Friday, March 4, 2011

Bank on Gold

Today gold and its sisters Trinity are up big.  The reason for this is simple:  The banking industry had to leverage gold up to support their balance sheet.  To stay solvent, while the rest of the world's assets were plunging, banks must loan their gold out, and this increases its value.  Gold became worth more to keep the clock moving, and people want to play this game all night.  The can is gold, and it will be kicked down the road as long as it has to.

Banks hold gold as an asset and subsequently loan it away.  It is the first loan of recourse; the chief investment.  Then the money earned from this is used again on loans.  This improves the asset side, and expands growth.  If gold is not loaned away, then it is used as a liability. 

Banks spin this how they need to.  When they need leverage, they loan gold, and earn revenue used to make more loans.  If they choose, they can also sit on their gold.  This is how a lot of the supply and demand has been created, until recently.

The movement into gold as a store of wealth instead of investing in paper assets is only just getting started.  The market is small, and the increases into it will expand somewhat exponentially.  The big question is, 'When will demand be greater than supply?'  For gold this could happen quite quickly.  In fact, it may have already happened.

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