Guest Post: Gold's Value Today

Tyler Durden's picture

Via John Aziz of Azizonomics,


Way back in 2009, I remember fielding all manner of questions from people wanting to invest in gold, having seen it spike from its turn-of-the-millennium slump, and worried about the state of the wider financial economy.

A whole swathe of those were from people wanting to invest in exchange traded funds (ETFs). I always and without exception slammed the notion of a gold ETF as being outstandingly awful, and solely for investors who didn’t really understand the modern case for gold — those who believed that gold was a “commodity” with the potential to “do well” in the coming years. People who wanted to push dollars in, and get more dollars out some years later.

2009 was the year when gold ETFs really broke into the mass consciousness:

Yet by 2011 the market had collapsed: people were buying much, much larger quantities of physical bullion and coins, but the popularity of ETFs had greatly slumped.

This is even clearer when the ETF market is expressed as a percentage of the physical market. While in 2009 ETFs looked poised to overtake the market in physical bullion and coins, by 2011 they constituted merely a tenth of the physical market:

So what does this say about gold?

I think it is shouting and screaming one thing: the people are slowly and subtly waking up to gold’s true role.

Gold is not just a store of value; it is not just a unit of account; and it is not just a medium of exchange. It is all of those things, but so are dollars, yen and renminbei.

Physical precious metals (but especially gold) are the only liquid assets with negligible counter-party risk.

What is counter-party risk?

As I wrote in December:

Counter-party risk is the external risk investments face. The counter-party risk to fiat currency is that the counter-party — in this case the government — will fail to deliver a system where that fiat money will be acceptable as payment for goods and services. The counter-party risk to a bond or a derivative or a swap is that the counter-party  will default on their obligations.


Gold — at least the physical form — has negligible counter-party risk. It’s been recognised as valuable for thousands of years.


Counter-party risk is a symptom of dependency. And the global financial system is a paradigm of interdependency: inter-connected leverage, soaring gross derivatives exposure, abstract securitisations.


When everyone in the system owes shedloads of money to everyone else the failure of one can often snowball into the failure of the many.

Or as Zhang Jianhua of the People’s Bank of China put it:

No asset is safe now. The only choice to hedge risks is to hold hard currency — gold.

So the key difference between physical metal and an ETF product is that an ETF product has counter-party risk. Its custodian could pull a Corzine and run off with your assets. They could be swallowed up by another shadow banking or derivatives collapse. And some ETFs are not even holding any gold at all; they may just be taking your money and buying futures. Unless you read all of the small-print, and then have the ability to comprehensively audit the custodian, you just don’t know.

With gold in your vault or your basement you know what you’re getting. There are other risks, of course — the largest being robbery, alongside the small danger of being sold fake (tungsten-lined) bullion. But the hyper-fragility of the modern banking system, the debt overhang, and the speculative and arbitrage bubbles don’t threaten to wipe you out.

Paper was only ever as good as the person making the promise. But increasingly in this hyper-connected world, paper is only ever as good as the people who owe money to the person making the promise. As we saw in 2008, the innovations of shadow banking and the derivatives system intermesh the balance sheets of companies to a never-before-seen extent. This often means that one failure (like that of Lehman brothers) can trigger a cascade that threatens the entire system. If you’re lucky you’ll get a government bailout, or a payout from a bankruptcy court, but there’s no guarantee of that.

Physical gold sits undaunted, solid as a rock, retaining its purchasing power, immune to counter-party risk.

I think more and more investors — as well as central banks, particularly the People’s Bank of China — are comprehending that reality and demanding the real deal.

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cbaba's picture

You have to add one more thing, Fiat Currency has a flag behind, the central bank of the country where it is printed, so you have to trust this country. But Gold has no Flag, it is accepted as a currency in all countries.


Aziz's picture

Correct. The counter-party involved with holding fiat currency is... the issuer. The issuer goes kaput, your investment goes kaput.

IBelieveInMagic's picture

I think we are missing the point. The USD has oil behind it. As long as other countries are unwilling or unable to break the USD hegemony of oil, the USD is safe. And the only way to break that hegemony would be war -- at that point, nothing matters. Keep stacking but it won't do you any good -- if the system is going down, the PTB has no choice but to take down everything... Instead just enjoy life ! 

sessinpo's picture

IBelieveInMagic               2383122

As long as other countries are unwilling or unable to break the USD hegemony of oil, the USD is safe.



