These bullion banks are extending credit to trading entities — probably high-frequency traders, hedge funds, and the other usual suspects — that don’t have any physical gold at all. These entities are just using the price of physical gold as an index — it’s just like LIBOR. As far as I’m concerned, the more leveraged these entities are when things turn around, and then they realize they are obviously on the wrong side of the trade, the more explosive the upside will be.
Some are asking, ‘How far can they stretch the rubber band?’ We thought 90 to 1 was pretty stretched, and yet here we are at 112 to 1.
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