A World with Two Gold Prices

Discussion in 'Gold' started by JulieW, Dec 10, 2019.

  1. JulieW

    JulieW Well-Known Member Silver Stacker

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    An interesting piece which answers the timeless conundrum of buying and selling your stash.


    In my previous columns I indicated that demand for gold as a safe haven has decreased while demand for gold as a risky investment has increased. But this is something many investors probably do not want to hear. They point out that this was a year of many uncertainties. That is absolutely true. But if gold were nothing other than a safe haven, its ‘behaviour’ would have been different from what we have seen in recent years.

    Since the end of 2004 the gold market has been open to a wide investment audience, which can now invest much more easily in gold. But investment horizons and objectives vary from one investor to another. Some investors buy gold as the ultimate safe haven. They purchase physical gold and keep this in a safe (at home or a banking institution). As long as this gold is held in the investor’s name, he is the contractual owner. Other investors invest in gold products that are backed by physical gold. In this case, each product must be carefully scrutinised to establish who is the ultimate beneficial owner of the physical gold and whether there are any additional risks. Still other investors speculate on fluctuations in the gold price. These products, however, are not always backed by physical gold. Examples are gold accounts and exchange-traded or synthetic products without physical gold backing. In short, investors can find a gold investment to suit any investment objective and any investment horizon.

    Investors who purchase gold as a safe haven tend to be patient investors, happy to take short-term price fluctuations in their stride. If they consider the gold price relatively attractive compared to the long-term outlook for the financial system, the economy and the financial markets, they will buy gold. But there are also many investors who want to earn money on the short-term movements of the gold price. They are chiefly responsible for the day-to-day swings in the gold price.

    So what happened during the global financial crisis of 2008? When the financial markets came under mounting stress, the gold price rose as investors scrambled to buy more gold. This trend continued until the liquidity crisis reached its climax. At that point, some investors sold their gold and other investments in exchange for dollars. Clearly, in the circumstances, they considered cash more valuable than gold. But who exactly were those investors that decided to sell their gold at that time? Were they the ones who were holding physical gold in a safe in case the entire financial system would collapse? Or were they the short-term speculators in gold? The first group would think three times before parting ways with their gold. And though the system appeared to be on the verge of collapse, it had not yet actually done so. The main panic occurred among speculators who urgently needed to trade in their gold investments for ready cash.

    Let’s now go a step further. Suppose there are two gold prices: one for physical gold and one for all other non-physical gold products. How would these two gold prices behave? In well-functioning markets that are free from panic, the price representing physical gold will probably rise less quickly (assuming a positive trend) and also be less volatile than the non-physical gold price. In times of financial crisis, however, the price representing physical gold will increase much faster than its non-physical counterpart. All in all, speculative demand for gold has made the gold price more volatile. In addition, gold is behaving less as a safe haven. When there is zero trust in the financial system, the only safe option for investors is still physical gold. In a world with two gold prices, the price of physical gold will predominantly behave as a safe haven. The other gold price, by contrast, will act more like a financial asset and can serve as an anti-dollar investment.

    https://insights.abnamro.nl/en/2019/12/a-world-with-two-gold-prices/
     
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  2. pmbug

    pmbug Active Member

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    Watch the premiums over spot at your favorite dealers. Watch the availability/inventory too. Back in 2008, junk silver became very hard to find (they don't make it anymore, so it's a pretty valuable indicator to watch). Premiums on Silver Eagles blew out as dealers sold inventory as fast as the US Mint could produce them. I don't recall how the dynamic played out in the physical gold space, but I suspect it was similar.
     
  3. JNS

    JNS Active Member Silver Stacker

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    Lucky for the citizens in some part of the world that gold can be bought like buying in a convenience store or an over the counter medicine in drug stores. Some countries put heavy tax when buying bullions overseas. Some countries when exceeded 200 usd will have a 32% tax on silver and gold bullion coins same with bars. They manipulate and control the people buying and investing in precious metal. It seems that they do not like the citizen to stack or hoard and to constantly believe in local fiat currencies. The Bullion prices on these countries are extremely expensive. For just ASE, a 35% premium is expected and for some Australian bullion coins almost at 50%. On this way, the local people will realize that it is no brainer to stack these type of commodities. They would rather stack guns and bullets which is easier to purchase.
     
  4. GoldenEye

    GoldenEye Well-Known Member Silver Stacker

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  5. 66rounds

    66rounds Well-Known Member Silver Stacker

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    Just a small indicator of what will happen when demand increases. Your best buddy dealer won't be able to help you anymore. You will be stuck with whatever you have on hand, your unallocated will be converted to whatever toilet paper currency you choose.

    Not shitting on paper gold, I regularly buy. I never buy more than I can afford to lose though. I treat it more like a gold backed savings account than anything else.
     
    Last edited: Dec 10, 2019
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  6. GoldenEye

    GoldenEye Well-Known Member Silver Stacker

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    Ditto.
     
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  7. tigger2

    tigger2 Member

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    Topic's really done to death in finance forums. Post 2002 if the gold price includes riskier paper gold, ETFs, unbacked deriviatives then today's reported gold price is less than the true physical gold price ie don't accept pseudo spot.
     
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  8. 66rounds

    66rounds Well-Known Member Silver Stacker

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    Hence spot means fuck all, buy whatever physical gold you can afford as often as you can afford.
     
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