Gold Price Manipulation: So What?

Whether or not the price of gold, as many have been arguing here and elsewhere, is being manipulated or not, interestingly enough, doesn't matter. Gold is told to be an excellent preserver of wealth, especially in rough times like these. I agree with that but I don't think the manipulation hypothesis should be given as much focus as it's been given so far, simply because there is nothing wrong with central and commercial banks occasionally pushing the price lower.

Why? Well, the central banks, led by the Federal Reserve, have been printing huge amounts of new 'money' and as soon as it gains velocity, inflation will propel gold to new highs. One way to preserve wealth is to buy gold and the best time to do it is before inflation kicks into high gear. Let's assume that the manipulation hypothesis holds true and the price of gold is being artificially suppressed. As an individual who is trying to buy gold I could not wish for a better setup, I would be glad to be able to buy gold at a suppressed price.

If gold exploded in a manner that it did almost 30 years ago, the hypothetical manipulators would be unable to hold the price of gold down. Margin calls would be all over the place and the hypothetical manipulators would have to exit positions en masse. That is very likely the scenario that would play out during another violent push higher. If you factor in the amount of deliveries that would be taken in the case of a price explosion, there would be nobody left to manipulate the price of gold.

If the price of gold will not explode, I still won't be worried about the effect of the alleged manipulation because even the 'manipulators' have been unable to stop the price from rising so far. I will preserve my wealth with or without intervention by the banks.

Manipulation or no manipulation?

I'm not saying the manipulation hypothesis holds true. I'm not saying it is completely wrong either. In fact, I don't even care much because in the long run, it really doesn't matter. If there is merit to the manipulation argument, I don't care because I can't do anything about it (let's face it, manipulation hypothesizers, you've been all over it for years and you haven't had any influence on the CFTC).

If the manipulation hypothesis is just that, a mere hypothesis, I don't care either. All I care about is the price of the yellow stuff and as I pointed out earlier, the 'manipulators' have been unable to keep gold price from rising from the low $200s to almost $1000.

There are much larger forces in play that will determine the price of gold in the coming years. We have all heard the inflation story, but added to that are growing signs that China is diversifying its foreign reserves away from the dollar and into gold. The population of the planet is in an uptrend and will continue climbing for the foreseeable future, this means that there will be less ounces per capita - more wealth and more people makes for a greater need for wealth protection.

Of course, I haven't listed all the factors that contribute to the rise of the yellow metal and that is not the point of this article. The point I would like to make is this: buy gold when it dips and don't fret about the manipulation hypothesis. We are in a secular bear market for stocks and a secular bull market for gold (see the chart of DJIA/gold) and market intervention, real or not, doesn't make a difference.

Disclosure: long AUY and silver bullion.

Comments

[Steve in Gr...:]

Yep. This sounds about right. The more the Western central banks sell gold, the faster their ability to manipulate disappears (and the cheaper I can buy, short term).

Jul 05 07:27 AM

[DONE_SONZ:]

The faster the cartel loses control the better.It's coming.

Jul 05 08:21 AM

[change is t...:]

Kristjan I agree that manipulation does not change the reasons to be fundamentally bullish on gold as a preserver of wealth. I would suggest caution, however, as manipulation often causes irrational behavior. No one wants to be caught in a bubble trap caused by manipulation. Your article implies a buy and hold forever suggestion. Because I have read what you have written, I know you are not naive. I know you would trade overly irrational behavior, someone reading this one of your articles for the first time, however, may not.

Jul 05 09:39 AM

[texpat:]

From a narrow standpoint, you may be right. From a broader standpoint, the problem is that if the manipulation ends in a blow-up, a lot of people will get hurt. Taxpayers for one, because the banks who are short and have to cover en masse will get bailed out, particularly if they're acting as central bank proxies. Force majeur will be declared on the commodity exchanges, so those who thought they could take delivery of bullion will receive paper instead. All of this will further erode confidence in what is already a shaky system. It therefore matters a great deal if the gold price is being manipulated.

Jul 05 10:04 AM

[Kristjan Ve...:]

I'm not implying a buy and hold forever scenario, rather, a buy and hold for a long time, but not forever. I guess I should've added that once the Dow Jones-gold ratio nears the historical lows (near 1, 2 or even 3) it would be time to sell and buy equities or other undervalued assets. I do acknowledge that central banks have some influence on the price of gold, but it is of short term nature only and that's why I doesn't matter in the long term. But the underlying reason for buying gold should still be the preservation of wealth, not getting rich as some suggest.


