Brodsky:  “The fractionally reserved gold market seems to be unwinding.  I don’t know if it’s at the end of it right now, or near the end, or whether it has further to go, but very clearly the paper claims on the gold and silver markets seem to be getting pretty tight.  More than that, it seems that this is now understood by more and more participants....

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“I still think there is leverage in the market, and futures prices will still ride up and down with leverage among hedge funds.  I don’t believe that’s anywhere near being over.  So I don’t think we will see gold start to settle for cash in the near-term.  However, I think we are well on the way down that road.

I would say gold is now poised to go much, much higher than any potential downside, and so the risk/reward is very favorable as I see it right here.  One of the major things that is getting in the way is a real market value play.  The US dollar is still relatively strong vs other fiat currencies, and when the dollar is strong it gets in the way of gold being an outlet for all fiat holders across the globe.

The impulsive move is to go out of euros, yen, rand, or whatever it may be, and into dollars rather than going straight into gold.  When the dollar is strong, when there is flight into the dollar as there has been recently, it implies there is no immediate need to have gold ascend as the sovereign currency.”

Eric King:  “Paul, can you elaborate a bit more on this unwind that is taking place?  Meaning, this fractional reserve gold system is in trouble now isn’t it?”

Brodsky:  “It’s habitually in trouble.  It’s structurally in trouble.  It seems like we are getting much closer to the ultimate unwind.  All of the things that you and others like to talk about on your network, and that I agree with, including the depletion of warehouse inventories, the forward rate on gold, backwardation, and various other things, they are all signs that there is major stress on the system. 

This is especially true if you are long ‘claims’ and short ‘physical.’  There is no question about that.  I am not exactly sure when there will be an event that will bring the fractional reserve gold system to its knees.  We have seen over the past year, 3 years, 10 years, and over the last 40 years, that there is an enormous power among central banks to maintain the status quo.

So I don’t know about the timing, but certainly there does appear to be a great deal more stress in the fractionally reserved gold system, and it does finally seem to be nearing the point of the ultimate unwind.”

Brodsky also added:  “The Fed continues printing $85 billion a month, so the monetary base over official gold holdings is only increasing.  I haven’t looked at the number recently, but I assume fair value for gold is approaching $12,000 or so.

That shows how much the dollar has lost its purchasing power vis-a-vis gold.  It doesn’t mean that is where gold is going to go in exchange for dollars.  In my view there is going to be a political solution to the currency problem, not an organic solution.

In other words, I think monetary authorities are going to decide what comes next for the monetary system, and it is going to include gold, and it will include gold at a much higher price than where it is currently trading.  But I also think it’s going to be whatever they think they can get away with.  So I don’t know if gold will be $3,000, $5,000, $10,000 or $20,000, but it is going to be much higher than where it is today because the bottom line is they are going to have to inflate.”


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