Gold And The Oil Majors Revisited

Posted 28 Nov 2009

The 'gold bugs' assert that at all times and in all circumstances gold remains money.  For some irrational reason the 'paper bugs' cling to their increasingly worthless colored coupons asserting their importance as currency.

The Great Credit Contraction has begun and in the macro sense there is no practical solution to the end of the current worldwide monetary system.  But in the micro sense the individuals and companies that will survive, thrive and prosper will be those that are liquid.  It will be those who can make payroll.


On May 20, 1999, Alan Greenspan testified before Congress, “Gold is always accepted and is the ultimate means of payment and is perceived to be an element of stability in the currency and in the ultimate value of the currency and that historically has always been the reason why governments hold gold.”

For these reasons gold, silver and platinum belong in the cash portion of the balance sheet.  The precious metals are the ultimate form of currency.  Unlike their comptition, the colored coupons, the precious metals can never become worthless, are always accepted and are the ultimate means of payment.

The 'gold bugs' will always be able to purchase something while the 'paper bugs', if they have physical notes and not mere digits in a database, are eventually left with an instrument that only has a single use after defecation.  What intrinsic value!


During the 1990’s Mr. Rubin had devised the gold leasing scheme with the intent being elucidated by Dr. Greenspan’s testimony in 1998, “Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.”

GATA’s alleged central bank gold price suppression scheme may include the COMEX’s participation.  Mr. Robert Landis, a graduate of Princeton University, Harvard Law School and member of the New York Bar, has asserted that “Any rational person who continues to dispute the existence of the rig after exposure to the evidence is either in denial or is complicit.”

GATA alleges that the central banks have less than half the physical gold claimed.  The central banks carry gold in the vault and gold out on loan as the same line item.  In effect, they report cash and accounts receivables as the same thing.  Ever tried making payroll with an accounts receivable?


It seems some countries are getting a little nervous and demanding their phsyical gold.  For example, the IMF by-law F-1 states, "Gold depositories of the Fund shall be established in the United States, the United Kingdom, France, and India."

With the lack of transparency it makes one wonder whether India's recent 'purchase' of 200 tons of gold from the International Monetary Fund was a bona-fide purchase or the taking of physical possession of 'paper gold' they had previously purchase on the open market and whether this was done of the IMF's free-will or through coercion because of the ancient rule that possession is 9/10th's of the law?  Perhaps this is why India, not China, got to purchase this large block of bullion.

But such is just speculation, like the tungsten rumors, based on circumstantial research and there are no real credible and verifiable sources that I have been able to find but it does highlight the issue:  actual physical gold is tremendously limited relative to the amount of colored coupons.


Nearly a year ago on 16 December 2008 in Oil Majors Should Just Buy Real Gold I wrote:

Combined these five companies [Exxon (XOM), Chevron (CVX), Total (TOT), British Petroleum (BP), Conoco Phillips (COP)] had current assets exceeding $300B. ... The entire eligible COMEX stockpile represents an immaterial 0.36% of the current assets of the five oil majors.  The oil majors could drain the COMEX with a rounding error.  It would be 14% of what Exxon Mobil was spending per quarter buying back stock.  Why buy back stock when oil is so cheap compared to gold?  Why not just buy physical gold and truck it away?

What has happened since then?

At the end of Q3 2009 Exxon (XOM) had $57.3B of current assets; Chevron (CVX) had $35.5B in current assets with $7.6B cash on hand; Total (TOT) had $48.4B in current assets and $13.8B cash on hand; British Petroleum (BP) had $66.7B in current assets and the runt,ConocoPhillips (COP), still possessed $22.3B in current assets.  Combined these five companies had current assets exceeding $250B and cash on hand exceeding $50B.

While the risk of a potential COMEX failure to deliver gold is a possibility for brevity I will not explain the mechanics nor current state of the warehouse.

The approximate two million ounces of registered gold in the COMEX inventory represents about 62 metric tons or a mere $2.3B.  For compaision, Bloomberg reported on 17 November 2009 that The Bank of Mauritius bought 2 metric tons for about $71.7 million.  Mauritius had a 2008 GDP of $8.65B or about .5% of the 2008 total revenue of the five oil majors.

On my article ‘How the Treasury Bubble Will Burst and Why‘ at Seeking Alpha I received a comment from Alan Brochstein, CFA and fellow Seeking Alpha Gold Standard Contributor who provides analytical services for hire. He said, “Trace, sorry, but this makes absolutely no sense…” This is not surprising considering his 8 Dec 2008 article ‘Own Gold? Time to Fold‘ where he stated, “Gold remains a sucker’s bet…”

On 8 December 2008 gold closed at $772.25 and by 27 November 2009 gold closed at $1,177, a 52.4% gain.  Not bad for a different currency; it makes one consider whether the FRN$ is in hyperinflation.


Platinum, a tangible asset, is incredibly safe and has now, with GoldMoney, gotten more liquid.  There is a miniscule amount of platinum compared to the illusions in the liquidity pyramid.  For example, the entire annual worldwide platinum production is valued at about $8B compared to the five oil major's $50B of cash.

While no one really knows what the total above ground silver stock is; Ted Butler, a noted silver analyst, suggests there are about one billion ounces which is about $20B.


In 2008 the five oil majors repurchased about $54.2B of stock.  Exxon with $35.4B, Chevron with $6.8B, Total with $1.3B, British Petroleum with $2.6 and Conoco Phillips with $8.1B.  The average price of gold in 2009 through October was about $941.

So let me get this right. Instead of holding increasingly worthless colored coupons the oil majors could have diversified their currency holdings to ensure they could make payroll and with about a third of what was spent on the share repurchases could have bought the entire annual production of platinum and the entire above ground stockpile of silver.  Or assuming the average price of gold they could have bought about 1,791 metric tons of gold.

The 1,791 metric tons of gold would make the five oil majors the fifth largest holder behind the United States, Germany, the IMF and France, but who knows how much physical gold the Western central banks really have, and have about twice the 1,054 tons of the sixth place China.

At the current price of gold the $54.2B of stock repurchases from five measly companies will only yield about 1,432 metric tons of gold or about 359 less tons than the hypothetical.  For comparison Venezuela is the 16th largest holder with 363.9 tons and the United Kingdom is the 17th largest holder with 310.3 tons.

This is one reason the 'new gold monetarists' should be taken seriously.  Even on CNBC, a starving vampire squid (Neilsen ratings are down 52% year over year) which hates gold like werewolves hate silver, had a serious discussion about the 'new gold monetarists' which included the quote, "That is what the new gold monetarists are saying.  If you take all the world's GDP and divide it by the amount of gold that is above ground that is available then you get a price that is somewhere between $11,000 per ounce and all the way up to $50,000."


Too many people have too much faith in worthless irredeemable colored coupons and their companion digital counterparts.  The Federal Reserve and other central banks are failing with quantitative easing.  And after all, the worldwide monetary system is just a confidence game and when confidence is lost it does not so much collapse as evaporate.  For example, auction rate securities, mortgage backed securities, Bear Stearns, Lehman Brothers, AIG, the Kazakhstan tenge, the drooping Vietnam dong, the British Pound or the FRN$ (more than 50% loss in a year is pretty bad!).

The current worldwide monetary system is failing.  Why will another fiat system not replace it?  The market will not permit such irrational behavior.  The monetary authorities are on the defensive. They have lost the confidence of the market and are unable to regain it with more secrecy, more bailouts and more of the same.  

The market is forcing them to do what everyone in the past has had to do.  They are being forced to show the market the money.  Real money and not some colored coupon currency.  Money that is a real and tangible asset that can be put in someone's hand or trucked away to a different vault.

Sure, what the new gold monetarists say seems incredible and may lead some financial professionals to declare 'this makes absolutely no sense'.  But this population of financial professionals has been systematically miseducated to despise precious metals and be 'paper bugs'.  

But as confidence continues evaporating those same professionals will demand that precious metals return to the center of financial life.  On the macro scene society will learn some very real and very hard lessons.  But on the micro scene there are tremendous opportunities to benefiit from the largest transfer of wealth the world has ever experienced.

The future is clear.  Gold will return to its historic role as the center of gravity for the Western and worldwide monetary system.  Sure, the Establishment, costumed officials and financial professionals do not welcome the change.  But it is not their choice because the market will force their hand and the market is more powerful than all of them combined.

After all, it will be the companies and governments with the monetary metals in the cash portion of their balance sheet that will be able to make payroll and those without will simply evaporate.  The number one killer of businesses is cash-flow.  Remember the first rule of panic:  do it first!

DISCLOSURES: Long physical physical goldsilverplatinum and no position the problematic SLV or GLD ETFs or XOM, CVX, TOT, BP or COP.