August 18, 2009 - Why is there never any discussion surrounding the subject of the issuance of paper gold? Banks in Canada sell Gold Certificates as well as Silver Certificates. These pieces of paper are lapped up by unsuspecting customers as if they were real gold. If this paper gold is considered by 90% of the purchasing public as true gold, then there is essentially an UNLIMITED supply of 'gold' for sale. If gold can be mined by a laser printer in every single bank in the world, how exactly is the spot price of gold relevant in any discussion? Banks are creating gold in the same fashion that they create money...out of thin air.

James Turk replies: You raise some good points, and I am in agreement with you.  For a long time I have been trying to inform people about the difference between physical gold and paper gold.  Here is one example.
http://goldmoney.com/essays-own-metal.html

Here is another example of some correspondence about gold certificates published by GATA a few years ago.
http://groups.yahoo.com/group/gata/message/1527
http://groups.yahoo.com/group/gata/message/1535
http://groups.yahoo.com/group/gata/message/1559
http://groups.yahoo.com/group/gata/message/1562

When you own paper gold, you do not own gold.  You own exposure to the gold price, which is contingent upon counterparty risk of the entity promising to deliver gold to you in the future.  Physical gold - being a tangible asset - does not have counterparty risk.

Slowly but surely the market is beginning to understand this difference.  The tipping point may have been reached last month when it was reported that Greenlight Capital Inc., a prominent hedge fund, had converted its holdings of GLD into physical metal.
http://www.bloombergnews.com/apps/news?pid=20601213&sid=arz6MqVbTVBs
This switch into physical may cause other firms to follow Greenlight’s lead.

The point is that there is a lot more paper out there than physical metal.  It's like the children's game of musical chairs.  There are not enough chairs.  The promises to deliver physical metal dwarf actual metal available for delivery, but they key is - when will the music stop?  When it does, there will be a scramble for physical metal.

As the economy continues to contract, unemployment grows and banks take more losses on their loan portfolios, confidence will erode further causing more doubts about paper promises, which in turn will cause people to convert their paper gold into physical gold.  Eventually the demand for physical metal will become overwhelming, just like it has been at many other periods throughout monetary history.  Many people who hold paper gold will then learn an unfortunate but valuable lesson - sometimes the promises aren't worth the paper they are printed on. 

Consequently, there are limits to how much paper gold can be printed.  If we reached the tipping point last month as I suspect is possible, then the contraction of outstanding paper gold obligations will send the gold price soaring as those who have promised gold, but don't have it on hand, go into the market to buy metal to meet their promise to deliver and avoid a default.  This rush out of paper gold into physical metal will accelerate when gold climbs above $1,000.  I expect gold will hurdle this level this year.

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