bearfund

Counterparty Risk May Lead to Potential Squeeze in Gold Market

You do your readers no favours by breathlessly promoting gold. Rumour, innuendo, and appeals to nebulous authorities are all pointless. Gold isn't an investment and it isn't going to "explode higher".

Here are the facts:

1. Gold is the only meaningful store and standard of value. The US dollar is a convenient medium of exchange - for now, at least - but is not a store of value. Accordingly, the "price of gold" is really nothing but the inverse of the real price of the dollar.

2. Price and value are related in theory only. While price must eventually converge to value, there can be no assurance that it will do so on any particular timeline, or that it will not overshoot.

3. The value of the US dollar is equal to the discounted present value of all current and future US production divided by the total number of US dollars in existence.

4. US production is falling.

5. The number of US dollars in existence has increased by approximately 190% in the past 12 months.

6. Therefore the value of the US dollar has fallen by about 66% in that time.

7. The market price of the US dollar has fallen by about 7% in that time.

Traders must wonder whether the US dollar was artificially depressed a year ago or is artificially expensive today. A first-order look would suggest the latter; the world is in the midst of a dollar short squeeze right now, which has propelled its price higher in absolute terms as well as relative to other financial assets. But it's entirely possible that 1/850 ounce of gold is actually a reasonable price for the dollar /assuming no further increase in supply were to occur/.

Place your bets, if you wish. For the rest of us, gold remains a very simple asset: a store of value. The price of the dollar is almost completely irrelevant. The value of the dollar is interesting only in making trades. Please don't go suggesting shadowy conspiracies and latent squeezes to get people excited about "buying" gold. People who think of it that way don't understand the purpose of gold and more importantly they mistakenly think the dollar is a store of value. That's why they keep score in it, and why they think they've "won big" when they "buy gold" and it "explodes". In fact all it means is that a portion of their portfolio retained its value while the rest dropped like a rock. If that makes them feel good, so be it, but they're not profiting and you're not helping them. Instead, please help people understand what gold and the dollar (and other assets) are for, what they do, how they work, and why someone might or might not want to own them. Rumours are delicious but facts are where profits come from.