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Source link: http://archive.mises.org/14985/gold-prices-and-panic/

Gold Prices and Panic

December 13, 2010 by

Bernanke assured the national audience that the Fed was not printing money; however, he didn’t explain where the Fed was going to get the funds to buy $600 billion worth of treasuries. FULL ARTICLE by Doug French


greg December 13, 2010 at 1:24 pm

Gold selling for $1,400 an ounce? You buy gold for around $1,450 and you sell gold for around $1,350. As long as you have this spread in place, gold is not very liquid and the gold brokers are the ones getting rich when the gold market is going up and going down. There is one good thing out of the gold frenzy, it helps keep the Pawn Stars in profits and I really love that show.

Juraj December 13, 2010 at 2:19 pm

Remember, that is the paper prize of gold, not the physical stuff. Once the paper owners start asking for physical, $1,400 becomes peanuts. There is big fractional reserve scheme going on in precious metals.

Dave Albin December 13, 2010 at 5:25 pm

Are the paper certificates immediately convertible for gold (or essentially immediate)? Seems to me that would have to be the case for anyone to buy gold on paper-otherwise, the paper is similar to US greenbacks.

Juraj December 14, 2010 at 1:55 am

Some of them, in theory are. Many of the paper claims to gold that are traded are “unsecured creditor”. That is, bullion bank owns those people gold but there is no gold in the vault as it has either been loaned out or sold.

The gold paper is indeed very similar to a Federal Reserve Note.


This paper market will also default, triggering a massive financial turmoil.

Zorg December 13, 2010 at 2:19 pm

Gold is highly liquid. Liquid means you can get in and out quickly. The premium on 1 oz coins is the profit margin for dealers. If you don’t like the premium, then sell the coins yourself on ebay or craigslist or something. But if you just want to drop them off at a coin dealer or pawn shop, why should you expect to get top dollar? Why complain?

I actually heard a guy complaining at a coin shop a couple of weeks ago, saying he couldn’t make money on silver and gold. He was upset for the same reason. He paid a premium for coins and then wanted to sell them a couple of *weeks* later when the price went up. He was missing the point, as are you.

Gold and silver, and other commodities, are rising in price against the dollar. That is because the value of the dollar is plunging. It’s pretty simple actually. High demand puts a higher premium on price. Dealers need to make money. They help you to be liquid by buying whatever you got to sell as they then make your coins available to others. They are brokers. They have to pay mortgages and put food on the table. They don’t work for free.

Gold and silver are not being used for money, so the market treats them like every other commodity. Exchanges of metals for dollars will include some type of profit for the dealer.
If they were used as money, then their daily use in exchange would mostly eliminate the need for dealers and therefore cut the premium, or handling fee. You would just exchange them for goods and services at the market price in terms of that money.

It is the “almighty dollar” that is in a “frenzy” and creates the conditions which drive people to protect themselves with valuable commodities from currency devaluation.

Dagnytg December 13, 2010 at 5:45 pm


Though I am sympathetic with your assessment of the relationship between the dollar and gold…I take issue with your definition of liquidity.

Liquidity requires lots of buyers and sellers (volume), small spreads (which is a result of volume), and quick and efficient delivery.

The spot gold market is not as liquid a market as compared to the stock market or the currency markets. It is relatively a small market. This has been pointed out many times by Jim Sinclair the gold investor and trader.

Pawnshops exist because of illiquid markets. They are filling the void for things that have little or few market participants. It’s why you don’t see pawnshops on every corner and why you see them in poorer neighborhoods.

People who are trying to sell their gold are at a grave disadvantage. They are going to pay a premium by going to a pawnshop. The pawnshop is offering a service for goods that cannot be traded quickly.

This is one of many reasons why I believe people should not own gold as an investment or trade. If you’re buying gold as insurance…that’s different.

Bottom line: Greg is correct.

Peter December 13, 2010 at 7:41 pm

greg has been posting this rubbish for years. And it is rubbish. First, the spot price is for 400oz LBMA bars; there is very little price spread in that market, and while it’s not a large market, it is a liquid one; and you can trade in a derivative market, buying and selling near spot, in very affordable grams, for 0.5% commission. The market for small (e.g., 1oz) minted bars and coins is different, and naturally the prices are different; nevertheless, it’s not difficult to buy coins one day and sell them at a profit a few days or a week later…I’ve done it…just not through coin dealers! But if you’re willing to wait years, you’d be better off. (I bought most of my gold for less than $400/oz)

Bottom line: Zorg is correct; Greg is full of shit.

Dagnytg December 14, 2010 at 4:37 am


Greg is full of shit.

This maybe true but I don’t know Greg personally and I haven’t read enough of his posts to make that assessment.

I was only commenting on Zorg’s interpretation of liquidity in context to Greg’s example and pawnshops. Nothing more.

