Au, The Base Mental Attitude

So we now have $700 per oz. of Gold. No, not OZ as in “The Wizard”, but “oz.” as in the "ounce", one-twelfth of a pound in the Troy system of weights or one-sixteenth of a pound in the avoirdupois weight system.

One ounce of gold is one "Troy" ounce. Now, so you understand just how much weight one Troy ounce of gold is, it is equal to 460 grains (31.103 grams). Yea, grains, as in a grain of wheat. Twelve “Troy” ounces equals one “Troy” pound.

However, for those Neanderthals who still use this stupid system of measurement, you are saying, “No, 16 ounces is a pound.” Well that is 16 “avoir de pois” (avoirdupois) ounces equal a pound. However, your ounce is equal to only 437.5 grains (28.35 grams) so it measures in at .910 Troy ounce. So, one Troy ounce is almost 10% heavier than one avoirdupois ounce.

Not to be confused, this means one avoirdupois pound is quite a bit heavier than one Troy pound.

Why all the fuss? I am trying to avoid a shoot out here!

I can see it now, Joe Schmoe hurries down the bank vault in New York in his pickup truck to pick up the pound of gold he purchased for $8,400.00 ($700 per ounce) thinking to himself “Damn! That idiot sold me a pound of gold for a steal.” The bank hands over 12 ounces of gold. Joe Schmoe completely wigs out! Not only has his “precious metal” dropped dramatically in value the day he went to pick it up, but now they are trying to short him 4 ounces!

His only recourse is to START A SHOOTEN!

This is what I am t-r-y-i-n-g to avoid with my somewhat elaborate description of the measurement issue here.

Now the real story:

Citigroup believes investors held commodity positions worth more than $120 billion April, with $30 billion in oil and $30 billion in gas. Gold came in third place at $13 billion, while the long position in copper stood at $4 billion, according to Investec Securities.

Why is this the “real story”. Because Joe Shmoe thinks he no longer needs to drive his pickup truck to the bank vault to get his gold. He thinks he can buy a fund that buys the gold and hold the paper. He believes it is the same thing. I have not read the fund’s prospectus but I am guessing the owners of the fund shares DO NOT have a claim on the actual gold held by the fund. In reality they hold only a fraction of the gold and float worthless paper contracts which are “designed to track the price of gold”.

“Its (the GLD ETF) objective is not to provide investors with the opportunity to own gold bullion by investing in the shares of an ETF. Rather, GLD is designed to track the price of gold. That objective is no different than what is accomplished by a gold futures contract or any of the dozens of numerous gold derivatives available these days. More to the point, futures and derivatives are sold even if the seller does not own the underlying gold bullion needed to deliver on its obligation. They are in practice fractional reserve systems, which allow liabilities for gold to far exceed the quantity of gold owned by the seller of that liability.

…the London bullion market operates on a 'trust-me' basis. Rather than move gold bars around when they are bought and sold - which is a costly process - the various participants accept the word of their counter-party that the bar they just bought really exists, and that it is safely stored in the counterparty's vault or the vault of another market participant.

… "Because neither the Trustee nor the Custodian oversees or monitors the activities of sub custodians who may hold the Trust's gold, failure by the sub custodians to exercise due care in the safekeeping of the Trust's gold could result in a loss to the Trust." To be blunt, these disclosures mean that there is no certainty that the gold supposedly owned by GLD really exists.”

The crux of this rant is simple. The people selling every concocted product under the sun to capitalize on the move in commodities prices are all building a house of cards. Don’t believe the hype!

OK, so you get it? Precious metals are expensive to store or move around and to Joe Schmoe, convert to cash. They also compose of no propriety value. They are metals used in some industrial applications and jewelry. If you want to “invest” it is better that you find companies making products that have propriety value, intellectual value, usefulness value, whatever you like. Stay away from Troy.


Quotes by James Turk