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Theoretically – Could the ‘Price’ of Gold go to Zero?

June 26, 2013

The key word is ‘Price’. My 50 years of valuation experience has taught me that there is a difference between ‘Price’ and ‘Value’. So let’s think about this difference via these two concepts of Capitalism. Let’s ask:  could the ‘Price’ of Gold go to zero and could the ‘Value’ of a physical gold coin continue to increase (in dollars or any alternative currency…via an exchange or barter transaction)? Keep in mind that this a theoretical exercise to demonstrate that there is a difference between ‘Price’ and ‘Value’ (in exchange).

Price is a result of our currency unit! Value is a result of our psychology! Discern the difference!

Recently, we have witnessed the ‘Price’ of gold decline from around $1900 in 2011 to a level of near $1200 today. This huge decline in the ‘Price’ of gold is mostly a result of various strategies (today we can call these strategies…manipulations) which create the ‘spot’ prices for this commodity. Short selling via ‘naked shorts’ and similar strategies can DRIVE the ‘Price’ of gold down even though the DEMAND for the physical commodity is growing (i.e., value in exchange is growing within the greater marketplace). What a paradox! Why this dichotomy?

Gold’s ‘Price’ dropped in  our virtual computer markets yet the psychological VALUE of gold in the marketplace (especially outside USA) increased. Why the difference between ‘price’ and ‘value’? A physical gold coin (in many markets) has increased in ‘value’ (relative to the real-time spot price)!

What we need to understand is that all ‘Prices’ today are derived as imaginary units of someone’s Consciousness. Prices are no longer derived as the result of physical exchanges of coins or paper notes as in past history. Prices, today, are derived mostly via our electronic transactions within the computer screen. If I desire to drive the ‘Price’ of gold down artificially, I can use a strategy called the ‘naked short’. I can drive down the virtual gold ETF (called GLD) on the futures market via a huge ‘naked short’ sale.

Since I will execute this strategy in real-time for merely a short period of time (say minutes or hours), I can influence the ‘Price’ of GLD and/or SLV with this manipulative strategy. Prior to any need for ‘covering’ this transaction (with real physical gold), I will be OUT of the transaction and back into CASH. My strategy (a manipulation of ‘price’) can be effective especially if I can DUMP a huge quantity of GLD (a phantom virtual entity) via my strategy. This strategy affects the ‘Price’ of GLD and then can influence those who set the ‘spot’ price at a later time (the LBMA and the COMEX).

Note that Demand for the Physical diverged substantially from what manipulated Spot Prices were implying! This implies that ‘price’ and ‘value’ can be different!

Our global electronic markets now allow traders to implement all kinds of unique and manipulative strategies to drive ‘Prices’ to levels that may not reflect reality from a ‘Valuation’…point of view. Since ‘prices’ can now be artificially manipulated via the computer and via all kinds of unique trading strategies, it is possible for a commodity like gold, silver, oil, wheat, corn, etc. to be manipulated in directions which do not reflect real (core) underlying fundamentals (real psychological ‘value’ in the greater marketplace).

Price and Value can diverge (this can be substantial for a commodity like gold) and distort the markets and investor psychology. All this was made possible with our new digital money and our global interconnected electronic markets, algorithmic trading, and speed of light executions. Our Central Banks and their proxies (select hedge funds and primary dealers) could resort to strategies (like the ‘naked short’ strategy) to drive ‘prices’ in directions that do not reflect reality among buyers and sellers in the greater marketplace. All this to influence market psychology and protect the interests of Keynesian manipulators. We live in interesting times!

Phantom shares enter the markets via most ‘naked short’ selling. This affects ‘prices’ and distorts psychological ‘values’! Values and Prices become distorted and meaningless over time! Imaginary money units create this dichotomy!

