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…


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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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2 Comments on "When the Paper Gold Market Blows Up"

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I think the US gold price action is weaker and will be subject to another hit soon along with the AUD. The AUD gold should be buffered to a degree by the AUD weakness. Trading action in AUD gold has looked stronger than USD gold since the support levels have been tested.
Just my own thoughts here and not trading advice.


Paper Gold is ‘a Paper IOU’ backed by nothing other than a strangers promise. A Stranger no one has met. It is an elusion of wealth.
That is why I prefer the comfort of reality. On Greg’s word, I buy the physical thing and keep it in a city vault…. no bank thankyou.
“Greg- when the system collapses as Australia is asleep, look forward to your :Told you so ….for years matey.”

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