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Priceless Gold? More Like Worthless Money

-- Posted Sunday, 7 December 2008 | Digg This ArticleDigg It! | Source:

By: Stefan Pernar

Some would make an argument that gold is priceless in terms of paper money these days based on the fact that gold went to backwardation for the first time ever in history in early December. Meaning: gold owners were forfeiting risk free profits by not selling at a higher price December delivery gold and buying lower priced February delivery gold. The logic being that should gold in fact go into permanent backwardation it would no longer be for sale at any price. Period.

I took this piece of news as a trigger to update my attempt at calculating the real gold price of late August 2008.  Back then I demonstrated an increase of roughly 2/3 for the premium over spot of 1 oz Gold coins based on actual eBay data and came to the result that gold coins demanded a hefty 11.26% premium over spot. Having now repeated the calculation for US 1 oz gold bullion coins (Eagles and Buffalos) sold on eBay the premium has now roughly doubled again (see chart). 

But why would gold coins sell for 25% over the actual price of gold? For that one needs to understand two things: the price of gold and the nature of money.

The gold price - or spot price of gold - is determined by the sale price of so called future contracts at the Commodity Exchange (COMEX) division of the New York Mercantile Exchange (NYMEX) the world’s largest physical commodity futures exchange, located in New York City. Future contracts are a promise to deliver gold at a certain date in the future. And this is were it starts to get interesting: because most investors are content with owning the future contract - so called ‘paper gold’. The reason is convenience: instead of going through the hassle of taking delivery of physical bullion, having to worry about how to safely store the metal, and finally doing the whole process backwards again when wanting to sell, they own the contract. For this reason, the vast majority of these contracts are being perpetually rolled over into the next moth without ever being executed and the COMEX gets away with holding a mere fraction of actual bullion to settle the few contracts that are not being rolled over.

Now that the spot price is significantly below the price of actual bullion, a bunch of investors are bound to demand delivery and pocket the 25% difference minus a (relatively) small production cost of turning the 100 oz COMEX bars into 1 oz coins and this is precisely what is happening right now. No problem, right? All that will happen is that the COMEX will open its vaults and let the market balance this temporary imbalance and all is fine again. Well - not quite. Apparently the huge interest of central banks to make their currencies seem more valuable than they actually are, has led them to manipulating the price of gold downward and there is a growing concern that a lot of the promised paper gold is not backed up by physical bullion. Ouch!

Which leads us to the nature of money. As anyone on the street what money is and they will reply that money represents value. You will be surprised to learn however, that in fact the exact opposite is the case: money is debt. Meaning once all debt is repaid, there would be no money. There was a time when money was backed by gold and silver and anyone could go and get a fixed amount of bullion for their paper. This system however was continuously eroded and eventually abolished completely by Richard Nixon in 1971. Since then money is based on a fiat currency whose usefulness results not from any intrinsic value or guarantee that it can be converted into gold or another currency, but instead from a government’s order (fiat) that it must be accepted as a means of payment.

Do the pieces fall together yet? The ongoing financial crisis and continued incompetence to deal with it is putting the final nails in the coffin of the dollar fiat currency and are causing the chickens to come home to roost.

-- Posted Sunday, 7 December 2008 | Digg This Article | Source:


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