Last week, we left off with this.
“Something is happening with gold…”
It began in Dec 2008. To understand it, it is necessary to understand two principles. The first is that gold is money and the dollar is credit, which currently has nontrivial value. A dollar is worth 28.4mg gold. To understand the second, let's look at how markets work at the mechanical level.
Regular readers of this Report know that we emphasize the bid and ask prices as separate values. The people and forces involved in the bid price are different from those involved in the ask price. This is critical in our definition and calculation of the basis and cobasis. You cannot just assume that there is a real price, somewhere between the bid and ask. That may be a working approximation during normal market conditions. But it could be badly misleading.
Suppose there is stress in the market, a crisis impending or active. The bid recedes, and can even withdraw entirely. For example, what if the US Geological Survey were to say that there will be an earthquake in Los Angeles, 15 on the Richter scale, and nothing taller than a dollhouse will be left standing? You would not find any lack of offers to sell real estate. But what is the price of a house in LA? There wouldn't be a bid in LA, and maybe not as far south as Chile, as far north as British Columba, and as far east as the Mississippi River. The bid would come back into the market when the threat was over (perhaps at a much lower level).
The second principle is that gold is not offered for dollars, despite what you see on any quote board. Gold is bidding on the dollar. It is comforting to assume it will always be so, that the only question is price. This is an illusion, based on unwarranted faith and the assumption—or hope—that things will continue as they currently are.
Even gold bugs accept this. They ask when gold will hit $5,000 or $10,000 or whatever price level. It may not. It may go off the board first. We don't know what the final quote will be, but we do know that there will be one.