I wasn’t including in my analysis the derivative market (paper market i.e. options, futures, etf’s etc.) or high-end buyers of 400oz LBMA bars, nor the mostly defunct online market (egold and such). Of course, I wasn’t referring to professional traders like yourself.

I was referring to people who are buying the 1oz (and smaller) bars and coins that you alluded to. That market, by most standards, is an illiquid market. The fact that people go to pawnshops to trade their gold is an indication of illiquidity. (My brother knows a guy at work who sells 50 to 60 oz’s at a time…at an L.A. pawnshop.) Apparently, this is a growing trend.

Since spot gold can easily fall $50 to $100 in a day it is apparent that these average Joe buyers are going to be in for a rude awaking when gold corrects and falls $300 or more in a week.

Don’t get me wrong… gold is cool, hip, and exciting right now. But then so was housing once upon a time. I just think people should be cautious and understand what they’re buying. Failure to understand liquidity has been the death of many a hedge fund, bank and average Joe investor.

Bogart December 13, 2010 at 11:31 pm

I admit that the central banks gone wild lends me to favor gold and other precious metal investing, but I still think that fear when investing is a very healthy feeling.

That having been said, I am buying gold miners and waiting for the price to go down to buy the physical metals.

Patrick Barron December 15, 2010 at 12:06 pm

Here’s why the gold/fiat money relationship will progress in gold’s favor: the supply of gold cannot be increased rapidly, plus it costs money to produce more gold (that’s why gold mining is no more profitable in the long run than other businesses). But fiat money can be increased to infinite amounts at zero cost, and the only thing preventing this from happening is the wisdom of central bankers. I’ll stick with gold.

Ned Netterville December 15, 2010 at 11:03 pm

Greg and Dagnytg, you are standing on your head viewing gold and thus you have things upside down. Gold isn’t going up, fiat money is going down. Stand up and see things as they are. Greg, you have been complaining about the “price” of gold as measured in dollars for so long and have been so wrong I’m surprised you’re still trying to talk the gold market down. I’ve asked you this before: Are you short gold, or are you just upset that you failed to buy some back when it was only 260 ferns to the ounce?

Greg, thanks to the recent creation of exchanged traded funds (ETFs) that own only gold (gold ETFs), the market for gold in that form can be said to be as liquid as the market for any stock on the Big Board or the NASDAQ. Gold ETFs have been trading in pretty large volume so the spread between the bid and asked prices is measured in a few pennies. And with commissions of discount brokers as small as $7.50 per trade, it possible to buy and sell gold ETFs as a relatively inexpensive way to trade the gold market.

I do agree that the spread between the buy and sell price on small transactions in gold, say of one ounce or less, using coin dealers and pawn shops, is prohibitively high for someone who wants to trade the gold market rather than just buying a few gold coins to sock away as an investment. But as Zorg pointed out, “If you don’t like the premium, then sell the coins yourself on ebay or craigslist,” which will reduce the spread to something more reasonable, but which is also for most of us rather inconvenient. With the volume of trade in gold escalating exponentially, probably even faster than its price, I guarantee you some entrepreneur(s) will solve this problem in the not too distant future.

Dagnytg, “Liquidity requires lots of buyers and sellers (volume), small spreads (which is a result of volume), and quick and efficient delivery. The spot gold market is not as liquid a market as compared to the stock market or the currency markets. It is relatively a small market.”

You are quite wrong about this. The market for gold is everywhere in the world, even in places where oppressive regimes make it illegal to own gold (places like here in America for 40 years after that thief FDR made Americans turn in their gold to him at gunpoint). An ounce of gold can be exchanged for the local currency in the Sahara dessert or the Amazon jungle at close to the prevailing price in London or New York. Try exchanging 45 shares (about the same value) of General Motors stock for the local currency at a jungle outpost. About the only thing more liquid than gold throughout the world is the US dollar, but the dollars ascendancy is rapidly approaching its terminus as explained in this article. And keep in mine, the only reason the market for small amounts of gold isn’t as liquid as dollar bills here in the US is because of legal-tender laws, which may be repealed.

Finally, a few words about the dollar-price of gold back in the late 70s and early 80s when it sold for as much as $850 before subsequently declining over 20+ years to a low around $260. First, I would point out that adjusting for inflation that price of $850 in 1980 is equivalent to about $2800 in today’s depreciated dollars, so at $1400 gold is still 50% below its high and thus has plenty of room on the upside. But more importantly, there is little doubt that the precipitous drop in gold from $850 back then was caused by the Federal Reserve and the US Treasury secretly lending and/or selling gold (illegally manipulating the market, btw) in order to drive its price down as part of the government’s effort to end price inflation.

Keep this straight: Gold is not increasing in price; the dollar is declining in value, so it takes more $$$ to buy an ounce of gold. And given the huge expansion in the money supply, it has a lot farther to fall. About the only thing you can do to keep from taking a beating is to trade your dollars for gold, which should hold its value for the reasons stated in the article.

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