciously displayed in its own display case. All display cases are also well-lit and well presented.
An impressive feature which BullionStar customers find useful are the electronic screens next to each display case which show updated prices for those products. These prices are live and are displayed electronically and updated electronically in real-time.
A final point to note is that the Mustafa Centre's gold bullion counter does relatively poorly in customer reviews, with customer feedback of poor customer service, dis-interested staff, and prices higher than elsewhere in Singapore. Based on reviews on the Singapore website 'Bullion Reviews', Mustafa scores lowest out of all 6 Singapore bullion dealers featured, with Mustafa getting a total score of 3.9 from 27 reviews.
In contrast, on the same review site, BullionStar receives a total score of 9.1 from 131 reviews. And BullionStar's prices are generally perceived to be some of the most competitive, if not the most competitive, in Singapore.
A popular phrase in segments of the mainstream financial media is that “You Can’t Eat Gold”. We don’t know who first uttered this comment, but it was more than likely a talking-head or Wall Street analyst on CNBC or Bloomberg.
The disparaging claim seems to be based on concluding that in a financial or monetary crisis, if you own gold, that “You Can’t Eat It”. And so, according to the logic of whoever came up with the phrase, this would make gold useless during a financial crisis.
In addition to the misleading and irrelevant nature of the comment, which we will discuss below, the claim that “you can’t eat gold” is actually factually wrong. And that is because you can eat gold. And also drink it.
Eating and Drinking Gold
While gold can be eaten, it cannot be digested. But it is non-toxic to the human body. And it does not react chemically in the human body. That is why gold can and does appear safely in a number of foods and drinks, not surprisingly foods and drinks which are predominantly at the luxury end of the market.
Some readers will have heard of Goldschläger, a Swiss/Italian liquor which has flakes gold suspended within it. On a similar note, a Swiss gin called ‘Studer Swiss Gold Gin’ also contains flakes of gold. Staying within Switzerland, you can also buy edible gold products including “Swiss chocolate truffles with gold flakes”. Not to be outdone by the Swiss, the Emirates Palace Hotel in Abu Dhabi (United Arab Emirates) offers a ‘Palace Cappucino” which is sprinkled with gold flakes.
In Selfridges department store in London, you can buy a “billionaires soft serve” ice cream cone topped with both sprinklings of gold leaf and a gold leaf covered flake. While in New York, in Manhattan’s Upper East Side, a high-end restaurant offers a "Golden Opulence Sundae” topped with gold leaf, for US$ 1000 a glass. Back in England, a specialist cheese producer in Leicestershire created Britain's most expensive cheese - "Clawson Stilton Gold", a stilton cheese interwoven with edible gold leaf and shot-through with gold liqueur. These uses of gold in food and beverages illustrate that gold is a sought after and prestigious substance, but also that gold is real, that gold is tangible and that gold is of value.
Wall Street's Selective Focus
The logic of the “you can’t eat gold” comment, as well as being wrong, is also flawed. Because by extension, you can’t eat any of Wall Street's favorite investment assets. Imagine chewing on financial securities or fiat currencies. But whoever coined the phrase “you can’t eat gold” conveniently failed to mention this on CNBC. We would challenge anyone, especially CNBC and MSNBC, to eat share certificates or bond certificates or the electronic equivalent thereof.
Nor can you eat the electronic coins of cryptocurrencies such as Bitcoin, Ethereum’s Ether or Litecoin. Real assets such as art, antiques, real estate, agricultural land, or vintage cars are also off the menu. A possible exception is that can drink an expensive investment wine collection, but would you really want to do this, as then you would be consuming your principal investment?
Gold's Many and Varied Benefits
But beyond the fact that you can in fact eat gold, and that Wall Street never points out the non-edibility of stocks and bonds, there are many beneficial reasons to buy and own investment grade physical gold of which we recently pointed out in 28 reasons to buy and own physical gold. What we are talking about is real physical gold in the form of gold bars and gold coins. This is true both during times of financial crisis, and also over the long-term as a form of investment and savings.
Gold is without doubt the ultimate safe haven asset. In times of financial crisis and turmoil, investors and savers flock to gold as a wealth preservation strategy. The reason for investing in gold during times of crisis is based on the fact that investors instinctively know that the gold price behaves differently to the prices of other assets, particularly during crises. This is because the gold price moves independently of economic and business cycles.
In times of war and social upheaval, physical gold's benefits also come to the fore. Since gold has a high value to weight ratio, significant personal wealth can discreetly be carried in the form of gold across borders and frontiers and within areas of conflict.
Since gold is a universal money supported by a highly liquid global market, it will always be accepted everywhere at the going gold price. Gold can easily be sold. Gold can easily be traded or even bartered with, especially in non-functioning economies where the local paper currency has collapsed or has become worthless. The fact that gold coins are regularly issued to elite military personnel in areas of conflict attests to gold's critical benefits in times of monetary crisis and localized economic collapse.
Gold as Store of Value
But gold is not just of use during financial crises. It is also an essential asset to own over the long-term as a strategic form of saving and investment. Physical gold retains its purchasing power over long periods of time. This is in contrast to fiat currencies issued by the world's central banks, which generally lose most of their purchasing power over time. In other words, gold is a great hedge against inflation, as the gold price adjusts upwards to offset inflation. The gold price even adjusts to inflation expectations, hence it is sometimes called an inflation barometer and is watched like a hawk by central bankers because the gold price signals future inflation.
Physical gold is also an asset without counterparty risk. This is because when you own physical gold in the form of gold bars or gold coins, there are no counterparties. In other words, the physical gold that you own outright is no one else's liability. Nor are there any governments or central banks involved in issuing gold, or in trying to increase and debase its supply. Gold also lacks default risk, because it cannot default.
Physical gold is also inherently valuable because it is a scarce precious metal that is difficult and costly to mine and refine. Gold's price will never go to zero because it has a finite and significant production cost. Physical gold is difficult to counterfeit, impossible to create artificially, and cannot be debased.
These are just some of the reasons for buying and owning physical gold. Please see BullionStar's recent article"28 Reasons to Buy Physical Gold" for a list of reasons why you should consider buying physical gold.
Gold in Zimbabwe & Venezuela & South Korea
In the real world, owning physical gold can be of critical importance in scenarios where trust in a nation's money supply has evaporated, such as is currently the case in Venezuela or Zimbabwe.
Gold can also be of critical importance when entire nations suffer economic shocks. A case in point is the interesting experience of South Korea during the Asian financial crisis that swept the region in the late 1990s. This crisis left the South Korean economy severely impaired, with it’s currency, the Won, collapsing against the US dollar.
In addition to a bailout by the International Monetary Fund, the South Korean government also launched a patriotic campaign in early 1998 to actually collect physical gold from the South Korean citizens which was then sold on the international market to raise much-needed foreign currency. This collective campaign was pursued precisely because the South Korean government understood that gold is a high-quality liquid asset that has substantial value.
National Mobilization of Gold
By mid-March 1998, the South Korean citizenry had donated more than 220 tonnes of gold, worth over US$2 billion, in the form of investment gold coins and bars, and other gold in the form of rings, jewelry, and gold medals. More than 3 million households were said to have contributed. This collective mobilization of gold to overcome a nation's economic adversity and raise financing is a great illustration of how gold comes to the fore in a time of crisis, due to its store of value, safe haven, and high liquidity characteristics.
In conclusion, knowing the many compelling reasons to buy and hold gold, and how gold can sometimes be a lifeline in a time of crisis, the claim that "you can't eat gold" is exposed for what it is, misguided and disingenuous, and shows either ignorance on the part of the people who use it, or more likely, a deliberate intention to mislead and deceive.
Gold is a highly valuable asset. When your buy gold, It is critical to store your gold bars and gold coins in a location that is secure but at the same time accessible.
