Of Course the Gold Price is Manipulated. That's the Point!

By: Julian D. W. Phillips | Thu, Sep 4, 2014
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Throughout history, there have been a constant flow of schemes to try to manipulate the gold price and gold itself in terms of paper money. These have come from governments, institutions as well as from individuals. The aim has always been to either establish the value of currencies or enhance that value in terms of gold. The first key to this is to ensure that the gold price is made in the paper currency and not the price of the paper currency in gold.

At school you probably read the book called the Alchemist, where villains tried to invent formulae where they could transform lead to gold. While what they managed to do was a good confidence trick, they could not replicate gold. Today the process continues, but now the boldness of government has gone as far as to say that paper money is better than gold in terms of its value. But gold is gold and for the prudent and those wanting to preserve their wealth over the long term, nothing can replace it.

Experiments using fiat currencies have been carried out since the days of distant Chinese dynasties in attempts to emulate or replace the real money of gold. The reason is simple and explained in a quote I borrow from Mr. Popescu, "Aristotle, the Greek philosopher, student of Plato and teacher of Alexander the Great, was mentioning fiat money 2,400 years ago when he said, "In effect, there is nothing inherently wrong with fiat money, provided we get perfect authority and godlike intelligence for kings." But we can't, which is why in history, there has never been a 'money' that can retain its value or replace gold as real money, in all seasons weathered by economies.

It is because we don't have perfect authority and governments do not have godlike intelligence that central banks need to attempt to manipulate the gold price in attempts to build and hold confidence in fiat currencies. Why do governments keep coming back to these different types of money? They have a need to govern/control all types of money, their economy and their people. Without control over money the majority of a government's power dissipates. That's man's history and his future, in this world.

That's why governments find themselves in opposition to real money, such as gold and silver, which essentially restrict and, in the end, governs governments when extreme times hit. This will happen in the near future once the monetary system fragments and when it does, governments will turn back to gold and later silver and try to hold as much as they can. But this does not mean they will move away from fiat money, no, they will use precious metals to add credibility to the rising quantity of paper money.

Please note we did not say backed by, or issued against it. Within the need for government issued money to retain credibility the concept of reformation of government issued money is unacceptable, because that in itself would be read as an admission of failure and give rise to falling confidence in it, an unacceptable option for governments. The level of control over an economy must be maintained at all costs. Precious metals will be used to reinforce that control. As always, this will be done in the interests of the nation and its citizens.

Likewise, when governments manipulate the gold price, it is with the intention of enhancing the acceptance of fiat money and our dependence upon it as both a measure of value and a means of exchange.

Often legislation and taxation are used to enhance its use and restrict the use of alternatives, either foreign money or precious metals. Manipulation has also been used by governments acting in concert such as after the 'closing of the gold window' by President Nixon in 1971.

Let's now look at the various examples of manipulation of the gold price through history.

Gold's Confiscation and subsequent dollar devaluation:

FDR Issues Executive Order 6102 Banning Gold Ownership

In 1933 the most complete form of manipulation was enacted by the U.S. when it confiscated citizen's gold allowing them only to retain $100 worth of gold, at the time this was five ounces of gold.

This brought the gold market to a halt with dealers [except where these coins were defined as rare coins] closing down, storage systems handing over client's gold to the Fed and the gold market going into hibernation in the U.S. for the next 41 years. Two years later the U.S. government devalued the dollar to $35 to one ounce of gold. While the reasons appeared plausible [to boost U.S. money supply and protect the banking system, in the nation's and its citizen's interests, was what the public was told - listen to the actual speech hyperlinked above].

Many believe that today there are better ways of achieving the same objective without gold confiscation, so why could it happen again?

The world has become inter-dependent with the U.S. dollar which is the center of the global monetary system at the moment and from which nearly all other currencies stem. But the emerging nations, while feeding off the developed world's economies are building a large degree of economic and monetary self-sufficiency. Recently they agreed to set up an institution replicating the I.M.F. for the emerging world. Its headquarters will be in Shanghai. Their path to an international currency that will be an alternative to the dollar is well under way.

China is at the forefront of this as its economy is expected to become the largest in the world by the end of this year or next. It will bring its own currency forward as a global reserve currency, breaking away from the dollar in the process. Without the U.S. dollar's hegemony, the dollar cannot stand as the only measure of value and as the sole global reserve currency. With this in mind the demand for gold by central banks will rise to reinforce confidence in all currencies.

And with the supply of gold at 3,050 tonnes of newly mined gold and 'scrap' sales, at best, at 1,200 tonnes, the gold market will not be able to supply the world's needs for monetary purposes, in the event it is needed to reinforce confidence in local currencies. Hence gold confiscation, for completely different reasons than in 1933 is, in our opinion, a distinct probability. With potential Yuan convertibility coming at the earliest in late 2015 we are very close to that event.

After the confiscation of gold in 1933 followed by the devaluation of the dollar by 75% in 1935, the bulk of the developed world's gold moved across to the U.S. The devaluation of the dollar was not reflected in foreign exchange markets in 1935, so gold continued to be sold at $20 an ounce in countries outside the U.S. while the U.S. was paying $35. This is why the U.S. amassed over 26,000 tonnes of gold before the Second World War. We see this as part of the strategic alliance that matured in the Allies coming together in that war. The control of gold had to be out of the reach of the war in Europe. This price manipulation ensured that this happened.

After the war and a period of recovery we saw the next blatant exercise in price manipulation of gold:

 


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Julian  D. W. Phillips

Author: Julian D. W. Phillips

Julian D. W. Phillips
Gold Forecaster

Julian D. W. Phillips

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price.
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