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Bullion Banking 101 – Speech by BullionStar CEO, Torgny Persson

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.

BullionStars CEO Torgny Persson Precious Metals Seminar at BullionStarBullionstar shop during precious metals seminar Precious Metals Seminar at BullionStar

Introduction

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.

paper-gold

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.

LBMA Unallocated Gold Trading Volumes

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!

gold-vaulted-in-london

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!

london-gold-etfs

Double-counted Reserves

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.

gold-fiat-comparison

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.

bb-protecting-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.

vault

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.

Thank you!

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.

 

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