Those of us who own real gold or the gold ETF really got routed recently. Gold prices cratered, while the actual demand for gold rose. The talking heads on TV are telling us that our economy is improving so much that the need to own gold as a hedge against inflation or monetary collapse is past now. Everything is going gangbusters again. Do you believe that?
It is time for a lesson in the fine art of gold and silver price manipulation. Enter the Western Central Banks, especially the Federal Reserve (FED) and European Central Bank (ECB). It is in these central bank’s best interests to continue to prop up prices of massively printed fiat currencies such as the dollar and the Euro. This means you need to eliminate monetary competition such as gold and silver. How do central banks do this if the demand for metals is greater than the supply? They trade “paper” gold. Some of you may be familiar with the GLD, the largest exchange-traded fund in gold, but central banks don’t even need to trade in the GLD to hammer prices down. A “naked short sale” is selling something that you might not own. Experts in the gold market as well as whistle-blowing traders indicated that the Fed dumped as much as 500 tons of paper gold recently while at the same time, the ECB was not so gently suggesting that struggling European nations sell their real gold to continue to receive bailouts.
When the central banks start a bloodbath in metals, a panic of forced selling or stop losses occurs. This drives down the price of gold and silver artificially.
Is is fair? No. Is it legal? I don’t think so. But just like any price manipulation, you must catch the hand while it is in the cookie jar to provide proof of wrongdoing. I have seen central bank manipulation for years, but things really got crazy with the QE forever plan.
Gold prices had been on a steady incline for years partially because of the dollar’s decline. The best way for central banks to prop up the prices of fiat currencies is by deflating bullion prices. If the Fed is printing more currency than there is demand for, the value of the dollar falls. That would mean exchange rates linked to the dollar also would fall. If exchange rates fall, prices go up. If prices go up, so do interest rates. If central banks loose control of interest rates, the bond markets collapse. If bond markets collapse, everyone trades in gold, forcing central banks to cough up all that paper gold they said they held. It sure sounds like a lot of trouble to change the price of gold, but in fact, it is desperation.
The dredging in gold prices is highway robbery. Forcing the sale of gold by smaller nations and individuals who panic sounds very much like the massive transfer of wealth in the real estate markets a few year ago. Those with money bought houses at fire-sale prices, while the rest lost their homes. The same can happen in the gold markets if central banks manipulate the price of metals in favor of them buying and you selling.
Not everyone is selling. Countries such as Japan, China, Russia and India are taking advantage of lower metals prices to hedge against movement in the dollar and interest rates. Can central banks short-sell their way out of the mess they created by printing fiat currency? I think not. When the dust clears, gold and silver prices are still driven by supply and demand. But as long as central banks keep printing, I am bullish on gold and silver. Does this mean prices can go down even further? Sure, but how long can this craziness go on? Longer than you think, as no one wants the party to end. Remember that markets can remain bullish or bearish far longer than you can remain solvent. I hope this helps all of you who are losing sleep at night worrying about gold prices. If you believe in metals, remember you are long in the markets, and what happens in the short term is of little consequence.
Carol Perry is a retired financial adviser and has been a Northern Nevada resident since 1983. She can be reached at Carol_Perry@att.net.