Some say that the reason for the gold price manipulation is the need to hide the debasement of the USD. If gold went up, up and away it would unmask the shrivelling of the purchasing power of the Federal Reserve Notes. This sounds plausible but there is a little bit that I would like to add to this argument. The true value of gold and the extent of the debasement of the notes is very well known. At a higher level. The big guns like national central banks, large wealth funds and large wholesalers have the true picture. They buy gold in the tons and at that level availability and price changes drastically. One or even ten tons may be available. 100 tons is hard and 1,000 tons is almost mission impossible. It is even more extreme with silver. A buyer with a billion USD can clean out the COMEX and send the price of silver to the moon. The price manipulation of gold via exchanges thus only misleads the small buyer.
Did you ever ask yourself why the Swiss Central Bank behaves like an ETF and invests in the US equity market? Would it not be more consistent with traditional values to convert at least some of its currency reserves into gold? That's what central banks used to do in the past. Why does the ECB not acquire some gold to protect itself and the currency against the inevitable meltdown of fiat money? Or the Bank of Japan, the central bank of a country that is heading for a currency bust some time in the future?
Because of the precious metal rationing agreements. The reality of the precious metal market is like the rationing regime in post war Britain. You may have lots of paper "money" but you can not spend it. You have a ration book instead. This book has coupons that entitle you to a certain amount of bread, sugar, meat et cetera per week and person. Part of this system is also price control. A butcher is only allowed to sell meat at the official price. The same goes for gold. Since the 1960s there was close cooperation between the US administration and its western juniors to control the price of gold. They formed a gold price cartel called the London Gold Pool. It failed because the US defrauded its partners by printing dollars without having the gold to back it. From the 1970s until today several agreements were struck between the US and western central banks to control the selling and buying of gold. The US strongly discourages western central banks from building gold reserves. This works very much like a ration book. Without a coupon – here approval by the US – no purchase of rationed gold. This price cartel is now falling apart because global wealth shifts to the East and Asia ex Japan does not prostitute itself to the US like slavish and subservient European governments.
What is the practical value of these thoughts? That I can use the market manipulation of central banks to my personal advantage. As a long term investor I have some very simple reasoning as guidance for myself.
Thought 1: The price of an ounce of gold is always higher than the price on my screen as long as central banks manipulate the market to suppress the price of gold. That means that I always get my gold at a discount as long as central banks intervene. For the last five years this meant ALWAYS.
Thought 2: The intensity of the market intervention gives me an indication how much of a discount I get. The higher the demand for gold is, the more central banks and colluding global banks need to intervene to keep gold prices within their range. last week saw an unprecedented level of day by day, hour by hour and minute by minute gold price smashing. On Wednesday there were 36 interventions, on Thursday 33; one of then a 40 tons paper gold dump. David Kranzler on Investment research Dynamics wrote a good article about this. On Friday central banks intervened more than 55 times up to the very last minutes of trading, to push the gold price below 1,270 USD. This suggests to me that on the wholesale market, gold is selling like hotcakes.
Thought 3: When will the gold price suppression end? It is ending right now, before our eyes. Retail buyers have finally understood that central bank price smashes are like Happy Hours in a nightclub. It means that the "SALE" signs go up and gold is offered at a discount. At the current intensity it is impossible to hide the manipulation. It is just so obvious. A manipulation that is recognised as such does not work anymore. Price smashes now attract swift buying. This defeats the object and makes it impossible for the manipulators to cover their naked shorts without creating a massive spike in the price. It is evident to me that the current price suppression regime broke within the last six weeks precisely because investors learnt to buy when central banks sell. This week, the effect of an individual market intervention only lasted for minutes. Without almost constant dumping of naked shorts, the price bounced back as soon as the dumping was over.
Thought 4: What is the true value of gold? Jim Rickards and others suggest it should be roughly 10,000 present time USD per ounce. Their videos are on YouTube and anybody can listen to their reasoning.
My basic assumption is that the paper dollar is in the process of utter destruction. The most wealthy and best informed have already started to dump it because they lost trust in the ability of the administration to balance the budget. Joe Sixpack obviously won't be briefed. He will have to pay for the party. One fine day it will dawn upon him that he is the one holding the baby, meaning bundles of worthless bank notes.
Ever increasing public debt demands ever more money printing to finance it. On the 23 May President Trump's budget director, Mick Mulvaney presented the budget to the press. During this presentation he said that the new administration was determined to bring three per cent (real) growth back to the country. However: "By the way if you don't (believe in the three per cent growth story) it (the budget) will never balance." I leave it up to you to work out what is more likely; that the US economy enters a recession within the next 48 months or that it starts to grow by three per cent from October this year onwards until 2027 when the budget is supposedly finally balanced.
N.B. The thoughts expressed in this article are my own. This is not an advice to invest. Readers should consult with their financial advisors before they make any investment decision.
By Sam Brown for Safehaven.com