GOLD 0.51% $1,391.7 gold futures

Re-statement of the problem

  1. 470 Posts.
    Gold is doing well. Still above both 50 and 200 day moving averages and trending nicely. Those who are into gold shares and/or the metal should remain confident over the longer term. I found this little snippet which explains quite well the major difficulties that gold has faced and what seems likeley to also result in it's final upward movement. Even though most gold bugs will be familiar with the content, it does provide a nice summary.

    "In speaking to the president of a Canadian gold-stock yesterday, I was told something that I've never heard before. Namely, gold "loans", not derivative bets on future prices, are why the bullion price is being manipulated, meaning held down and knocked down when bullion rises.

    This scenario reminds me of the Japanese failure and refusal to clean up THEIR banking mess by selling off bad loans quickly.

    Here's the gold scenario. Commercial banks either "borrow" gold from central banks at roughly 1% interest, and re-lend it at a profit, or simply lend their own gold hoards at the same 1% or so. Better low interest on non-interest bearing assets than none. Next, the non-bank borrowers of this bullion turn around and sell it, and use the cash generated for various purposes. In theory, these non-bank borrowers have an obligation to replace the physical gold at some future date. In a nutshell, as the price of bullion rises, the latter borrowers can't afford to buy back bullion and replace it.

    So what's a commercial bank to do. Presumably, as long as INTEREST on these gold loans is paid, they need not declare the loans in default. If they pressure their borrowers to fork over bullion, the same borrowers could throw in the towel and declare bankruptcy. Presto, commercial bank lenders are forced to recognize their "bad loans" AND could be forced to try to buy back bullion that THEY borrowed.

    Exactly how much money is tied up in this death spiral is unknown. My Canadian source believes this problem somehow will be unwound slowly, and bullion eventually will trade freely, and will rise anyway. But what if something goes wrong, and there's a buying panic in bullion? Good for holders of gold stocks, very bad for certain banks and by extension the global financial system in general"

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