A world with two gold prices

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Maverick

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Quantum Leap For ABN AMRO As It Questions Gold Price Discovery

The article, titled “A world with two gold prices?”, questions how, if gold is a safe haven asset, its price has not continued to reflect the ongoing crisis and stress in financial markets.

Boele then seeks an explanation of this puzzle in terms of a framework which consists of both safe haven gold demand and speculative gold demand, one of which reflects the purchase of physical gold (safe haven demand), and the other which speculates on the gold price via paper and synthetic gold products (speculative demand) which are not physically backed by gold.

https://www.zerohedge.com/commodities/quantum-leap-abn-amro-it-questions-gold-price-discovery


Translated from the original: https://insights.abnamro.nl/2019/12/een-wereld-met-twee-goudprijzen/

A world with two gold prices?

In my previous columns I indicated that the demand for gold as a safe haven has decreased and that the demand for gold as a risky investment has increased. Yet this is something that many investors probably don't want to hear. They point to the fact that there were many uncertainties this year. This is absolutely true. However, if gold is only a safe haven, then its "behavior" was different from what we have experienced in recent years.

The gold market has been open to the large investment public since the end of 2004, which has since been able to invest more easily in gold. But the investment horizon and objectives differ per investor. There are investors who buy gold as the ultimate safe haven. They buy physical gold and keep it in a safe (at home or at an institution). As long as this gold is in the investor's name, he is the owner (contractually established). In addition, there are also investors who invest in gold products that are physically covered. For each product, however, a thorough assessment must be made of who is the ultimate owner of the physical gold and whether other risks have been added. There are also investors who bet on price fluctuations. However, these products are not always covered by physical gold. This includes an account in gold, exchange-traded products without physical gold coverage and synthetic products without physical gold coverage. In short, it means that investors can find an appropriate gold investment for every investment goal and investment horizon.

Investors who buy gold as a safe haven are often patient investors. They are not easily influenced by short-term fluctuations. If they find the gold price relatively attractive compared to the long-term outlook of the financial system, for the economy and the financial markets, they will buy gold. There are also many investors who want to make money with the short-term fluctuations of the gold price. They provide more mobility for the gold price.

What happened during the global financial crisis of 2008? As the stress on the financial markets increased, the gold price rose, as investors bought more gold. This trend continued until the climax of the liquidity crisis. At that time, investors were selling gold and other investments in exchange for dollars. Then it became clear that for some investors, cash was more valuable than gold. But who exactly were the investors who then sold their gold? Were it the investors who had physical gold in the vault in case the entire financial system collapsed? Or was it the investors who speculated with gold? The first group of investors would think about selling gold three times, the system seemed to collapse but in reality it had not collapsed. The panic was especially great among speculators who needed cash instead of a gold investment.

Now let's go one step further. Suppose there are two gold prices. A gold price for only physical gold and a gold price that represents all other gold products on paper. What would the behavior of these two gold prices be like? In well-functioning financial markets without panic, the gold price representing physical gold is likely to rise less rapidly (if there is a positive trend) and to be less volatile than the other gold price. In the situation of a financial crisis, however, the gold price representing physical gold will rise much faster than the others. All in all, the speculative demand for gold has made the gold price more volatile. In addition, gold behaves less as a safe haven. The only safe form of investing with zero confidence in the financial system is still investing in physical gold. In the case of two gold prices, the price of physical gold will mainly act as a safe haven. The other gold price is more of a financial asset and can serve as an anti-dollar investment.
 
I’ve known many people that were fine with owning stocks, which are just a piece of paper (and now days you don’t even get a paper certificate but just an electronic account showing how much you have) I don’t know many though that are comfortable with gold stock investments though. My gut feeling is physical gold is just a safe haven. I don’t expect to see any major increase in it as an investment anymore, just a safe hedge against the dollar. Not too long ago you could get gold at 300 an ounce. At that price it was an investment too, but now it’s high enough I don’t expect the price to move enough to consider it having a great potential.
 
I was in both camps for a while, with physical as well as paper gold. The paper gold is without question more liquid than physical gold, and much easier to move at market prices. Earlier this year when gold hit $1550 that was my cue to exit the paper gold market post haste, and I turned a tidy profit. And because it was in a Roth IRA, I didn't have to pay capital gains on it.

I don't think I could have sold enough physical gold quickly enough to take advantage. Local buyers like pawn shops and coin shops were buying at like 70 cents on the dollar, even on coins they sell for a large markup over melt. My best bet would have been eBay, but that takes time and a lot of effort.
 
I was in both camps for a while, with physical as well as paper gold. The paper gold is without question more liquid than physical gold, and much easier to move at market prices. Earlier this year when gold hit $1550 that was my cue to exit the paper gold market post haste, and I turned a tidy profit. And because it was in a Roth IRA, I didn't have to pay capital gains on it.

I don't think I could have sold enough physical gold quickly enough to take advantage. Local buyers like pawn shops and coin shops were buying at like 70 cents on the dollar, even on coins they sell for a large markup over melt. My best bet would have been eBay, but that takes time and a lot of effort.
There is no doubt that physical gold has its limitations. Not only with liquidity being slow during good economic times like you mentioned above, but during hard times finding someone willing to trade for it could be even more difficult. I still believe holding some physical gold is wise but not in large amounts. One thing to consider too is if the dollar does drop terribly then our commerce system will be caput anyways. I don’t think there is anything that will ensure wealth protection 100%
 
I would invest in copper and lead for my 9mm if possible instead of gold. gold, silver and paper is only valuable until those in charge decide to start a new snowball system. Invest and win is ok, invest and keep is the only way I play and plan anymore... took my losses and decided to stop playing in the poker games on the stock markets...
 
I know people downplay gold (I'm on the fence myself), but we are preppers....and that is what gold is for.

My father's entire family is Jewish, and there are many stories in our oral tradition about people escaping concentration camps in WWII by bribing people with gold.

There is even a story about hoarded silver being used to finance a hit on a Jewish man who was working undercover for the S.S. and betraying his fellow Jews. From what I understand, the hitter--hoping to send a graphic message--recircumcised him after garroting him (or maybe before....the story is vague and apocryphal).

I've heard stories about hoarded gold being used to book passage on boats and trains to escape the Nazis.

Even the Nazis themselves used hoarded gold after WWII to escape to places like Brazil, Paraguay, and Argentina when they were fleeing justice.

This is how I envison using gold and silver post SHTF.

Does anyone disagree?
 

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