Ann Barnhardt: Explaining Decoupling
Posted on December 16, 2011
OK, this is required reading From Ann Barnhardt.
ABShe does an excellent job articulating how the futures market works and how its continued operation is in serious trouble. Understand the problem is simply one of confidence, specifically the lack thereof. Decoupling of the gold futures and the cash market must happen when:
1. When cash sitting with a commodity broker can “disappear” like it did at MF Global.
2. When your positions can be frozen by the exchange, effectively locking you in positions where you cannot close them to protect yourself from fraud like we see at MFG.
3. When it occurs to enough people that there isn’t sufficient supply to provide real delivery on demand, not the delivery of a promise to deliver.
It is only a matter of time before the paper price of gold and the spot cash price diverge. When it does diverge it will be disorderly and sudden. This is because the situation is dynamically unstable. No manner of smoke and mirrors or shoestrings and bubble gum is going to change the fact that we are talking about fraud. The Go to Jail and Do Not Collect $200, Ass in the Slammer and Throw Away the Key kind of fraud.
The thing newbies to this kind of thinking must realize is that the price of gold will not rise to Freegold valuations, it must fall hard first. This is simply because the paper gold (futures) market cannot exist with Freegold. Freegold cannot be “free” until the paper market dies and paper supply collapses with it. This very process frees gold.
Since gold is priced by the futures market, price will fall as the process Ann describes plays out. It will dawn on people at some point that “in your hands physical” is the only safe place to be where your capital has a 100% chance of being retained and not stolen. The smart ones will immediately cash out in dollars and head for somewhere where they can acquire physical. The dumb ones will attempt to take actual delivery, and I mean actual where they hire a Brinks truck to pick the shit up at the vault. Then they will find out that the “delivery” was really and IOU (Certificate) for gold. When they show up at at the vault they will be informed that the gold has already been removed by some guy that an identical Certificate. That’s when the shit hits the fan and real panic sets in.
In short order we are going to see a divergence of the paper price and the spot price. For us small ants it will look like this: we will be licking our chops as price collapses on the Comex and we will call our favorite gold dealer with a purchase order. He is then going to quote us a price that in no way resembles the price on the CNBC ticker. He will politely tell you that the real price is what he is quoting, and that is if you are lucky. This is going to happen so fast he probably will say he’s not a seller at any price, but would be more than happy to buy your gold.
Waiting for the gold price to plunge in order to pick up your physical at a bargain price is a fools errand and will end with you holding a fistful of dying dollars. The flow of gold will disappear and gold will go into hiding. Only a Freegold price will bring it back out into the light of day.
So be happy when the price of gold is rising, it means you can still buy physical gold with your bank credit. Do not be happy because you are richer, it is a pittance compared to real Freegold valuations. Do not be depressed when gold price plunges because you are less rich. Be depressed because you do not have enough physical gold and do not have the capability to purchase more. Be happy when price plunges if you have spare bank credit or have enough physical gold to preserve your wealth at Freegold valuations.