Inside a Home
There are many places to store gold and other precious metals in your home, with some places more secure and covert than others. Luckily, since physical gold has a high value-to-weight ratio, for most people, storing their gold bars and gold coins won’t take up too much space.
1. Floorboards: Gold can be hidden under floorboards between joists, preferably under a short section of board covered by a rug or carpet.
2. Chimney: Positioning gold in a recess within a disused fireplace chimney stack is also an option.
3. Within a Wall: A natural hollow or cavity in an internal wall, or a hidden panel in a wall, are also worth considering.
4. Frozen Food: Hiding gold bars and gold coins within frozen food in a freezer is possible, for example, actually buried and frozen within minced meat or in a large tub of ice-cream. Horizontal chest freezers used for long-term deep freeze storage of supermarket produce are ideal for this tactic.
5. Piping: In a kitchen, possible covert storage locations include within a section of disused kitchen piping, or indeed within a section of false piping that has been specifically designed to accommodate your gold bars and coins, but which does not function as a real pipe.
6. Air-Conditioning: Gold can be concealed within an air-conditioning duct, which has the added benefit of usually being above head height.
7. Furniture: Heavy objects such as immovable furniture can also be considered as hiding places for gold, places that may not be obvious to time constrained intruders. For example, gold bars and gold coins could be securely attached within a compartment inside a chest of drawers or even stored inside a piano. A large cache of Gold Sovereigns was actually found inside an old piano in England in 2017.
8. Aquarium: For those with the option, storing a gold bar / gold coin cache inside an aquarium or fish tank is worth considering, among aquatic plants and fish tank paraphernalia.
9. Large Plant Pots: Large indoor plant pots on a veranda, patio or balcony provide another covet place for hiding gold. with the gold within the pots under the actual plants. These pots are always difficult to move, and would not normally be on the radar of a burglar.
Attics and Basements
Attics and basements provide further practical options for covert storage, and the inconvenience and difficulty of accessing such locations could act as a secondary deterrent to thieves.
10. Water Tank: In an attic, one possible place to hide your gold bars and coins is in a covered water tank.
11. Insulation: Another option is to secure your gold under ceiling insulation, preferably on ceiling joists that can support the weight of the gold.
12. Basement: Within the basement of a house, the choices for hiding gold are varied and include alcoves behind walls and under a basement floor.
13. Basement Junk: A gold cache can strategically be placed in one of the many large junk items or boxes that invariably end up being stored in basements - as long as you make a record of which item or box you have stored your gold in.
Garden Shed / Workshop
14. Paint Tin: Gold coins or gold bars can be hidden in an old paint tin in a garden shed or workshop, a tin that is securely sealed and looks to have not been opened in a long time. The sheer difficulty for intruders to search numerous old paint tins in a shed or workshop makes it highly improbable that anyone would spend time doing so during a break-in or robbery.
On Your Land or Property
Apartments will in most cases lack a garden, a location which can offer the adventurous multiple cunning places in which to covertly store their gold.
15. Buried in Garden: If your property has a garden, you can dig down into the ground on your land, wrap your gold securely, and bury it deep enough in the hole under soil.
16. Fishpond: Those with a large enough fish pond could also consider storing their gold cache at the bottom of the fish pond preferably among pond plants or reeds.
17. Under and In Trees: Under a tree in your garden or in the hollow of an old tree trunk on your property provide further concealment opportunities for gold. Indeed, in 2014, a US$10 million cache of 19th century gold coins was discovered under a tree on a property in Northern California.
18. RVs and Caravans: Those with RVs or caravans or rarely used boats that are stored on their properties could consider the possibility of storing their gold in these vehicles. However, this is presuming the entire property is secure and inaccessible to intruders, and runs the risk that the RV or boat or caravan might itself be the target of a robbery.
Hidden Rooms, Home Safes, Display Cases
19. Hidden Room: For those lucky enough to have a panic room (or other hidden room) in their house or apartment, this would obviously be a ready-made location to store their gold, as it is both secure and concealed. But would this be the first place a team of sophisticated intruders would try to locate and access if they had suspicions that such a room existed?
20. Home Safe: A home safe will offer a secure location in which to store gold bars and coins. Home safes rang from the small models such as those found in hotel rooms with digital keypads, to larger safes with combination locks, to large models that are fireproof and waterproof. The main consideration with a home safe is whether the safe itself is hidden and concealed within a house or apartment, or whether it is installed in a location which is easier to access but which could be discovered by burglars.
21: Display Cases: A final home option for those with the means and security, would be to store your gold bars and gold coins in museum style high-security and alarmed display cases within your house or apartment. While this will impress friends and visitors, you would need to be confident that your property is fairly impenetrable.
22. On Public Land: A less used and unusual tactic would be to hide your gold bars or gold coins in a secure and remote location which is on public land, for example in a forest, mountainous area, or coastal location. These locations have the benefit of being completely off the radar, but could by chance be inadvertently discovered by passers by, or disturbed by wildlife. A public location also runs the risk that it could be developed in the future, for example for road or path construction, so your gold could end up being buried under asphalt.
Safety Deposit Boxes
23. Safe Deposit Boxes: Renting and using a safety deposit box is a common way to store valuables including gold bars, gold coins, and other precious metals.
While safety deposit box companies and banks will pitch the fact that only the key holder has access to and knowledge of the box contents, this is a two-edged sword in some jurisdictions because of the following.
If police or other law enforcement officials raid a safety deposit box company in the pursuit of criminal assets, and seize all the contents of all the boxes, then your legitimate valuables could be confiscated and be extremely difficult to get back. For example, a number of safety deposit box companies in central London were raided by Metropolitan police in 2008, events in which everything in every box was seized. In typical government style, gold, jewels and other high value assets were the most of interest to law enforcement. This type of operation undermines the entire premise of deposit box confidentiality and is a disaster for those storing legitimate assets in these locations.
Safety deposit box companies can also be the target of professional thieves. Again, London provides a prime example, when in 2015 the vault of a safety deposit company in the famous Hatton Garden jewelry district was robbed by a gang of professional thieves over an Easter weekend and million of pounds worth of assets were taken from a large number of safety deposit boxes in the vault.
Safety deposit boxes within bank properties also pose another concern, in that since the box location is within a bank premises, the location could become inaccessible in the event banks remained closed during a financial crisis (think Cyprus in 2013), or fall under dictatorial government directives that the contents of safety deposit boxes would be in accessible due to capital controls (think Greece in 2015).
A final point to note is that safety deposit box companies can eventually open your box if you fail to pay the storage charges, and sell whatever is needed to pay the outstanding storage fees.
Stored with Family or Attorney / Solicitor
24. Family Member A less obvious option would be to ask a trusted family member to take care of the storage arrangements for some or all of your gold bars and / or gold coins. Storing portions of your gold in various locations could be considered a 'location diversification strategy.'
This arrangement would obviously be based on trust and you would need to ensure that wherever they stored the gold at their property was itself a secure and sensible place.
25. Attorney / Lawyer / Solicitor: In a similar vein, you could instruct your attorney / lawyer / solicitor to take care of storage arrangements for some or all of your gold. This arrangement would have to be based on a formal contractual arrangement or understanding and could involve a legal trust in some instances. It would probably also involve another layer of costs. Again, you would need to determine that the storage location used by the lawyer or attorney was practical, smart and secure.
External Secure Vault
26. Secure Vault Storage: Beyond home storage options, a popular choice for many is to store their gold in the vault of an external precious metals storage provider. When using such a service, a number of considerations are critical, such as the jurisdiction of the provider, its reputation within the industry, the cost of the storage service, whether the storage is allocated, and the flexibility and access offered to customers to keep track of, view, audit and withdraw their gold.
BullionStar's Secure Singapore Vault
BullionStar in Singapore operates a secure precious metals vault which is integrated into BullionStar's bullion shop and showroom in central Singapore. The storage vault itself is a high security old style steel bar concrete vault with a modern vault door.
