Best of the Week
Most Popular
1.UK House Prices Momentum Crash Threatens Mini Bear Market 2017 - Nadeem_Walayat
2.Perfect Storm - This Fourth Turning has Over a Decade of Continuous Storms to Come - James_Quinn
3.UK House Prices Momentum Crash Warns of 2017 Bear Market - Video - Nadeem_Walayat
4.Billionaire Investors Backing A Marijuana Boom In 2017 - OilPrice_Com
5.Emerging Markets & Basic Materials Stocks Breaking Out Together - Rambus_Chartology
6.Global Currency Reserve At Risk - Jim_Willie_CB
7.Gold and Silver: Your Stomach Is Probably Wrenching Right Now - The_Gold_Report
8.Warning: The Fed Is Preparing to Crash the Financial System Again - Graham_Summers
9.Basic Materials and Commodities Analysis and Trend Forecasts - Rambus_Chartology
10.Discover Why A Major American Revolution Is Brewing - Harry_Dent
Last 7 days
The Stock Market Guns of August, Trade Set-Up & Removing your Rose Tinted Glasses - 16th Aug 17
Stocks, Bonds, Interest Rates, and Serbia, Camp Kotok 2017 - 16th Aug 17
U.S. Stock Market: Sunrise ... Sunset - 16th Aug 17
The Next Tech Crash Could Delay Your Retirement by a Decade - 15th Aug 17
Gold and Silver Precious Metals Nearing Breakout - 15th Aug 17
North Korea Showdown: Pivotal Market Turning Point - 15th Aug 17
Tech Stocks DOT COM Bubble Do-Over? - 14th Aug 17
Deep State Conspiracy or Chaos - 14th Aug 17
From the Trans-Atlantic Axis and the Trans-Asian Axis - 14th Aug 17
Stock Market Intermediate Correction Underway - 14th Aug 17
The Islamic State Jihadi Pivot to Asia - 13th Aug 17
Potential Pivots Upcoming for Stocks and Gold - 13th Aug 17
North Korean Chinese Proxy vs US Military Empire Trending Towards Nuclear War! - 12th Aug 17
Gold Stocks Coiled Spring - 12th Aug 17
Neil Howe: The Amazon-Walmart Rivalry Will Determine the Future of Retail - 12th Aug 17
How to Alton Towers Half Price Discount Entry 2017 and 2018, Any Time, No Pre-Booking! - 12th Aug 17
Top 3 Technical Trading Tools Part 2: Relative Strength Index (RSI) - 11th Aug 17
What Makes Women Better Investors - 11th Aug 17
Crude Oil Price Precious Metals Link in August - 11th Aug 17
Influencer Marketing Predictions All Businesses Should Take Into Account - 11th Aug 17
Really Bad Ideas - Government Debt Isn’t Actually Debt - 10th Aug 17
Gold Sees Safe Haven Gains On Trump “Fire and Fury” Threat - 9th Aug 17
Why Is The Stock Market Not Trading On Fundamentals Lately? - 9th Aug 17
USD/CAD - Can We Trust This Breakout? - 9th Aug 17
New Monthly Rebate to Help Reduce Your Trading Costs - 9th Aug 17
Stock Market Divergences Are Now Appearing! - 9th Aug 17
Is Inflation an issue or did the Fed Mess Up? - 8th Aug 17
Top 3 Technical Trading Tools Part 1: Japanese Candlesticks - 8th Aug 17
Researchers Find $10 Billion Hidden Treasure In A Dead Volcano - 8th Aug 17
What Happened to Thousands of Sheffield's Street Trees 2017 - Fellings Documentary - 8th Aug 17
Solar, Bubble, Banks, War, and Legal Tender: Five Reasons Why You Should Buy Silver Now - 7th Aug 17
CRASH - If Some People Do It, Nothing Bad Happens, But If Everyone Does It, All Hell Breaks Loose - 7th Aug 17
Gold and Silver : The Battle for Control - 7th Aug 17
Precious Metals Sector is on Major Buy Signal - 7th Aug 17
Stock Market - Has Time Run Out? - 7th Aug 17
Get Ready for an Historic Upside Gold and Silver Run - 7th Aug 17
BOOM! Bitcoin Rockets To New All-Time High As Cryptocurrencies Surge Higher! - 7th Aug 17
U.S. Dollar: This Crash Signals the End - 6th Aug 17
Predicting The Price Of Gold Is A Fool’s Game - 6th Aug 17
Asda Sales Collapse and Profits Crash! UK Retailer Sector Crisis 2017 - 6th Aug 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

Is the Gold Price Manipulated?

