I picked up some shares of Sprott Physical Gold Trust on a tip from a friend who is a lawyer at a Bay Street firm here in Toronto. What backs up Sprott Physical Gold Trust? Its Net Asset Value (NAV) as of close Friday is $11.60 per share, based upon 820,753 oz of physical gold held in the Canadian Royal Mint.
It is possible to buy Gold certificates from major banks. What backs up the gold certificates of banks? Well, the Bank of Nova Scotia says,
Scotiabank gold certificates are backed by the assets of The Bank of Nova Scotia.
And this:
And finally, this:
This means that the Bank of Nova Scotia likely sells a great deal more gold certificates than the physical gold that they have to back it up, because they only hold allocated gold if the certificates are bought within an RRSP plan at their Scotia McLeod brokerage. The rest is just paper.
The idea, therefore, that there is far more gold paper than there is physical gold is not at all far fetched. This was exactly the point of a previous post that suggests that gold should be worth $56,000. But because there is many more times more paper gold than physical gold, the gold market is actually flooded with worthless papers. The Bank of Nova Scotia is not alone in this practice of selling unallocated gold.
The fractional reserve system of gold selling is a dangerous practice and it puts the buyer in a position of assuming the bank’s default risk. If you put your money in a savings account, it is insured up to certain amount. But it doesn’t seem that unallocated gold certificates are insured at all. This website seems to give a pretty good explanation of unallocated gold certificates: gold.bullionvault.com/How/UnallocatedGold
The Righteous Investor 
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Good post, PW.
PHYS and CEF are my alternatives to GLD and SLV. Both have done well for our portfolio.
I didn’t know about CEF. Thanks for the tip.
TV and radio adds are pumping the hype on gold to lure in small ma and pop investors who think they might cash in on this gold mine. In time, there will be a correction (when profit seekers cash in) and gold will drop like a rock. I’m not saying gold is a bad investment, it is simply a place to park your money with some stability (if it is allocated gold). But even if you bought gold in 1980, with inflation in mind, you still haven’t broke even yet. In short, aggressive traders will make money, and the blue collar Joe will break even only in the long haul.
The banks are selling gold on a fractional reserve basis. This is keepign the price of gold artificially low because there is who knows how many times more paper gold as physical gold, and the same is true of silver. Now as the hyperinflationary scenario begins to unfold, all that is paper, fiat currency and paper gold alike, will disappear, and the only thing left as money will be physical gold and silver. Gold is not in a bubble: for every TV commercial that sells gold there are others who will buy. In the meantime, there are many gold bears, such as Buffet, who dissuade people from buying. Gold is worth probably something like $56,000 per ounce (that’s how much gold is held by the US government compared to the amount of paper money, in the calculation of Adrian Douglas). As more and more fiat money comes into existence, gold becomes exponentially more valuable.
1980 was a hard fought battle for the integrity of the dollar with extremely high interest rates. Yes gold could go down if the Fed stops creating new money and also allows the interest rates to go back up to 15-20%. Then I wouldn’t be surprised if gold lost some luster. But such conditions are not happening now. The point is, the market will fluctuate, but the fundamentals tell us that the dollar is not healthy at this moment, and that gold will remain more stable as long as the interest rates are low and debts are being monetized.
What I don’t understand about your comment is that the run-up in the price of gold has everything to do with bad monetary policy. It isn’t about enthusiasm for gold per se but about pessimism regarding the dollar and its oversupply. So if that’s the case, the bad things that are devaluing the dollar have to stop, as it did in 1980, or else gold will continue to rise. You don’t address bad monetary policy at all in your comment. So it is as if in 80’s gold magically went up and then down again. But we know that gold prices respond to monetary policy. That is the crucial issue.
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