Singapore is one of the safest and most secure countries in the world for storing gold bars and gold coins. With virtually no crime, a strong rule of law, and inviolable property rights, the Singapore jurisdiction is a natural gold storage location. Furthermore, the Government of Singapore actively supports and promotes the country as a gold trading and storage hub. There are no reporting requirements on buying, selling or storing gold or other precious metals in Singapore. There are also no sales taxes, no GST, or no taxes whatsoever on buying or selling gold in Singapore.
All customer gold stored in BullionStar’s vault in Singapore is stored on an allocated basis. Customers have full unencumbered legal ownership of their gold. All gold stored in the vault is fully insured for all insurable risks as evidenced by the Insurance Certificate.
All customer bullion product handling is meticulously documented, and all bullion is handled under camera surveillance. All customer bullion is photographed and photos of each customer’s bullion are uploaded to his /her online account.
Customers have full online control to view their gold holdings, view photographs of their gold bars and gold coins, see a transaction history, view the vault insurance certificate, generate a personalized vault certificate, and request withdrawals of gold bullion from the vault.
BullionStar employs a series of audit approaches which provide full confidence to vault customers. Via the 'Live audit report', customers can view photos of their own bullion.
BullionStar employs 5 levels of auditing to bullion products stored in the vault:
The ‘Live audit report’ allows customers to verify their stored bullion online and it view it visually via photographs.
Vault customers can also inspect their own bullion via a personal on-site customer audit at BullionStar's Singapore shop and showroom.
Physical audits of all customer owned bullion are conducted twice a year by LBMA approved independent auditor Bureau Veritas.
A physical stock inventory report is conducted each year as part of BullionStar's financial audit.
BullionStar futhermore conducts its own internal inventory audits.
Finally, BullionStar vault storage customers can withdraw their gold bars or gold coins at any time and have their gold delivered to them, or alternatively collect it in person at the BullionStar shop and showroom in Singapore.
Throughout human history, gold has constantly emerged as an unparalleled form of savings, investment and wealth preservation. Due to its unique characteristics and features, gold has inherent value and cannot be debased. When holding physical gold, there is no counterparty risk or default risk. Wealth in the form of gold can also be held and stored anonymously.
From its ability to retain its purchasing power over time, to its safe haven status in times of financial turmoil and uncertainty, to gold's ability to diversify investment risk, there are many and varied reasons to own physical gold in the form of investment grade gold bars and gold coins.
1. Tangible with Inherent Value
Physical gold is real and tangible. It is indestructible, impossible to create artificially, and difficult to counterfeit. Mining physical gold is arduous and costly. Physical gold therefore has inherent value and worth. In contrast, paper money doesn't have any inherent value.
2. No Counterparty Risk
Physical gold has no counterparty risk. When you hold and own gold bars and gold coins outright, there is no counterparty. In contrast, paper gold (gold futures, gold certificates, gold-backed ETFs) all involve counterparty risk.
Gold deposits are relatively scarce across the world and difficult to mine and extract. New supply of physical gold is therefore limited and explains why gold is a precious metal. Gold's scarcity reinforces it's inherent value.
4. Cannot be Debased
Because of its physical characteristics and features, gold cannot be debased, and gold supply is immune to political meddling. Compare this to fiat money supplies which are constantly being debased and destroyed via deficit government spending, central bank quantitative easing and financial system bailouts. On a survivorship scale, gold has far outlived all fiat currencies by thousands of years.
5. A 6000 Year History
Gold has played a central role in society for thousands of years from the early civilizations of ancient Egypt, right up to the contemporary era. Gold has facilitated international trade throughout history, has been directly responsible for the economic expansion and prosperity of numerous civilizations throughout history, and has even been, due to gold exploration and mining, the direct catalyst for the growth of some of today’s best-known cities such as San Francisco, Johannesburg, and Sydney.
6. Store of Value
Gold is a preeminent store of value. Physical gold, in the form of gold bars or gold coins, retains its purchasing power over long periods of time despite general increases in the price of goods and services.
In contrast, fiat currencies such as the US Dollar are not stores of value and their purchasing power consistently becomes eroded by inflation or the general increase in the price level. Fiat currencies have a long history of either becoming totally worthless and going out of circulation, or else becoming completely debased, such as the US dollar, while remaining in circulation.
Since the creation of the US Federal Reserve in 1913, the US dollar has lost over 98% of its value relative to gold, i.e. the US dollar has lost over 98% of its purchasing power relative to gold.
7. Long- Term Inflation Hedge
Physical gold’s ability to retain its purchasing power over time is sometimes referred to as the “Golden Constant”. This reflects the fact that gold’s purchasing power is constant over long periods of time. This ‘constant’ exists because the gold price adjusts to changes in inflation and future inflation expectations. Therefore, physical gold is a long-term hedge against inflation.
8. A 2500 Year Track Record as Money
Because of its ability to retain value and act as a store of value, physical gold has been used as money for over 2500 years. Gold coins were first issued in the Lydian civilization in what is now modern Turkey. Subsequently gold was used as a stable form of money in Persia, ancient Greece, ancient Rome, the Spanish and Portuguese Empires, the British Empire, and right through to the various international gold standards of the 20th century.
It was only in August 1971 that the US famously suspended the convertibility of the US dollar into gold, a move which triggered the debt fueled expansion that is still having repercussions within today’s monetary system.
To put gold’s monetary importance into perspective, for 97% of the last 2500 years, gold has been chosen by numerous sophisticated civilizations as the form of money par excellence and an anchor of stability, precisely because of its ability to retain its value.
9. Safe Haven
Physical gold acts as a safe haven asset in times of conflict, war and geopolitical turmoil. During the financial market stresses and heightened uncertainties caused by wars, conflicts and turmoil, the counterparty risk of most financial assets spikes. But since physical gold does not have any counterparty risk, investors rush to gold during these periods so as to preserve their wealth. This is analogous to sheltering in a safe harbor. Gold can thus be seen as a form of financial insurance against catastrophe.
10. Portable Anonymous Wealth
Gold bars and gold coins combine high value with high portability. In times of conflict and war, gold bars and gold coins are ideal for transporting wealth and savings across borders and within conflict zones in an anonymous fashion.
11. Universal Acceptance
Gold is universally accepted as money across the world, with the highly liquid global market always providing ample sales opportunities for gold bars and gold coins. This means that whichever city you are in across the world, you can always sell or trade your gold bars and gold coins.
12. Emergency Money
Military personnel are often issued with gold coins that they carry with them in conflicts zones as a form of emergency universal money. For example, the British Ministry of Defense often issues RAF pilots and SAS soldiers with Gold Sovereign coins to carry on their persons during combat missions and activities, such as in the Middle East.
13. Outside the Banking System
In the current era of global financial repression, physical gold is one of the few assets outside the financial system. Gold is not issued by any monetary authority or central bank or government. Because its not issued by any government or central bank, gold is independent of the banking system. Fully owned physical gold, if stored in a non-bank vault or held in one’s possession, is outside the banking system.
14. No Default Risk
Unlike a government bond, there is also no default risk with gold because it is not issued by any authority that could default. Gold bars and gold coins are no one else’s liability. Physical gold cannot go bankrupt or become insolvent. Therefore, there is no need to have to trust any other party when holding physical gold.
15. Portfolio Diversification
Adding an investment in gold to an existing portfolio of other investment assets such as stocks and bonds, reduces the volatility (risk) of the investment portfolio and can increase portfolio returns. This is because the gold price has a low to negative correlation with the prices of most other financial assets, because gold is less influenced by business cycles and macro-economic cycles than most other assets.
Numerous empirical studies by financial academics, as well as industry bodies, such as the World Gold Council, have validated gold’s role as a strategic portfolio diversifier. Optimal allocations to gold in multi-asset portfolios have found to be in the 5% to 10% range.
