Gold price manipulation – the never ending game?

I remember sitting in the audience at a gold investment conference a couple of years ago – I think it was probably at one of the Denver Gold Group’s European Gold Forums – that a member of the audience asked the one question which is on many gold investors’ minds, namely “Is the gold price manipulated by governments and central banks?”.  The experts on the panel, after some discussion, unanimously agreed to agree that there was absolutely no manipulation of the gold price by the financial powers that be.

At yet another conference, organised by the Gold Anti Trust Action Committee (GATA )in London a little later, every speaker unanimously agreed that the gold price was indeed being manipulated and suppressed by governments and central banks.

Who is correct – and why this strong difference of opinion?

To an extent this polarisation of opinion represents two sides of the argument – let’s call it the gold mainstream vs the gold mavericks – with neither side really prepared to admit that the other might have a point.

One suspects that opinion is gradually moving towards that expressed by the gold mavericks, although sometimes it seems they might damage their case by over-exaggerating the importance of, or over-theorising with regard to, some factors which may, or may not be truly significant.  It’s a bit like Erich von Daniken’s books of the  1960s and 70s putting forward the idea that ‘God’ was actually a spaceman from a different world and fitting some wildly disparate ‘facts’ into supposedly ‘proving’ a personally-held theory to account for some naturally-occurring phenomena and unexplained archaeological discoveries.

But so-saying, GATA – which is very much the co-ordinator and cheerleader, if not the instigator, of the gold manipulation proposition – has come up with some interesting data, and quotes from some very significant individuals - like former US Fed Chairman Paul Volcker - which certainly do suggest that the financial powers that be are at the very least conscious that some kind of control of the gold price can work to the favour of an attempt to maintain global financial stability, and that of the U.S. dollar in particular (effectively seen by the U.S. elite as the same thing!).

While the idea of exerting control over the gold price may seem a little abstruse to the uncommitted observer, the logic of so doing is fairly strong.  While current US Fed Chairman Ben Bernanke does not appear to accept that gold is a de facto currency – at least not in public statements – in reality it does indeed act like one and gold’s proponents would rate it as the currency of last resort – and there is little doubt that governments manipulate currencies.  Economist John Maynard Keynes is often misquoted as calling gold a ‘barbarous relic’ when in fact the actual quote in a treatise on monetary reform, from which the quote is taken actually was “In truth, the gold standard is already a barbarous relic” rather than gold itself, but to an extent gold remains something of an anathema to mainstream economists.

What gold is is a metal of value that is hard-wired into the human psyche as the epitome of wealth in cultures from all parts of the world.  It is not unique to the East or the West, or points in between.  Unless there is some kind of global brainwashing to wipe it out of human culture, then it will ever remain thus.  It is seen very much as being the ultimate store of value in people’s minds (put there almost from birth in childhood fairy tales and legends and thus instilled into us at our mother’s knee). 

While gold’s value in paper money terms can vary, in itself it cannot be debased through huge increases in supply, as can paper (fiat) money and thus is seen as some kind of protection against governments using the printing presses to increase monetary supply without any control.  The gold price tends to exert its own valuation on fiat currencies – the more paper money is printed, the less that money is worth against the ‘constant’ of gold – at least in theory and outside a financial sector where nowadays everything seems to be subject to manipulation of some kind or another.

Of course the above is a somewhat simplistic view of the process, but is sufficiently accurate for the money printers to be aware that given that gold is thus in effect a reference point against which a currency can be valued, if some kind of control can be exerted over the gold price then the debasement of the printed money through monetary easing is not so apparent.  Thus the logic for exerting control over the gold price is a strong one indeed and it would probably be surprising if there was not some attempt to do just this.

Where perhaps GATA gets it wrong, perhaps unintentionally, is that it appears from some of its statements that this price manipulation is seen as something of a plot designed to do down the gold investor, whereas it would be better presented as a desire to protect the perception of currency value in people’s minds.  It is not obvious to the person in the street in the US, for example, that the dollar has lost 80% or more of its purchasing power since 1971 when President Nixon took the dollar off what remained of the gold standard (with the dollar theoretically redeemable in gold at the then official gold price) and thus turned the greenback into a true fiat currency.