And that ZH's is why Iran really has sanctions against it - because they are trying to exchange their oil for goods and currencies not in US dollars. Oh yea, other nations are making similar deals, China with Russia anyone? Been done. Right now, the trouble with Euroland is what is helping to keep the dollar as the reserve. But all roads come to an end.

Hulk's picture

Don't get MF Globaled Bitchez! If it ain't in your hands, you don't own it...

Yen Cross's picture

 I clearly stated last week/ go long aud/everything!  Those weirdo Canadian bugs make me laugh! Is the Canadian dollar pegged to U.S. equity markets? Oh I get it.  QE makes the usd/cad trade go parabolic, when all the cash goes to emerging markets!

 Canada, the 51st state!

fourchan's picture

best state in the union. canada, americas hat.

Yen Cross's picture

 You clearly missed my sarcasm!  Have you checked the " tightening on crude spreads"? Not that it matters.

  U.S. gdp @ 2.2%?

Likstane's picture

gotta add the sarc tag, dude!

Yen Cross's picture

 I'll try harder next time. Thanks for your patience.

long-shorty's picture

very confused by these alleged statistics. the # of shares outstanding in the GLD (the largest ETF) are actually UP since 2009, so unless there is suddenly seven times more physical gold above ground (which there is most certainly not), it is non-sensical to say that the "% of the market" represented by ETFs has dropped from 75% to 10%. the market for PM ETFs has most certainly not "collapsed."

not sure why it is a good thing if all of a sudden people are flipping/trading their physical gold more often, which seems to be the only statistic this article is based on.

junkyardjack's picture

Its a game of hot potatoe, who is going to be left holding the worthless metal not backed by anything?

TWSceptic's picture

Something with intrinsic value doesn't have to be backed by anything. That's the whole point of money. And it's the reason that fiat currency is a stupid idea.

WAMO556's picture

For Real?? Gold backs up gold. Gold backs up paper. You had a interesting post and needed a quick dose of reality! Just saying.

shuckster's picture

I'll take your paper - just wire it to my account no questions asked!

Seer's picture

"no questions asked!"

Except by Homeland Security...

DoChenRollingBearing's picture

@ GMad

+ 1  Physical in your own possession is what will save you!

DavidPierre's picture



"Deals" ahead of "revaluation".

First and maybe most important, China announced that they will purchase oil from Iran and will pay in Gold.

This follows the same type of arrangement announced by India a couple of weeks ago. THIS is a very big "in your face" to the western world's SWIFT transfer and settlement system. No matter how you look at it, this is Dollar negative and further proof that Dollar demand will drop as the world distances itself from the use of Dollars.

Economic numbers out of Euroland have turned decidedly weak as Britain looks toward the double dip abyss and Spain is rapidly "sliding" down the Greece'd totem pole towards bailouts.  Spain however is no Greece by a long shot, they are "Greece squared" or maybe cubed because they are so much bigger and their banks are suffocating on home loans where the collateral has collapsed.  The European sovereigns are doing the exact same things as are the Fed and Treasury, whatever you want to call it, the bottom line is plain and simple monetization. The Fed already is the largest buyers of Treasury bonds, it is only a matter of time before they become the ONLY buyer.

Same story in Europe where the ESM, EFSF and other "programs" (funded also in a big way by out wonderful Federal Reserve providing "currency swaps") provide "liquidity" to the banks who in turn buy sovereign debt. It is one big merry go round of Ponzi laid upon Ponzi that is already obvious. It is just a matter of time before it becomes "obvious enough" for Jane and John Doe to see, realize and understand.

A week ago several announcements from the IMF, BIS and World Bank regarding levels of and use of Gold as "money" (maybe Ben Bernanke read these?), preparations are being made.  Russia and China are doing cross border deals that exclude the Dollar.  Both India and China are doing deals directly with Iran for oil.  Asian nations have made multiple trade deals amongst themselves.  Germany has made individual deals with Russia over natural gas, again without using Dollars.  While all this is happening, the U.S. in it's ultimate wisdom has continued to push the ignorance that "SWIFT" isolation is some sort of punishment through isolation.  When all is said and done, the only one "isolated" will be the U.S. and with a currency that will no longer "spend".

