Gold Is Manipulated -- But That's Okay
Prior Known Efforts at Manipulation
One other daunting challenge to the idea that gold is not being manipulated is that such a thought requires us to presume that all the past known and proven efforts at gold manipulation are just that: in the past.
One thing I know is that when a tool has proven to be effective -- whether it is secretive liquidity injections by the Fed, or MBS purchases -- that tool tends to get used again and again, and in increasing amounts if called for. That is, what works is never dropped; it is merely set aside when not needed.
The best we could argue here is that gold truly has no legitimate signaling mechanism at present, and therefore controlling its price has been set aside. For now...Or, if we believe that gold indeed has an important signaling function, it becomes all the more difficult to argue that its price is simply left to "the market" to set. One example:
On June 3, 1975, Fed Chairman Arthur Burns, sent a "Memorandum For The President" to Gerald Ford, which among others CC:ed Secretary of State Henry Kissinger and future Fed Chairman Alan Greenspan, discussing gold, and specifically its fair value, a topic whose prominence, despite former president Nixon's actions, had only managed to grow in the four short years since the abandonment of the gold standard in 1971. In a nutshell Burns' entire argument revolves around the equivalency of gold and money, and furthermore points out that if the Fed does not control this core relationship, it would "easily frustrate our efforts to control world liquidity" but also "dangerously prejudge the shape of the future monetary system." Furthermore, the memo goes on to highlight the extensive level of gold price manipulation by central banks even after the gold standard has been formally abolished. The problem with accounting for gold at fair market value: the risk of massive liquidity creation, which in those long-gone days of 1975 "could result in the addition of up to $150 billion to the nominal value of countries' reserves." One only wonders what would happen today if gold was allowed to attain its fair price status. And the threat, according to Burns: "liquidity creation of such extraordinary magnitude would seriously endanger, perhaps even frustrate, our efforts and those of other prudent nations to get inflation under reasonable control." Aside from the gratuitous observation that even 34 years ago it was painfully obvious how "massive" liquidity could and would result in runaway inflation and the Fed actually cared about this potential danger, what highlights the hypocrisy of the Fed is that when it comes to drowning the world in excess pieces of paper, only the United States should have the right to do so. (Source)If the price of gold was not "controlled," monetary policy outcomes would have been somewhat removed from the direct control of monetary bureaucrats. Gold was a threat to an institution dedicated to increasing its effectiveness and power. To give up the battle to control the price of gold, we have to presume something that has never happened in history: the willing abandonment of bureaucratic power to an outside force. There is also the London Gold Pool of 1969 and the strong dollar policy of the 1980s, which reveal that in the past, the price of gold has been officially monitored and controlled in order to help direct either a desired interest rate or dollar strength outcome. The point here is that gold price suppression is a clear matter of history at this point and has been well studied. Somehow I think some people have forgotten that history and, quite oddly, consider it less likely that gold suppression is happening today than in the past. I say oddly because the number of overt market interventions has been increasingly enormously over the past few years, and one might think this would soften opposition to the idea that gold, too, is being actively targeted.
Supply & DemandSo, if the price of gold is subject to manipulation -- or influence or control, if you prefer those terms instead -- in a way that reliably holds the price in check, then why should we buy it? In a few important ways, it's because of the very fact that gold remains the subject of so much official concern and secrecy. The laws of supply and demand tell us that anything with a cheaper-than-market price will experience stronger-than-usual demand. In the case of gold, we might suspect that purchases of gold have been bolstered by a weaker-than-otherwise price. Among those benefiting from buying cheaper-than-otherwise gold would be anyone and everyone who has bought gold lately. Private and official purchasers alike have been getting a very good price, indeed. Where you and I can be thankful for less expensive gold as we add to our holdings, so, too, can India and China be pleased at the national level. If a future gold standard is in the works, then whomever has the gold at that point in time wins. To any given nation, official gold stocks held by the central banks represent just one stock of gold, with that held by private parties representing another. India has always had a robust domestic gold market and is among the strongest of the strong hands. Gold goes into India and just never seems to come back out. China legalized and then modernized the gold market for its citizens, and gold sales there have been increasingly robust over time. Germany recently faced a "call from within" to repatriate the gold that is currently held in its name in reserve by the New York Fed, perhaps channeling the concern that said gold would be safer within its own borders than in the U.S. Given the confidence-shaking rehypothecation fraud perpetrated by MF Global, a bit of caution on the part of foreign concerns regarding the US's trustworthiness is warranted. All told, we are seeing a very interesting game play out around gold, and my suspicion is that it is the possibility of eventual re-monetization that motivates some of the moves. If this comes to pass, the gold price suppression will prove to be a most unfortunate mistake, providing short-term political and market cover for excessive money printing while sacrificing long-term advantage to those taking the other side of the suppression trade.
ConclusionIn Part II: How High & When To Sell?, we explore the most likely price targets for gold under the scenarios we believe are most likely to play out over the coming years. Equally as important as understanding where the price will go is knowing when the time has arrived to exchange your appreciated gold for other assets. We investigate both, as well as which asset classes to start tracking now in expectation of rotating into them with your gold proceeds when appropriate. Click here to access Part II of this report (free executive summary, enrollment required for full access).
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