The truth about gold : it can not lie

The past years have characterized the financial markets as volatile, leveraged but also intransparent. Complex financial instruments have flooded the markets. At the same time, the impression we get from governments is they are doing their utter best to “hide” some facts, surely if it comes to economic related matters. This is our perception, as observers of markets.

Let’s review some recent examples where service providers or governements mastered intransparency but where they failed to hide the truth.

  • First and most recent, JP Morgan announced initially 2 billion losses on some “trades”. Only a week after their first announcement, it appears their loss increased already to 5 billion. Well, that’s more than their current quarter’s expected profit. We all know that JP Morgan has the highest exposure to derivatives. A lot of economic analists have been warning that the derivatives complex, worth some 100 trillion US dollars (that’s a rough estimate), contains huge risks. Could it be we are seeing the first signs of a crack down of this complex ? Anyway, it was only two months ago that JP Morgan passed the US banking stress tests. Maybe the setup of the test should be stress tested as well, to include risks like the one we are seeing right now ?
  • Greece’s situation calls for an uncountable number of doubts. A couple of months ago, Europe echoed that the whole situation was under control. The European governments reassured us  that Greece for sure would not exit the euro. Today it appears almost certain that an exit is imminent. But one thing caught our attention: the role of big banks in worsening Greece’s debt situation. Lack of transparency is the least we can say.
  • A year ago in Europe, the banking stress tests showed that only 8 banks failed while all the other ones (Dexia included) passed. Just 3 months later Dexia declared it was not at stress resistant; a bailout was needed.
  • The mastercase of intransparency is the bankruptcy of MF Global. After more than half a year, there is no sign of clarity about the billion dollar loss of the company’s client funds. The money is lost … “somewhere” … amen.

These cases tell us that financial assets inherently have the ability to create highly intransparency. Let’s take a fresh look on this. Maybe the fundamental issue here is related to  supply & demand characteristics, which are on both sides very easy to manage, change, complexify :

  • Supply can be easily controled. It’s easy to create, increase, decrease. Think of the speed at which new and complex derivatives are launched; think of the ease at which fiat money is created (out of thin air).
  • On the “demand” side, when focusing on the aspect of “holding” assets, it’s clearly the counterparty risk that one needs to consider. We are in a period of time where those risks are reaching historic highs. Although it’s difficult to quantify this, it doesn’t need too much expertise to simply observe this statement as being true.

Let’s compare all the above with (physical) gold. The other precious metals have also an industrial aspect, that’s why we focus on gold for now. Physical gold doesn’t have the characteristics we just mentioned. Let’s review the supply and demand :

  • Supply cannot be manipulated : it’s not possible to create, increase or decrease the amount of gold. Supply can only be increased in a natural way, by mining new gold.
  • On the demand side : when holding gold, you for sure don’t have any counterparty risk; for as long as you are the owner, it’s your gold. One exception is confiscation by governments, but it seems unlikely to confiscate gold on a worldwide basis (which is why spreading geographically your physical gold is recommended).

Are there any lies gold could tell ? No, physical gold simply cannot lie. After all, it’s a precious metal. By contrast, paper gold like options, futures, ETF’s (except the ones backed by physical gold), do not fall in the same category as physical gold; we consider them as a paper financial asset.

In today’s economic environment, where financial instruments have a high counterparty risk, where risk-on / risk-off moods change overnight and where the derivatives complex starts to show signs of cracking down, we hold to our belief that owning physical gold is the safest bet you can make to preserve your wealth. Yes indeed this is the truth.


Author: Desk of


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