Physical Versus “Paper” Silver And Gold

A few days ago I began writing a very different piece. With the concept of Limits to Growth as background, I introduced Financial Permaculture and The Great Turning. These ideas can inspire us to envision and work towards a future in which communities, at the local level, manage their resources to foster reasonable and sustainable prosperity for themselves. Such a vision can be a comfort in times like these when the world’s anonymous mega-economy heads into a terrifying collapse, dragging many innocent bystanders down with it.

But the cosmos did not want me to write such an article this week: Despite having carefully saved the draft of the piece in my blogging service Monday evening, the content had just disappeared when I went to work on it on Tuesday morning. And of course I did not have a backup on my own hard drive. The cosmos is probably right. The chaotic busyness of October burnt me out and I needed a little bit of a break. I’ll do the Deep Thinking next week. Or whenever.

So now I shall, instead, write rather briefly about what to do if the idea of holding physical silver or gold makes you uncomfortable. I also need to give you an update on the latest precious metals market gossip.

A relative of mine, nervous about owning and storing silver bullion coins, recently began purchasing shares in SLV, an Exchange Traded Fund  that you buy through a broker like a regular stock. I do not trust SLV and similar instruments (e.g., the gold ETF, GLD) because I don’t know for sure that they really own the metals that they say they do. Funds like these also purchase futures and other paper proxies that follow the official market price of gold.

Without ounce-for-ounce backing in real silver and gold, these funds have some characteristics in common with fiat currency. In particular, at some point the market may figure out that they do not actually own the metals and downgrade their price.

However, having done some research into this question, I can confidently recommend two alternatives to physically holding silver and gold.

  • Central Fund of Canada: This fund has only one purpose: to own physical gold and silver (roughly half of each). You buy shares of this fund (ticker symbol CEF) on the stock market just like any other stock. Unlike the ETFs, it employs rigorous and redundant third-party accounting mechanisms to ensure that the shares traded on the exchange do represent real ounces of silver and gold.
  • Goldmoney.com: This company’s propieter, James Turk, contributes frequently to the Financial Sense Newshour and is endorsed by Catherine Austin Fitts. The operation runs very differently from CEF. You open a personal account with goldmoney.com and purchase a specific amount of gold or silver. Goldmoney.com holds the physical metal, also under redundant third-party accounting mechanisms, in vaults in London and Zurich. It is an easy and cost-effective way to secure precious metals.

I personally use both of these mechanisms — I trust no one else to hold precious metals on my behalf.

I have already discussed the price volatility of precious metals. Let me reiterate: I do not advocate that you put all of your savings into precious metals. I advocate putting some percentage of your savings into precious metals as a hedge against inflation, counterparty default, and currency collapse. Their price volatility makes them a poor choice for money that you need to use in the short to near term.

I believe that silver and gold are real money. The fiat currency system enables the banking system to manipulate the economy in ways that, over the long term, penalize people who live within their means and spend only what they can afford rather than what they can get credit for. So the sharply dropping price of precious metals in the official commodities markets lately leaves me disheartened.

But actual transactions of physical gold and silver tell a price story rather different from the official spot price on the COMEX (the official commodity exchange). Bullion dealers and mints cannot keep up with demand for physical gold and silver. Consequently, buyers are paying a premium of 100% for some types of silver bullion coins on ebay. In essence, buyers are willing to pay double the spot price for some coins. In a recent article, Jim Willie describes a gold transaction of conspiratorial proportions. Last week in Toronto a multi-million dollar purchase of gold took place at $1075 per ounce, while the COMEX price of gold last week was around $300 per ounce less.

In other words, good old fashioned supply-demand dynamics are pushing up the price price for physically held precious metals. The disconnect between the official market price and the physical price can only mean that the paper representations of the metals (futures, certificates, etc.) do not really represent the metals themselves. But the official market price is bound to catch up with that the physical market.

Jim Willie’s article also observes, by the way, that the foreign entity purchasing gold at $1075 per ounce settled the transaction in Euros. He also draws our attention to similar transactions over the past several months where foreign entities settle transactions for large amounts of gold in foreign currencies. For example, a few months ago a sovreign entity moved four hundred metric tons of gold into storage with the Royal Canadian Mint. Might some central bank in Europe or elsewhere be taking steps to back its currency with gold? Willie thinks so. If he’s right, the official metals markets would have quite a reaction!

Please review my usual disclaimer: I am not a professional financial planner and have no credentials in this area. You should always review your long-term financial plan with a qualified financial planner. I recommend finding one who understands monetary inflation and peak oil. Also, I have no affiliation with or other reason to promote the Central Fund of Canada or goldmoney.com.

© 2008 Philip Glaser

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One Response to “Physical Versus “Paper” Silver And Gold”

  1. Stacey Derbinshire Says:

    Nice site. Theres some good information on here. Ill be checking back regularly.

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