The person in the street may, however, look at it somewhat differently – say perhaps seeing their property soar in value and thus feeling that they are perhaps far better off now as a result – no matter that nearly everything else has risen by a similar amount – this is inflation.  In 1971 an ounce of gold was valued at $35 – today it is worth $1560 – a 4,357% increase.  Thus gold has hugely outperformed inflation over that period, but perhaps mainly because the price of gold back in 1971 was artificially held down.  Once it was released from its government controlled price tie in 1972 it quickly rose, probably too far too fast, to around $850 an ounce by 1980 before falling back to what should perhaps be considered its equilibrium level at the time of around $300 an ounce.  Gold in dollars has thus ‘increased’ in value a little more than five times over the past 25 years or so – which is probably effectively the level of dollar debasement over the same period.  Those who don’t believe gold is manipulated by the financial authorities will point to this as evidence that the price is, in fact, not manipulated at all – and like other goods gold has increased in line with inflation.  One can argue about percentage differences in the currency debasement and the rise in the gold price, but overall the gold price has risen in value, or the dollar has fallen – depends from which side of the coin you are looking.

Inflation is fine – as long as wages, pensions etc. keep up with it.  It actually makes life easier for the person in the street.  The zero interest rate environment which exists in most western nations at the moment can be more problematical.  Inflation can make debts like mortgages far easier to pay off over time – again as long as earnings keep up with the inflation rate.  Supposed zero inflation means that this easing of debt repayments does not happen.  It is even worse when, as at present, underlying inflation is actually present, but government statistics, due to regular goal post moving, claim there isn’t any and wages are frozen as a result, but prices continue to rise anyway.

Be this as it may, there has never in the past been monetary expansion like that we have seen over the past few years since the implementation of Quantitative Easing programmes.  Economic theory will tell us that the more money that is added into the supply, the greater the fall should be in the value of the underlying currency being printed. 

Now even if there was in reality relatively little control exerted over the gold price in the late 20th Century and the first few years of the current one, the game has changed dramatically.  The degree of money printing by the authorities has been such that there really is a clear and present danger of total currency value collapse and resultant hyperinflation.  Some economists see this as inevitable. 

Under these circumstances the only way of perhaps warding off hyperinflation is by convincing everyone that there isn’t a problem in the first place.  Hyperinflation kicks in when people lose all confidence in their currency – if you can maintain the belief that all is right with the world and inflation doesn’t exist, nor will it to any serious extent in the future, then maybe it will never happen.  At least that seems to be the theory that the Ben Bernankes of this world are working on and it is indeed a very dangerous policy.  It just can’t go on ad infinitum.  Sooner or later the dam will burst and most people will have absolutely no protection against the economic collapse that will result.  Think Weimar Republic, Think Zimbabwe. Think Argentina.  Yes people survive but any wealth most of them have accumulated will be wiped out – certainly any cash savings will be.

This is where gold manipulation is most likely to kick in and almost certainly has done.  The gold price is seen as the ultimate valuer of a fiat currency.  If the gold price soars it becomes apparent that the currency is collapsing and those who have been burying their heads in the sand for so long will at last be coming to the realisation that they are in financial danger, thus driving the currency down further, and moving their wealth into what they consider safe haven investments – key amongst which will probably be gold adding to the spiral – gold up, currency down.

It is thus in the interests of money printing governments, and their economic advisers, to try and keep a lid on the gold price.  Indeed it might be surprising if they were not already doing so.  It has been noticeable of late that events, like the Cyprus collapse, which would normally see gold rise, in practice saw a small increase at which point heavy selling came in and beat the price back down again.  Every time, it seems, that such events occur and gold starts to move up, it is immediately taken down – this is more than just profit taking.  GATA may indeed have a point!

How long can this gold price suppression go on?  Perhaps indefinitely now that countries do not seem to care about ever increasing debt.  Just print more money and pay it off!  Indeed like QE, gold suppression may be with us for the long term as if the authorities lose control over the gold price that may signify they are losing control of the whole global economic system and the consequences of that may be too horrific for everyone to contemplate.

What is perhaps more likely to happen is that policies will change to bring back a supposedly managed degree of inflation – or that’s what the politicians will be hoping  - and gold will be allowed to rise accordingly, but still kept under control.  External factors – perhaps more bail outs (and bail-ins) in precarious European states could upset the apple cart and see a flood of money moving from the banks into safe havens like gold which would destroy the very delicate balancing act conceived by the politicians and their tame economists.  That is the danger these kinds of policies face.  Ultimately one suspects  the matrix, as being implemented today, will have to blow up, but whether that happens this year, next year, sometime....  - one cannot predict.  Safe haven investment in gold is probably an answer, but it has to be looked on as insurance rather than a way of making money per se.