Wednesday , 20 September 2017

Talk of Gold Manipulation Is Just a Bunch of Bunk!

So writes Keith Weiner ( in edited excerpts from his original article* as posted on entitled What Is Pushing Down The Gold Price?.

What follows is a sometimes-humorous and often-irreverent and hard-hitting discussion. I write this not out of a desire to insult anyone, but to help people see their way out of a no-win zero-sum game. I hope to offer a different perspective and expand your thinking about gold and silver. My other goal is to address those people who are holding gold and who are nervous about the near-term price volatility. I hope that in this article, you come away with a stronger understanding that you are in the right place, that selling low is never a good strategy, and the dollar is not a store of value. [That being said,] if you are firmly committed to the belief that the gold price is suppressed, then you may want to stop reading right here or else prepare to be offended. Consider yourself warned.

The Conventional “Gold Bug” Theory

It is commonly accepted today that as the quantity of money rises, then prices must rise especially including the prices of gold and silver (throughout this article, I will use the word gold to refer to both metals unless I call one metal out explicitly). Prices in the real world do not move that way, so a convenient explanation has become very popular.

In this theory, there are nefarious forces, composed of various central banks plus assorted bullion banks (often called “vampires” and/or “squids”). In some versions, this dark cabal does not care about taking losses to suppress the price of gold. Other accounts accuse them of making illicit gains by causing poor old gold investors to buy high and sell low.

They are supposed to surreptitiously dump physical metal (which is finite in its supply) onto the market in order to push down the price. Alternatively, they might be dumping unlimited quantities of futures to accomplish their evil end.

The reason they would want to suppress the gold price is vaguely given as trying to prop up “faith” in the paper dollar, or otherwise somehow “protect” their paper money.

In any case, when the price is rising, the gold bug treats it as right and natural. When the price falls, it is due to manipulation. Why would anyone be satisfied with this simplistic view? It won’t help in trading, though it does offer comfort after each wounding.

I have written many times to debunk these conspiracy theories, so I do not want to dwell too much on them here, except to make two observations. First, the central banks don’t have any silver. If they were dumping real metal to suppress the price, it would have to be gold only. This leads to a nagging question. Historically, the gold-silver ratio was around 16 (i.e. 1 ounce of gold could buy 16 ounces of silver). If gold is artificially cheapened — but not silver — wouldn’t one expect to see the ratio fall below 16:1? Today the ratio is near 60:1.

If both metals are suppressed, then it has to be done using futures. There is an equally nagging problem with this idea. If they sell futures (but not real metal, which is typically claimed to be scarce and getting scarcer), then they tear open a large spread between the price of a future and the price of real metal. For example, if both are trading around $1600, and they sell hundreds of tons worth of gold futures — enough to drive the price down $250 — then there would be a $250 spread between real metal which would remain up at $1600, and futures which would be driven down to $1350.

The term for when the futures contract is cheaper than spot metal is called “backwardation”. While there is intermittent gold backwardation, the magnitude is in the cents or perhaps a dollar or so, not hundreds of dollars. Indeed, on Monday morning, April 15, the slight backwardation that had existed in the June gold contract disappeared.

My personal opinion is that the Fed cares far less about the gold price than we do. Gold is not in the basket of goods whose prices comprise the Consumer Price Index. Dollars are not redeemable in gold, the Fed and the banks are not struggling under an obligation to deliver gold, and there is no run on the gold of the banks.

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Monetary Metals Theory

Monetary Metals was founded on a single idea: gold is money, and the dollar is credit – of declining quality. One cannot profit by buying gold and waiting for the price to rise. Sure, one has more dollars, but each of them is worth less. How much less? The decline of the value of each dollar is in exact proportion to the gain in the number of them. If the amount of gold that you own has not changed, then it stands to reason that you have not gained real wealth (and in the US, you lose wealth due to the tax on capital gains).

Let me illustrate this point with an example. Imagine you have 1,000 silver coins. The silver price is about $24, so your hoard is worth about $24,000 today. What if the silver price rose 0.1% to $24.024, and you spent one coin? Your 999 remaining coins are worth … $24,000. What if the silver price rose again to $24.048, and you spent another coin? Your remaining 998 coins are still worth $24,000. You continue this process every day (while it lasts).

Is this really like living on the interest on a bond? Or, are you consuming your capital? You are certainly reducing the amount of silver you hold, even if the dollar value of it remains constant. This is the picture of capital destruction that everyone should have firmly in mind whenever a central banker or talking head uses the term “wealth effect”. Rising prices can make one feel wealthier, but it is not real wealth.

We must operate in the real world. Few people hold our unconventional view. Most Westerners think of a rising gold price as a gain, and a falling price is a loss. (attitudes are quite different in India and parts of Asia). Western gold bugs have to sell gold. They sell when the price rises, to realize their gains. They sell when the price falls, to stop their losses.

Though many call themselves investors, gold bugs are speculators… They play a zero-sum game, hoping to front-run the others, to buy first, and then let everyone else’s buying drive up the price so they can sell. Or, often, they are the greater fools who buy from other speculators who are selling to take profits. Then, when the price drops, they sell to avoid further losses.

Although they tell the story of the falling dollar, this is just lip service. Gold bugs measure their gains in dollars, and they sell gold for dollars as their modus operandi. When they are buying en masse, the price of gold can rise sharply. When they are selling en masse, we can see precipitous sell-offs, as over the last week.

Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.

* (Copyright © 2008-2013 – All rights reserved)

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One comment

  1. RE: Talk of Gold Manipulation Is Just a Bunch of Bunk!?

    Tell that to the Chinese who are acquiring as much as they can get as fast as they can get it without causing the price to skyrocket, while at the same time keeping all they mine/produce which is important since they are also the #1 producer in the World!
    I suggest those interested in this subject read the latest posts on along with the posted comments.

    I think we are now seeing the first real skirmishes in the PM Wars, where China and others are causing those that are trading in paper to think twice before fooling around with those with BIG players. I’m betting we will soon start to discover just how much Gold left Eastern Europe and was absorbed in Asia!

    As far as the Fed not caring about the price of Gold, I don’t believe it, since Gold and other PM’s are the only thing that really threatens the continued rule of the US$.