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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.
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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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