As a valuation consultant for the past 45+ years, I am cognizant of the differences between ‘Price’ and ‘Value’. These two concepts can diverge for a time when market manipulations are prevalent. Today, we call valuation of assets a process of ‘price discovery’. This concept emerged after the closing of the gold window in 1971. Prior to 1971, the goal of valuation was to derive values for goods and items of production based on the idea that these items contained inherent ‘value’ (to some degree). After 1971, our currency unit (the dollar) became merely a ‘no thing’ unit of Consciousness (nothing) and this created the concept that ‘price’ and ‘value’ were identical.

The new definition of ‘value’ that emerged after 1971, was the concept of ‘Most Probable Selling PRICE’. Price discovery was the goal for all valuation consultants and appraisers. The idea of intrinsic or inherent ‘value’ within a commodity, house, site, or item of nature (production) was considered meaningless (now that our money unit was merely an ‘imaginary’ number). What emerged in the 1970’s and 80’s was the idea that ‘value’ (this concept) was subjective and imaginary…but that ‘price’ was objective and real. Prices could be discovered via comparison (comparables) in the marketplace. Prices were touted as objective phenomena and the goal of appraisers and valuation consultants was to estimate the ‘objective’ PRICE for an item, commodity, or units of production.

Appraisers and Valuation Consultants have created the concept of ‘most probable selling price’ as a representation of Value. With today’s virtual, electronic, and digital money units, however,  prices now get distorted and manipulated within the computer screen. We need to recognize that today’s prices are subjective, derived, and manipulated! Prices may not reveal core psychological thinking (value)!

The entire valuation profession entered into the Keynesian fiction that ‘imaginary’ numbers were actually objective phenomena and that ‘value’ and ‘price’ should be viewed under the new definition:  MOST PROBABLE SELLING PRICE. This created the fiction that VALUE (separate from ‘price’) was meaningless. Today, we witness the return of VALUE as different (and separate) from PRICE (when we witness gold and silver declining in ‘price’ yet demand for the physical commodity is increasing). This demonstrates that many traders, investors, and the general public view current manipulated ‘prices’ (those created via our digital electronic computers) as DISTORTED from what should be the real underlying VALUE.

Many retail sellers have limited supplies even as the ‘price’ of gold declines almost daily! What a paradox!

Yes, there is a difference between PRICE and VALUE for certain core goods and commodities. Even real estate ‘prices’ can be distorted from what many would view as the real underlying ‘value’. Within my personal neighborhood in the Tucson area, ‘prices’ vary for identical houses from one block to the next. Buyers and Sellers determine their ‘prices’ based on their personal perceptions of VALUE. Since the concept of ‘value’ is subjective and psychological, it means that one’s person’s PRICE setting for a house could VARY substantially from another person’s perception. Price distortions are everywhere in today’s markets!

To conclude, we can say (theoretically) that the ‘price’ of gold, as expressed via our virtual computer markets, could go to ZERO. The commodity we call gold, however, remains (gold does exist within space/time).  This means that an EXCHANGE of this commodity in the marketplace will likely produce various VALUES from buyers/sellers when an exchange is desired. These ‘values’ would be determined (subjectively) from party to party. Value is different from Price and we witness this in the GOLD and SILVER markets today. Watch as the markets change from price suppression of gold/silver to price enhancement…down the road! The markets are all psychological, subjective, distorted, and manipulated today!

None of the Functions of Money work…given today’s fictional digital money creations. Today’s Digital units have NO ‘store’ of value function (long-term) and these units are incapable of measuring or estimating objective value in the marketplace! Will the marketplace discover these realities?

Our digital (imaginary) money has created these distorted markets. There is no solution to this situation given our fictional Keynesian economic philosophy. Keynesianism is based on fiction, illusion, word distortions (calling what is subjective…as objective), and false perceptions of reality (Monism and such). In reality, economics and money was founded upon a Dualistic philosophy of reality. Money is supposed to be some THING from nature which everyone can view as having some objective VALUE. Our Constitution chose GOLD and SILVER…not imaginary digits within the computer screen and real-time manipulations of Central Bankers! Today’s markets are all about BERNANKE, Bernanke, Bernanke (also called the Fed) and his/their real-time manipulations to influence and distort our markets! What a shame! Enjoy! I am:

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