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Old 01-31-2013, 08:17 AM   #1
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Lightbulb Paper markets vs physical bullion markets - why spot isn't a good guard dog

He doesn't even delve into the MF Global, PFG Best/Knight issues:
Originally Posted by Gonzalo Lira :
We all know and understand what’s going on with the global economies and the fiat currency system: The global overindebtedness is forcing central banks around the world to devalue their currencies, so as to make the debt burden less onerous.

Many people—and I happen to be one of them—believe that this policy will lead to an inflationary crisis, which will spiral into an uncontrollable hyperinflation event. The key assumption in this scenario is that the only cure for runaway inflation—raising interest rates higher, and hard, like Paul Volcker did in ’79—will never be implemented by the world’s central banks, because they believe (with some justification) that higher rates will shove the global economies into a deflationary death spiral.

Thus a spike in inflation will bleed into hyperinflation, and by the time the central banks wake up and raise interest rates to stop it, it’ll be too late.

In such a case, gold would be the perfect hedge against inflation and eventual hyperinflation. In fact, even better than a hedge, gold would be the perfect investment, an investment that would outpace all other asset classes, because market participants would anticipate this inflation scenario, and thus pile into gold so fast and in such numbers that gold prices would spike parabolically, far outpacing the fiat currency devaluation.

Since everyone with any sense realizes that this is the endgame of the current race to the bottom, gold ought to be rising dramatically.

But that is not happening. Gold rose steady and strong from 2000 through September 2011—but since then it’s been drifting jaggedly.

So why would gold—which is an actual, physical commodity—be acting like credit default swaps did right before the 2008 crisis?

For the same reason: Gold buyers don’t trust the counterparties selling gold.

Because after all, most gold markets are paper markets, not bullion markets.
There is only one market in gold, not two. There is no way to segregate gold bullion holders from gold certificate holders, and thus create two markets, one for the real thing, one for the paper thing.

Thus the current spot price of gold is reflecting market uncertainty as to who has actual gold, and who has worthless paper certificates of gold.
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Old 01-31-2013, 09:24 AM   #2
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I like this guy but he kind of misses an important issue. Spot is a paper number which ignores premiums paid, insurance and delivery costs. An ounce of silver [an Eagle specifically] is around forty bucks when all is considered. The spot market is a convoluted and neurotic mess, driven by computerized trading using some formula or another. Look at today's drop for instance. There is no fundamental reason for silver to have risen like it did yesterday, just as there is no reason for today's drop. Back in the day, a nickel rise or fall in silver was a busy day. Now, a dollar swing intraday is just another day of trades. The extreme volatility [I believe] is solely a result of the exponential increase in what I call invisible silver, paper that purports to have hard metal behind it, but in reality has only fractions of an ounce per paper ounce.

When industry recognizes paper for what it is, inherently worthless, then metals can trade on a foundation rather than on a fantasy [spot price].
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Old 01-31-2013, 11:22 AM   #3
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...I for one, cannot imagine, hard as I might, what is the purpose/rationale of holding a "paper silver/gold" - other than speculation/hedging. But it only works for as long, as the market participants want to believe in paper claims, i.e., it is utterly worthless, if we realize that markets are broken, there is no law enforced, trust is gone, and counterparty risk is unacceptable. Someone explain to me, what is the difference between paper silver/gold in such a case, and, say, Grim brothers' tales book?
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