On Jul 05 09:39 AM change is the only constant wrote:

> Kristjan I agree that manipulation does not change the reasons to
> be fundamentally bullish on gold as a preserver of wealth. I would
> suggest caution, however, as manipulation often causes irrational
> behavior. No one wants to be caught in a bubble trap caused by manipulation.
> Your article implies a buy and hold forever suggestion. Because
> I have read what you have written, I know you are not naive. I know
> you would trade overly irrational behavior, someone reading this
> one of your articles for the first time, however, may not.

Jul 05 11:18 AM

[manya05:]

I agree with "change is..". Manipulation may not matter if you believe in the long-term such manipulation is resolved by a short-squeeze (which is the scenario many goldbugs are waiting for). However, if there is manipulation, an alternate scenario is also possible, and that is capitulation. Some may have bought into gold at the height of the crisis, and if after 1, 2, 3 years...nothing happens and the price of gold goes nowhere, many investors (save the goldbugs) will exit their positions. This is exactly the objective of the manipulation, so, manipulation does not matter if it fails, but it matters a lot if successful. The market is so murky that nobody knows what will happen...really.

Jul 05 11:39 AM

[CoinMiner:]

Sure, maybe manipulation or control in a market manages the price of an asset. Perhaps an artificial price of that asset does little to change the FUNCTION of that asset.

However, intervention on a scale to constitute manipulation will - over time - completely erode public confidence in that particular market. That market will fail and ultimately be replaced by another with greater transparency.

There ARE reasons to consider the pros and cons of 'managed' economies irrespective of the price of any one thing on any given day.

Jul 05 12:03 PM

[thannagan:]

If you sell gold (no matter who "you" are, or why you're doing it), you are buying a (probably your own) currency. "You" may be doing this as much to prop-up your currency as to negatively affect the price of gold. And "you" may be doing it because of a need rather than a desire. The "manipulation", if that's what it is, tells two stories, doesn't it. Besides, gold has been in a rletively flat pattern for some time. Nobody has moved it a lot, for long - yet. Would you rather have more currency of the purported sellers or the gold they are dumping?

Jul 05 12:06 PM

[adan:]

interesting, and probably wise, take re manipulation of the gold price -

nice work, thanks!

Jul 05 03:03 PM

[Kristjan Ve...:]

manya05,
First of all, gold should be viewed as a safe haven, because when it comes down to it, gold is the purest form of money. It doesn't earn you a dividend, the real rate of return is minuscule or sometimes even nonexistent (while the nominal return is big) and it costs money to store it. The people who buy into gold at the height of the crisis in the hopes of making money are usually the so-called cab drivers (no offense) and the trait that characterizes them best is that they don't know a thing about fiat currencies and gold. Thus, they are late to adapt to changing conditions and seeing how they have lost most of their wealth due to inflation, they will go the way of the smart money. Unfortunately for them, and fortunately for us, that is the final phase of the bull market for gold. Can you hear the bubbles bursting?

PS! If the scenario of massive inflation were ever to become true, I think we would see a decoupling in the gold market, i.e. the price of physical metal would be much higher than that of the paper gold.

Jul 05 03:36 PM

[psig:]

The assumption continues to be that a possessor of physical gold will be able to use it in commerce if the price starts rising substantially. I expect the current US gov't to make it illegal to use in any transactions if the price reaches a certain level thus preserving the federal gov't ability to control their "monetary" system. Or they could go the route of requiring it to be surrendered like 1933 then make it illegal to possess and let the price skyrocket. Sure black markets will develop and you will have a 1950's soviet style economy with gov't ownership of large business and banks (already in progress), central gov't planning and a lots of controls over everyday life. The gov't could do the same with any prescious metal or declare some kind of emergency like they are prone to do and voila' you are screwed. I know this doesn't put a smiley face on gold possession but we do not have a garden variety gov't at present.

Jul 05 04:33 PM

[kohalakid:]

I'd disagree that there would be a wide spread between "paper" and physical gold prices. "Paper" gold prices are all based on the right of the buyer to take delivery. There would be enough arbitrage that the two rates wouldn't get out of line. The physical market has enough liquidity to avoid a "paper" discount.


