Paper Gold = Paper Tiger

They just couldn’t leave well enough alone. After sitting back and watching the generosity and spirit of Australian’s in adversity, the government has decided to pick our pockets some more with a proposed flood levy.

Don’t they know levees are best installed before the flood?

Who knows whether the donations made around the country are enough to cover anywhere near the cost of damage done? Who knows what the final bill will be after insurance is taken into account?

The government, apparently.

$5.6 billion is the number, of which the one-off levy will contribute $1.8 billion. Those earning between $50,000–100,000 will pay a 0.5 per cent levy while incomes over $100,000 will attract a 1 per cent levy.

Now, we’re sure most people, when pressed, will not mind paying the levy to help out their countrymen who are doing it tougher than they are. From this perspective it’s an easy sell for the government.

And there’s a certain amount of fiscal responsibility here too. The government could just go to the market and borrow the money (which would be easy considering the amount of liquidity floating around these days).

But that would risk even greater tightness in the labour market and put more pressure on interest rates. And if they hadn’t blown so much money on building a school revolution and other assorted schemes then they would have the money they’re looking to take from you now (because they took it from you before).

Instead they have come up with a plan to cut non-essential infrastructure spending and some other programs, and make up the difference with a levy. Labor is paranoid about its ‘economic credentials’ so when confronted with the choice of a new levy or pushing the budget surplus target out a year or so, they opted for the levy.

The problem we have with it is it will have unintended consequences. How do you think the people who have already given generously feel now they will be forced to contribute more?

People instinctively like to make their own decisions and contribute in their own way. Cash donations, work-in-kind, clothes, food, manual labour…whatever it may be. The point is it’s a decision made free from coercion – it comes from the heart.

Now the next time some region or city in Australia experiences a disaster, what will the response be? Instinctively, you will want to contribute. Then you will remember that the government wants to contribute too. But you, the taxpayer, fund the government.

So maybe you’ll wait ‘for the government to do something’. A sense of community and personal generosity is lost.

The community of the taxpayer just doesn’t have the same spirit.

*** We’re not exactly North Africa though, and for that we should be thankful. Tunisia and Egypt are turning revolutionary. Not even Ben Bernanke can save Egypt’s investors class, although we bet he’s working on it…it probably depends on whether J.P Morgan’s exposure is material or not.

Check out Egypt’s stock market crash below. In US dollar terms, it has fallen 25 per cent in a week. With stocks and the currency crashing, it is little wonder that rumours abound of Egypt’s ruling family nicking off with gold.

Apparently, airport authorities ‘intercepted 59 shipments of gold directed for the Netherlands’ BEFORE rioting broke out. Would it surprise you to know that Gamal Mubarak, son of President Hosni, is a banker? Talk about a proactive investment strategy.

Notice these fleeing despots (remember the wife of Tunisia’s president also swiped some gold from the vaults before heading to Saudi Arabia) are taking physical gold? They’re not stashing paper gold in the form of futures or options.

That’s because physical gold has value, paper gold does not. But the paper gold market is many, many times the size of the physical gold market. The amount of ounces of gold traded through options and futures dwarfs the physical availability of the metal.

The gold price is falling at the moment. It’s in correction mode. The gold ignoramuses are out in force, with breathless explanations as to why gold is falling.

Apparently the US economy is on the mend. Inflationary forces means the Fed will soon raise rates, increasing the allure of the greenback.

Markets might make opinions, but that doesn’t mean those opinions are right.

The gold price is falling because all the action is taking place in the paper gold market. Comex February gold options expired on 26 January while the last day of trading for January gold futures was 27 January (last night).

More often than not, there tends to be some pretty explosive action around these times. The fact that most participants are leveraged exaggerates the price movements.

To avoid these speculative and paper driven gyrations, you’re better off owning physical gold…and relaxing. There are increasing signs of physical shortages in both gold and silver. Both metals are in ‘backwardation’ up to six months out, a strong indicator of tightness in the physical market.

By all means be a spectator in the paper gold market, but don’t be a participant. It might force you out of your position, ensuring you miss the best part of the gold bull market, which still awaits us.

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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3 Comments on "Paper Gold = Paper Tiger"

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What a complete crock. Score one for Agora and Greg in terms of confusing, mis-informing and trying to scare the audience. A pure and unadultared piece of science fiction, if ever there was one. Shoulda published it in the US, however. Or, maybe, sent it to Glenn Beck for airing.

Intrigue, suspense, conjecture, NO facts. JP Morgan as Dr. Evil(ooooh!), paper gold as not “real” gold (ooooh!), AND, -the clincher- if YOU buy gold, you are effectively no better than a fleeing Arab potentate who is robbing his country’s treasury.

Really, now.

Get a grip, Mate.

Mick A.

Physical gold and silver is money…always will be..the US dollar is doomed. The criminals at the Federal Reserve, JP Morgan, Goldman Sachs…and the ‘to big to fail banks’…should be in jail for butchering the global financial system while lining their own pockets. Pieces of paper will be worthless when the crash comes…it won’t matter what is written on the paper…it is still only paper.GET PHYSICAL.

I have already donated to the flood and don’t have a problem being taxed again. The tax is still much less than what I was willing to further donate later on. For several years I traveled about 46 return plane trips a year interstate and was taxed even more by John Howard, above and beyond what was recouped for the Ansett collapse. Did the media go on and on and on about it? Did anyone whinge and kick up a fuss when John Howard had a levy for the guns buy back? Stop whinging about being taxed the cost of… Read more »
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