Gold buying panic: Will the run on the shiny precious metal lead to the next financial crisis?

There have always been discussions about how gold should actually be classified. James Rickards, economist and investment banker with many years of experience on Wall Street, has also taken up this topic in his book “The Way to Corruption”. It is not a commodity. Although gold is traded like one at certain times and then reacts to inflation, deflation etc. in the same way, it is not one, according to Focus. “Gold is money,” says Rickards. But the central banks all over the world disguised the true role of the shiny precious metal, the expert explains.

 

Gold in circulation declines

Rickards warns that the current situation in the physical gold market is extremely tense – there is less and less gold. There is, however, an important difference between the outstanding stock and the total stock. While the total inventory describes all the physical gold available in the world, the outstanding inventory represents the gold available for immediate delivery. And this stock is declining. One reason for this is the Chinese government, which is buying more and more gold. There, the precious metal disappears into underground steel chambers and is therefore no longer available to the market for the time being, which means that the stock in circulation becomes smaller, explains Rickards in his book. A similar thing happens when Germany or the Netherlands retrieves their physical gold, which is kept in the Federal Reserve Bank of New York. This gold is then stored in safes. Although it could actually be leased out, since there is no well-developed leasing market either in Germany or in the Netherlands, the return of gold to Europe further reduces the outstanding stock. But that is not all, there are many problems of this kind. The economist also warns that the increasing storage of gold by private providers outside the banking system, the illegal replacement of gold bars or counterfeits are trends that are accelerating the decline in outstanding gold. “The difference between outstanding stock and total stock has a direct negative impact on the risk that a lack of delivery after a purchase of physical gold could grow into a tangible gold panic,” quotes Focus from the book Rickards.

 

Is the market heading for a supply shortfall?

“Gold deliveries are increasingly experiencing bottlenecks, delays and fraud. For the time being, market participants are ignoring such disruptions because they are happy to get their hands on gold at all, albeit sometimes somewhat belatedly. The fact that such shortages in the physical gold market are becoming more and more visible to insiders is heralding a phase transition,” continues the investment banker. Supply bottlenecks are therefore becoming more and more probable, and the market is ultimately heading for a supply shortfall that would have far-reaching consequences. First, investors with a paper claim to gold would demand physical gold. As a result, Rickards fears that the price of gold will shoot up. Intermediaries would now try to buy the increasingly scarce physical gold in order to carry out promised deliveries. And even institutions that were not previously interested in the shiny precious metal would suddenly include gold in their portfolios, further exacerbating price pressures. The end result would be fatal: “Gold exchanges will cease trading; contracts will be dissolved and settled in dollars at the final closing price; counterparties will be excluded from future price rises and access to physical gold. And all those who do not yet have gold will no longer be able to get it at all – for no money in the world,” predicts Rickards in “The Road to Decay”.

 

Trigger for the next financial crisis?

But the consequences are even more far-reaching – not only the gold trade will be affected, fears the economist. “The financial system will be lucky if a gold panic is limited to gold and does not spread to the capital markets. But that is unlikely – financial hardships are contagious. And even if we succeed in temporarily curbing a gold panic, that will not mean that the capital markets are stable,” t