there is a lot of confusion and misinformation about the way...

there is a lot of confusion and misinformation about the way price setting occurs in the gold market. Up to now COMEX set the price and the physical followed, a master servant relationship.

the Comex market is in fact a financial market. there is a small physical base of gold and that physical is "monetised" to create paper contract of sales .

Just as a bank lends out 10 to 15 times its capital the Comex markets deals in paper contract many times the size of the physical and bullion banks who own or borrow gold can create paper contracts 10 or 15 times or more the value of the physical gold. In fact it was the goldsmiths of Europe who started modern finance by issuing certficates against gold held by them on trust. They had a rule of thumb of 10 to one.

Nothing wrong with this until there is a run. Even a healthy bank will collapse if to many punters ask for their money back

Within the last week to guys whose understanding of the precious meatls markets I respect more than anyone, being Jeff Christian of CPM group and Jim Sinclair have alluded to the physical market becoming the price setter, the master of COMEX. Cristian was referring to the silver market and Sinclair is as follows. The implications of this change will be dramatic and blow the gold bears to smithereens




The Bullion Market Versus The Paper Gold Market - An Explanation

Author: Jim Sinclair


Dear Friends,

It is axiomatic that the most leveraged gold market most often (95 percent of the time) sets the price of any cash market. First derivatives (listed futures) commands price.
This remains true as long as the COMEX warehouse of gold is NOT meaningfully depleted by long gold contracts by taking delivery from the exchange warehouse.
As long as an exchange maintains a warehouse that historically overwhelms historical demand for delivery the first derivative, The COMEX listed gold future, will be the primary cause of price.
Taking delivery from the COMEX warehouse is not an easy process as the system is designed not to violate your contract but to be a world-class pain in the ass.
The COMEX requires re-assays, assuming you wish to re-deliver. This then places another raving pain in the ass in your way.
The COMEX market is effectively an international 24-hour market as there is no location where you cannot buy or sell a COMEX clone.
Cash bullion gold as opposed to the semi cash markets that non-USA banks trade is the only totally private means of buying and selling gold.
As currency problems increase, first the knowledgeable public such as you clean out the coin market.
This is the first time that the international coin markets have been cleaned out everywhere. This did not happen globally in the 70s.
Large gold bars are still available in major markets but the backup inventory is getting low.
As long as the COMEX warehouse remains adequate and large bars still are available, the paper market, the leveraged COMEX market, will rule the price.
Only with a decline in COMEX warehouse inventories and a run down in large bar supplies of the cash market will the cash bullion market command the price of the COMEX futures market.
It was not the buying by the Hunts that caused silver to move above $30 into the $50 area, but rather the universal belief that they would take delivery, which would deplete or exceeded the COMEX warehouse supply.
The War between paper gold and bullion gold is a war to determine which will take command of the price of gold, nothing more, nothing less. There will be no two markets trading at different prices. All this battle is about is IF the bullion gold market is going to take the lead in making the singular price away from the traditional axiom that the most leveraged market makes the price. I believe the bullion, in these most unique conditions, will command the one gold price making it hard to impossible to manipulate the gold price via the paper gold market, as is the practice every day.