Disparity Between The Gold Markets Spells Opportunity For Gold Coin Investment

The sudden rise in the gold price over the past few days is heartening news for gold coin
investors. It’s not so much the change in price that matters – we’ve seen prices fall back all too
often recently – it’s the nature of last week’s activity.

Bill Murphy stated on his LeMetropoleCafe website, “The gold open interest rose a whopping
16,891 contracts [Thursday] to 433,847, which is a new recent high, by a substantial degree.”
By current trends that would mean a lot traders were simply covering short positions. This time,
however, it had more to do with “major-league buying,” which has been gaining momentum for
several weeks.

That is to be expected whenever paper gold trades well below the price demanded by the
physical gold market for any extended period. The supply of physical gold available to fulfill
contracts falls as new buying removes it from the system.

That presents a serious problem to a market that turns over nearly three times a year and quite
likely doesn’t come close to having enough allocated gold to cover all bets. Prices have to rise
substantially to get more physical gold back into the system.

Another, and potentially more disruptive, problem arises when paper gold holds prices
artificially low for too long: profits fall in the mining industry, forcing a curtailment of
production even though it is already beginning to lag demand.

Any decrease in production supply will greatly compound the demand for physical gold in the
paper market. While paper gold sets the price over the short term, the fundamentals driving the
physical gold market must eventually prevail.

Consider the worst case scenario: Commodity gamblers playing the manipulations of central
banks drop prices below the level necessary to sustain viability in the mining industry so
production halts altogether. With no new production competition escalates dramatically for
existing gold, sending the price into the stratosphere.

The mines, of course, start going back to work as prices rise, but remember that production is
struggling to keep pace with demand. Available gold will have been permanently reduced to the
extent that production was interrupted.

If the price of paper gold does not soon rise to a level sufficient to sustain production, the primal
forces driving the physical gold market will see to it that it does – and then some.

In other words, the value of physical gold rises when paper gold prices are held below fair
market value. Investing in rare gold coins is the best way to capitalize on the current disparity
between the value of physical gold and paper gold prices.

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