On Jul 05 03:36 PM Kristjan Velbri wrote:

> manya05,
> First of all, gold should be viewed as a safe haven, because when
> it comes down to it, gold is the purest form of money. It doesn't
> earn you a dividend, the real rate of return is minuscule or sometimes
> even nonexistent (while the nominal return is big) and it costs money
> to store it. The people who buy into gold at the height of the crisis
> in the hopes of making money are usually the so-called cab drivers
> (no offense) and the trait that characterizes them best is that they
> don't know a thing about fiat currencies and gold. Thus, they are
> late to adapt to changing conditions and seeing how they have lost
> most of their wealth due to inflation, they will go the way of the
> smart money. Unfortunately for them, and fortunately for us, that
> is the final phase of the bull market for gold. Can you hear the
> bubbles bursting?
>
> PS! If the scenario of massive inflation were ever to become true,
> I think we would see a decoupling in the gold market, i.e. the price
> of physical metal would be much higher than that of the paper gold.

Jul 05 04:43 PM

[bindlepete:]

This is perverse for the " Free Market " folks.

I too like to buy low sell high but remember the last time this went down it became illegal to hold gold and the owners were forced to sell it back to the e. The last president was purportedly the signator to Presidential Directive authorizing the federal examination of safe deposit boxes. I suspect in prep for the seizure of gold.

Now with the suspicion that we will inflate our selves out of historic debt and all the international work that has been going on to repeg gold at a new level the mining stocjks look better and better rather than the hard gold itself. Out of the country is better yet.

Don't dodge the real problem as it has happened before and in my lifetime here in the US of A.

Just try to buy gold at anythig but a premium in Asia perhaps and don't think you can hide it in Bermuda . Maybe elsewhere but it will be a felony, if undeclared, here in the US. Some overseas mutual funds perhaps - even those controlled by US Banks which I might name but even this is risky with USB leaking like a sieve.

FiNCEN may be pretty stupid but they are getting better although they too are subject to political influence. Ask Senator Dodd.

Canadian gold and oil equities may be a safer haven. It could be hard to commandeer those and a lot of the bigger players are there to protect the front from a political standpoint.


It has happened before and is I regret to say

Jul 05 05:26 PM

[joevans:]

Surely with all the insecurities spoken about, it is saver to go for goldshares, like the South African Goldfields (GFI)
The South African Rand has strongly apreciated, so wage increases will not so badly affect the production costs of Gold in $ terms.

Jul 05 05:57 PM

[Ad Orientem:]

I am guessing "secular" is meant to be "cyclical," unless there is a religious inference that I somehow missed. Other than that, great article.

Jul 05 06:53 PM

[Bruce Pile:]

Bank manipulation of gold pricing is one reason I am amazed that fractal gold predictions seem to work. How does fractal analysis factor in what the banks do and when they do it? But the fractal practitioners keep accurately calling the moves of gold anyway - see my blog post "Is Gold at a Fractal Moment?" (goodstockinvesting.blo...). Fractal analysis must have some built-in mechanism for anticipating big money selling or buying.

Jul 05 08:28 PM

[dcb:]

Interesting stuff bruce. I never thought of fractals, but I have specific graphs at home of 5 day petterns that I see happen over and over again so I can recongnize entry and exit points. I think there would be a book somehwere in these patterns!!!


On Jul 05 08:28 PM BrucePile wrote:

> Bank manipulation of gold pricing is one reason I am amazed that
> fractal gold predictions seem to work. How does fractal analysis
> factor in what the banks do and when they do it? But the fractal
> practitioners keep accurately calling the moves of gold anyway -
> see my blog post "Is Gold at a Fractal Moment?" (goodstockinvesting.blo...).
> Fractal analysis must have some built-in mechanism for anticipating
> big money selling or buying.

Jul 05 10:25 PM

[sarge 907:]

Not all of us purchase gold, better yet, silver as an investement. Some, like me, purchase the stuff as a hedge against the billion dollar fiat notes that are surely on the horizon. I'm sure they'll have to take (by force) our guns before they steal our precious metals. Shades of 1933, not this time.

Worry more about the horde's of take-care-of-me's than the manipulators.

Jul 06 09:04 AM

[rick12345:]

Any way you look at it, the government is screwed with regards to inflation. Strong USD leads to cheaper prices and more spending, resulting in price inflation. Weak USD leads to an increase in prices, ultimately resulting in wage driven inflation.
Everyone in the market is expecting the gold price to crash, just because it did in July of last year, however I am sorry to say that it does not work that way. Seasonality may operate well in a vacuum, but this is definately not a normal situation that we are currently experiencing.

Jul 07 07:07 AM