Thursday, 25 August 2011

So you think you own Gold?

I heard an interesting rumour yesterday from a friend in the industry. We were discussing the price of gold which is an all to often had conversation these days with the 182% price increase over the last 5 years. With banks and government currencies becoming much less of a sure thing in investment terms people have been looking into what else they can put their money. Hence the massive hike in gold price, it seems to be about the only thing that is guaranteeing  a suitable return for investors with even oil prices finally dropping.

So the rumour was that not all the gold that is being sold actually exists (yet) people have been selling gold at such a rate to investors that some of the gold simply doesn't exist but on paper! Either it hasn't been mined yet or just isn't there and hopefully no one asks for all their gold at one time! If its true or not who knows but its a fairly interesting idea, and something that I wouldn't put past people trying to make some quick money!

I had a quick look around and found a few things that seem to support the idea at least;

"Most gold investments, including some billed as “physical” bullion investments, really amount to someone owing you metal that you do not actually hold legal title to. This is not just a matter of nit-picking semantics. If someone owes you gold or silver, the other party may be a reputable dealer or even one of the world’s largest and most reputable banks. In any normal circumstance, they are going to be able to make good on their obligation to you. But hold on… If the reason you decided to buy gold or silver bullion in the first place was to hedge against the risk of a major “black swan” event, i.e. a ‘non-normal circumstance’ such as a currency collapse, hyperinflation, or worse, having someone owe you gold may not be the form of protection or insurance you thought it was. If the rationale for favoring precious metals is in part is to avoid having a counter-party who might default on its obligation, being owed gold by such a counterparty does not help you."

Food for thought at least!