WE NOW KNOW WHY THE GOLD PRICE HAS SOARED / MACLEODFINANCE

We now know why the gold price has soared

Here is the answer to the puzzle everyone has been trying to solve!

MACLEODFINANCE

We now know why the gold price has soared. 

It is a combination of a few but growing band of foreign sellers of the dollar and a sharp decline in paper gold liquidity. 

And here’s why.

To understand gold’s apparent performance requires a short refresher in price theory. 

In a transaction, two parties can agree on one thing, and that’s the medium of exchange. 

This is termed the objective value. 

The seller of a product prefers the medium of exchange to the product, and the buyer prefers the product. 

The degree of their relative desires is reflected in the price of the product measured by the medium of exchange, which reflects subjective values. 

If these subjective values coincide, then a transaction occurs.

In the case of gold and a fiat currency, by convention we assume the objective value is in the currency, and gold’s value is the subjective. 

But gold is internationally agreed money confirmed in almost everyone’s law, and the currency is simply the highest form of national credit, whose value is variable.

Therefore, we have it the wrong way round: gold is the objective value and currency the subjective.

This is why gold standards are always expressed as a weight of gold being exchangeable for a unit of currency. 

We describe it the other way round (i.e. $35 per ounce) for convenience’s sake. 

But technically it is incorrect.

Now that we have established that gold is the objective value, and dollars the subjective, it follows that it is the dollar falling in value, and not gold rising. 

Coincidently, this is how increasing numbers of foreign dealers and investors see the relationship. 

For better or worse thy have their own currencies and dollar balances may be held for good reason, but many of them are held for less good reasons or pure speculation.

In the current economic climate, it is becoming obvious to growing numbers of foreign holders of dollars that the US Government is in a debt trap, interest rates will have to rise to fund its debt, and higher interest rates threaten to crash the economy and the entire banking system.

They are not necessarily selling dollars, perhaps because they have weaker currencies to sell. 

But they are not buying either.

Even fewer are actually selling dollars for gold. 

We might note that the People’s Bank of China is buying gold. 

It is not — it’s selling dollars. 

And it’s gradually dawning on other central banks, sovereign wealth funds and the family offices of ultra-high net worth individuals (of which there is a growing number in Asia) that they should sell dollars as well. 

And at the margin, like the PBOC they are selling them for gold.

The amounts need not be substantial to drive down the value of dollars and dollar based credit, such as US Treasuries. 

It’s just that there are very few foreign buyers of dollars prepared to part with gold, real money in exchange for credit of dubious value.

Domestic US buyers of dollars for gold are also few. 

True, gold ETFs in America and Europe have been liquidating, but that’s almost certainly slowing. 

The bullion banks are short of gold and long of dollars and they dare not buy dollars with gold which they don’t possess.

Incidentally, the London forward market, which used to be up to ten times the size of Comex has contracted substantially. 

According to a slide presented by Ruth Crowell, CEO of the LBMA at the Denver Gold Forum in Zurich last week, current daily LBMA volume at about $90bn is only about one and a half times that of Comex. 

The slide from her presentation is below.

This is a huge surprise, indicating that there has been a major decline in liquidity in London’s forward market. 

So where are the buyers of dollars prepared to part with real money (gold)?

They simply don’t exist.

I shall go into the implications in a subsequent posting.