You are here

Adrian Douglas: How much imaginary gold has been sold? Part 2

Section: Daily Dispatches

By Adrian Douglas
Sunday, October 18, 2009

On Friday, October 16, I wrote "How Much Imaginary Gold Has Been Sold?," which you can find here:

This article looked at how much gold the London over-the-counter market should be holding to be able to trade 2,134 metric tonnes each and every day. The conclusion was that the exchange should have at least 64,000 tonnes. From data compiled by the GFMS metals consultancy it can be deduced that the London OTC market has only 15,000 tonnes at most, because this is the estimated total existing London Good Delivery (LGD) bars in the world. This means that there are at least 49,000 tonnes of imaginary gold that have been sold. This scam is unlikely to be discovered unless the owners of the imaginary gold actually request delivery. The bad news for the Anti-Gold Cartel is that this is beginning to happen.

I have written this follow-up after some e-mail exchanges with some readers and GATA Chairman Bill Murphy. I think additional text may clarify the original article.

First I would like to emphasize that there lately are various reports of difficulty in meeting gold deliveries in London. This has been described as a "lack of liquidity." If there is a "lack of liquidity" in the London gold market, then there is fraud. No other explanation possible. If the OTC market traded only gold that was in the vaults on a 100 percent reserve ratio, there could never be a lack of liquidity. Recent information indicates there is a lack of liquidity, so there is a fraud. Period. Now all we are trying to do is to estimate the scale of it.

Gold has been "blamed" for not keeping up with inflation. That is ridiculous. This is basic economics. The relative supply and demand of gold with respect to U.S. dollars determines its price. Inflation is a monetary phenomenon. If the supply of money is increased without increasing the supply of goods, the result will be an increase in the price of goods. If the money supply is doubled and the supply of goods is doubled, there will be no change in the price of goods.

In the last 14 years the supply of dollars has increased from $4 trillion to $15 trillion (+275 percent) while the gold price has risen from $400 in 1995 to $1,000 in 2009 (+150 percent). How could this happen? Has the demand for gold gone down?

No, it has gone up. So supply must have gone up? Wrong. Mine supply has been decreasing. There has to be an alternative massive supply of gold to make the price rise slower than the influx of dollars.

Enter the sale of imaginary or "paper," which makes up the imbalance.

In 1995 the world stock of real gold metal was 140,000 tonnes for $4 trillion of money stock. Let's assume the amount of imaginary gold was small at that time, as this was before U.S. Treasury Secretary Robert Rubin's "strong dollar policy." If the price of gold had remained at $400, the gold stock would have to match the rise in the dollar stock (it grew 3.75 times) and be 525,000 tonnes (140,000 x 3.75). But the price didn't stay static; it went up 150 percent (an increase of 2.5 times), so the gold stock should be 140,000 x 3.75/2.5 = 210,000 tonnes.

The gold stock is actually 160,000 tonnes. The difference must be imaginary gold = 210,000 - 160,000 = 50,000 tonnes.

That is quite astonishing because this is almost exactly the number calculated in my previous article. But in my previous article I calculated it by using the GLD exchange-traded fund characteristics to determine what the daily trade volume to inventory ratio should be for unallocated gold. When the GLD trading characteristics are applied to the OTC daily trading volume, it gives an implied minimum inventory stock level of 64,000 tonnes. Given that the actual inventory cannot be more than 15,000 tonnes, this tells us that 49,000 tonnes of imaginary gold has been sold. That is to say "unallocated gold." But it's not just unallocated; it is also non-existent.

This is quite amazing that this in-depth analysis of the OTC market gives almost the same result as a back-of-the-envelope calculation of money supply.

This lends credibility to at least the ballpark level of our estimate. It means that about 50,000 tonnes of gold has been sold that is in excess of actual real stocks. This does not include all the lookalike scams of pool accounts, gold certificates, unallocated brokerage sales, ETFs, etc., which might be another 10,000 tonnes. So the order of magnitude of the net short position of gold in the world is 60,000 tonnes. This is against a total possible claimed gold supply of 30,000 tonnes from all central banks, a figure GATA believes is now less than 15,000 tonnes. Of the 15,000 tonnes, perhaps, at a maximum, the central banks would be willing to part with only 7,500 tonnes.

So there is imaginary gold sold of 60,000 tonnes and only at an absolute maximum 7,500 tonnes that can be mobilized to meet it. Of course, when the squeeze comes, the demand from fresh buying is going to skyrocket to pile even more misery onto the Anti-Gold Cartel.

I don't think it is melodramatic to say this is likely to be the biggest short squeeze in history. What price will be needed to bring supply and demand into equilibrium? I don’t know, but it will have to have a lot more zeroes on it than $1,000 per ounce has.

Anyone who suggests gold is in a bubble at $1,000 does not have a clue what he is talking about.

If 60,000 tonnes of imaginary gold has been sold in a market that has a total stock of 160,000 tonnes, there is no question that the gold price has been suppressed, as long stated by GATA. No further debate is required on the subject.

If the OTC market has a 100 percent reserve ratio, let its managers state it publicly under oath and agree to an audit. Let them also explain how recent transactions could not be met without central bank leasing and why cash settlement with generous premiums was offered instead of physical gold delivery.

As Warren Buffett famously said, "When the tide goes out you get to see who's swimming naked." The tide is going out on the Anti-Gold Cartel.


Adrian Douglas is a member of GATA's Board of Directors and publisher of the Market Force Analysis letter (, which identifies turning points in various markets.

* * *

Support GATA by purchasing a colorful GATA T-shirt:

Or a colorful poster of GATA's full-page ad in The Wall Street Journal on
January 31, 2009:

Or a video disc of GATA's 2005 Gold Rush 21 conference in the Yukon:

* * *

Help keep GATA going

GATA is a civil rights and educational organization based in the United States
and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are
free, and you can subscribe at:

To contribute to GATA, please visit: