Can Gold Be Suppressed Indefinitely? 18 comments
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Recently a subscriber wrote to me and inquired, “if gold has been subject to manipulation by the dark forces at the top of the economic pecking order, then why couldn’t they continue to do so ad infinitum?”
Arriving at an answer to that has taken me several weeks of noodling it around in my head while observing developments in the gold market and the housing market and the global economy.
It seemed obvious to me, as it does to many of the writers lobbing missives into the blogosphere on the subject, that the continuous printing of currency would cause a proportional devaluation of said currency in line with the excessive representation of ersatz wealth it theoretically should be backing. And that’s the bottom line for a currency, isn’t it?
A dollar is supposed to represent a share in the collective wealth of a nation. And in a truly democratic and fair society, the citizens and the government should all be genuinely and sincerely motivated to ensure that the valuation accorded to its dollar is indeed a fair and accurate expression of the appropriate portion of its wealth. They would seek to thwart at all costs any over-supply of dollars, for otherwise, the purchasing power of their collective wealth would diminish, and its ability to borrow might be encumbered, as those in a position to lend would regard the borrower’s integrity questionable, if it wasn’t even able to manage an accurate representation of its balance sheet, which the value of a dollar inevitably does.
But that is not the case for the United States.
Instead of clear and level-headed financial stewardship by the country’s “leaders”, we have a situation where the government, at an ever increasingly transparent level, seeks to enrich itself at the cost of its citizenry, a situation they at the same time claim to be in the position of defending against. Its George Orwell’s doublespeak enshrined in a political system.
The nationalization of Fannie (FNM) and Freddie (FRE), both “government sponsored” corporations, presents just such a perversion of language designed to confound and anesthetize a general public already muddled with the continuous bombardment of juvenile and conflicting messaging from both public and private enterprise.
I watched an hour of television last night (a rarity) and was stunned to realize that of the 9 commercials being aired at each break, all but one were for medications of one type or another.
But, to stay on topic, note that in the mainstream newswire description of the nationalization announcement on Sunday, Fannie and Freddie had been placed under “conservatorship”.
Conservatorship?!
Searching through Google News, the use of the word “conservatorship” prior to Sunday is limited primarily to references to the “conservatorship” of Britney Spears’ children by her father Jamie, with one notable exception.
It turns out the collapse of IndyMac in July was actually succeeded by its placement under Federal Deposit Insurance Corporation [FDIC] conservatorship. Under this arrangement, the accounts of deposits up to $100,000 are guaranteed by the FDIC, and the $58 billion fund that backs the FDIC is accessed to cover any shortfall from the illiquid bank’s cash on hand as customers withdraw those deposits.
There have been 11 bank failures so far this year where the banks have been placed under FDIC “conservatorship”, while the banks' affairs are unwound, their assets sold, and all insurable deposits are returned to customers who had deposited them. In 2007, there were 3 bank failures for the entire year.
At this point, there are 117 banks in the United States that are deemed as troubled by the FDIC, and the news is that the FDIC will be seeking funds from the U.S. Treasury to shore up the depository insurance fund as banks fail and the $58 billion that was left after IndyMac dwindles.
Now that Fannie and Freddie are under conservatorship, and not by the FDIC but by the United States Treasury, the federal bank account of the United States of America is now acting as the FDIC for the trillions of dollars of mortgages, among which even the default rate on primes is accelerating.
The only way for the U.S. Treasury to continue to provide bailouts to the backers of these mortgages, which for the most part are sovereign treasuries of other nations, is to print more money, or else sell assets to raise money. What assets does the United States have that it can sell to raise money?
T-Bills? Well, it doesn’t take a rocket scientist to see that T-Bill is just a new word for common share of Freddie and/or Fannie, and we’ve seen how those are being valued by the market.
What about the U.S. inventory of gold?
Well, according to the International Monetary Fund’s Official World Gold Holdings report, the U.S., at December 2007, held 8,133.5 tonnes of gold, or 75.3% of the world’s central bank holdings. That’s 261.5 million troy ounces, valued at $209.2 billion at $800 per ounce.
Never mind the Gold Anti-Trust Action Committee’s assertion that that gold has long been surreptitiously leased out and subsequently sold, thereby suppressing the price of gold while claiming to have this gold still intact in its vaults. In the discussion as to the solvency of the United States treasury, that’s really a trifling amount.
So why would the United States even care what the price of gold is. You’d think they’d want it to go up, if they are in fact as broke as all evidence seems to suggest.
Ah, but here’s the rub. Historically, a nation’s currency was valued according to how much it took to buy one troy ounce of gold. When the United States government confiscated all the private gold and pegged the price at $35, it became a question of how many U.S. dollars could your currency buy. The U.S. currency was governed by how much gold it held in reserve, which limited the amount of currency it could issue. From that period in 1933 until the abolition of this “gold standard” in 1971, was the foundation from which the U.S. Dollar as the official Foreign Reserve Currency usurped gold’s historic hold on that position.
Since 1971, when the U.S. dollar was representative of whatever others were willing to pay for it, there has been a pervasive and subversive conflict inherent in holding U.S. Dollars in your coffers as primary foreign currency. The further the dollar declines in price, the less value your own currency has, because your entire foreign holdings are in U.S. dollars. If, for example, it took 5,000 U.S. dollars to buy an ounce of gold, what would that say about the value of the rouble, the yuan, the yen or the British pound?
And so, if one asks, could the price of gold be suppressed indefinitely, the answer is YES! It sure could! If central bankers around the world are so profoundly incentivized to protect the value and purchasing power of their own currencies by continuously mis-representing how much gold they actually had, and how much they had in the past sold and were presently selling, then the answer is yes.
And here’s the scary part. There is no way of knowing how much gold is actually bought or sold in a single day. Apart from official central bank disclosure documents, which are released quarterly, there’s no daily tally of what anybody has bought or sold.
Three things should now be abundantly clear to the investing public: 1) Mainstream media acts as PR and Image Perception Management for big business and government; 2) The government acts in the interests of itself primarily; and 3) If the information issued by any of these entities is suspect in its integrity, then its impossible to know what’s coming next.
Chris Powell from GATA says, “Governments may be able to suppress the gold price forever but only if, first, their own gold reserves are infinite and the governments are prepared to dishoard them indefinitely, or if governments are prepared to put legal restrictions on gold ownership. Unless such restrictions can be enacted worldwide -- in every major country -- it's unlikely that the gold price can be suppressed forever.
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This article has 18 comments:
Since 1971, when the U.S. dollar was representative of whatever others were willing to pay for it, there has been a pervasive and subversive conflict inherent in holding U.S. Dollars in your coffers as primary foreign currency. The further the dollar declines in price, the less value your own currency has, because your entire foreign holdings are in U.S. dollars
that's a very silly comment. There is no country on the world that is FORCED to hold US dollars...your article is inceitful until you reach this comment that makes no sense. Please respond and expalin yourself on this board. thank you
Oh.. really? Who said so? And what the h*ll is this "collective wealth"?
So true.
Gold is going down, like all other assets, because we are in a dis-inflationary environment. Not yet deflationary, but heading in that direction. Nothing can stop it until it runs its natural course, but the Plunge Protection Team will attempt it with the unlimited printing of dollars and a willing Congress that knows no limits on federal debt creation.
Gold's next stop? try $600 as a way station. Silver's headed to $4.00, then we get to reassess.
The US now walks the road to Weimar, and although you may gloat about the wheelbarrows of cash you have to your friends, you won't be fooling us
Yes, that is the theory... the question is, how long can it be propped up?
US History Encyclopedia: Devaluation
Devaluation, a downward adjustment of the price of a currency in terms of other currencies, in a system in which each currency has a gold par value. The downward adjustment may be achieved through a devaluation of one currency, an upward revaluation of other currencies, or a combination of the two. The U.S. dollar has been devalued several times since the early nineteenth century. The gold content of the U.S. dollar, established at 24.75 grains (2 April 1792), was reduced to 23.2 grains (29 June 1834) and then raised to 23.22 grains (18 January 1837). The 1834 devaluation was intended to attract gold from Europe and thereby encourage a shift away from bank notes in domestic transactions. A century later, when the gold content of the dollar was reduced to 13.71 grains (31 January 1934), the aim was to raise dollar prices of U.S. farm products, which had a world market, by reducing the foreign-exchange value of the dollar. Under President Richard M. Nixon, the gold content of the dollar was reduced to 12.63 grains (31 March 1972) and then reduced another 10 percent to 11.368 grains (12 February 1973). For each dollar weight in gold, there is a corresponding price of gold per fine troy ounce of 480 grains (480/11.368 ≅ $42.22). Since convertibility of the dollar into gold was suspended 15 August 1971, the devaluations in terms of gold were pro forma only. The new gold prices were merely devices for measuring the downward adjustment of the U.S. dollar relative to other currencies set by the Smithsonian Accord (17–18 December 1971) to help correct a deficit in the U.S. international payments balance. The Reagan Administration briefly adopted devaluation policies in the 1980s, but abandoned them when they failed to reduce the trade deficit.
Bibliography
Edwards, Sebastian. Devaluation Controversies in the Developing Countries: Lessons from the Bretton Woods Era. Cambridge, Mass.: National Bureau of Economic Research, 1992.
Friedman, Milton. A Monetary History of the United States, 1867–1960. Princeton N.J.: Princeton University Press, 1963.
North, Douglass C. Structure and Change in Economic History. New York: Norton, 1981.
Samuelson, Robert J. The Good Life and Its Discontents: America in the Age of Entitlement, 1945–1995. New York: Times Books, 1995.
Of course the question remains: Where does one put one's money for a secure future?
Consider oil - the numbers for the most current period oil report:
--The percent utilization of operable refinery capacity - 78.21% - down 10.41%
--US crude oil stockpiles fell by 5.8 million barrels
--Gasoline stockpiles fell by 6.4 million barrels
--Distillate stockpiles fell by 1.25 million barrels
--Gasoline stockpiles down 3.7 million barrels
--ULS diesel stockpiles (<15 PPM Sulfur) fell by 1.1 million barrels
--Kerosene-type jet fuel down 2.3 million barrels
& Heating oil stockpiles down 15.7% from year ago
On top of that, there is a major hurricane heading for the Galveston area, one of the most important oil centers in the United States.
What is the price of crude doing today? As I write this, it is down $1.38 after earlier being down $2.48. What economic sense does that make? Oil related inventories are down, and a likely major disruption in incoming oil supplies is predicted from hurricane Ike . . . and you lower the price of oil so people use more of it?
The only rational explaination I can see is that oil, like gold, silver, etc. is being manipulated to make the dollar look stronger than it is. My hunch is that China and other large dollar (debt) holders have let Bernake & Company know that if the dollar continues to drop, they would cash theirs in for whatever they could get (in gold, oil, commodities, real property, etc.). That would destroy the dollar as the world currency.
No matter how Bernake & Company tries to make the dollar look like it has secure value, to use an expression in the news yesterday, 'You can put lipstick on a pig . . . but it will still be a pig.'
Too bad the nay-sayers are not intelligent enough (in investing) to see through the smoke and mirrors our illustrious government is spinning out there for us to view. When the dollar starts its downward spiral, it will truly be a terrible thing. Of course, we "bugs" will be okay.
All logic points to the price of gold rising...in an honest world, that would be the right thing to expect (as a hedge against all the volatility which currently exists throughout the market).
However, if the price of gold should rise, it would be the end of bonds, treasuries, or equities (at least for the foreseeable future), as people piled into the metals for wealth protection. The "Powers that Be" would lose huge when their leveraged vehicles were forced to unwind. Hence, "Might" is doing everything it can to suppress what is "Right"...and they will continue to do so as long as it is within their power.
- the dollar is going up (why?)
- gold is going down (why? but conspiracy always alluded)
- banks are failing (a fact of life because we are not on gold standard)
- dollar is stretched because of this and will eventually break
- no way to capitalize the dollar which will not weaken it.
When something does not appear logical there is something you do not know. Unfortunately, the truth is not always a conspiracy. Please buy an economics book. Know your enemy (the fiat boys) and understand the dynamics of currency capitalization.
I am not a gold bug but a gold bug sympathizer. Gold historically functioned as a reserve currency but the truth is it has decoupled and is now acting more like a commodity. This may change tomorrow but it is painfully true today.
What you do not agree with is not always wrong.
I suspect the Plunge Protection Team ( Tres, Fed Res, SEC and Com Ex ) are selling futures against our Strategic Petroleum Reserve to push oil down. Paulson supposedly said in July he wanted oila at $100 before the election.
This risk/expenditure of public assets ( the SPR) is criminal when used for political purposes
Nope, it simply isn't. The latter is a dynamic, ever changing quantity, and the former is a fixed nominal claim on the Federal Reserve.
The number of workers, factories, computers, patents, etc in the country never stays the same for five minutes. Why would the value of a dollar?
The author is simply peddling money illusion. Everything's value in terms of anything else, anything, is always bouncing around as every factor affecting the value of anything and everything, fluctuates.
"Do what you will, capital is at hazard". That used to be known to every schoolboy.
When a banker makes a new loan and it finances construction of some house, say, it doesn't pick your pocket or break your nose. But it changes the value of - houses, dollars, wood, nails, wages, lighting fixtures, Home Depot stock, interest rates, euros...
*All* entrepeneurial activity changes the exchange value of anything.
No one ever guaranteed you that the exchange value of any asset would remain the same forever, and if they wanted to they could not. Only a complete cessation of all meaningful economic action could, and that would freeze said value at "zero".
As for gold and its imaginary manipulation and still more imaginary safety, it is in a bear market because it was driven to insane bubble speculative levels by madmen with an ideological line, but unable or unwilling to do obvious due diligence and look up M1 since spring of 2005 when the Fed's tightening began.
Men bet that a grand hyperinflation was underway because that fit their ideology. But it flat wasn't. And because there are no more actual spendable dollars chasing goods around today, than there were 3 1/2 years ago, none of their insane bubble prices are going to stick. Not one.
The real estate bubble prices didn't stick, the oil prices didn't stick, and the gold prices aren't going to stick either.
It was an illusion. Pure and simple. You can snap out of it now, or you can wait until your gold is worth $400 an ounce. You can then tell yourself it is still worth the same as ever but the dollar isn't, or wear tinfoil hats if you like. But nothing will make your make-believe into a reality.
For lots of commentary on gold, you and your readers may want to visit my linked article: Which Way For Gold And The US Dollar?
Today those who still have such luxury of own home and land such as common people in India still buy gold.
However almost all economies that are linked to American dollar based economy has higher number of people (such as Singapore) where majority of people only have mortgaged homes (on debt).
Their problem is to ensure their own ability to pay for their home mortgages. Keeping gold will not assist them in ensuring this ability. They thus have to invest in stocks or bonds that will provide them this ability (in interests or higher value). Gold being a commodity for stability (meaning stable price) is not an investment.
Thus I humbly warn anyone who wishes to "invest" in Gold, please ask yourself. Are you an investor such as that Indian who saves money in gold. Or an American in debt who needs an investment vehicle to earn more money?