Executive Summary

• The U.S. may have a lot less gold than widely believed
• Replacing these missing reserves would be extremely costly and disruptive
• Understanding this, the recent market manipulation begins to make sense (in a tradable way)
• Why physical ownership is of paramount importance now as supply is increasingly tenuous

If you have not yet read Part I: Unintended Consequences Are Increasing World Demand for Gold, available free to all readers, please click here to read it first.

Exactly How Much Gold Do We Have?

There's growing concern that a lot of official gold has been leased out into the market and that sooner or later, as happened back in the late 1990s, one or more parties, perhaps bullion banks or a metals exchange, would run into difficulty trying to meet a physical gold delivery commitment.  

For a short video on the mechanics of gold leasing, click here.

If a lot of gold has been leased out, someday it will have to be rebought, and difficulties may emerge if the gold cannot be rebought in sufficient quantities without creating mayhem within the financial system by causing a very large hike in the price of gold.

Important:  The amounts of gold leased by central banks is a very closely guarded secret, and we do not have direct information on them, which means we have to try and back-calculate these amounts by other means.

A recent and thought-provoking study regarding gold leasing was done by Sprott Asset Management in March. After accounting for all known flows of gold into and out of the U.S. over the past 22 years, the Sprott team arrived at a figure of nearly 4,500 tonnes of gold that cannot be accounted for.

Here's the summary flow chart:

(Source) 

In short, because gold is not consumed and never misplaced, there has to be a balance between gold supply and demand. It cannot be printed out of thin air, and it is this inconvenient fact that really matters the most here.

One caveat:  Because of the explosive nature of the above findings, Adam and I sought out an opposing view.