From the Financial Times:
Fears that the US Treasury’s bail-out plan could fail provided support for the gold market, which saw holdings by the main gold exchange traded funds rise to record levels as investors sought a safe haven from the turmoil in financial markets.
On Thursday, the US government was forced to “temporarily” suspend sales of the American Buffalo one-ounce bullion coin after a rush by retail investors depleted stocks.
European central banks have cut their sales of gold to the lowest level in almost a decade, reversing the practice of recent years when hefty sales helped depress prices.
As central banks sell less, investors are rushing into bullion-backed exchange traded funds to such an extent that some analysts refer to the ETFs as the “people’s central bank” because they are now bigger than most countries’ official reserves.
That last sentence caught me off guard. Central banks are effectively peddling gold derivatives (ETFs) instead of the metal itself. People are hyping up a market around something that doesn’t actually contain value, only the promise of value. Isn’t that the same behavior that got us into this mess in the first place?
I await the next Gold crisis, where derivatives of gold stock associated with banks that do not actually contain a gold reserve are sold inside of gold hedge funds. A few people get rich, but the funds eventually default, leading us to lose trust in banks’ abilities to sell gold.
There will be a run on gold holdings and a resultant spike in gold traded on Internet websites, sold on eBay, or bartered on Craigslist. Internet applications will thus absorb the entire function of the market, leading to an increasingly subtle and diffuse economy.
I’m writing this post at 2:45 am. I need to go to bed.