Earlier this week, an interesting article appeared on the website of the major Dutch bank ABN Amro, written by the bank’s currency and precious metals strategist, Georgette Boele.
The article, titled “A world with two gold prices?”, questions how, if gold is a safe haven asset, its price has not continued to reflect the ongoing crisis and stress in financial markets.
Boele then seeks an explanation of this puzzle in terms of a framework which consists of both safe haven gold demand and speculative gold demand, one of which reflects the purchase of physical gold (safe haven demand), and the other which speculates on the gold price via paper and synthetic gold products (speculative demand) which are not physically backed by gold.
This leads her to the observation that safe haven investors would not sell their physical gold in the midst of a crisis, as they “would think three times before parting ways with their gold”, and that it is speculative investors (those who are not invested in real physical gold) who are pushing the gold price around.
One Small Step
While the ABN AMRO strategist fails to address the reality of how the international gold price is really established, i.e. via gigantic trading volumes of fractional-reserve London unallocated gold and COMEX gold derivatives, she does take a quantum leap, at least for a prominent investment bank, when the penny drops that there are two separate things being traded. Finite tangible physical gold on the one hand, and paper gold synthetics on the other. Shouldn’t these two things have distinct prices? Boele then makes the jump:
“Let’s now go a step further. Suppose there are two gold prices: one for physical gold and one for all other non-physical gold products. How would these two gold prices behave?”
…click on the above link to read the rest of the article…