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The big question that many investors want to know is what is going on with the gold price? The big smash down recently, at some stages reaching 8 sigma down moves on essentially no news (hmmm, fishy, but I’m sure the ‘hear no evil, see no evil, say no evil’ folks at the CFTC are on the case), has many investors tending to their wounds.
However, even with the Fed pumping trillions into the market in an obvious effort to manipulate asset prices, to suggest the Fed, BIS and other central banks are actively conspiring against gold is still seen as heresy.
But should it be?
When the client to whom I was speaking said, “What proof do you have that the Fed is suppressing the price of gold?”, I got to thinking, why don’t we consider the question from another angle.
If I was Bernanke and was risking my entire reputation and a nasty place in history if things go badly, (nice to meet you Herr Von Havenstein) on engineering a recovery and a rising gold price could potentially unravel all my printing largess and solvency schemes, why wouldn’t I manipulate the price of gold?
Does it really make any sense at all that Bernanke would leave gold to trade in an open and transparent market? Hardly.
Consider. The Fed has conjured multiple trillions of digital dollars out thin air in the last five years. These efforts have propped up the Treasury market, the domestic TBTF banks, the foreign TBTF banks, the ECB, the BOE, every European sovereign bond market, the RMBS market, the CMBS market, the equity market, the housing market and the entire industrial and soft commodity complexes, to name a few.
Since the price of gold we see on our Bloomberg screens is set via derivatives and overwhelmingly settled in USD, the ability for central banks and bullion banks to manipulate the price of gold is way too easy. All the bullion banks have to do is coordinate (as in LIBOR), sell in size and punish anyone in their way.
Take losses? No problem, more fiat can be conjured post-haste. So long as no one is taking physical delivery, the band(k) plays on. (Actually, physical demand delivery IS becoming a major new problem for the banks but this is a topic for a different note.)
A quickly rising gold price upsets this fiat-engineered, centrally planned, non-market based recovery. Gold left to its’ own devices would signal the unwinding the rehypothecated world of shadow banking where latent monetary inflation goes to summer (think of it as the monetary Hamptons where only the Wall Street elite get to play).
It would signal the true rise of many emerging market countries at the expense of their creditors in developed markets.
But most importantly, it would signal a huge lack of faith in the US dollar. A currency backed by nothing more than faith in central banking.
A faith which is dying a little every day. Just ask the Japanese or Europeans how confident they are in their own Oracles of Delphi. This loss of faith in central banking immediately translates into a loss of faith in the currency and just as quickly works its magic on bond prices – meaning lower bond prices and higher rates.
So without being too ranty, I’ll end this one short today. Just remember, the next time someone is questioning why the Fed would be manipulating gold, turn the question around and ask them what incentive Bernanke has to NOT manipulate the price of gold.
And fortunately for Bernanke, as the list above illustrates, he’s living in Washington D.C. at exactly the right moment to do whatever he wants, lie about it and get away with it.
