Financial lingo disguises how plainly markets function. Most of the terms used are abstract and complex, and sound unreal to many.
It is hard to explain why it’s so important to own physical gold in today’s context and why the spot price doesn’t matter that much in determining the real value of gold, without being aware of certain key elements moving the gold market.
And it is of the utmost importance to understand some of those elements, if one is to be able to support a seemingly discouraging volatility.
We will try to explain the situation by making an historical parallel with the Titanic shipwreck:
You’re on board the Titanic, it just hit the iceberg (2008 crisis), and it’s going to sink.
Not all passengers are aware of it, except for you and a few others who have the technical know-how (an understanding of the monetary system) to know that the ship cannot be repaired and that it’s going to sink.
You fully understand the importance of owning a lifeboat (physical gold or silver).
But, for the moment, the value of your lifeboat (the price of gold) isn’t perceived as very high by the other passengers, because most of them are convinced that a ship like the Titanic cannot sink.
The “spot price” of your lifeboat on the bridge of the Titanic has gone up since hitting the iceberg, but it has not reached its maximum value, because most passengers still don’t believe the ship is sinking.
But, since you know what’s going to happen, you’re not really worried about the “spot price” of your lifeboat, especially as you know the staff members are lying when they tell the passengers not to worry because there are lifeboats for everyone.
By telling passengers there are enough lifeboats for everyone (virtual offer), the staff members contribute to keeping the price of your own physical lifeboat low (gold price manipulation).
But, you know those lifeboats don’t exist, and the value of your actual physical lifeboat is much greater than its “spot price” on the bridge of the Titanic (the difference between “paper” gold and physical gold), or the value of certificates with a “lifeboat delivery promise” being given out by staff members.
The “spot price” of your lifeboat on the bridge of the Titanic does not reflect its real value, but you know that, in time, its value will explode to the upside.
The staff members are “manipulating” the price of the lifeboats by creating an offer of virtual lifeboats (“paper” gold) that do not exist.
As the owner of a real lifeboat, you aren’t that much worried about the “manipulation”, because you know it will cease when all the passengers try to get into a real lifeboat.
On the other hand, knowing the staff members are lying, and not trusting them since the crash, you’re not going to let them keep an eye on your lifeboat for you (storage outside of the banking system), because they might have promised it to many other passengers (gold re-hypothecation) so they might not be able to “deliver” it to you when you need it.
The staff members are trying desperately to avoid general panic, and to control the situation (delaying the outcome) by influencing the price of the only asset that has real value on the bridge of the Titanic—the one that ensures you survive the shipwreck.
Yes, this parallel is simple, and it’s meant to be, but it gives a clear explanation of the situation.
P.S.: All the “staff members” own lifeboats (physical gold).