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Real Gold vs Pretend Gold - Craig Hemke (14/01/2020)

Numerous fine gold bars placed in a sequence with one on the top of others

January 14, 2020

The battle continued in 2019, and rarely has the disparity been this sharp.

And what do we mean?

Well, on one hand, you have real physical gold. This is gold that you store yourself or at a trusted vaulting company. This is gold that you can actually hold in your hands. This is the gold that is demanded at record levels by central banks around the globe.

On the other hand, we have pretend gold. This is the domain of the bullion banks. They offer futures contracts, unallocated accounts, and ETFs...all as an alternative to the real thing and as a way of increasing the total supply of "gold" in what amounts to a modern day alchemy.

What's astonishing is that the investment world allows a physical price to be determined through the trading of the pretend alternative. More on that in a minute. But first, let's look at two data points that stand in stark contrast to each other.

First, there's demand for the real thing: physical gold. One great story in 2019 was how the Polish central bank purchased—and then demanded immediate delivery of—about 100 metric tonnes of physical gold. The Poles are no dummies, and they apparently wanted no part of the unallocated promises from the LBMA: https://www.bloomberg.com/news/articles/2019-11-25...

In total, it appears that reported central bank demand for gold will exceed 670 metric tonnes in 2019. This follows what was a 50-year record demand of 641 metric tonnes in 2018. This from the World Gold Council at the end of Q32019: https://www.gold.org/goldhub/research/gold-demand-...

So, as price rose by 18% in 2019, a logical conclusion would be that this was due to strong physical demand. And that conclusion would be mostly correct. This is Econ 101. Surging demand often leads to higher prices, and the central banks alone soaked up nearly 25% of global gold production in 2019.

But as stated above, price is not determined through the exchange of fiat currency for physical metal. Instead, price is determined through the trading of gold derivatives and futures contracts—pretend gold, as it were. So perhaps that 18% price rise needs to be viewed through a different prism, such as derivative supply and demand, instead.

Well, check this out. From our 2020 forecast posted here last week, see the relevant data below:


In short, last year saw the global central banks demand delivery of 670 metric tonnes of physical gold, while at the same time, the global bullion banks oversaw an increase in supply of 1024 metric tonnes of pretend gold. Stated another way:

Central Bank physical demand: 21,500,000 ounces

Global physical mine supply: 90,000,000 ounces

Bullion Bank pretend gold supply: 78,616,600 ounces

The question to ask yourself: With the price of gold rallying from $1280 to $1520 in 2019, a move of 18%, which factor had the largest impact? Demand for physical gold or the supply of pretend gold?

Answer that question correctly and you'll go a long way toward determining where prices are headed in 2020. As laid out in the forecast linked above, I believe that all of these trends will continue in 2020, and as such, the price trends will continue, too.

  • Central bank demand for physical gold will continue unabated as foreign currency reserves are gradually shifted from fiat currency to sound money.
  • Institutional demand for physical gold will increase as fiat currencies are devalued and global interest rates trend lower.
  • Personal demand for physical gold will increase as investors increase asset allocation to our under-utilized sector.
  • Bullion bank supply of pretend gold will increase as these banks defend their established and underwater short positions. (Keep in mind that these Bank shorts positions are not constrained by the same factors that face Spec longs. These Banks are deemed "too big to fail" and thus will always have access to enough cash to meet perceived margin requirements. Additionally, these Banks are rarely forced to actually deliver physical gold against their short positions, as the Spec longs rarely demand physical delivery.)

Thus, as slowing economies, growing debt, and tightening liquidity force the Fed, the ECB, the BoJ, the BoE, and the SNB to keep the monetary spigot at full blast in 2020, expect gold (and silver) prices to continue rising. How far? The first levels to watch are $1650 for gold and $20 for silver. However, $1750 and $22 are not out of the question. This would place 2020's gains on par with 2019, and that seems about right.

In the end, though, you must realize that the bullion bank control over the pricing scheme grows more tenuous by the month. Each ounce of physical gold that is demanded globally removes it from the over-leveraged hands of the Banks. So keep the pressure on in 2020. Buy gold and demand immediate delivery. And then let's see if we can finally begin to see prices reflect true physical gold demand and not fabricated pretend gold supply.

Don’t miss a golden opportunity.

Now that you’ve gained a deeper understanding about gold, it’s time to browse our selection of gold bars, coins, or exclusive Sprott Gold wafers.

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Head shot of Craig Hemke

About the Author

Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities.

Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.