16. Currency Hedge
There is generally an inverse relationship between the gold price and the US dollar, in that the gold price generally moves in opposite directions to the US dollar. Therefore, holding gold can act as a currency hedge of the US dollar, and help manage the currency risk of portfolios denominated in US dollars.
17. Gold's Metallic Properties
Gold has many and varied metallic properties. These properties provide gold with many technological and commercial applications and uses, which in turn contribute as additional demand drivers in addition to the investment and monetary demand for gold.
Gold is highly ductile (can be drawn into very thin wire). It is also highly malleable (can be hammered and flattened into very thin film). Gold is a very good conductor of electricity and heat. Gold does not corrode or tarnish. It is chemically unreactive and non-toxic to the human body. Gold has a high luster and shine, and an attractive yellow glow.
These properties explain gold’s use in electrical and electronic wiring and circuits (e.g. computers and internet switches), its use in the medical and dental fields, gold’s use in solar panels, space travel, and gold’s traditional uses in jewelry, decoration, and ornamentation. With new technological uses being found for gold all the time, gold's demand pattern is diversified and underpinned by its commercial importance.
18. Physical gold - A tiny fraction of Paper Gold
The London wholesale gold market and the US-based COMEX gold futures market generate huge trading volumes of paper gold that dwarf the size of the physical gold market. However, these markets only trade derivatives on gold (futures and unallocated positions), representing fractionally-backed and unbacked claims on gold that could never be convertible into physical gold by claim holders.
In a scenario under which these paper gold markets became unsustainable, the prices of paper gold and physical gold would diverge, with the paper gold markets ceasing to trade and collapsing, and only physical gold retaining any real value. Physical gold is therefore an insurance against the collapse of the world's vast paper gold markets.
19. By Definition - Not an ETF
Physical gold Provides all the benefits that gold-backed Exchange Traded Funds (ETFs) do not. ETFs provide exposure to the gold price, not to gold. Holding physical gold is by definition direct exposure to gold. With most gold-backed ETFs, you cannot convert the units into gold and take delivery of the gold, and in many cases, the locations of the vaults are not even known. If holding physical allocated gold bars or gold coins in a vault, such as with BullionStar in Singapore, you can always take delivery.
Gold ETFs have many counterparty risks since there are many moving parts in an ETF such as a trustee, a custodian, and a sponsor / issuer. Physical gold has no counterparty risks. When you hold a gold-backed ETF, the quantity of gold backing the ETF declines over time due to management fees being offset against the gold holdings. When you hold physical gold, you always remain with 100% of the actual gold you first purchased. There is no erosion of holdings.
20. Anonymous Storage
Gold can be stored anonymously, either in your possession within your house or property, or in a vault in a jurisdiction, such as Singapore, that has no reporting requirements. Since gold has a high value to weight ratio, storing gold does not take up much space.
21. Independent of Internet
Owning physical gold is not reliant on having internet access and access to electronic wallets and cryptocurrency exchanges. Furthermore, gold cannot be stolen by hacking an electronic address or by transferring or deleting a number in a computer.
22. Real Gold is Measured by Weight
Physical gold is measured in weight, not through a number set by a politician or central banker. When you buy a 1 Kilo gold bar, or a 10 Tola gold bar, or a 1 troy ounce gold coin, or a 5 Tael gold bar, you will always have that gold bar or gold coin, irrespective of the fluctuations of fiat currencies.
While thinking of the value of physical gold in terms of a fiat currency might be convenient, a better way is to think of a gold holding in terms of weight.
23. Coins and Bars - Build a Collection
Buying investment gold bars and bullion gold coins allows you to build a diverse collection of bars and coins that are at the same time a fascinating pastime and a form of investment and saving.
Bullion gold coins from the world’s major mints are beautifully illustrated and often have a connection to history. Investment gold bars from the world's major gold refineries are distinctively different from each other and you can vary a collection by cast or minted bars, and a selection of weights.
24. Physical Gold Feels like Real Wealth
Physical gold feels like real wealth. When you hold ten 1 ounce gold coins in your hand, you intrinsically know that you are holding real wealth, gold that is scarce and that has been costly to produce.
25. Gold as Loan Collateral
Gold can be used as loan collateral. Since gold is highly liquid and valuable, it can be lent and used as a form of financing, and as a way of generating interest. The wholesale gold lending market between central banks and bullion banks is highly active. Likewise, retail gold holders can also in various ways lend their gold to receive financing or interest, with new innovations to do this arising all the time.
26. Central Banks hold Gold
Although the world’s central banks like to downplay the importance of gold because it competes with their fiat currencies, most central banks continue to hold substantial amounts of physical gold bars and gold coins in vaults around the world. They hold this gold as a reserve asset on their balance sheets, and they value this gold at market prices.
Like private gold investors, central banks hold physical gold because it is highly liquid, it lacks counterparty risk, and because gold is a safe haven or ‘war chest’ asset that acts as a financial insurance in times of crisis. Central banks also hold gold for the unpublished reason that if and when gold re-emerges at the centre of a new monetary system, these very same central banks will not be caught out having no gold.
27. Gold for Gifting
Gold coins and small gold bars make great gifts and presents, and gold is a traditional form of gifting in many societies around the world. Gifting a gold coin or small gold bar to mark a birth, or anniversary, or a wedding or other special occasion, is an ideal present that will be highly appreciated by the recipient.
28. Gold for Inheritance
Gold bars and gold coins are a great form of inheritance for your children and family members. Because gold is real, tangible, valuable, and has a highly liquid trading market, it is an ideal asset for inter-generational wealth transfers. Because physical gold is fabricated in convenient weight denominations, such as troy ounces and kilograms, it can be distributed equitably among recipients, and specified equitably in wills and trusts.
Financial market prices are generally set by the trading venues which command the highest trading volumes and liquidity. This is also true of the gold market where the venues with the highest gold trading volumes - the London over-the-counter and COMEX gold futures markets – establish the international gold price.
However, these two gold markets merely trade paper gold claims in the form of unallocated gold positions (London Gold Market) and gold futures derivatives (COMEX). This trading creates paper gold supply out of thin air and is also highly leveraged and fractional in nature since the paper gold claims are only fractionally backed by real physical gold.
Although these highly leveraged synthetic gold trades have nothing to do with the transacting of physical gold, perversely they still establish the international gold price because physical gold markets merely inherit the gold prices derived in these ‘high liquidity’ paper gold markets.
BullionStar maintains that these paper gold markets cannot price physical gold accurately because they don’t trade physical gold, instead they trade infinitely scalable fractional claims on a smaller amount of physical gold. The international gold price is thus an artificial gold price totally removed from supply and demand in the physical gold markets.
Drawbacks of paper gold / Benefits of physical gold
Each trading day in the London OTC gold market, the equivalent of a staggering 6500 tonnes of gold is traded.
To put this into perspective, less than 7500 tonnes of physical gold vaulted in the entire London gold vaulting network, most of which is owned by central banks and Exchange Traded Funds.
Nearly all trading in the London OTC gold market is speculate activity based on unallocated gold positions. Unallocated gold positions are just book-keeping entries where the holder of the position is an unsecured creditor to a counterparty bullion bank, and the position just represents indebtedness between the two transacting parties.
Likewise, on the COMEX futures exchange during 2017, only 1 in every 2650 gold futures contracts actually reached delivery via a transfer of underlying gold. The remainder (99.96%) of gold futures are cash-settled. There is very little physical gold backing COMEX gold trading i.e. Registered physical gold inventories in COMEX approved gold vaults represent only a tiny fraction of the total volume of gold futures traded at any given time.
Conversely, real physical gold is a tangible asset that exists in limited quantities, it is inherently valuable, difficult to produce, difficult to counterfeit, and most importantly when held in the form of fully allocated, segregated and unencumbered gold bars and gold coins, it has no counterparty risk and so is no one else’s liability.
