Gold Price Manipulation: What’s in it for You

Gold Price Manipulation: What’s in it for You, by Jim Rickards, a financial writer with strong connections to Wall Street, Long-Term Capital Management (deceased), the IMF and the US Federal Reserve. This is an excerpt from his 2016 book, “The New Case for Gold“.

There are two players in the world with a strong motive to suppress gold prices, at least in the short run: one is the United States, and the other is China. …

Many observers have a naïve and, in my view, mistaken analysis of the Fed’s interest here. Observers assume the Fed wants to squash the gold price to give an impression of dollar strength. In reality the Fed wants a weaker dollar because it’s desperate for inflation. It doesn’t want the dollar to go away or collapse, yet a cheaper dollar will cause imports to cost more, which helps the Fed to meet its inflation targets. …

What the Fed fears are huge, disorderly moves of $100 per ounce per day that seem to gather upward momentum. When that happens, the Fed will immediately take steps to rein in the upward price momentum.

A good example is the July, August, and early September 2011 period. At that time the gold price was skyrocketing. It went up from $1,700 to $1,900 per ounce quickly and was clearly headed for $2,000 an ounce. Once you get to $2,000 per ounce the momentum psychology can feed on itself. The next stop could have been $3,000 per ounce; clearly a disorderly process. … The Fed manipulated the price lower, not because it ultimately wanted a lower price, but because it was worried about a disorderly increase. The Fed is perfectly fine with an orderly increase as long as it doesn’t go up too far, too fast, and change inflationary expectations. …

China definitely wants a lower price because it’s buying. It sounds like a paradox — China owns a lot of gold; why would it want the price to go down? The reason is that it’s not done buying. China probably needs several thousand more tons of gold before it catches up to the United States. It’s precisely because China is still buying that it wants the price to stay low. …

Contrary to much speculation, China is not buying gold to launch a gold-backed currency, at least not in the short run, but to hedge its Treasury position. The Treasury has to accommodate that or else China will reduce its position in Treasuries. …

What remains is a strange condominium of interests where the Treasury and China are in agreement that China needs more gold and the price cannot be too high or else China could not easily afford all it needs. This is an issue I have discussed with senior officials at the IMF and the Fed, and they’ve confirmed my understanding that a global rebalancing of gold from the West to the East needs to proceed, albeit in an orderly way. The United States is letting China manipulate the market so China can buy gold more cheaply. The Fed occasionally manipulates the market as well so that any price rise isn’t disorderly. …

The United States is letting China manipulate the market so China can buy gold more cheaply. The Fed occasionally manipulates the market as well so that any price rise isn’t disorderly.

What’s in it for you?

Where does the manipulation end? What can individual investors do to weather the gathering storm? …

There is an inclination to say: “I can’t win against these players, therefore it’s not worth the risk of being in the gold market.” In the short run, it’s correct that you can’t beat them, but in the long run, you always will, because these manipulations have a finite life. Eventually the manipulators run out of physical gold, or a change in inflation expectations leads to price surges even governments cannot control. There is an endgame.

History shows manipulations can last for a long time yet always fail in the end. They failed in the 1960s London Gold Pool, with the United States dumping in the late 1970s, and the central bank dumping in the 1990s and early 2000s. The gold price went relentlessly higher from $35 per ounce in 1968 when the London Gold Pool failed to $1,900 per ounce in 2011, the all-time high. …

Any manipulation requires some physical gold. It may not be a lot, perhaps less than one percent of all the paper transactions, yet some physical gold is needed. The physical gold is also rapidly disappearing as more countries are buying it up. …

The price has to be kept down until China has enough gold. When it’s done buying, when it has approximately eight thousand tons [like the US], the United States and China can shake hands and both say they’re protected. At that point, a dollar devaluation by a rise in the dollar price of gold can commence.

So buy and wait for large price rises, he seems to be saying.