Do you question or outright disagree with monetary policy and its potential repercussions for the economy?
If you are a precious metals bull, the answer is probably an overwhelming yes.
As far as polarizing topics within the gold and financial community go, the question of whether there is a concerted effort to suppress the price of gold surely ranks near the top of the list.
In this article, we will be exploring that idea, and what the implications would be if it were the case.
First, we must determine what the motive would be. Recognize that a key goal of the US government and the Federal Reserve (albeit typically not an acute issue) is to maintain the strength of the dollar relative to other currencies and assets (indicated by the DXY and CPI respectively). This way, it can maintain its world reserve status. The power and luxury granted to a country with a reserve currency are immense, and the last thing the government and it’s people want is to lose that status.
In the 1500-the 1700s, it was the Spanish Real, followed by the French, the British, and finally the United States. The reign of the dollar officially started with the Bretton Woods agreement of 1944.
Because of the nature of these cycles, it spurs the question of how long the US reserve system will last. This is largely dictated by decisions and strategies of the US central bank and the government.
Where does gold factor into this? In 1971, the dollar was no longer convertible to gold (through the Federal Reserve). Now, after over 50 years of a non-gold-backed currency, some claim gold is a mostly irrelevant yellow metal. They should ask themselves, why would the Federal Reserve still maintain or claim 8000 tonnes of it? It has an enduring propensity as a store of value.
Why would this be the case? In terms of gold compared to other metals, its history, properties, and scarcity. In economic terms, physical gold is a risk-free asset if it remains in your possession. Guess what also serves and is touted as a risk-free asset? The dollar and US bonds. Bonds, as the US always pays their debts (“backed by the full faith and credit of the United States Government”). The dollar, because it’s the world reserve currency of the strongest and most economically powerful country of all time and of course irrevocably linked to bonds.
Because both are market-deemed risk-free assets (or transiently are deemed so) and have a history of serving as such, gold and the dollar can be perceived as competitors. If the US dollar ever showed very significant weakness, a rush into gold would shortly follow (or at least, price reflexively and commensurately adjusts). The price of gold can fluctuate upwards a fair deal without affecting the stability or interest of the dollar. In theory, there’s a general threshold (related to rate of change) where it might start to present issues. As every potentially dangerous increase in price precedes a smaller rise, interjecting by increasing supply during this period may altogether prevent the unfavorably high prices, on a relative basis. Though, this is speculative.
Now we can postulate the main idea of this article. Any potential systems in place that lead to a suppression of the price of gold could derive from the desire to maintain the strength of the US dollar.
On November 1st, 1961, eight central banks, including the United States Fed, formed what would be known as the London Gold Pool. This is when the US dollar was still backed by gold, making the metal of greater forefront significance. Per the gold pool agreement, the central banks made concerted efforts to maintain the price of gold at $35/ounce.
They achieved this price stabilization by selling gold from the balance sheet of the central banks when the price was spiking, hence introducing supply into the market. If demand remains the same, and supply increases, price decreases (and hopefully to the $35 level). On the other hand, if the price on the open market was falling, they would remove supply from the markets by buying gold at the $35 level.
The system had a flaw. If demand gets too high, reserves are quickly depleted. And in the context of the expensive social programs and the Vietnam war necessitating an increase in the currency supply (of dollars), demand rose too high.
US Central Bank gold reserves hemorrhaged from 25,000 tonnes to around 8000 tonnes. By 1971, the dollar was off the gold standard, and indeed, prices rose substantially. Starting at $40 at the beginning of the decade, it reached highs of approximately $850/ounce, representing a gain of over 2000%.
During this time, the markets witnessed the dawn of financial derivatives on commodities. This permits a situation where the market deemed supply is higher than it is, and certain fluctuations in demand/supply have less of an impact on price. This helps reduce the effect of inflation, as the price of commodities serves as input costs for goods. This applies to effectively all commodities, including gold.
With this, it serves to understand the difference between physical and paper gold. Paper gold is a technical assurance that you can receive a commensurate amount of physical gold. Is this paper-to-physical gold ratio 100% backed, meaning a 1-1 ratio of physical to paper gold? No. There is significantly more “paper gold” (COMEX and LBMA commodity futures markets). These are in effect systemic naked short positions (selling contracts for commodities that are not readily available).
“The futures markets are not manipulated (they are as well – spoofing is proven, though probably goes both ways in price); the futures markets are the manipulation”.
Note, spoofing only has short-term effects on price. Nonetheless, it may serve as an indicator of the general poor practices surrounding futures markets, with a particular emphasis on gold.
Hence, gold price manipulation warranted by the presence of excessively unrestricted paper markets may have been in part intended to somewhat diminish the perception of inflation. Meaning, a debasement or loss in the value of the dollar.
One might say, “Well, gold has been increasing in price. It’s gone from $40 in the early 1970s to $1700 today, with plenty of big fluctuations in between! How can that be suppressed?”
The degree to which suppression occurs does not need to be total for it to be manipulated. Also, gold has underperformed relative to the expansion of credit, at this point. This is in part because paper markets create an imaginary inflated supply.
The price of gold and inflation is inherently and almost instinctually reviewed by a cohort of the population to determine the extent to which major currencies are being devalued. We’re not in an official gold-centric monetary system, but 4000 years of human history doesn’t go away that easily.
