Gold. Collateral Damage

Bruce Johnson
In reference to the bottom dropping out of the "greater fool" market known as precious metals, let us consider the behind the scenes ramifications of Gold's sudden plummet. Yes, Gold is used as collateral.  It was considered a bullet proof good faith backing for market risks.  A speculator or trader could even use Gold to back up his purchases of  more Gold. Some exchanges even allow the posting of Gold to serve as margin, or good faith money. So what happens when Gold drops?  If Gold is placed to back other Gold purchases, the drop in the market creates a domino effect.  The Gold owned in the position loses value, and the Gold placed as good faith money also loses value.  So there is less "good faith" margin or collateral behind the falling value of the commodity owned.  A liquidity problem develops for the financial guarantor of the customer. Back in the ancient history of commodity trading (1930s),  there was an extremely bullish Wheat...(Read Full Post)