For those who are interested in knowing more about the recent takedown in the price of “paper” gold, the article linked below is a fascinating play-by-play, full of mystery and intrigue. 

The operation that took place in the gold futures market doesn’t appear to have been executed by interests that wanted maximum value for the gold they owned.  If they wanted top dollar, they would have spread out the sells so they didn’t drive the price down too fast.  This would have allowed them to lock in a higher average price.  Instead, it seemed more like a “shock and awe” operation.  Paper worth $28 billion was sold into the gold futures market on the Friday…which overwhelmed that market…which triggered stop losses and caused further selling…which all caused even more selling to cover margin calls. 

The key questions are: “Who has $28 billion to throw at this market? And who would gain the most if gold fell out of favour?” 

Ironically, the operation may have backfired.  Yes, the price of “paper” gold dropped significantly and that of physical gold dropped somewhat.  Yes, it may take weeks or months for the price to get back above $1,500. Or then again - given the resulting frenzy of physical gold purchases unleashed in numerous countries around the world - maybe the gold price will bounce back fairly quickly. 

Why has “paper” gold reacted differently than physical gold?  It is believed that the “paper” gold market is leveraged 100 to 1.  Put simply, it would be like 100 people having a paper IOU for the same ounce of gold.  As more and more people wake up to this reality, there is a rush to buy the real thing – and let the other 99 people figure out whether the IOU is really worth anything in a time of crisis. 

I think the author captured it perfectly when he wrote that in all the various market crashes he has seen over the last 30 years, not one had people stampeding to buy the asset that was supposedly tanking. 

Read “Things that make you go hmmm” right after the table of contents: