- What if the price of gold is drifting not because the markets don’t trust the world’s reserve currencies to continue to devalue, but because the market doesn’t trust gold?
- Remember CDS’s?
- Credit default swaps were the insurance—the hedge—against exactly what happened in 2008
- CDS’s stopped rising in value just when the markets collectively realized that the counterparties to those CDS contracts might not be able to pay up.
- price discovery of the CDS’s was impossible while the crisis was raging.
- So why would gold—which is an actual, physical commodity—be acting like credit default swaps did right before the 2008 crisis?
- most gold markets are paper markets, not bullion markets.
- There is only one market in gold, not two. There is no way to segregate gold bullion holders from gold certificate holders, and thus create two markets, one for the real thing, one for the paper thing.
- In the long run, assuming that central banks don’t manage to raise rates in time to prevent high- or hyperinflation, gold prices will go parabolic. But between now and then, gold prices will continue to drift, because the markets don’t really know whose gold is real, and whose is worthless paper.
Basically, it all boils down to manipulation. As long as the government remains credible, the currency should hold up due to the manipulation. But once the government loses credibility, hyperinflation could come quickly.
Hence, no trillion dollar coin. If the government was to do something to expose itself as the emperor with no clothes on, it loses its credibility. It won't expose itself, so the exposure will have to come from the outside--- like the little boy who noticed it and said so out loud.
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