Monday, April 15, 2013

"What Happened to Gold"

I woke up this morning to a text from my father.  My father, a former huge lefty, now is starting to notice what he was told doesn't add up to what is transpiring in the real world.  Matter of fact, I get the impression he almost feels violated for being lied to all these years and is even more conservative and angry than I am.  Regardless, since his economic epiphany he now approaches me with questions about the economy, politics and the like, the most recent one in his text was "what happened to gold."

I speculated at first. 

Market bumps. 

Margin calls.

The US dollar is gaining strength against other "less sucky" currencies and thus in terms of "relative" currencies the dollar is increasing.  But then something struck me.

"Wait, could it be that PAPER gold is going down while phyiscal gold isn't?"

With ABN Amro failing to deliver physical gold recently, that event could spook the markets, as it rightly should.  However, it would have an effect on paper gold, not physical gold, if anything increasing the price of physical gold at the expense of paper.  But since there is no separate quoting system between paper and physical gold, you would not see this difference or "premium" between the two.

Enter in my coin dealer. 

Last week I stopped in to see if there was a way to calculate a market "physical price" and he essentially said, "no, but."

The "but" being is that the dealer (who has to make a profit on his coins) is charged a premium by his supplier. And premiums HAVE BEEN GOING UP RECENTLY beyond the spot price.  This is the closest we can get to calculating the premium, the price suppliers are charging retailers, in excess of the spot price, because they only deal in physical gold. 

The moral of the story is to remember why you invest in gold or silver - as an insurance policy.  And your precious metals investments do you no good when they are merely claims on physical gold...

to be mined in the future...

in a mine in Australia...

that will be held in proxy by a gold ETF...

and the economy hits the fan.

In the future as unscrupulous banks and investment firms aim to profit off of the metals market, especially with their fractional reserve mentality, you can expect only a fraction of the paper gold to be backed by physical gold and the two markets to diverge significantly in the future.

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