Yes, these preparations are being made across the globe for their own protection and so that the Western IMF and World Bank can say "we told you so" or "you were warned".  Since 2008 the mathematics to this equation are what?  Jim Sinclair warns that "Gold could gap up to $3,000" which is another way of saying that FIAT Dollars would be "devalued" by roughly 50 %.  Whether he is correct and we first get a "mini devaluation" or whether it is the big enchilada where a "0" or two gets added to Gold's fiat price no one knows.  Jim has not been an "alarmist" in the past and Mother Nature is screaming revaluation at the top of her lungs.

Devaluation plans behind the scenes are  being discussed and probably better than 50/50 already decided on. 

Remember, a "bank holiday" is the same thing as the music stopping in a game of musical chairs.  Once the music stops you will not be afforded the chance to re-position yourself in any way shape or form.

It will be the beginnings of a very different world.


IBelieveInMagic's picture

Is this Gold-for-Oil deal allegedly struck by China and India confirmed? I think it is all posturing and geopolitical negotiations. I would be more worried about Food-for-Oil barter deals. What is the use of a useless metal to Iran?

If Gold was such a great asset, India should be the richest country instead a being a dump. The truth is that food-energy-defence security are the real determinants of countries wealth and well-being -- on these three dimensions, USA is still the king.

Non Passaran's picture

I don't want to waste time on your ignorant post except to say that in India it is residents that have gold, not the state.

IBelieveInMagic's picture

Ah, so gold in hand of the goverment is somehow wealth and in the hands of individuals, Shit! So, why are you collecting Shit?

prole's picture

I do not know sir. Why are you eating it and posting it on this chat board Trav?

Prometheus418's picture

Why not?  It's a valid argument.  

Truth is, gold is in a severe PR slump- we're all looking at fundimentals and saying it's vastly undervalued.  The thing is, even though the nominal price has increased dramatically, that still doesn't mean that it's magic all by itself.  When the Western countries start screaming for gold, then India might get a taste if they're willing to sell it for tangible goods- but as long as it sits idle, it doesn't matter what it's worth, you're still dependant on your infrastructure.

Right now, if you were to go sell your gold and silver you'd feel like an Indian too, when the coin shop gives you 85% of the spot price, or the jeweler gives you 60%.  Metal isn't winning until it's a widely accepted currency again- until then, most of the retail outlets for selling it are little better than pawn shops.

** I'm going to add the exception here for selling to some of the more reputable dealers like APMEX and Gainesville, who actually do offer something at or above spot much of the time- still less then their premium, but relatively fair.


DosZap's picture

Non Pasaaran,

I don't want to waste time on your ignorant post except to say that in India it is residents that have gold, not the state.

Excuse me but their Banks damn sure do.

jomama's picture

the caste system is why it is still so segregated in india.

IBelieveInMagic's picture

It is estimated that 1/3rd (or something like that) of excavated world wide Gold is in the hands of individuals in India. It still does not do anything for that economy. 

prole's picture

Since the defecation of Trav Beavis and MathMan, we need a new Paper-Bug anti PM troll. Would you be willing to step up and be the resident retard of the board? You will need to make alarmist pro-ponzi posts about gold's imminent "collapse."

noses's picture

Idiot. India has more millionaires per capita than the USA. It just has a different distribution of wealth. And face it: The USA is quite richt of dumps, too.

dognamedabu's picture

Not like it matters to me who has more millionaires since I ainèt one of them.. But there is no way India has more millionaires per capita than the US.



Jam Akin's picture

No way what you say is true, unless one ignores the $/rupee exchange rate!

DosZap's picture

If Gold was such a great asset, India should be the richest country instead a being a dump

Right, and if it wasn't for customs over centuries they could be.Its a symbol of wealth and prosperity there,always has been always will be.

Their gvt, and banks have over 18,000 metric tons.That is equal to EVERY other nations holdings on the planet,( at the printing of last stats) now add the populations jewelry, and stashes....................likely nearly as much...............

So my $ is on India having close to 40 thousand metric tons of gold (not counting silver).