Real physical gold is not a claim on gold. It is gold. Real physical gold is real money, and is the ultimate form of saving and store of value due to its ability to retain its purchasing power over time. Unfortunately, the proliferation of paper gold trading dwarfs the volume of physical gold traded, and thus the gold price is set on these huge paper gold trading volumes.
But given the dominance of gold pricing by the paper gold markets, can this situation continue, and if so for how long?
BullionStar would contend that this situation can only continue while the bulk of paper gold market participants are happy to continue trading paper gold claims and in the absence of a shock to the physical gold demand-supply balance.
Conversely, a shift in the trading behaviour of paper gold traders away from paper gold towards physical gold, or a scenario in which physical gold demand overwhelms available physical gold supply, could cause a disconnect between gold pricing in the paper gold and physical gold markets, with the paper price falling while the physical price simultaneously rises.
Physical Gold flows West to East
As Western institutional and retail investors continue to speculate and trade staggering volumes of paper gold instruments, Eastern buyers in Asia continue to accumulate real physical gold, physical gold which is in limited supply.
These flows of physical gold from West to East have been ongoing for some time and can even be viewed as a slow and silent bank run on the physical gold market.
Classic commercial bank runs either begin when a subset of a bank’s customers suspect that the bank may not have sufficient liquid cash to repay all depositors, or else suspect that the bank’s loan base has soured. Since commercial banks employ fractional reserve banking where only a fraction of depositors’ money is kept in reserve (the majority being lent out in the form of loans), depositors with early suspicions begin withdrawing their money first.
Word spreads that the bank is having trouble meeting withdrawal requests and more and more depositors follow suit attempting to make withdrawals. Panic soon sets in with the bank forced to limit withdrawals and request emergency assistance from regulators.
The same end-game could be said to be true of fractional-reserve gold banking where holders of claims on physical gold rush to be the first to convert their claims into physical gold. Since the early 2000s, there has been a continual and substantial flow of physical gold from West to East. For example, since 2001, India has net imported over 11,000 tonnes of gold. This imported gold has for the most part stayed within India.
Likewise, since 2001, China has imported over 7,000 tonnes of gold. Because exports of gold are prohibited from the Chinese gold market, this gold cannot leave China mainland. In addition, the Chinese central bank has reported a 1400 tonne increase in its gold holdings since 2001. This is gold that the People's Bank of China buys exclusively on international gold markets in the form of wholesale gold bars and imports secretively into China, and is above and beyond reported Chinese gold import figures.
In the global gold market, Eastern buyers of physical gold are analogous to the early depositors of a commercial bank withdrawing their cash. In this scenario, a gold market ‘depositor shock’ prompting further withdrawals from the global stock of gold would be analogous to a widespread realization that the outstanding set of traded gold claims is far larger than the dwindling quantity of physical gold backing those claims. This realization would prompt further rotation out of paper gold into physical gold.
If at the margin, paper gold market players (later adopters) begin converting their paper gold claims into physical gold, or more realistically cash settle their paper claims and then try to use the proceeds to buy physical gold, this could set the scene for a disconnect between physical gold prices and paper gold prices.
On the one hand, a shift towards physical gold would overwhelm available physical gold supply, a situation which could only be rectified via an increase in the physical gold price to induce supply from existing above ground stocks. On the other hand, selling pressure in the paper gold markets to release proceeds to convert into physical gold would drive the paper gold price lower, thus also reinforcing this gold price disconnect.
Gold Price $65,000
But what would the real price of physical gold be in the absence of the subduing influence of the fractional and limitless paper gold market, or how do we even approach calculating a range of such physical gold prices?
Throughout history, gold has been the ultimate money and ultimate store of value. Until 1971, physical gold backed the international monetary system. Throughout monetary history and up until the latter half of the 20th century, gold played a critical role in backing paper currencies and in backing monetary debt. It is thus still appropriate to analyse the value of gold in relation to the value of currencies and the value of outstanding debt.
Approximately 190,000 metric tonnes of gold have been mined throughout history. Nearly all of this gold can still be accounted for in one form or another and is known as 'above-ground gold'. About 90,000 tonnes of this gold is held in the form of jewellery, 33,000 tonnes of gold are (supposedly) held by central banks, 40,000 tonnes are attributed to private gold holders, with the remainder having been used in industrial and other fabrication uses.
While 190,000 tonnes may sound like a lot, at the current gold price of USD 1250 per ounce, all the gold ever mined in the world is valued at less than $8 trillion, and official central bank gold holdings (monetary gold) are valued at just $1.3 trillion. The US Treasury claims to hold 8133 tonnes (or 261.5 million troy ounces) in its official gold reserves (a figure which, by the way, could be far lower since it has never been independently audited). At the current gold price, these US Treasury gold reserves are worth just under $320 billion.
Compare these gold valuations to total outstanding money supply figures. The total broad US money supply is currently running in excess of $18 trillion (using a "continuation M3" measure). For the US money supply of $18 trillion to be fully backed by the US Treasury’s gold, this would require a gold price of $68,840 per troy ounce.
Even at a 40% gold-backing, a backing which was historically in place for the US money supply in a recent period in US monetary history, this would imply a gold price of $27,500 per ounce.
Beyond the US money supply, total world money supply is currently running at over $85 trillion [source: broad money supply CIA World Factbook]. This global money supply of $85 trillion is approximately 11 times more than the current 'valuation' of all the gold ever mined.
For the world’s money supply to be fully backed by total worldwide central bank gold holdings [33,000 tonnes] would require a gold price of $82,600 per troy ounce. Even if world money supply was 100% backed by all the gold ever mined, this would require a gold price of $13,900 per ounce.
According to a recent study by the high-profile consultancy McKinsey, the world’s total outstanding debt is currently $200 trillion (of which government debt is $58 trillion). For the total outstanding stock of global debt to be backed by all the gold ever mined would require a gold price of $32,700 per ounce. For all government debt to be backed by the world’s official central bank gold reserves would require a gold price of $56,000 per troy ounce.
While extrapolating implied prices for physical gold in a world absent of paper gold market distortions will always be estimates, if and when the fractionally-backed paper gold market does cease to function, then ownership of allocated and unencumbered physical gold will become the only way to take advantage of the potential price movements in the physical gold market.
The following speech, by BullionStar CEO Torgny Persson, was given to an audience during a Precious Metals Seminar held at BullionStar's shop and showroom premises in Singapore on 19 October 2016.
What have I got here?
It’s 87 grams of gold.
As many of you know, we have our own bullion vault integrated in BullionStar's bullion centre here in Singapore. What if I told you that every day we sell 6 kgs (6000 grams of gold), meaning that we sell about 1500 kgs gold per year to customers storing with us, but that we actually only keep 87 grams of gold in storage as reserves.
You would call it fraud and have me arrested, right? I’m obviously running a Ponzi scheme with very small fractionalised reserves backing up huge trading of unallocated paper gold.
Now, for clarity, that's not how we conduct business. When you buy and store bullion with BullionStar, your bullion is fully allocated and you can withdraw your metals at any time by just walking into BullionStar's bullion centre. You don’t even have to notify us beforehand.
What I just explained to you is something else - it’s bullion banking per definition - more precisely it’s unallocated gold trading by bullion banks.
As most of you know, the London Bullion Market Association (LBMA) has held its annual Precious Metals Conference in Singapore over the last two days. The LBMA is at the core of the world’s bullion trading system, a system which generates extremely large trading volumes every trading day. To understand the gold market, one has to understand the LBMA system as it is of great significance to both the price of gold and also to the physical movements of gold around the world. I will therefore provide you with an introduction to bullion banking and this LBMA system, and talk about how bullion banking operates.
Bullion Banking - Unallocated Gold
Almost all gold traded in the LBMA system today is in the form of unallocated gold which is accounted for in unallocated accounts. The definition of an unallocated gold account, as we can read on the LMBA’s website, is that the holder of such an account with a LBMA bullion bank does not have any ownership interest in any specific gold bars.
