The Truth About Today's Gold Market

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"Gold is gold, paper is paper. . .and Comex gold is nothing but paper masquerading as gold."

Just what is the link between retail gold coin prices and the apparent manipulation of gold futures and options? You may have seen some rather wild commentary of late concerning gold and silver prices. In terms of gold bullion, this sensational "analysis" mistakes the key basics of how the gold market actually works.

First it confused a surge in gold-coin prices for a surge in the price of gold itself. Then it confused dealing in physical and paper gold futures, by ignoring the world's very largest, deepest and most heavily traded gold market. Now, at the very same moment as gold-coin demand leapt in 2008, the "paper gold" market of futures and options was also hit by a shock—a shock rise in financing costs.

These two events were entirely related, of course, because both were sparked by the worldwide shutdown in lending. But unlike eager physical buyers looking to defend their savings with physical metal, all those hedge funds and other "large speculators" trading the gold price for three, six or 12 months in the future could no longer roll forward their bets, as their brokers could no longer lend money to finance their trades.

The net effect? It depressed paper-gold prices—the unsettled price of future delivery—even as retail gold prices moved sharply higher. And that's why many respected gold analysts began talking about a "disconnect" between gold futures and physical metal.

Either way, "Gold is gold, paper is paper," as Alex Wallenwein of the Euro vs. Dollar & Gold Monitorwrites, "and Comex gold is nothing but paper masquerading as gold."

The "truth" about gold prices today is that, whatever form it comes in—whether as coins, paper or digital contracts, or large wholesale bullion bars—the price it's worth is the price at which you and another willing party agree to deal.

If you'd rather know the "real" price of gold as judged by the huge London gold market—a market worth upwards of $60bn per day—then check the price that London dealers are quoting for gold held as large 400-oz bars. And if you want to deal at the very best prices, in the world's very deepest and most liquid gold market, then stop paying retail and start trading wholesale gold bullion instead.

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