Certain individuals and entities in the market invest more in gold when conditions align. This means more demand than before, causing prices to rise. However, with outsized paper markets, these demand increases can be somewhat muted in the metric we see when we search “gold price” on Google.
On the other hand, those who remain keen believers in gold, review premiums and underlying trends of demand for physical gold and continue to stack their precious metals pile. This is reflected in higher premiums. AKA: a disconnect between the physical and paper markets. Though, this fluctuates and is severely volatile (as the market is often wrong).
Masking the devaluation of the currency is no longer possible with high CPI. Now, inflation is headline news, but a task remains (if one believes gold price suppression is in fact occurring): suppress the efficaciousness of gold as a haven asset in the context of somewhat uncontrollable and broadly accelerating inflation (thus-far).
Before it was, “excessive currency debasement is not happening because the price of gold is not increasing”. Now it is, “gold is not an ideal investment in the context of high inflation because the price is still barely moving or heading down” (though this point has been made plenty across the years as well).
“Gold Loses Status As Safe Haven”
Wall Street Journal
Remember, inflation is at its highest level in 40 years, yet the price of gold hasn’t budged since mid-late 2020 (fluctuations have occurred of course). Potentially, the level to which money printing occurred was factored into the price, as it surged approximately 35% in the first half of 2020. This means headline CPI inflation numbers were more of a delayed indicator.
But, this was just an increase in liquidity, creating favorable conditions for a bull run in most financial assets. In fairness, that increase in liquidity is a function of inflation, meaning this is just reiterating the initial point.
In January, plans by the Federal Reserve indicated a constriction of the currency supply would soon happen through the cessation of Quantitative Easing and the start of a new Quantitative Tightening (QT) program coupled with rate hikes.
Because the market presumes the bull run in gold due to the expansion of credit was sufficient to bring gold’s price to a commensurate level, any rate hikes and QT would conceivably bring the gold price back down (if it were successful in taming the supply of currency and inflation in a somewhat enduring way).
The price of physical metals tells a different story, with high demand, and high premiums (sale price – spot price = premium). When readily available supply decreases, and demand increases, premium costs rise.
Going back to the market structure and actions potentially causing price suppression, these implicit measures set are not a hedge or measure against a collapse of the dollar precipitated by financial collapse derived from excess debt and inflation, as key stakeholders, decision-makers, and the market itself consider by and large the problem of inflation and economic stability transitory (without a collapse necessary to clear the problem). The problem = too much debt.
Instead, if it exists, it may be a simple means of reinforcing the current monetary system and subduing overt and dramatic swings in the price of precious metals which may affect the stability of the markets. AKA: the situation we are now in. High inflation, but not extreme.
For potential evidence that concerted attempts are still made by banks, like with the London Gold Pool of the 1960s.
“Nor can private counter-parties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where the central banks stand ready to lease gold in increasing quantity should the price rise.”
Alan Greenspan (Form Chair of Federal Reserve) July 24, 1998
The Federal Reserve encumbering part of their gold by leasing it would help diminish a run on the price. Market intervention by the Federal Reserve is not exactly an unexpected discovery. Broadly speaking, market intervention is the role of the Fed. Mainly through rate hikes. Then, QE came into the picture with the GFC. What is QE if not market intervention, and hence market manipulation? This is not controversial, so why should gold price interventions be?
Sure, there are differences. Keeping asset prices inflated via QE ensured the stability of the financial system. Keeping gold price somewhat deflated is subject to more questions, and feels more, “wrong”, especially since many are unaware of this. But it’s not illegal.
The Gold Reserve Act authorizes the US Treasury Department, through its exchange stabilization fund, to intervene and trade in public markets privately for the purposes of maintaining the stability and best interests of the US dollar. Effectively, it means the act allows the US government to act as secret market makers.
It isn’t a grand countermeasure to a total collapse of the financial system, as it wouldn’t stop it. Eventually, reality tests all.
To reiterate past points made by commentators about the Federal Reserve and the global economy, it comes down to rate hikes and QT. As the Federal Reserve continues with quantitative tightening and tightening overall market conditions through rate hikes, credit markets will constrict. Unfortunately, the financial markets cannot handle the constriction necessary. This is where it aligns with the principles of a financial bubble. It must continue expanding. We have reached a point in the level of debt relative to productivity and production, where the standard contraction in credit (a natural phase of the cycle of credit), will lead to the system collapsing.
Fortunately, it is simple to outline why…
- Too much debt.
- Refer to point one.
How to clear bad debt? Mass defaults. How will central banks manage this impending catastrophe? Provide liquidity to prevent mass defaults. This means inflation will go unchecked. Severe unchecked inflation + extreme money creation in the current macro-economic environment? Meaning, potential hyperinflation.
Does this system, which seems to suppress the price of gold, spell bad news for gold bulls? Not exactly. As discussed above, it is unthinkable the current financial system is not eventually poised for a collapse. In such a scenario, only the physical markets will matter. The current COMEX and LBMA gold markets go against what gold represents.
Because open interest is higher than readily available physical supply, once a run on gold occurs (taking delivery), the price will squeeze. Because the reality of supply coupled with demand for the real thing will have a real influence on transactions. If demand is too high, many who supposedly had exposure to gold will not be able to take delivery.
We are potentially seeing the start of something:
If the demand for gold swells greatly enough, the markets in their current state will fall out of fashion quickly.
For references pertaining to the matter of monetary policy and gold, GATA.org possesses a good aggregation of ideas and evidence.