When the Paper Gold Market Blows Up

Yesterday we were talking about the gold market in terms of paper gold. The volume of gold paper sloshing around the market is huge compared to the volume of physical gold that underpins it. Price discovery happens in the paper market.

Right now, the most important technical level for the paper gold traders is around US$1,340 to US$1,350. If it can punch above that level in the next week or so, it should head much higher in short order, as it will trigger a lot of short covering.

The good news for the bulls is that gold currently trades just above its 50-day moving average, so its momentum is good. The bad news is that if it can’t sustain a breach above US$1,340, then it will head back down through the 50-day moving average and resume its downtrend.

The other bad news for the bulls is that while gold is a monetary metal, with characteristics like no other commodity, it’s effectively trading just like other commodities. Gold’s recent rally comes on the back of short-covering and bullishness in other commodity markets, largely due to China’s latest mini-stimulus, which will at best buy their economy a few more months of decent growth.

So despite gold being nothing like other industrial commodities due to the overwhelming amount of paper gold out there, it trades in lock step with them as these paper traders try to arbitrage all sorts of different ‘pair trades’.

Only when the paper gold market blows up (due to the physical reserve base disappearing into private and very large and strong hands) will gold display its true value and price as a monetary metal.

Whether a blow up means the paper price of gold collapses (while the value of physical screams higher)  or shoots much, much higher (forcing the banking system to recognise it cannot make good on delivering physical metal against all the paper claims) we have no idea.

What we do know is that the current system is untenable. It creates ‘market-based paper’ to absorb the central bank created paper which helps to keep official price inflation low…while turning asset markets into casinos.

It’s a top system, if you’re at the top of it…


Greg Canavan+
for Markets and Money


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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

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