'Paper Gold' Vs. Real Gold

VANCOUVER ( Bullions Bull Canada) -- When markets are manipulated, especially markets for physical goods, imbalances are created. The longer the manipulation continues and/or the more extreme the degree of manipulation, the larger the resultant imbalance.

The media continue to attempt to describe the large gold deficit that exists in India as a "current account deficit" -- i.e. a currency deficit. Gold is a currency. It is and always has been regarded as such by our governments and the international cabal of private banks (the "central banks") that are allowed to control/operate our monetary systems.

As a matter of the most elementary logic, it is impossible for one to create a "currency deficit" when you are simply swapping one currency for another. If we were to trade McIntosh apples for Delicious apples, we could not end up with "an apple deficit."

So all these media reports of a "current account deficit" for India are a clumsy sham. India has a large gold deficit. Period.

Why does India have a large gold deficit? Why does this worry the Financial Oligarchs to such a great degree that they not only continue to obsess about it in their own, media propaganda machine but feel compelled to lie about the situation? Most important, why do these same oligarchs believe they can fix/solve this gold deficit through selling "paper gold"?

There is only one possible explanation for the large, persistent gold deficit in India: the underpricing of gold versus its own paper currency. Understand that Indians are not only renowned as the biggest consumers of gold, but also the most-shrewd buyers with respect to price.

In short, India's "gold deficit" could be solved tomorrow, with no financial contortions (or fraud) of any kind, simply through a substantial increase in the price of gold (to its fair market value).

In fact, this is the most elementary principle in our (supposedly) free/open markets: Whenever a supply/demand imbalance exists -- in this case gold currency versus paper currency -- price rises for the good in short supply to whatever level is necessary to restore equilibrium in that market.

Note that with all our currencies maintained (i.e. manipulated) within relatively tight ranges to each other (what our governments call "competitive devaluation") that if gold is (and has been) chronically underpriced versus the Indian rupee then it must also be chronically underpriced with respect to all the other variations of these paper currencies.

Presumably the bankers are familiar with the most basic mechanism of free/open markets. Presumably these same individuals actually believe our own markets to be free/open. Yet, when these same individuals continue to fret (and lie about) India's gold deficit the only remedies they can suggest are fraud or manipulation.

The manipulation is already a fait accompli. India's government has jacked up the import duty on gold. Or to put this another way, it has artificially raised the price of gold in order to artificially decrease demand. The only possible way to characterize this action is "market manipulation."

Now the (proposed) fraud. The other "bright idea" being floated by the media/bankers is to sell Indians more (imported) "paper gold" -- lots more. The obvious question is how can you solve a gold deficit by selling "paper gold" unless one is actually only selling paper, but calling it gold?

The fact that some sort of sham is being attempted here is obvious. The only remaining issue is to precisely clarify the nature of that sham. Examining this issue from a technical/legal perspective, there are two ways in which "selling paper gold" could 'solve' a gold deficit.

1) Open fraud: Calling something "paper gold" but selling only paper backed by nothing.

2) Selling "paper gold" that is more or less "backed" by real bullion, but where no actual ownership of gold is being conferred in the sale.

In the slippery world of Big Banks and the Western gold market, in fact, we have seen the bankers engaging in both these forms of behavior.

Many (former) clients of Morgan Stanley ( MS) will still ruefully recall purchasing "paper gold" from those bankers. These clients were sold bullion "accounts" where Morgan Stanley assured them "their gold" was being safely stored by Morgan Stanley on their behalf, and could be claimed/delivered at any time.

However, when some of these clients did actually attempt to take possession of their "gold" they discovered the cupboards were bare. Morgan Stanley was fined heavily for the deception.

Then we have the world of "bullion ETFs," undisputed kings of the paper-gold industry. Here there is no better place to start than with the first and largest of these funds the SPDR Gold Trust ( GLD).

If one wants to understand how bankers can sell paper gold while not actually selling gold, they only need to read the GLD prospectus. This was previously dissected in The Seven Sins of GLD, and a particularly significant technicality was noted.

In the event of "willful default" by the custodian of GLD bullion -- primarily HSBC ( HBC) -- the custodian has no obligation to deliver gold to unit holders even if unit holders demand delivery of what they undoubtedly believe is their gold. What is a willful default? It's where the custodian actually possesses abundant gold to satisfy legal claims against that gold, but simply chooses not to deliver that gold.

Who "owns" GLD gold? HSBC is in possession of the gold. HSBC has ultimate legal/proprietary authority over every ounce of that gold in its possession. When the same entity has both actual possession and ultimate legal/proprietary authority over that bullion, then that is the only entity that can rationally claim to "own" this bullion.

Obviously it is not necessarily true that a gold fund would not/does not convey actual ownership rights to holders in that specific fund (or account or trust). This is one of the reasons why all purchasers in any "financial product" need to scrupulously sift through the proverbial fine print -- and make sure they understand it.

This brings us back to India's gold deficit, and the Western proposal to "solve" this deficit problem through selling Indians lots of imported paper gold. Obviously this paper gold must be imported. If a gold deficit (i.e. shortage) exists inside India, this can't be remedied by selling (domestic) paper gold. That is simply open fraud.

Thus selling imported paper gold into India to "solve" a gold-deficit problem that apparently cannot be rectified through the sale of real, physical bullion implies one and only one reality. What would actually be imported into India to solve the gold deficit would be paper, not gold.

This means any Indian gold consumer pondering the purchase of paper gold from the Indian Chump Fund (or whatever Western bankers choose to call it) would ultimately only have one question to ponder: Would the paper they were buying be like the paper purchased by GLD unit holders or are these bankers about to attempt to pull off another "Morgan Stanley?"

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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