When Banks, Governments and Major Funds Buy Gold "Off Market"

Listen to episode 6 of “À l'Orée de l'Éco” (in French), our podcast presented by Tom Benoit:

Many banks, governments and large funds are buying gold on a massive scale via perfectly legal but off-market channels. This is a growing trend, mainly in the Middle East and Asia, which makes the measurement of gold's value more complex than it first appears.

The less sacralized private property is, the more skewed the storage of value becomes. Let's start from a simple principle: the more the years go by, the less official prices, whatever they may be, will reflect the reality of the markets. What is a market? A junction between a mass of supply and demand, which ultimately defines prices that no one should be able to deny.

As long as policies are reasonable, as long as companies make sense... markets keep pace. Conversely, parallel markets end up reflecting the authenticity of prices.

It would take too long to go into detail here on other parameters that will be crucial in the future, such as the value of legality. Here again, as long as legality was synonymous with relative logic, there were no major impediments; when many rules and laws become illogical, a corresponding proportion of products and services see their official values fluctuate – but this is done here according to data contrary to reason.

For our subject, gold, what really makes it valuable? And to whom? Is it its official price? More like its official price, in fact – or, rather, the fact that everyone wants and buys it. I say everyone, not out of familiarity, but simply because it's everyone.

In this sense, to define the current value of gold, and not its price, we need to include those gigantic quantities of gold that are part of what we call off-market transactions.

In fact, there are official transactions that determine the price of gold, which is also very official: those that take place on the COMEX; ETF purchases and sales that lead funds to buy or sell physical gold to balance their positions... Then, in parallel, there are all the private exchanges carried out between two parties. Large investors, of course, but above all, institutional investors; states that the West too often forgets about, big banks, funds, etc. 

I'm not talking about transactions carried out in London with players like HSBC and the Bank of Switzerland. No, I'm talking about a transaction between an African bank and a Chinese institution that would make agreements in the United Arab Emirates. It happens! More than you'd think – and in significant quantities. So I want to tell you that, today, there are transactions involving colossal amounts that do not cause the gold price to fluctuate upwards, as it should.

All other things being equal, I deduce that the value of gold is proportionately undervalued. Don't forget that in the literary sense, value is akin to courage, and that courage is that magnificent act of resistance that consists in acting in spite of troubles and difficulties.

The value of an asset, when the motivations for acquiring it are not immediately speculative, must always be established in relation to its capacity to withstand the maximum economic collapses that could lead to its erosion. The asset must therefore be in demand, its ownership must be legal, its use must make sense or be useful... You will find that no asset undeniably and simultaneously combines all these virtues. Who could guarantee that private gold ownership could not be made illegal in certain countries? No one could! On the other hand, it is certain that, in certain cases, undeclared gold can remain in circulation.

My idea is not to encourage people to bury gold in their own backyards, but rather to make it clear that, whatever the regulations, gold can be taken out of official channels, and that its value is not simply decreed by institutions. 

In one situation, a Hong Kong bank would hold the equivalent of $100 million in US bonds in its vaults; in another, the same bank would hold the equivalent of $100 million in gold. The equation is simple: whatever decisions the USA might take, in the second case, the assets held by the bank would not depreciate.

Gold is once again becoming the only true measure of value – and this is happening more through transfers on parallel markets than on official ones.

It's important to understand that, having sought to dismantle the Nations, successive Western governments have also begun to annihilate the value of legal tender. We are heading for a transitive period, during which one of the major challenges will be to segment a multiple and relative quantity of parameters. There will still be illegitimate but legal values, logical but illegal values; it will sometimes be difficult to place the cursor. 

In the end, only one parameter remains, the one that makes sense. Look, for example, at how stock market fluctuations following misinterpretations systematically end up being offset. Reality is catching up with all markets - and the only market that will be worth anything tomorrow is that of demand.