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Before you listen to the podcast, I would like to provide some additional context and background to the discussion, that could offer a deeper understanding and further dimensions to the positions and arguments that we’ll elaborate on with Todd Horwitz.

Todd Horwitz is known as Bubba and is chief market strategist of He is a regular contributor on Fox, CNBC, BNN, Kitco, and Bloomberg. He also hosts his daily podcast ‘The Bubba Show.’ He is a 36-year member of the Chicago exchanges and was one of the original market makers in the SPX.

“The idea that human kind can shape the world according to wish is what I call the fatal conceit” – Friedrich August von Hayek

Some time ago, I read an interesting study entitled: “Who sets the price of gold? London or New York?”, written by Martin Hauptfleisch, Tālis J. Putniņš and Brian Lucey.

One of the most interesting findings was the following:

“A striking result of our analysis is that although the volume of gold traded in the UK OTC spot market is more than ten times higher than that of the US futures market (78.0% market share compared to 7.7%), the futures market tends to play a more important role in incorporating new information about the value of gold. This result highlights the importance of market structure and instrument type. Our results support the notion that the centralization and relatively transparency of the futures market contribute to its disproportionately large role in price discovery. It is also likely that the low transaction costs, inbuilt leverage and ability to avoid dealing with the underlying asset, make futures contracts an attractive option for those that trade gold as a financial asset, and such trades contribute disproportionately to price discovery.”

To me, this just confirms what I’ve observed though my experience in the gold industry, that consumers in the western world could easily live without physical gold. We have largely forgotten Gold and this is the main reason why we see such huge paper leverage today. In addition, this is only possible as long as the market players respect the unwritten rule to limit physical delivery to as little as possible. When you look at this issue from that perspective, you also understand why we had up to 500 paper claims at the Comex for every single ounce readily available for delivery in the past.

The authors of the paper also describe the current situation as follows:

“According to the Loco London Liquidity Survey (Murray, 2011), the daily turnover on the London gold spot market alone is in excess of $216 billion, which is comparable in value to US- Australian and US-Canadian dollar foreign exchange settlements (based on 2010 data in Bank for International Settlements, 2011), as well as the daily turnover of all stock exchanges in the world. The average daily dollar volume of the front futures contract over the same period is approximately $22 billion, illustrating the size disparity between our markets.”

As per London gold clearing statistics for 2016, the total trading volume in the London Over-the-Counter (OTC) gold market is estimated at the equivalent of 1.5 million tons of gold. The volume of 100oz gold futures on New York’s COMEX reached 57.5 million contracts during 2016, or 179,000 tons of gold. If we now take into consideration that only approximately 187,000 tons of gold have actually been mined up to today the paper scam is just gigantic.

These observations remind me of John Exter, Member of the Federal Reserve Board in the 50ties, and the way he described our current monetary system. He saw it in the form of an inverted pyramid, as shown below.

Exter Pyramid

I’m obviously part of a small group of individuals in the western world, that have one thing in common with the banker J. P. Morgan, a person that I otherwise don’t admire at all. However, he was right in his proclamation that «Gold is money and anything else is credit». This, in combination with Exter’s pyramid, provide some important, big-picture context to the fact that as little as 0.3% of total financial assets are in gold and related asset classes such as mining. In other words, 99.7% of the rest is built with credit based on gold. And Debt is always consumption brought forward.

Another signal I’m following is what I see as historic game changer, which started a few decades ago: The East is buying up the physical gold of the West. At the same time, we can see that certain cultures still see Gold as the highest and purest form of money. Some of these cultures are located in countries with weak national currencies and/or with natural resources and therefore an economy heavily dependent on USD. They are among the first to break apart when liquidity is tightening, interest rates rise and the USD is strengthened. The future of the so called emerging markets does not look bright, as long as they are integrated into this system. They will be among the first victims of a global deflation, which is rising on the horizon. Therefore, the constant purchase of physical gold to diversify risk away from the USD system shows that they are preparing for the future. The biggest country in terms of economic power, as well as market size and production volume, is China. At the same it also became one of biggest gold owning countries on a global scale. Conservative estimates show that China owns 18’000 tons of physical Gold, while the official gold reserves of the Bank of China are reported to be only approx. 1’840 tons of Gold. Russia and other central Asian countries are also building up their reserves, while Turkey is doing the same and the Indian government is trying to make the purchase of gold as hard as possible.

Koos Jansen Slide provided by the best analyst of the Chinese gold market – Koos Jansen, working for

The world is changing and let us not forget that the Soviet Union did not collapse because people suddenly changed their minds overnight. It failed only because of the logical consequence, that the centrally planned communistic system was no longer sustainable. You can only go into debt up to a certain level, however one fine day you will have to either repay or default. When I look at the global debt and its growth, I think it should be obvious that we reached a level where repayment is not an option any longer. Also, this time «it is not different». That’s why we saw dozens of Hyperinflation periods globally in the past century, that proved governments can go broke. We reached a peak point of leverage and the day of reckoning is fast approaching. At the same time, the largest part of the world population is preparing and looking forward to this day.

Keep in mind that in a deflationary environment, people will want to shift their investments to high quality assets with little or no counter-party risk. In short, it is a flight to quality and the hardest currency for the past few thousand years has been and still is Gold. Conversely, in a boom, or inflationary environment, people will tend to move their money toward high-risk assets.

I truly believe we are standing at the end of a long-term debt cycle and that brings me back to that 0.3% figure I mentioned in the beginning. It is clearly time to act.

I hope you will enjoy the podcast. Start listening now!

Claudio Grass
Independent precious metals advisory Switzerland

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