Why you should buy physical gold, not paper gold.

The quick answer to why you should own physical gold is that you can’t trust the banks or your government.

Eric Sprout, the billionaire precious metals trader, recently conducted an audit of how much gold the U.S. government has been buying and selling over the last few decades.

Here is his conclusion:

“We used this framework to analyze supply and demand in the US going all the way back to 1991, which is as far back as the FT900 documents go. Over the span of 22 years, the total amount of gold that the US has exported – above and beyond its supply capability – is almost 4,500 tonnes! A truly stunning figure.”

And if the U.S. has exported thousands of tons of gold beyond what it has brought in, where has that gold come from? It has almost certainly comes from its reserves at places like Fort Knox, which haven’t been fully audited for decades.

But the government continues to behave as if all that gold were still at Fort Knox. And the market continues to trade as if all that gold was still there.

The banks are no better. In 2007, Morgan Stanley paid out $4.4 million to settle a class-action lawsuit by its clients after the bank charged them to buy and “store” precious metals for them, but neither bought or stored the metals.

In other words, their clients thought they owned physical gold in the bank’s vaults. But they didn’t. It was just paper gold…and they were being charged storage fees!

And…according to Egon von Greyerz of Matterhorn Asset Management, Swiss banks are trading physical gold bullion which is being held in special “allocated” accounts for its customers. That means, if you have allocated gold with them…gold that is yours…they are trading your gold as if they owned it.

In his own words:

“This confirms what I’ve always thought. Not only should you not have gold in banks or even unallocated gold, but even allocated gold. It seems that some banks don’t even possess that. So the risk of having gold in the banking system is major.”

Are you getting the picture here?

First, you need to own physical gold, not some “promise” of gold, or paper gold.

Second, you need to understand that if the gold market is trading under the belief that the supply of gold bullion is thousands of tons greater than it really is, then the price of gold is hugely under-valued.

In other words, while the price of gold is lower than it has been for a long time, you should buy and hold as much physical gold as you can.

About the author: DH Kenrick is a student of world economics and a committed gold enthusiast. Follow me on Google+

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