The Gold Price

Posted 19 Oct 2008


What is the gold price?  The answer should be simple.  However, things get complicated.  For example, most readers of are from the United States but there are a good portion from Canada, Britain, Europe, Australia, countries in Asia and a few from the Middle East.

This past week gold has reached all-time highs when priced in A$, £, C$, Indian Rupee, and the South African Rand.  Gold, being a monetary commodity, has counter-intuitive supply-demand functions.  When prices rise oddly demand rises.  Demand for gold is also seasonal.  Historically October through March is the strongest period.

Indians are ending harvest and on October 28th enter Diwali, the festival of lights and the period of worshipping Lakshmi, the goddess of wealth.  This is also a period of Indian weddings so gold’s demand is inelastic.  Then comes buying in the western world for Christmas and Hanukkah.  The seasonal demand is ended during Chinese New Year.

Additionally, there are different types of gold.  There are LBMA bars, COMEX bars, coins, jewelry and what the US Treasury calls ‘deep storage gold’ which is probably gold still in the ground that has been not been mined.

The ‘spot price’ of gold is generally determined by the COMEX price that trades about 24 hours a day.  This contract does have some limitations such as delivery limitations, counter-party risk, a potential delivery default and the specter of price suppression by central banks that stand ready to lease gold in increasing quantities should the price rise.

Then there is the price of getting coins in your hand.  Their price is starting to vary significantly from the COMEX price of gold.  From the top 40 list of a large reputable dealer.

The coin price is $60-80 above the ‘spot price’ as determined on the COMEX.  Some sellers are charging even higher spreads.  Even the Perth Mint has halted production for new orders.  It would be funny if it were no so sad.  Ultimately, the ‘price of gold’ is what a willing buyer and a willing seller agree to by voluntary mutual consent.  The EBay market appears to be showing some dislocation from the spot market.

What we do know is that gold is a perfect sentinel that is always on guard and always poses a mortal threat to the fiat paper currency franchises.  It is currently sounding the alarm against A$, £, C$, Indian Rupee, and the South African Rand.  Central banks and governments are now going to test the very limits of economic law by creating ‘unlimited’ amounts of dollars and guaranteeing ‘unlimited’ amounts of bank deposits.  The chart above shows the tenuous situation of the United States economy.  Based on history it is certain that government promises will be broken.  Why believe and trust governments?

CNBC and other regulated news organizations are not going to report about frozen trade from untrusted letters of credit.  Nor will they report on OTC derivatives and the other real threats.

While deflation is being asserted remember the last layer to evaporate in a credit contraction is the currency through hyperinflation.  Time will be of the essence and  preparation is essential while the window of opportunity is closing.

McAlvany discusses hyperinflation possibility.