Is the Gold Price really managed or suppressed...?
HERE AT GOLDFORECASTER, we have absolutely no doubt that the Gold Price has been and may well be either suppressed or managed today, writes Julian Phillips of GoldForecaster.com.
Just look at the record of central-bank gold sales in the 1970s, '80s, '90s and in this century so far. Gold was sold during these periods first by the United States. It was done to discredit gold as money and to support the US Dollar as the prime global reserve currency.
President Nixon removed the convertibility to gold in 1971 but faced a world that did not want to replace gold with the Dollar. Tying the US currency to oil payments made it a globally needed currency. But the Gold Price still rose and in so doing cried 'foul', pointing to the fact that the Dollar was simply an American government promise to pay.
By discrediting gold it was taken out as an alternative money, implying that paper money was superior to the "barbarous relic". In fact, it allowed the development of the present banking system with US bankers very much at the global money helm.
Considered on a global scale, it became clear that 'paper' money allowed more scope for banking systems than gold (it governed the money system, bankers didn't). So Gold Bullion was shunned to the distant background of the monetary system.
After the US gold sales stopped in the late 1970s (the demand was just too great), the International Monetary Fund (IMF) tried to disconnect gold from perceptions of money with its own sales, but these too failed to achieve their aim. Then, as stronger interest rates helped defend the value of paper money and reduce the money-price of gold, the implied threat that European central banks would sell gold deterred investors and the price steadily fell further, falling over two decades from $850 to $275 an ounce.
This fall was extended by central banks lending gold to Gold Mining producers, so they could "hedge forward" their future output for many years to come and thus maximize income, locking in current prices for fear of further drops, while actually helping drive Gold Prices down. The loans would then be repaid when the gold was produced, effectively 'shorting' the market in the meantime.
In 1999, with the arrival of the Euro currency, the Eurozone banks signed their first "Washington Agreement", limiting their gold sales and ensuring their remaining gold reserves were not devalued. This agreement, while supporting the arrival of the new currency, helped to "contain" the Gold Price and discourage any flights to gold from the new and untried currency.
Now take a look at today's central banks and their present policies. The European Central Bank promises not to increase or open new leasing or lending of gold. Britain is not in a position to do so, nor inclined to do so after its gold sales debacle. The United States could, but at heart (and on historical evidence) will not sell gold. (It seems they may have lent far more gold than they admit to?) And don't expect any new gold hedging from the miners, for there are insufficient Gold Mining executives who would want to place their careers in the toilet again.
The Third Central Bank Gold Agreement is a farce with less than a tonne sold since its inception. So count out significant future central bank gold sales in support of currencies.
Look to the east, in contrast, and we see that Asian central banks are now buyers – not just "net buyers", but big buyers, having bought over 300 tonnes in 2009 alone. And they are still buying persistently, quietly each weekday.
We point to Russia and China specifically, but let's not exclude India (with 200 tonnes of IMF gold so far, they have indicated they will buy any leftovers too), plus other smaller banks following their lead.
Why are these countries and perhaps more in the future now Buying Gold? Simply put, the trust that existed in the Dollar is diminishing. With Dollar reserves sprinting towards $2 trillion in China, they are very worried by the fall in its value, and they are right to feel that way when one looks at the almost imperial attitude of the US money lords in Treasury and the Federal Reserves. Their attitude to the international value of the US Dollar is that it is not a major concern. So if you were China, an Opec oil-producer or other Dollar-surplus holder, wouldn't you feel vulnerable?
Wealthy central banks now want to reduce that vulnerability through gold and currency diversification. Yes, Dollar surplus holders are in a cleft stick with little way to turn but to the US currency at present. But with a potentially new petro-currency being formed, and China soon to turn to a "basket of currencies" in trade deals – rather than just the Dollar – the signs are that the days of the Dollar leading international trade are numbered.
It may take some years, but the fact that the Dollar's position is slipping makes it clear that major currency crises are on the way. With gold an important "counter to the swings of the Dollar", it is imperative that the gold content of foreign exchange reserves be increased in those countries whose reserves are growing. Either that, or they will suffer the damage a falling Dollar will bring.
It takes gold sales to hold down and manage Gold Prices. Lending won't do it, nor will hedging any more, because any large sales of gold will be snapped up without a really significant and semi-permanent lowering of the Gold Price. When you find huge buyers in the market, whose only concern is not to drive the Gold Price higher on small purchases, you don't sell gold to manage or suppress price.
Right now, large central bank buyers want tonnage, large tonnage, but it is not there at the moment, so they content themselves with buying small amounts persistently as it comes onto the market. It's a dealers dream to find a big seller and place it with a big buyer and not move the price. And it's a buyers dream to buy big quantities and neither move the Gold Price nor be noticed. Which is where the market is now.
Yes, short-term forays into the market may happen to even out these moves, but not by central banks of note. So any scheme from now on to suppress or manage the Gold Price will face central bank buyers who will take all gold on offer. Even large quantities could be transferred with little downwards price movement.