Jesse’s Café Américain: This Is the Gold Bull Market

Jesse always has the most beautiful charts. This one is very similar to my weekly chart that I publish and shows the big picture. Yesterday my father asked me if it was a good time to buy gold. My response is that it nearly always a great time to buy gold, both from a technical perspective, as this chart implies, and also from a fundamental perspective. I no longer trade gold, therefore my view as someone who subscribes to the idea of Freegold is that it makes little difference at what price you attain your gold at as long as it is physical gold. The reason is that today we are being offered the deal of the century where physical gold is priced at the same level as paper gold. You can actually acquire physical gold and hold it in your hand for the same price as gold that is promised to you, and simultaneously other people around the world.

The fact is that paper gold, or gold that resides on a ledger sheet, has a supply that is many multiples of the actual supply of physical gold. The price of physical gold should be many multiples higher than that of paper gold due to limited supply. In fact where physical gold supply is strictly limited and cannot grow more than a couple of percentage points per year, paper gold supply representing a claim to physical gold has no limit whatsoever and is only constrained by the level of confidence that exists as to the ability or willingness of the claims counter-parties to deliver. If trust and confidence is high, people are satisfied with a paper claim to gold and will trade them as if they were real gold. However, as in a traditional bank run when confidence is shaken, the holders of claims would rather hold the real thing in their hand instead of an IOU. When all the claimants come asking for their gold they find a particularly nasty thing has happened, the sellers of claims sold more than they can back with physical gold!

Long before we ever have a run on the Comex or a bullion bank, the market will smell something funny and will gravitate to physical gold. First utilizing pooled allocated gold warehouses such as Sprott’s Physical Gold Trust (PHYS) and finally by opting for physical gold in hand such as bullion bars and bullion coins. The capital that has gone into paper Ponzi schemes like gold ETFs (GLD) and the futures market (Comex) will go into physical gold where it will put additional pressure on limited supplies. The effect of this capital moving away from paper gold to physical gold will serve to lower the price of paper gold and increase the price of physical gold.

Since the physical gold price is determined by the paper price when the futures market is open, the initial move in the physical price will be down even though capital is flowing to physical. This will not last long because as price lowers in physical, the flow of physical increases. In short order there will be shortages of physical gold as value buyers increase their acquisitions. Simultaneously volume will be drying up in the paper futures market as holders of underwater long positions bail out. Buyers of size however will be tempted to keep their positions and actually force delivery of real gold at contract expiration. This will put overwhelming stress on the Comex to source and acquire physical gold to facilitate delivery. As the Comex attempts to buy the gold on the spot market, demand will quickly overwhelm available supply and price will soar. When any whiff of fear from the Comex hits the street, there will be a run on its very limited stock of physical gold. They will be forced to terminate settlement in real metal. That will be the end of the gold futures market and the end of paper gold.

All of the capital that seeks safety in gold will now have only one place to go, physical gold. The price will go ballistic as that capital crams itself into a supply that is anywhere from 1/10 to 1/100 of the supply of paper gold. Fortunately, gold is infinitely divisible and can handle any price that it is assigned. Gold will be multiples higher than the current paper gold price, what does $50, $100, or $500 and ounce mean in the grand scheme of things? The risk in this market is not being in it, all in.

19 October 2011

This Is the Gold Bull Market

Here is something from my ‘private stock.’

This is the picture of a quiet flight to quality.

If you must trade, buy strength and sell weakness, and not the other way around when driven by greed and fear.

But for almost everyone, it is better to see the trend and ride its crest, perhaps hedging a little at the extremes, while the fundamentals that created it are intact.

What are the fundamentals driving this phenomenon?  Keep Jesse’s Paradox in mind.

And if you have to rely on something wonkish,  with the trappings of an economic theory, then an eye to negative interest rates on the ten year bond is not bad, provided that you can find a measure of inflation that has not been fouled by official corruption.

Posted by Jesse at 10:23 AM

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