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Politics : Dutch Central Bank Sale Announcement Imminent?
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To: sea_urchin who wrote (19509)11/6/2003 9:29:08 PM
From: The Vet  Read Replies (1) of 81869
 
Searle, I don't disagree with your observation that "The tail is wagging the dog rather than the dog wagging its tail. In other words, actual gold sales, despite your contention, have become increasingly irrelevant to the gold price.

In fact most gold is traded as "paper gold" including the majority traded by Mr Kaplan. There is simply no need to move gold sold for investment purposes and the actual gold (if it even exists) can be transferred by a book entry often without the physical metal moving within a bank vault or other depository.

So if the metal remains in place but ownership is changed, has the physical gold been traded at all, or was it just a paper trade?

In reality only gold removed for manufacture or new gold added from mining actually trades, so unless the buyer has the real metal in his own physical possession he has simply made a paper trade.

If any transaction has the provision that either party can substitute a cash settlement in place of the either delivery or acceptance of actual metal then the trade is a completely "paper" derivative trade which could have been made (and probably was made) without either the seller owning gold or the buyer intending to take delivery.

But this must be true of anything that professes to be a store of value, even fiat currency. We all trade and exchange electronic numbers that represent value even though we know that the only physical representation of that value comes in paper notes which don't exist and even when they do, are intrinsically valueless. They can be produced or destroyed in unlimited quantities at the whim of a central bank or their masters at any time.

Of course unlike fiat, gold does have a value and cost of production and physical limitations on the quantities that can be produced. While the world is prepared to continue to accept both paper and electronic fiat currency on faith without question, it will probably accept paper gold on faith as well.

That is likely to remain the case until some major trader reneges on their implied promise that what they profess to have owned and sold was real but they cannot deliver the gold in the circumstance where the buyer will not accept a substitute.
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