If worrying reports from the U.K. are any indication, physical gold may be getting a lot harder to get a hold of than you might think.
At least, that’s according to Peter Hambro, Chairman and co-founder of Petropavlovsk. (Source: Bloomberg, last accessed September 14, 2015.)
The gold industry veteran explained his reasoning in a recent interview on Bloomberg television, citing the massive outflows of physical gold heading towards China and India. There is such a high demand in the East, in fact, that it has become essentially impossible to import enough of the yellow metal to satisfy perpetual calls from Eurasia. (Source: Gold Seek, last accessed September 14, 2015.)
Wait, hold up. The British are importing gold so that they can export it?
You heard right. London simply does not have anywhere near enough of the actual product to export. Instead, they’re relying on imports in June from the United States and other countries. (Source: Bloomberg, last accessed September 14, 2015.)
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What this phenomenon reveals is the intrinsic weakness of the paper gold market, which is based on promises rather than actual physical delivery. The physical volume of gold available for you and I to buy and take possession of is only a small fraction of the virtual stuff floating around on commodity exchanges.
What would happen if that paper market was suddenly hit with a cataclysmic event such as a stock market crash, or even a global economic collapse? Those who are holding pieces of paper with gold written on it might suddenly find out that their virtual holdings are worthless.
Borrowing costs for gold have risen sharply in the past few weeks, as traders are responding to the brewing crisis in supply. This has been due to large volumes of gold being delivered to Switzerland so that it can be melted down and shipped to India or China. (Source: Silver Doctors, last accessed September 14, 2015.)
This rise indicates a very real tightness in gold’s supply and demand equilibrium, which is shuddering under the weight of surging demand from eastern buyers who prefer the real stuff over paper promises.
But why hasn’t the price of gold risen, then? Because the gold price is subject to the market forces of virtual trading and demand. And those are disconnected from the realities of real physical gold.
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