Instead, the account holder is merely an unsecured creditor of the bullion bank and holds a claim on the bullion bank for an amount of gold. At the same time, the bullion bank has a liability to this customer for this same amount of gold. Therefore unallocated gold is essentially paper gold. It is gold that doesn’t exist in the physical realm.
The creation of unallocated gold is in fact very similar to how fiat currency is created in the fractional reserve banking system. The fractional reserve banking system provides a good gateway into understanding bullion banking.
How is Fiat Money Created Today?
Let’s quickly recap on how fiat money is created in the fractional reserve banking system.
Money is created out of thin air. When a bank extends a loan, the money is created out of thin air.
Let’s take an example:
1) Robert plan to buy a house for $1 million.
2) Robert goes to a bank and the bank takes a look at Robert and deems him credible. With today’s low lending standards, it is rather easy for Robert to secure a loan. The bank deposits $1 million into Robert's account.
3) Where does this $1 million come from? The answer is 'nowhere'. It doesn't come from anywhere. The money is created out of thin air when loaned out to Robert.
This is easy to understand but hard to believe for some people. But it is true that this money is created out of thin air and lent into existence. About 92% of our money today is lent into existence in this fashion.
Banks keep a very small amounts of money in reserve to cover withdrawals, but they face liabilities which are far larger in size that their reserves.
The term "loan" as used in banking has been corrupted and twisted by banks. When a bank extends a loan, there is nothing loaned. To loan something you need to be in possession of it first, but when banks make loans, there is no countervailing transaction - The money is just created when the loan is extended.
How is Paper Gold Created?
Now, what about gold? How is gold created? You might say gold can’t be created, it has to be mined, right? Yes, you would be correct, physical gold cannot be created, but gold as an investment product definitely can be created and is created on a massive scale.
When a bullion bank customer goes to the bank and requests to buy gold, the standard procedure is for the bullion bank to create unallocated paper gold and credit this paper gold to the customer’s account. This ’gold’ is simply created out of thin air as a book-keeping entry in the bank’s accounting system.
Similarly, if actual physical gold is deposited into an unallocated account operated by a bullion bank, this deposit of gold is also in fact very similar to a deposit of fiat money. Just as a bank keeps deposited fiat money on its own balance sheet, a bullion bank keeps deposited physical bullion on its own balance sheet.
Bullion banks don’t generally safeguard or segregate gold deposited with them or held by them unless they are specifically instructed to do so if a customer opens an allocated gold account.
This means that depositors of gold into bullion banks' unallocated accounts are no longer the legal owners of the gold that they have deposited. Instead, they are just one of the general creditors to the bank, and they merely hold a claim for gold against the bank.
By depositing gold into an unallocated account at a bullion bank, you therefore lose ownership of your gold in return for a mere claim on gold.
Trading in unallocated gold by the bullion banks is thus based on book-keeping entries denominated in gold. The gold is fractionally reserved. Gold is created out of thin air as book-keeping entries in the banks' ledger systems, and even gold that is deposited into an unallocated account becomes the property of the bank.
LBMA Unallocated Gold Trading Volumes
From the LBMA’s published clearing statistics, which is one of the only transactional statistics that the LBMA does publish, we know that 600 tonnes of gold are "cleared" in the London Gold Market each and every trading day. Cleared means that it’s 600 tonnes of gold that's transferred between participants after netting out all trades between all trading participants.
According to a LBMA gold trading survey conducted in 2011 (the last such survey), the ratio between trading turnover and clearing on the London Gold Market was about 10 to 1. This means that the total amount of gold traded in the LBMA system each day is about the equivalent of 6,000 tonnes!
In other words, almost twice as much gold is traded in the LBMA system in a single trading day than is physically mined globally during an entire year.
But what is backing this 6,000 tonnes of unallocated gold traded each day, or 1.5 million tonnes of gold traded each year?
Let’s take a look at the reserve side of bullion banking in the LBMA system.
Bullion Bank Gold Reserves
The LBMA bullion banks' outstanding gold liabilities, and the unallocated trading system in the London Gold Market are ultimately backed by a quantity of 400 oz Good Delivery gold bars.
However, bullion banks don’t really want to hold physical gold. They will buy it if someone forces it on them but bullion banks have no real need for physical gold and are therefore incentivised to keep as little gold as possible in reserve, and lend out the gold they hold in reserve so as not to incur storage fees and handling costs. Banking reserves are looked upon as a dead asset so the banks minimise these reserves and try to make them into live assets by loaning them out.
When a bullion bank receives a gold bar by buying or borrowing it, it either sells, leases or allocates that bar elsewhere.
This sets a bullion bank apart from any other bullion entity because a bullion bank can hold deposits of gold on its balance sheet as assets even if it no longer has, or never had, the actual physical gold in its possession.
How much backing is there for all the unallocated gold traded in the LBMA-system?
We don’t exactly know as there are no reserve figures published but we can make an educated guess.
Vaulted Gold in London
How much gold is actually vaulted in London? The LBMA recently said on its website that there was approximately 6,500 tonnes of gold stored in London, about three-quarters of which was at the Bank of England. The Bank of England recently revealed that it was custodian for 4,734 tonnes of gold in its vaults.
This would leave 1,766 tonnes of gold privately stored in the LBMA vaulting system outside the Bank of England.
BullionStar research recently calculated (30 September 2016) that ETF gold holdings held in London accounted for 1,679 tonnes. This would mean that there are only 1,766 - 1,679 = 87 tonnes of gold in the LBMA system which is not allocated to ETFs!
Therefore, nearly all of the LBMA reserves are allocated to the ETFs with only 87 tonnes of gold left to back up the vast amorphous of unallocated gold trading amounting to 6,000 tonnes per day or 1.5 million tonnes per year!
Chart layout inspired by GoldChartsrus /Nick Laird. Data gathered by Goldchartsrus/BullionStar's Ronan Manly
Physical gold in the LBMA bullion banking system is therefore like physical cash in the monetary system. It is rarely seen!
LBMA is a banking system that by definition is based on fractional reserve banking.
HSBC, JP Morgan and ICBC Standard Bank are the only LBMA bank custodians with their own precious metals vaults in London. Most of the circa 42 LBMA bullion banks don’t even have their own gold vaults but still keep books denominated in gold ounces. A bullion bank without a gold vaults instead holds its gold reserves with a bullion bank that does have a gold vault.
For example, if Citibank keeps its reserves with a bank with a vault such as JP Morgan, then Citibank merely holds a gold claim for which JP Morgan has a gold liability. These unallocated gold reserves are therefore just pooled with the bullion banks that do have vaults.
The bullion banks without a vault never see or touch the metal they keep in reserves. If a bullion bank stores its gold reserves at another bullion bank’s vault, this means that the reserves are unallocated credits/claims which are standing behind the bank’s own liabilities. So even the reserves are fractionalised. So not only are bullion banks’ liabilities to their customers unallocated, even the reserves are unallocated inter-bank liabilities which are fractionalised.
Paper gold thus stands behind the liabilities of paper gold.
The LBMA system serves as a pool of reserves and uses coordinated reserve management where the different participating bullion banks can loan and lend to each other the few physical reserves that there are in the system so as to meet any demand for physical bullion.
Gold Bank Run
The bullion banks face massive liabilities in the form of unallocated gold credits. Bullion banks are thus, just like normal banks, susceptible to bank runs.
The difference between bullion banks and normal commercial banks is that whereas central banks are the ultimate lenders of last resort to commercial banks, most central banks no longer back-stop bullion banks as the lender of last resort because most central banks no longer sell or lease bullion that can be used to prop up bullion banks' reserves.
