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Why Gold Is Down When It Should Be Up

Why Gold Is Down When It Should Be Up

Alex_Wallenwein
The Market Oracle
October 13, 2008

Why is gold dropping right now when anyone in their sane mind would expect it to rise? The simple answer to this question is, “because Comex-gold isn’t gold” – and because it deceptively pretends to be ‘the’ price-setter for real gold.

Gold is gold, paper is paper, and “Comex gold” is nothing but paper masquerading as gold while simultaneously pretending to be the price-setting medium for actual gold in the world. Now, finally, Comex-gold is in the process of being unmasked.

The real supply and demand determinants for Comex gold are not actual gold investors but fund managers . Fund managers are inextricably intertwined with the world of contract-based credit instruments. They use bet on Comex gold contracts to hedge their other (currently horrendously losing) bets with something they all, in their in-bred belief in paper markets, believe will ‘go up’ in value while everything else is going down.

However, these very same fund managers and their paper-bound investment psychology are the exclusive reason why Comex gold is dropping in these times when everyone (including fund managers) expects gold to rise. As already stated, though, and as they now finally realize to their own dismay, Comex-gold just isn’t gold – and that causes even further selling.
Two Losing Bets, Compounded

Fund managers’ other bets are losing money fast, now, so they need to raise cash to keep up the overall value of their respective funds, so they can earn their management bonuses and avoid getting booted for lack of relative performance. Guess what they cash in on? The very same Comex paper-gold they mistakenly bought as a ‘hedge’, of course.

Meanwhile, real investors in real gold are enjoying their shopping spree – except that the spree turned into a treasure hunt as the shelves and display cases of gold dealers look more and more like the supermarket shelves in the old Soviet Union – bare.

This is the only ‘bare-market’ in real gold the world will see for a long, long time to come.

With this split, this disconnect, between Comex illusion and gold reality, one thing or the other will have to give, and it won’t be physical gold that gives.

The system built up around the reputation of Comex-gold as being a price-setting mechanism for real gold plays right into the hands of the financial establishment. The establishment depends for its (now increasingly meager) existence on the illusion that gold “isn’t living up to its promise” as a real inflation and disaster hedge. The implication, of course, is that investors might as well stay in the computer blip and paper world.

As the Comex gold price illusion drops, many retail investors are still persuaded to keep their money circulating in the paper world, and that ultimately feeds the system. Of course, by now that ‘feeding’ mechanism looks more like life-support, but try and unhook someone who is on life-support. The results are dramatic, inevitable, immediate – and final.

Yet, even on life-support, the system is deteriorating at a catastrophic pace. It would be hilarious to watch if it wasn’t for the fact that we are all depending on this phony system for our real-life support. Without credit freely circulating through the commercial paper universe, for example, grocery stores won’t have food on their shelves, there won’t be gas a the gas station, and your bank will be shut. Cash doesn’t transfer very well without the bank settlement process.

That’s the problem.

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COMEX Gold Drops $681 on October 24, 2008