I have 10 million grams of gold, locked safely away in a secure, guarded vault. I have cleared all regulatory hurdles and I am fully licensed to see the gold to the general public, at spot price + x%, where x is my commission.
Because shipping the gold is risky (the plane could crash, the shipment could get stolen, etc.) and expensive (insurance, security), when you buy gold from me I don’t actually ship you the gold. Instead I send you a receipt (or bond, instrument; whatever the right term is) entitling you to the gold.
Eventually I sell all 10 million grams of gold and I realize, lo and behold, I have all this money from my customers and a vault full of gold. Profit! So I keep selling the gold: eventually there are ten times as many receipts for gold as there is actual gold. I just have to hope that no one actually demands their gold.
Seriously, you deposit a dollar with the bank, they can lend five dollars out to punters, and their worst fear is that their account-holders will all want their money back at the same time, which they won’t be able to manage because so much of it has been lent.
Is it necessarily a scam? If you’re prepared to go buy gold from the open market to meet customer redemptions, you’re not cheating people. The problem is that as the price of gold rises, people are going to want their gold, so that they can sell it. But you wouldn’t have enough cash to buy more gold at spot.
And I don’t see it as the same a banking, since the price of a dollar doesn’t float. (But then again, I am not an economist.)
I was going to say The Producers, but kaylasdad99 beat me to it.
It’s an overselling scam. Overselling isn’t always a scam, as when an airline or hotel takes more bookings than it has spaces, because it knows that some will be cancelled, or with regulated fractional reserve banking. But knowingly selling over 100% of an investment to investors who believe they own what they’ve bought is fraud. I’ve read about an overselling scam with racehorses – selling more than 100% of a horse, or selling a horse to multiple investors simultaneously.
Are you selling gold, meaning that the purchasers become owners of a particular, individually specified bar of gold, which you just keep in custody for them? Or are you just selling receipts which entitle the purchaser to claim a certsin quantity of gold from you, without defining a particular gold bar which is theirs?
If what you do is the former, then it’s a scam. But the latter is more analogous to fractional reserve banking than the former.
The second version sounds more like investing, specifically the futures market. “I will sell you a gold bar today at cost=$xxx, for future delivery. Then I will hope that the cost drops between now and then.”
The difference between the second version and the futures market is that on the futures market, contracts have a specified date when delivery has to occur. In the second version which I describe, there is no such date; the holder of the receipt may claim immediate delivery at any time. This makes the scheme analogous to sight deposits in banking. Of course, the analogy breaks down in another respect: The commodity bought and the price paid are denominated in different units (grams of gold and dollars). In banking, it’s the same unit (dollars). No analogy is perfect in every respect.
Some people are going to redeem. You are going to either send them gold - or money. As soon as you are using customer Ys money or gold to pay customer X - it is a Ponzi scheme. It might not start off as one, but it can become one pretty quickly.
While in some cases it might be legal to do something as far as futures or fractional banking - you would obviously have to be up front about it. The words you use such as “as soon as I sell all” suggests you would be representing they own the actual gold like bullionvault.com. They actually publish a list of what accounts own what bars by serial number - they do not own the vault where it is stored - and publish a list daily of all bars that go in and out of the vault by serial number (I think this is limited to people that own those bars) - and the owner of the vault will not move anything in or out of the vault that isn’t on the list.
Kind reminds me of the currency used on the island of Yap. these are 500 pound stone discs-they are difficult to transport, so they stay in the “central bank”. years ado, some were sent as payment to a neighboring island-the canoes transporting them were sunk-but divers verified that the stones were still on the bottom. Loans and credits were arranged (against the stones on the bottom of the ocean)-the people trusted that they were still there!
I would say the difference between “legitimate banking” and “Ponzi scheme” rests on whether you follow banking regulations to keep necessary reserves, and whether you keep the money available/reinvested. If you do that, you’re a bank. If you don’t keep reserves and the money goes to buy your new yacht, then you’re just a scheme.
