(excerpt) Let's expand on that "voracious arbitrage" idea: The Shanghai exchange is a physical market, where buyers go to get actual gold and silver. So prices there are set by sellers with metal to move and buyers who want to take delivery. On the Western paper exchanges, in contrast, the players mostly gamble on price movements using futures contracts with very little actual metal changing hands.

But if the price set in the Shanghai physical market is higher than in the paper markets -- reflecting the different aims of the respective sets of traders -- then it becomes profitable for holders of long futures contracts in the West to demand delivery of the metal, ship it to China and sell it at the higher Shanghai price.

Once this process gets going it will quickly clear out the inventories of the Western exchanges, leaving nothing for future arbitrageurs. The exchanges will then force those wanting delivery to accept cash instead, in effect defaulting on their promises. Then it's game over, with the big futures manipulators no longer a factor in pricing.

Presumably from then on gold and silver prices will reflect rising physical demand in the East (and in the West from individual stackers). And gold will begin its long climb to the $10,000 or so price necessary to balance the amount of fiat currency created during the inflation of the Money Bubble.

This phase change could take a while, creating the possibility of some more nasty corrections while the paper players retain the upper hand. And once it gets going it could be steady and relatively peaceful or a "punctuated equilibrium" move where the failure of an exchange or bullion bank sends gold from $2,000 one day to $6,000 the next. Either way, the dominance of physical exchanges implies that much higher prices are coming.