Peter Pan's picture

The time will come when serious transactions are carried out in gold and the daily ones in silver.

The problem we have though is that the bulk of the people don't understand gold unless it's part of a pirate story.

Fiat still has the allure of greazy take out with two litres of soft drink. Tastes good, feels good, it's convenient etc etc but in the long run clogs your arteries.

Then one morning people will wake up and realise that fiat is just pink slime.

Marco's picture

Then the banks will offer them interest and they will settle for gold certificates and we can go around the merry go round once again.

Seer's picture

"The problem we have though is that the bulk of the people don't understand gold unless it's part of a pirate story."

This is one of the subtle layers of propaganda.  This is how it all works..  Why have TPTB programmed this story?  I have a theory on how this goes down:

Confiscation (ouch!) occurs.  Individuals known to have physical will be pressured by the programmed masses to turn it over (narc on your neighbor- he/she is the one who is responsible for your "poverty" by "hording" PMs).  The big holders, however, the banks, will gladly do as they are part of the scheme and they know that they will get the gold back (it's only on loan in order to help reset everything).  Masses conditioned to help TPTB maintain their power, same as it ever was, same as it ever was...

Seer's picture

Obviously someone doesn't understand this...  I'm the fucking messenger, I'm NOT advocating confiscation!  Ask yourself this: if you were TPTB what do you think that you would do?  They have NO choice other than to control PMs, otherwise they lose control of EVERYTHING.  Of course, whether a given strategy can derive the desired results is a whole nother story.

Again, who are TPTB going to turn to?  THEY are incapable of doing for themselves.  People like here on ZH ain't going to help them.  So... again, it's not all that hard to see what they see as being their only POSSIBLE (not saying probable) way out.

Deo vindice's picture

Seer - I think there's someone who just gets high on clicking red arrows.

akak's picture


The problem we have though is that the bulk of the people don't understand gold unless it's part of a pirate story.

Avast, Matey, so what is there being wrong with pirates, ahhhrrr!

Yen Cross's picture

 No offence to the Canadians.  French or English.

Deo vindice's picture

There are some folks who would say the French are an offence to the Canadians. ;-)

(Of course there are more than a few French who think they are the ones offended - so it all equals out, I guess)

Bansters-in-my- feces's picture


The dollar is NOT a store of value as you state.

Niether is the yen or renminbei.

Both allow your wealth to be stolen through increase in money supply by hitting CTRL Print....

Shame on you for that statement.

Yen Cross's picture

 Who talked about " wealth storage"? I don't recall anyone discussing wealth storage?

  We were discussing " Grocery Store" politics!  The real world" INFLATION" , paper note politics!

 I'm not in the mood for a bantering session. I understand your comment.

Aziz's picture

In a technical sense, all currencies are a "store of value". They may not be a very good store of value (i.e. they may lose you most of your value).

Ron Paul is right. Gold is money, but so too is the dollar, the yen, the Euro, etc. The point is that some monies are more equal than others, and no fiat monopoly can change that.

Yen Cross's picture

 Yea " Aziz" you are " XAu" and " XAg" correct.

 Fiat exists, because the world has other "Tangible assets"! 

TWSceptic's picture

No, fiat currency is not storing value, only representing value. Storing value means that the material itself has to have enough perceived value. Printed paper bills have no value, they are only representing whatever number is printed on them. If the system collapses, all value represented is lost. So not storage there.


People need to understand that the meaning of money is completely different from the meaning of fiat currency. Currency is never money, only a government approved representation of value.

_underscore's picture

I'm not even sure they even represent 'value' - they represent confidence - each note is a vote of confidence (or otherwise) in the issuing body (govt.)

My confidence that the cabal that control our politico-economic system have my best interests at heart is in an inverse realtionship to my PM holdings - had they not fallen out of my boat, fishing, recently, that is.

Winston Churchill's picture

Gold is money.Everything else is credit.


buzzardsluck's picture

'No asset is safe now. The only choice to hedge risks is to hold hard currency — guns & ammo'


p.s.  i love PMs (guns/ammo too) but lost them all in a boating accident while traversing Lake Baikal.  

owensdrillin's picture

I invested everything into SCUBA gear and have increased my silver/gold holdings by a shitpile over the past year.

Keep floating those PM's around boys.