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Saturday, June 30, 2012

Why is gold behaving as a risk asset?

To those who understand the gold market the most interesting question at the moment is: Why is (paper) gold behaving as a risk asset?

Why does (paper) gold rally with stocks, and fall with stocks?

And there is only one plausible answer: because in a casino everything is a risk asset.

On Friday stocks and (paper) gold rallied together.


Because Europe announced they would print an unspecified amount of Euros to funnel directly to the banks without any need for "austerity" which is to say - no strings attached. 

Just as the US Fed does here on a continuing basis.

Nobody thinks this is anything but the most temporary stop gap measure to the continuing European - and World - banking crisis.  Nobody believes that anything resembling a solution has even been proposed, much less debated, much less accepted, much less implemented.

So why did everything rally on the news?

Because only Banks and large Hedge Funds have the capital to survive - and influence - the massive volatility of the risk markets - which is to say all paper markets.  They are the only ones left in these markets.  And they run them in increasingly sharp spurts in either direction based on "News."

Of course, they create the News, and those closest to it (Goldman Sachs, JP Morgan) run the markets through Futures sharply in a matter of seconds, while those slightly farther away (Bank of America, Citibank) surf the tail end of these massive moves.

And, of course, this gives retail brokers a chance to churn retail accounts on the tail end of the moves for any poor retail investor dumb enough to want to try to make sense of the rigged casino.

It is important to keep in mind, however, that  the Central Banks and many large Hedge Funds are amassing huge Physical Gold positions even as they manipulate the paper gold markets.

How is this possible?  For central Banks through direct investment and control of mines, and large scale, off-market purchases of tons of bullion that nobody hears of until months or years later.

At some point this will create an enormous divergence between the paper price of gold and the physical price.  And at some point it will not be possible for the retail investor to purchase physical gold.

I don't know when that will be.  But I suspect it will happen very suddenly.

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