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.

17 comments:

Cogitans Iuvenis said...

That's some pretty important news there. It looks like a lot of speculators are going to get burned.

Ras All Ghul said...

This would explain why there have been large withdrawals of gold lately.

Dreamer said...

I'll be honest Captain. And I hope you'll read this. My parents took a good chunk of savings and put it into physical gold.

Hearing how gold is now under 1,400 is more than alarming. It means my parents is out of thousands and those thousands still means tons of service and goods and etc. Of course, if physical is not affected and just paper or a real bounce-back. But that still means I need to check the dealers and look around how much I can physically exchange. Else, all the arguments that it is just paper value and everything doesn't matter when one is out of a lot of usefulness it could have been instead.

At moments this like this, it does make it seem the conventional information is right rather than the blog circles information here.

Captain Capitalism said...

Dreamer,

If they took out their savings for LONG TERM INSURANCE INVESTMENT PURPOSES, then they are fine.

If they took out a CRIPPLING level of their savings to speculate on gold, then they will have to suffer the ups and downs.

Precious metals are an INSURANCE investment. You don't need a "ton" but you do need some.

Karl said...

I think you are right, Comrade Captain.

Margin calls and stop orders are accelerating the effect. Combined with a USD that suddenly 'sucks less' in comparison to others because those countries chose Obama's policies 20 years before Obama started the same stupidity here.

I'd rather own gold today than trust Corzine, or any other Democrat, with my money.

Anonymous said...

http://www.theospark.net/2013/04/its-what-you-dont-see-that-gets-youfrom.html

Anonymous said...

http://www.theospark.net/2013/04/rode-six-hundredfrom-rico.html
I don't know, but he seems to know something...
D

Frank said...

I've got physical gold locked up here, so I'm glad to see it's not the physical gold that's losing value, as I feel rather stupid sitting on this gold instead of having it in a portfolio.

I'm still ahead because I bought it very early on, but I am annoyed to see the devaluation lately. If I had known I could have sold at the high point, and be buying back when gold hits a clear support level so I'd have even more gold.

Financial markets, God bless anyone who knows how to work it for all its neurotic behavior.

John Apostate said...

Cappy, do you have any advice for choosing a coin dealer? Seems like my area is flooded with them.

Anonymous said...

I have some physical gold. To me it is an insurance and that means that I am in fact hoping to loose money on this investment, because if I earn money on my gold I will loose money on all my other assets and society will be in a havoc.

Eric Mueller said...

I'm convinced most investors operate about on the level of a "cargo cult". They don't really understand what they're doing or why they're doing it. All they really have is one data point that people are "getting rich" doing this thing, therefore if I do this, I too will "get rich".

It happens with stock. How many people do you know who think the entire point to stock (or real estate, for that matter), is to buy low then flip it for a higher price as soon as possible? That's all they seem to understand about investment. They don't think about long term holding benefits, like stock dividends or rental income. All they see is "buy low, sell high" (within 15 minutes if possible).

Then when prices drop, they panic and sell off without thinking. I'm sure this kind of herd mentality is easier to manipulate than we can imagine. So people "buy gold" to "keep money safe", then as soon as the price glitches, they freak out and sell off, losing money in the process.

It's a cargo cult herd mentality.

James Wolfe said...

Gold and silver are not quite the same as other commodities like copper. While all of them have industrial uses and the demand can rise and fall based on the strength of the economy, gold and silver, by their scarcity also have value as money. You can't print more gold.

What is happening now is speculators who made bad bets, either in commodities or stocks or even bonds, are now having to sell their positions in gold and silver to cover their bad bets. In futures trading on commodities you only have to put a fraction down to secure a price, you leverage as much as 20:1. If you bet wrong you have to put more to hold that position or sell. If you don't have more money to put down or you think your bet is a wash, you dump that position. Hundreds of tons of leveraged paper gold was dumped, more than the amount of actual gold at COMEX. This triggered the panic selling of gold futures and the price plummeted. Real gold price is based on paper gold. Paper gold is nearly worthless at the moment. Speculators are getting out of paper gold, while investors are buying up physical gold faster than it can get to market. If you are investing in gold or silver it's not how much you paid at the time but how much you have when you need it.

I'm not one who has a lot of money to invest so gold is still mostly out of my range, but silver is also a good investment and you can stack a lot more of it for fewer dollars.

aerodawg said...

Guys at work were pounding on me about my advocating gold as a part of a portfolio. They don't get that it's only a piece of the puzzle and one that plays to the long game, not the daily or even monthly swings...

Son of Brock Landers said...

Premiums have gone up. My dealer still has plenty of 1 oz pieces, and premiums have increased. I try to pick up 1/4 oz pieces for quick pick ups. Those are tight at my dealer right now so they recommended me to Edward VII sovereigns that are .23 oz. Gold is a long play and an insurance holding. It is an indictment of the leadership of the West than people consider relying on it.

Robert of Ottawa said...

Not sure, Cappy. I too am puzzled by gold - where is all the money going? Into US debt?

Are people so foolish?

My problem is I don't fully understand "paper gold", although apparently government bullion dealers are leasing out gold and keeping it on their books, so they effectively double the amount of gold available. Is this true?

Gold producer shares are down too; but then, as they don't issue a large dividend in general, why buy them?

Why would anyone buy "paper gold" whatever that is. I want real gold, under my bed, along with emeralds and other precious stones and metals.

Robert of Ottawa said...

Dreamer,

If your parents are negative in physical gold right now, then tell them not to sell it.

Robert of Ottawa said...

Eric Mueller,

Many people can't even get the "Buy low, Sell high" idea. They only now a stock is good once it has risen, and then panic and sell when the price drops.

Suckers.