GULD & SILVER - En sammanfattning av investering i ädelmetaller

FOFOA: Another gold writer emailed me the other day with a few questions about my take on the apparent disconnect between the gold price action this year and "physical gold's obvious fundamentals." I explained to him how the POG (price of gold) is thoroughly and utterly disconnected from the physical segment of the gold market today. I said that any increase in physical demand (due to physical gold's obvious fundamentals) does not, cannot, drive the price higher today. It does one thing and one thing only, it stresses the current gold market structure.

The reason, I said, is that physical gold's fundamentals have nothing to do with "today's gold market." Today's gold market is "majority-owned" by gold trading as an electronic FOREX currency, which has almost nothing to do with the physical side of the market. That exchange by itself would probably make a good post, but this one is all about his primary follow-up question, which was:

"The area where I’m still hazy is the gold as a FOREX currency."

The following was my reply to his question, which I wrote in great detail with the intention of turning it into a post because it's something I haven't seen any other gold writers even acknowledge, let alone factor into their POG analysis:
[...]

FOFOA: The FOREX market is a $4T per day market including all currencies, and it looks like the "gold trading as a FOREX currency" portion of that market could be $240B at a minimum, possibly higher. That would make "paper gold" a full 6% of all currency trading in the world, including dollars, pounds, yen, euro and the rest of the 178 "currencies" with their own ISO 4217 codes. Think about that.

FOFOA: It is, in fact, traders that are driving the price of gold. It is those who are buying and selling it as a commodity, while the real insiders are buying physical gold as "money" as Another put it. So the outsiders are the massive pool of traders, and the pool of "trading money" on the FOREX is larger than that in any other segment of the "gold" market, so that is the primary driving force in the POG.

This brings me to why gold stays correlated with oil and silver and everything else. It is not, as some people believe, a manipulation run by the USG intentionally stirring up trouble in the Middle East. It is because of something very similar to Mises' Regression Theorem. Correlated commodities are correlated today because they were correlated yesterday. And they were correlated yesterday because they were correlated the day before. As long as they trade in relatively free and open markets, their ratios or correlations will not change quickly.

Why? Because traders expect them to stay correlated due to the Regression Theorem and therefore they (the traders) act on that expectation. We normally call this arbitrage, but it's more of an effect of the Superorganism than it is the individual act of a conscious "arbitrageur".

If, say, silver is heading higher while gold is not, traders will tend to sell silver and buy gold because they see opportunity in the GSR being stressed. And at that point, it in fact becomes a democratic process. If more traders expect the GSR to remain static, then they win. If more expect it to widen, then they win. If more expect it to narrow, then they win. That's where TA comes into play in predicting what the majority of traders will expect at any given time.

So ratios do change slowly over time through this democratic process, but they never change abruptly as in a revaluation which Freegold predicts.

Now think about this in terms of the "gold thesis" of almost every gold bug in the world. They all have it basically right. They all think that gold should be much higher. But how can gold get there when it is chained to all of these other commodities through the regressive expectations of a massive Superorganism of traders that far outnumbers the gold bugs? It can't!

So in this case, all of the publicly traded commodities in the world constitute a weight around gold's neck holding it under water. If the gold bugs try to drive gold higher in isolation, the rest of the trading world will see a profit opportunity in selling gold and buying whatever their favorite correlated commodity is. This will keep gold correlated with all of the commodities it was correlated with yesterday. And if those commodities are not ready to explode in price, then neither will gold. The only way we get $3,500 gold is with $230 oil and $70 silver. And that's not a revaluation. That's either a commodity bull run or inflation.

So when we look at all of these other poor gold writers throwing in the towel, we should feel sad for them because they have the basic thesis correct—that gold should be much higher—but they are missing the bigger picture of how it will get there. And that's where the Freegold lens comes in very handy!

Think back to the Austrians (including Ron Paul) in the early 60s. They fully expected a revaluation of gold, because they clearly saw how Bretton Woods was unsustainable as it was. If the revaluation had come as they expected, it would have been only in gold!!! Very important!! If the US had chosen to revalue its gold reserves to, say, $200/ounce in order to extend Bretton Woods, it would have been only gold that was revalued. Not oil. Not silver. Not copper.

That's because revaluations always happen overnight and by surprise, which doesn't allow the traders (the army of unwitting arbitrageurs) the opportunity to act on their perceived profit opportunity as gold inches up. It takes their power away from them.

So what was expected in 1970 didn't come. Something else did. Likewise today, what is expected by almost every gold bug won't come. Something else will. Again, this is where the Freegold lens comes in very handy.

So that was the "market support" over the last decade. Everything else was rising, so gold went along for the ride. If there was "official support" it was probably a combination of providing physical, cutting deals to keep some big interests out of the public arena, and also possibly buying XAUEUR at key points in time.

Make sense?