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Bullion Star/Ronan Manly/3-2-2020
“Given that international gold price discovery takes place on derivatives markets which have little or no connection to the physical gold market and that the prices are merely blips on a screen (screen gold), we can therefore say that the gold price plunge last Friday was driven by trading in these markets, led by the COMEX, and also that the gold price fall last Friday was unconnected to the physical gold market.
While the mainstream financial press will never question gold price discovery or the difference between screen gold and physical gold, they do predictably try to come up with reasons to explain price movements. Unfortunately, most of these reasons are often not based on anything other than off-the-cuff the remarks of stockbrokers, trading desks, and buy side investment bank analysts. Unfortunately also, by not explicitly distinguishing between prices derived in an electronic casino and the real physical safe haven asset of tangible gold, the reasons provided by these reporters will fall into the trap of jumbling up two different things.”
USAGOLD note 1: The tail wags the dog and quite often, as the cartoon above suggests, to the surprise of the dog or, better put, to the surprise of the dog’s owners. In this piece, Manyly makes a distinction between the price “taker” (physical gold) and the price “maker” (the paper gold markets). That dichotomy has been the centerpiece discussion in the gold market for the past quarter-century. Though a source of great frustration to speculators in the short run, big price drops like the one we had this past Friday create opportunities for knowledgeable, strong-handed buyers to accumulate physical metal. Asia comes to mind. So do American professional money managers who have joined them in loading up on the dips.
USAGOLD note 2: Sooner or later, demand for the physical metal translates to the paper markets, even if cause and effect do not always match-up precisely on the timeline. If that were not the case, the price of gold would still be at $35 per ounce and physical supplies would have disappeared from the face of the earth long ago.
Image courtesy of Bullion Star