London Gold Shortage Exposes the Gold Market’s Musical Chairs Game

Recent events are reinforcing the value and scarcity of physical gold and silver in your own possession compared to "paper" precious metals.

A recurring theme in this newsletter is the importance of holding physical gold and silver rather than relying on “paper” alternatives such as exchange-traded funds, futures, or options (at least for long-term investing as opposed to trading). The reason is simple: the quantity of actual physical precious metals is minuscule compared to the vast amounts of “paper” gold and silver in existence. The recent global scramble for bullion, which I’ve been covering, has only reinforced this point.

As a reminder, there are a staggering 128 ounces of “paper” gold for every single ounce of physical gold:

The situation with silver is even more extreme, with an astonishing 380 ounces of “paper” silver for every single ounce of physical silver:

Exter's Pyramid, created by economist John Exter, provides a powerful visualization of the scarcity of physical gold and silver relative to the vast supply of paper assets—including paper money, bonds, stocks, and derivatives (including gold and silver derivatives). The pyramid categorizes assets by risk and total outstanding value, with the safest and scarcest—physical gold—at the base and the riskiest and most abundant—derivatives—at the top, with various assets in between. This framework reinforces the famous declaration by renowned financier J.P. Morgan: "Gold is money. Everything else is credit."