“Although gold and silver are not by nature money, money is by nature gold and silver.”– Karl Marx Repeatedly in this space, commitments have been made to take up certain topics in the near future, but due to technical grounds never before could those be honoured, so why now readers might be wondering. Well, the magic of gold is bewitching, after all! But before moving on it is imperative to point out that the limitations of liability clauses included in last week’s column continue to apply. So any consequences of buying gold are yours and yours alone. Guess what; even The Economist has jumped on the ratings bandwagon with an article last week on Indian government’s efforts to curb import of gold. Interestingly, according to the publication, the Indians have around 20,000 tons in jewellery and private holdings, and further, gold is the country’s second largest import after oil every year. To put this quantity in perspective, as mentioned last week, the total quantity of gold in the world is estimated around 165,000 tons, and the Indian government owns just 557 tons. And while mainstream economic writings from the west might continue to insist that gold will eventually lose its lustre, to venture a guess, the Indians aren’t listening and will probably continue to keep on buying gold. And not only foes, as pointed out last week, friends are buying gold too, and a lot of it. But why do economists and governments repeatedly discourage the common man from buying gold? The response by this duo is either stupidly technical enough to be unintelligible to the masses, or just, well, let’s say, not technical. In any case it’s not worth getting into that debate; simply recall the anomaly pointed out in last week’s article: if gold is going down and is essentially just a commodity, why Central Banks continue to hoard thousands of tons in their vaults, albeit if you believe in conspiracy theories, some of these vaults are empty. “There are about 300 economists in the world who are against gold, and they think that gold is a barbarous relic, and they might be right. Unfortunately, there are three billion inhabitants of the world who believe in gold”, says Janos Fekete. Okay, way more than three billion nowadays! In the days of yore, the biggest nemesis of gold prospectors was fool’s gold — the mineral pyrite. The modern world has invented another form of fool’s gold — paper gold. And while buying real gold is a no-no, buying paper gold is expected of the rational man dreamt up by economists; and on a lighter note, economics rational man exists if and only if all else being constant the Hulk also exists. aper gold is similar to holding stocks in a company; you think you own a part of the company but you don’t. Gold forward and gold futures, the generic forms of paper gold, are both contracts that promise gold delivery at a future date with the former between known counterparties and the latter traded anonymously. So how do they work? Essentially, one of the parties agrees to buy, while the other party agrees to sell an agreed quantity of gold, majority of the contracts being for 100 ounces, a brick, at an agreed future date at an agreed price. And here is the cliché; all this glitter is not gold. In most cases, and to go out on a limb here, almost all cases, these are cash settled with not a single ounce of physical gold getting exchanged. So everybody is buying and selling paper gold on personal bullish or bearish views at any given time, while remaining absolutely clueless about the future; and always remember if some idiot believes that the price will go up, there has to be another idiot who believes that the price will come down. Otherwise obviously there would not be a contract, and only time decides who is the bigger idiot. Laymen like me can only guess the intricacies and complications of what goes on in the futures market; as an example, take oil futures. How could the price of oil have crossed 100 dollars per barrel and then suddenly collapse to under 30 dollars in a very short span of time? How could all the financial geniuses with all their projections and economic models get it so wrong, especially considering that the cost of producing oil for the big producing countries always was, and still is, less than 10 dollars per barrel? In all probability, while the speculators driven by greed were trading oil futures at higher and higher prices, somebody suddenly realised that paper oil was too far detached from real oil, and was even treading beyond the realms of fantasy. While in the real market there was an oil glut, in the paper market there was a huge shortage; after all, prices could only have gone up if everybody felt that there was a supply deficit. Accordingly, suddenly the party came to an end. On the other hand, if you believe the conspiracies, oil prices were made to collapse through the auspices of the ‘masters of the universe’ to teach the Russians a lesson. Is such malicious manipulation of markets even possible? Actually, that would be impossible in the market for real oil, but include paper oil, and everything becomes hazy. The quantum of paper trade in a commodity is multifold times more than the physical trade in that commodity, which means that the former sets the market price and is hugely susceptible to manipulation. So if there are suddenly orders to sell millions of barrels of paper oil, which is possible since those barrels don’t exist and market players don’t care that they don’t as they are in it for the money not buying oil, than the price of oil will obviously fall. And if the sell order is from an influential broker, everybody else will start selling too, and the market will collapse. But there is a proviso: if real oil was in short supply, such a squeeze would be short-lived and suicidal for the perpetrator, since paper oil cannot be cheaper than real oil beyond a very short term. Why? Logically because everyone would buy the paper and ask for delivery! Not the norm obviously, but on the closing date, the buyer can, at least in theory, stand for delivery against a futures contract, like when in the 1980s the Japanese bought 300 tons of paper gold and surprised the market by asking for and taking delivery in gold bars. Barring the occasional volatility, the trend has been that gold prices have been rising since 1900. The annual production of gold is around 2,500 tons, and the annual creation of paper gold is several times more, hundred times more. So if suddenly everybody wanted delivery against paper gold contracts — which would translate into more gold than there exists in this world –take a wild guess what would happen to the price. And in the case of gold, it is in demand because it is scarce. Charles de Gaulle said, “Betting against gold is the same as betting on governments. He who bets on governments and government money bets against 6,000 years of recorded human history.” Once again, we have reached the end of the allotted space, and there is no end to gold. Irrespective of whether there is a gold III, the point is simply, with the Chinese and Russians buying gold, clandestinely even, it would perhaps be in Pakistan government’s interest to keep at least a watchful eye on gold! On an individual level, gold is forever! The writer is a chartered accountant based in Islamabad, and can be reached at syed.bakhtiyarkazmi@gmail.com