The thin paper line

A recent report by Thomson Reuters GFMS revealed the gold market to be one of the most leveraged financial markets in the world.  Monday’s post gave you a little insight into the same for silver.  

They estimate 183,600 t of gold has been produced in all of human history and that in just 2014, around 3 times that was traded in that single year, worth around $22 trillion.  $22 trillion is more than the total trades on the Dow Jones and S&P500 combined!  The vast majority of that was paper trades (Futures and ETFs) where not an ounce of gold was delivered.  To give you an idea of how ‘western’ dominated this paper trade is, they estimate 80% was through the loco London centres.

A key differentiator of the gold market is the difference between total supply (in theory around 180,000t or $7 trillion) and ‘market supply’ – gold actually being available and not locked out of the market (jewellery, CB reserves etc) which has been estimated at around 40,000t or $1.5 trillion.

So consider that all financial assets (shares, bonds etc) total around $294 trillion.  Consider the daily occurrences of another financial peer expressing concern at the central bank induced bubble like nature of these markets.  Finally, consider 2 scenarios when (not if) this bubble starts to pop:  

  1. What if these highly leveraged paper trades in gold ask for delivery of real gold?, and
  2. What if there is a rush of that $294 trillion in paper financial assets into the age old proven safe haven of the little $1.5 trillion physical gold market?

Hint:  the words “epic squeeze” might come to mind… Or pictorially..