Thursday, October 15, 2009

Must Read: Adrian Douglas on The Dynamics of the Gold & Silver Markets

Author: Adrian Douglas of Market Force Analysis.
This week gold closed above $1000/oz for the fourth consecutive week and made another all time weekly high close. But the top-callers have come out in their droves declaring that gold is in a bubble that is about to burst, and because the recession has been declared as over there is no reason to hold such a safehaven asset. All that is nonsense and I will explain why. The dynamics unfolding in the gold and silver markets are nothing short of explosive. The dynamics are different for gold and silver so I will start by discussing gold.
Gold is a unique substance. It is about the only thing on the planet that is bought and stored and never consumed. Almost all the gold ever mined in history still exists above ground. The purpose of gold is to act as a store of wealth. This singularity of gold makes it susceptible to a scam that was first perpetrated by the goldsmiths in the 16th century. The goldsmiths realized that customers would buy gold and leave it for safe keeping in their vault. This meant that they could show the same gold bar to many customers and sell the same gold bar many times over. This was the early form of the concept of fractional reserve banking where banks only retain 10% of the money on deposit gambling that no more than 10% of the money will ever be called upon to be paid out.

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