In case of the LBMA, the central bank is replaced by a private company called London Precious Metal Clearing Limited (LPMCL) which is run by 5 clearing bullion banks and whose clearing system AURUM nets out all gold claims and liabilities in the LBMA system. The clearing system functions as a pooled system in that only net balances are cleared and the bullion banks' gold reserves are essentially pooled and can be leased and double counted whenever necessary.
When they no longer have any physical gold to deliver, the ultimate rescue plan for bullion banks is to use cash settlement instead.
In the same way that banks increasingly promote cashless solutions as a means to reduce cash handling costs, earn credit card fees, reduce the risk of bank runs and lock in customers, LBMA system bullion banks promote gold-less gold transacting.
Just as the banking system inherently incentivises reckless debt behavior, the bullion banking system inherently incentivises the reckless creation of paper gold assets.
LBMA – The Paper Gold Protector
In creating artificial paper gold, bullion banking protects the fiat money system.
If even a small minority of the paper gold traded today was backed up by physical gold, the price of gold would have skyrocketed. A gold price significantly higher than today would point towards the inferiority of the fiat money system, and possibly the collapse or implosion of the current monetary system.
Bullion banks and gold industry organisations, such as the LBMA and the World Gold Council, which itself has developed and owns securitized gold products, can profit from gold trading volumes that are far higher than they would be if they were limited to the constraints imposed by the availability of physical gold to trade.
The bullion banks and the LBMA work hard to overcome the tangible limitations of physical gold mining. By promoting gold-less gold transacting, the LBMA unallocated system artificially increases the supply of gold, earning the banks higher fees from artificially large trading volumes.
To reiterate, the LBMA unallocated gold trading is a banking system based on fractional reserve banking which is all about exposure to the price of gold but not to gold itself.
The LBMA system is used to coordinate unallocated paper gold trading where ‘gold’ is created out of thin air, and the tiny physical reserves held are pooled and shared out among participants so as to minimise costly reserves and avoid gold bank runs.
When bullion banks need to allocate gold to the ETFs, such as to the SPDR Gold Trust (GLD) in London, they use credits from the same unallocated gold credit system as was previously used to offset other gold liabilities. Even though the ETF may own the gold outright, the gold is still being double counted within the system because its being allocated out of a bullion bank pooled systems of credits.
To summarize what the LBMA is all about, it is a paper gold protector for the bullion banks which allows the bullion banks to earn fees from an artificially high trade turnover while at the same time protecting the fiat currency system.
The Guarded Secret of no Gold
The fractionally-reserved bullion banking system is a fragile system. Many investors and savers holding paper gold believe that the gold they are holding is backed up by real physical gold. But if the bullion banking system implodes, which it will do if the high demand for real physical gold in Asia is sustained at anywhere near today’s levels, these holders of paper gold will at best end up holding paper claims which will be cash-settled, or at worst these paper gold holders will be empty-handed.
Demand for ETF’s and unallocated gold will likely not stress the system systemically since the pooled LBMA gold reserves are used for leasing and double counting. It is the demand for real physical gold, draining bank gold reserves, that stresses the system.
Many gold investors/savers buy various paper gold products as a means of protecting themselves against the fiat currency Ponzi scheme. It may therefore come as a surprise to some holders that these investments are no safer or even less safe than the fiat currency against from which they are seeking to protect themselves. Bullion banks give the impression that these investors into unallocated gold are actually holding gold, whereas in reality they are just unsecured creditors holding paper gold, gold that is created out of thin air, in a fractionally-reserved Ponzi scheme.
As long as everyone is happy to buy and sell ledger entries/book-keeping entries, this fragile system can continue to balance on a thin thread. The systemic problem arises when larger entities start to demand physical delivery, a trend which has been happening in the last few years, most notably in Asia and Russia. There is therefore an imminent risk of the bullion banking system collapsing in the next few years.
This is an accident waiting to happen, because when enough holders of paper gold ask for delivery, the default that will follow will trigger the biggest bank run for gold in history, which due to gold’s significance as a monetary proxy, will shake the entire monetary system.
When there is no longer any physical metal to deliver, the ensuing shortage will result in a disconnect between prices, in which paper gold will become worthless while the price of real physical gold will be revalued at a much higher level based on the market equilibrium for physical supply and demand of gold.
This week BullionStar is attending and exhibiting at a unique conference called FreedomFest in Las Vegas, Nevada. FreedomFest is the largest pro-liberty conference in the world and it has taken place annually in Las Vegas since 2002. The event was founded and is still organized by Mark Skousen. This year's FreedomFest event runs from Wednesday 13 July to Saturday July 16 at the Planet Hollywood Resort and Casino in Las Vegas, and is expected to attract a few thousand attendees.
FreedomFest is grounded in the Libertarian philosophy and the celebration of free thinking, and the event hosts a huge range of high-profile speakers as well as debates, panel discussions and a film festival. Attendees include representatives of free market think-tanks, those involved in the fields of politics and economics, the investment sector, the media, and the publishing industry. Themes celebrated in the conference include liberty, limited government, economic freedom and free market capitalism.
Topics covered in FreedomFest range from economics, philosophy, technology, finance and investing, to law, geo-politics, art and literature, public policy, science and religion. In the run-up to FreedomFest, an associated event called the Atlas Summit has just wrapped up which focused on the Ayn Rand philosophy of Objectivism – the pursuit of happiness and productive achievement. The film festival integrated within FreedomFest is a libertarian film festival called Anthem Film Festival.
The speaker list at FreedomFest this year is large and varied and includes such well-known names as Senator Rand Paul, Steve Forbes, Judge Andrew Napolitano and George Foreman.
BullionStar's CEO, Torgny Persson, CEO of BullionStar will also be speaking at the FreedomFest conference on Thursday afternoon, 14 July, at 4:20pm local time on the topic of 'How Safe is your Gold?"
There is an extensive exhibition at FreedomFest and BullionStar is exhibiting from today Wednesday 14 July, to Saturday 16 July. Initial tasks for the BullionStar team last night and this morning involved setting up the display booth on the exhibition floor complete with display cases and audio-visual monitor equipment which had been shipped in for the event.
The BullionStar booth contains product displays and a unique and timely interactive game highlighting the perils of the quantitative easing currently being pursued by the world's largest central banks.
BullionStar will be providing regular updates during the FreedomFest conference via this blog, which will highlight interesting speakers, visitors to our booth, and any other topics which we find noteworthy from the conference. So please check back for updates. If you happen to be at the conference, please drop by the BullionStar exhibition booth to meet us, and to find out why Singapore is the best place in the world for storing precious metals. Likewise, if you are in the Las Vegas area, why not drop into the conference or exhibition area to meet us.
Many topics in the world of gold are opaque and secretive, none more so than the famed gold vaults of the world’s major central banks and their bullion banking counterparts. BullionStar Gold University is now bringing transparency to this intriguing yet under-reported area by profiling the largest and most important of these gold vaults.
According to the vault owners and the information that they divulge, these gold vaults officially store over 16,500 tonnes of gold, which is approximately half of all reported central bank gold reserve holdings. That’s also nearly 10% of all the gold ever mined in the world. This in itself makes knowledge of these vaults important.
From the labyrinthine Bank of England gold vaults storing nearly 5,000 tonnes of gold in custody for over 70 central bank customers, to the Federal Reserve Bank of New York's subterranean gold vaults housing nearly 6,000 tonnes of gold on behalf of 36 foreign central banks and the US Treasury, this BullionStar series brings together information about these vaults that has never before been documented in one place.
Where are the vaults located? Who are their customers? What type of gold bars are stored there? How are the vaults laid out? When were they constructed? These are just some of the questions covered in BullionStar’s Gold Vault series. Only on rare occasions have reporters, camera crews or other observers been allowed to access these vaults and document their layouts and contents. We have included a media section in the profiles where possible to point you to these sources.
Witnessing such large quantities of gold bars stored in one single place seems to create a profound and similar impact on the observers regardless of which vault they have visited.
“I’m speechless when exploring the Sacristy, , … you don’t see this every day” - Alberto Angel, reporter RAI, Italy
”It’s quite extraordinary” - Professor Martyn Poliakoff, visiting the Bank of England vaults
“you never get sick of the gold… it even puts a smile on our faces when we’re down there working with it” - Fed Vault Custodian, New York
“from a purely human perspective, we could see with our own eyes a quantity of precious metal that goes beyond an ordinary perception … I must say that it arouses feelings that are difficult to explain” - Senator Giuseppe Vacciano, Italy
Why the observers have these powerful reactions to seeing such vast quantities of gold, we can’t say for sure, perhaps it’s because gold is money par excellence and the ultimate store of wealth, and that being close to this powerful and aesthetically pleasing element invokes a timeless sense of respect and wonder.
The BullionStar Gold University vault profiles series also covers the deep underground Banque de France gold vaults in Paris. Known as ‘La Souterraine’, home to over 90% of France’s 2,435 tonnes of gold, the Paris vaults also store gold bars on behalf of the Bundesbank and the International Monetary Fund. The series also visits the Banca d’Italia’s gold vaults, "La Sacrestia Oro", under the Banca d'Italia's Palazzo Koch headquarters in Rome which hold 1,200 tonnes, or approximately half of Italy’s gold.
A knowledge of where these central bank and commercial vaults are located and their operating details is also critical, since, if there was ever a physical gold shortage or a crisis in the gold market, these central bank and LBMA bullion bank institutions owe it to the global financial community to prove that they are storing the gold they claim to store, in the locations they profess to store it in.
In early February, I visited the World Money Fair in Berlin with a number of BullionStar executives, namely, Torgny Persson, CEO of BullionStar, Luke Chua, COO of BullionStar, and also Michael From, CEO of Liberty Silver in Sweden, a company founded by Mr Persson.
The World Money Fair is the world’s leading numismatic and precious metals convention, and is now in its 45th year. Held each year in the Estrel Convention Centre, part of the Estrel Hotel (Germany’s largest hotel), about 9 kilometers south-east of central Berlin, the 3 day event attracts a crowd of between 10,000 – 15,000 precious metals enthusiasts, as well as hundreds of precious metals exhibitors from all over the world, with a strong representation from the German gold market. The exhibitors range from precious metals refineries and mints, to precious metals dealers, to precious metals manufacturers of technical machinery and equipment for the minting and refining industry (such as coin presses), and finally many precious metals numismatics, coin and bank-note dealers. Hence, lots of bullion and numismatic coin collectors also attend the fair. The World Money Fair was previously held in Basel, Switzerland, up until 2006, at which point it moved to Berlin.
One of the more intriguing aspects of the convention is that apart from the individual attendees, literally hundreds of precious metals dealers and precious metals suppliers also attend the Fair, primarily to hold meetings and discussions with each other, and also to catch up on the latest offerings from the convention exhibitors. Most of these face-to-face meetings take place within the hotel lobby at the numerous seating areas, cafés, and restaurants that are positioned within the Estrel’s expansive open plan atrium. While most of the meetings are pre-planned, there is an air of spontaneity as customers and suppliers rush around trying to keep to their previously agreed schedules, while bumping into old acquaintances. Some suppliers seemed to literally have numerous back-to-back meetings in the lobby for a good part of the first two days.
I sat in on some of BullionStar’s meetings which included a large German gold and silver refinery, one of Switzerland's biggest gold refineries, and some of the largest worldwide precious metals wholesalers. I found these meetings fascinating as the format was a combination of an informal catch-up, and a more formal discussion of product pricing, business conditions, inventory requirements, bar premiums, and supply channels etc. We also attended dinners on different evenings with a variety of large precious metals suppliers from markets such as Germany, the US and Singapore. I considered it a privilege that during these meetings and dinners I was able to meet some of the top names from the worldwide gold refining and wholesaling sector.
On the first day I took a tour of the exhibition floor. This space consists of an immense series of halls about the size of a few football pitches. There were about 50 national and private gold and silver mints and central banks exhibiting, as well as approximately 250 dealers in precious metals, bullion and numismatics, and about 60 technical suppliers including some large gold refineries. It might seem surprising that central banks, such as Banco de México, would attend such a gathering, but given that many central banks regularly produce their own precious metals coins, it actually makes perfect sense, as they too are in the business of marketing their own coins.
While there were plenty of new releases of limited edition numismatic gold and silver proof coins, I was most interested in the investment bullion gold and silver bar and coin displays, but the vast number of displays (under protective glass) was extensive and varied and would easily take an entire day to see properly. A lot of well-known names were exhibiting, including the Perth Mint, the Royal Canadian Mint, the Royal Mint, South Africa's Rand Refinery, the Austrian Mint, PAMP, as well as MDM Deutsche Munze (Germany), Schoeller (Austria), and China Gold Coin Incorporation. As it's not every day one gets all of these mints in and refineries in the same room, I made sure to chat to staff on the various stands just to get an idea of their views on the precious metals market and their product offerings.
Some of the larger investment gold bar displays in the exhibition were laid on by German precious metals refinery Heirmerle + Meule along with its Spanish subsidiary Sempsa JP, as well as an extensive selection of gold and silver bars from German / Belgian refinery Agosi (Umicore). Agosi even had a display of base metal investment bars which it calls AgosiBase, covering titanium, aluminium, copper, bronze, and brass bars, as well as Sparkasse gold bars which it produces on behalf of the German Sparkasse (Savings Banks).
Britain’s Royal Mint also had a relatively large gold bar display of recently launched gold bars which use the former Royal Mint Refinery (RMR) logo. At the Royal Mint stand I also learned that its precious metals vault at its headquarters in Llantrisant, South Wales, is built to the security specifications of the Bank of England. Hmmm, could this mean that the Bank of England holds some of its gold not in London, but in the more remote Royal Mint vault, which after all is guarded by Britain's Ministry of Defence police force? The Royal Mint also points out on its vault page that customers can 'rest assured' that it operates "outside of the banking and London clearance systems", which doesn't really inspire confidence in the London precious metals vaulting system.
Each year, a different country is the ‘Guest of Honour’ at the Fair. This year, it was the turn of The Republic of Korea, and so KOMSCO (Korea Minting, Security Printing & ID Card Operating Corp), Poongsan (producer of coin blanks for 60 countries around the world) and Poongsan-Hwadong (an official distributor in South Korea for a lot of international mints), had large exhibit stands. While attempting to find out some lesser known facts about South Korea's gold market, I was surrounded by helpful representatives from KOMSCO and Poongsan, but a lot seemed to be lost in translation, although I did manage to learn that they are exporting gold bars to Indonesia, which was news to me.
There were also a lot of other mints exhibiting at the Fair but which were focusing on their 'mint coin' collections, such as Japan Mint, Czech Mint, Royal Dutch Mint, Portuguese State Mint etc. Mints usually use the World Money Fair to launch new coins or announce updates to existing gold and silver coins in their range. Surprisingly, the huge US Mint did not have a stand at this year's exhibition, although I understand that it did in previous years.
BullionStar also brought video recording equipment to Berlin and conducted short interviews with various exhibitors about their views on gold. We also recorded some interviews of our own views on the gold market, material which will be used in forthcoming BullionStar audio-visual releases. Finally, at one of the many banknote dealer stands, I purchased a very new looking 100 billion Zimbabwe Dollar note for the knockdown price of €10, which I think is the highest denomination Zim Dollar hyper-inflationary note ever issued.
Next Year, South Africa is the Guest of Honour country at the World Money Fair, and Rand Refinery and South African Mint will be ‘guest of honour’ companies representing the South African gold market. The year 2017 is also the 50th anniversary of the launch of the famous Krugerrand gold coin, which undoubtedly explains the timing of South Africa receiving this accolade.
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