Commodities / Gold and Silver 2016 Feb 05, 2016 - 04:45 PM GMT

By: Arkadiusz_Sieron

Commodities

The claim that the gold prices are manipulated is one of the most popular notions within the gold investing community. Probably, no other market (except the silver market) holds such a belief so strongly. The core argument goes as follows: an increase in price of gold signals inflation and the decline in the value of fiat currencies, especially the U.S. dollar, which undermines confidence in the contemporary monetary system. Thus, governments, central banks and their collaborators from the financial system are heavily interested in suppressing the price of gold.


Three insights support this theory: one theoretical and two empirical. First, the Austrian theory of money and business cycle says that gold was chosen as money by the free market and a monetary system based on fiat money is inherently unstable. Therefore, the price of gold would be higher without government interventions. Second, we know that the price of gold was fixed for decades by governments or suppressed under the London Gold Pool. Third, a few financial institutions (like Barclays) have already been fined for influencing or manipulating gold prices.

However, academic research conducted recently by Dirk Bauer did not find any clear evidence of gold price suppression. So is gold manipulated or not? Let’s investigate this issue in detail, starting with the above arguments.

First, we agree that gold used to be a free-market money for thousands of years and it would probably re-emerge again without the government meddling in the monetary system. We also agree that the current financial system is inflationary and eventually doomed to collapse (as the Bretton Woods was). However, nobody knows when the current monetary system will crash – it may actually take decades or centuries (like the collapse of Roman denarius) and there is no guarantee that gold would replace the U.S. dollar as the major currency in the new monetary system (some are looking at bitcoin and similar products for this purpose). Therefore, the price of gold is lower than in a monetary system based on gold as money, but it does not imply that it is manipulated. As the yellow metal no longer serves as genuine money, its value is simply lower.

Second, yes, the price of gold was fixed under the gold standard, but it was not manipulated. Gold was simply money, while the U.S. dollar was defined as a specific unit of gold weight, which naturally created a “fix”. It is also true that the governments tried to suppress the price of gold by creating the cartel of eight central banks pooling the gold reserves in the London Gold Pool. However, it was under the Bretton Woods system and gold was still used (at least partially) as money. The central banks and governments tried to regulate the price of gold because they wanted to assure the convertibility of the greenback into gold. But today, the U.S. dollar is no longer convertible into gold, so there is no need to control the gold price. For the Bretton Woods system to remain effective, the free market price of gold would have to be maintained near the $35 official foreign exchange price, since when it was higher, it was tempting for other countries to buy gold at the official price and sell it in the London gold market, which exacerbates the drain on the U.S. gold reserves.

Actually, the history of the London Gold Pool shows that it is extremely difficult to systematically manipulate the price of gold. The market prices often diverged from $35 and the whole cartel collapsed after just a few years, bearing earlier huge costs to suppress the price of gold. Thus, even a group of the world’ eight most powerful central banks could not overcome market forces and merely stabilize the price of gold (but today, with a much larger and more liquid market the price of gold is believed by some investors to be systematically lowered). As one can see in the chart below, when the London Gold Pool ended, the price of gold rose.

Chart 1: The price of gold (in $) between April 1, 1968 and April 1, 1969 (London PM Fix)

Third, the case of Barclays (or other financial institutions) fined for influencing the setting the gold prices does not prove a systematic manipulation in the gold market. Why? Barclays was fined for failures in internal controls that enabled former trader Daniel James Plunkett to manipulate the gold price to avoid paying $3.9 million to a customer under an option contract. Therefore, what this case proves is that traders try to influence the markets to benefit their book. Nobody denies that this sort of price manipulation exists in financial markets; however, it is not the same as a global conspiracy systematically manipulating gold prices downward. In fact, traders try to influence the price of the underlying assets, including gold, around expiration dates both ways, depending on their position. Moreover, as James A. Kostohryz pointed out, they can manipulate the price only for a specific date, as later they have to unwind the positions that they initiated.

We have not discussed all arguments for and against the stance that the gold market is fundamentally rigged in this part, but neither theoretical considerations, nor historical examples analyzed so far prove that gold prices are systematically repressed by manipulation. There may be some minor and short-lived aberrations or direct manipulations, but gold market is simply too large and liquid to be systematically directed. Therefore, gold investors should base their decision on both technical and fundamental analysis of supply and demand, not the notion of manipulation. We do not deny that there are attempts to influence the price of gold, but they should not have systematic or lasting effects in the gold market.

Thank you for reading the above free issue of the Gold News Monitor. If you'd like to receive these issues on a daily basis, please subscribe. In addition to these short daily fundamental reports, we focus on the global economy and the fundamental side of the gold market in our monthly gold Market Overview reports. We also provide Gold & Silver Trading Alerts for traders interested more in the short-term prospects. If you're not ready to subscribe yet, or are unsure which product suits you, we encourage you to sign up for our mailing list and receive other free alerts from us. It's free and you can unsubscribe anytime.

Thank you.

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife