Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
AI Mega-trend Tech Stocks Buying Levels Q2 2020 - 1st Jun 20
M2 Velocity Collapses – Could A Bottom In Capital Velocity Be Setting Up? - 1st Jun 20
The Inflation–Deflation Conundrum - 1st Jun 20
AMD 3900XT, 3800XT, 3600XT Refresh Means Zen 3 4000 AMD CPU's Delayed for 5nm Until 2021? - 1st Jun 20
Why Multi-Asset Brokers Like TRADE.com are the Future of Trading - 1st Jun 20
Will Fed‘s Cap On Interest Rates Trigger Gold’s Rally? - 30th May
Is Stock Market Setting Up for a Blow-Off Top? - 29th May 20
Strong Signs In The Mobile Gaming Market - 29th May 20
Last Clap for NHS and Carers, Sheffield UK - 29th May 20
The AI Mega-trend Stocks Investing - When to Sell? - 28th May 20
Trump vs. Biden: What’s at Stake for Precious Metals Investors? - 28th May 20
Stocks: What to Make of the Day-Trading Frenzy - 28th May 20
Why You’ll Never Get Another Stimulus Check - 28th May 20
Implications for Gold – 2007-9 Great Recession vs. 2020 Coronavirus Crisis - 28th May 20
Ray Dalio Suggests USA Is Entering A Period Of Economic Decline And New World Order - 28th May 20
Europe’s Coronavirus Pandemic Dilemma - 28th May 20
I Can't Pay My Payday Loans What Will Happen - 28th May 20
Predictive Modeling Suggests US Stock Markets 12% Over Valued - 27th May 20
Why Stocks Bear Market Rallies Are So Tricky - 27th May 20
Precious Metals Hit Resistance - 27th May 20
Crude Oil Cuts Get Another Saudi Boost as Oil Demand Begins to Show Signs of Life - 27th May 20
Where the Markets are heading after COVID-19? - 27th May 20
Silver Springboards Higher – What’s Next? - 26th May 20
Stock Market Key Resistance Breakout Is Where the Rubber Meets the Road - 26th May 20
5 Ways To Amp Up Your CFD Trading Today - 26th May 20
The Anatomy of a Gold Stock Bull Market - 26th May 20
Stock Market Critical Price Level Could Soon Prompt A Big Move - 25th May 20
Will Powell Decouple Gold from the Stock Market? - 25th May 20
How Muslims Celebrated EID in Lockdown Britain 2020 - UK - 25th May 20
Stock Market Topping Behavior - 24th May 20
Fed Action Accelerates Boom-Bust Cycle; Not A Virus Crisis - 23rd May 20
Gold Silver Miners and Stocks (after a quick drop) Ready to Explode - 23rd May 20
3 Ways to Prepare Financially for Retirement - 23rd May 20
4 Essential Car Trade-In Tips To Get The Best Value - 23rd May 20
Budgie Heaven at Bird Land - 23rd May 20
China’s ‘Two Sessions’ herald Rebound of Economy - 22nd May 20
Signs Of Long Term Devaluation US Real Estate - 22nd May 20
Reading the Tea Leaves of Gold’s Upcoming Move - 22nd May 20
Gold, Silver, Mining Stocks Teeter On The Brink Of A Breakout - 21st May 20
Another Bank Bailout Under Cover of a Virus - 21st May 20
Do No Credit Check Loans Online Instant Approval Options Actually Exist? - 21st May 20
An Eye-Opening Perspective: Emerging Markets and Epidemics - 21st May 20
US Housing Market Covid-19 Crisis - 21st May 20
The Coronavirus Just Hit the “Fast-Forward” Button on These Three Industries - 21st May 20
AMD Zen 3 Ryzen 9 4950x Intel Destroying 24 core 48 thread Processor? - 21st May 20
Dow Stock Market Trend Analysis and Forecast - 20th May 20
The Credit Markets Gave Their Nod to the S&P 500 Upswing - 20th May 20
Where to get proper HGH treatment in USA - 20th May 20
Silver Is Ensured A Prosperous 2020 Thanks To The Fed - 20th May 20
It’s Not Only Palladium That You Better Listen To - 20th May 20
DJIA Stock Market Technical Trend Analysis - 19th May 20
US Real Estate Showing Signs Of Covid19 Collateral Damage - 19th May 20
Gold Stocks Fundamental Indicators - 19th May 20
Why This Wave is Usually a Market Downturn's Most Wicked - 19th May 20
Gold Mining Stocks Flip from Losses to 5x Leveraged Gains! - 19th May 20
Silver Price Begins To Accelerate Higher Faster Than Gold - 19th May 20
Gold Will Soar Soon; World Now Faces 'Monetary Armageddon' - 19th May 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

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

© 2005-2019 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

6 Critical Money Making Rules