With the continued adoption and hysteria involving cryptocurrencies, it appears that the age-old method of wealth storage via the accumulation of gold may be dying out. While cryptocurrency markets are often perceived to be manipulated by so-called ‘whales’, the gold market has been the victim of systematic manipulation for the past decades. With the total market capitalisation of gold exceeding $7trn, this notion is often completely disregarded. This article highlights various historic occurrences and outlines motivations which may convince some that, although classed as a ‘free market’, positions of power continue to shape the gold market that we know today. Central banks’ intervention in various markets is well documented. For example, interest rates are influenced by their presence in the money markets while foreign exchange intervention is one tool in a nation’s monetary policy armoury. It is surprising then that intervention in the gold market is so strongly denied. One must remember that it was only in the 1960s, during the Bretton Wood system, that the US treasury worked alongside European central banks and the Bank for International Settlements (BIS) to ensure that gold prices remained fixed at $35/oz, and so the notion that manipulation still occurs is far from absurd. The consensus is that the true intrinsic value of gold is much higher than its current market price, which is being suppressed in two main ways: through propaganda and derivatives.
Along with the diversification opportunities made possible through the purchase of gold, the commodity has long been held as a form of financial insurance. Gold, unlike many other assets, has a definite intrinsic value demonstrated via demand, long before any form of fiat currency was introduced. The performance of gold and that of the US dollar have an inverse relationship. Thus, theoretically, occurrences which lead to a reduction in the value of the dollar should simultaneously have a positive impact on gold prices and vice versa. Over time, certain parties have capitalised on the view that an increase in the price of gold is synonymous with the weaker performance of other assets, therefore forecasting an inimical economic environment. Conversely, a favourable light is cast on declining gold prices as this seems to indicate that the performance of said assets will be strong. Misleading articles attempt to indicate that demand for physical gold is dying. An article by Reuters in 2017 stated that American gold eagle sales in Q3 2017 were down 80% compared to the same time in the previous year. Although these figures are accurate, it is the message that it portrays which is misleading. The demand for physical gold in the US is less than 1% of that in China and about 2.5% that of India. Even when taking differing population sizes into account the differences in demand are significant. While China has approximately 4.3 times the population of the US, the demand for gold is approximately 110 times larger. Focusing only on US demand for gold is one method used to reduce demand for gold and thus suppress the price. These factors have allowed orchestrated attacks on price to be undertaken as other market observers actually view these moves as positive and overlook the lack of evidence supporting the moves.
While propaganda requires a certain amount of time to be effective, the use of derivatives, such as futures contracts, may bring about a significant reduction in gold prices in a short period. During times where the gold market is thinly traded (i.e. the volume of trades in the market is low) a party will flood the market with a very large number of futures contracts. The price of gold then collapses, taking with it any stop losses set manually or via the use of algorithms, causing the price to fall even further. Once the selling has stopped the party repurchases the gold required to cover the contracts at a profit. The primary reason that gold futures were first introduced in the mid-1970s is particularly cynical. The following is an extract from a telegram sent on December 10th, 1974 from London to the US secretary regarding gold dealers’ view on US gold sales and private US ownership:
“Each of the dealers expressed the belief that the futures market would be of significant proportion and physical trading would be minuscule by comparison. Also expressed was the expectation that large volume futures dealing would create a highly volatile market. In turn, the volatile price movements would diminish the initial demand for physical holding and most likely negate long-term hoarding by US citizens.”
A History of Price Manipulation
Decade after decade has detailed the progress of gold price manipulation and provided us with examples of the desire of central banks to hold some influence on gold prices. Below is a timeline illustrating some of the most interesting events that have occurred.
The 1960s: Due to the Bretton Woods system, the US treasury and European central banks colluded with the BIS to manipulate the gold market and ensure that the price remained fixed around $35/oz. The lack of gold available for delivery would eventually lead to the breakdown of this fixed value of gold and ‘force’ gold prices to be determined by free market mechanisms.
The 1970s: In the early part of the decade President Richard Nixon implemented several economic measures, known as the Nixon shock, the most notable of which was the elimination of policy allowing the convertibility of the US dollar to gold. August 1971 signalled the birth of free-floating gold price, and only three years later the price had increased more than 5x to $187/oz. However, this growth pales in significance to the growth seen at the tail end of the decade.
It was this exponential growth in the demand for gold and its associated price increase which played a major factor in discussions to reinstate a London Gold Pool.
The 1980s: The London Gold Pool was prominent in the 1960’s during the times of fixed gold prices to maintain the $35/oz price by intervening in the London gold market. The London Gold Pool was a consolidation of gold reserves valued at several hundred million dollars created by the US, Germany, Italy, France, Belgium, UK, Netherlands, and Switzerland. This pool bought and sold large quantities to ensure the price remained within a predetermined, acceptable range. This gold pool dissolved once it was decided that gold prices will be determined via free market mechanisms. However, following the exponential increase of gold prices in the tail end of the 1970s, central bank governors from G-10 nations looked to re-establish the Gold Pool. These meetings remain relatively unknown and whether the new Gold Pool was ever implemented is still debated to this day. However, with gold prices falling to less than $350/oz by 1982, it appears as though some powerful external stimulus played a part. Support for its creation came from those stating that intervention was necessary to prevent the price of gold skyrocketing once it was introduced as payment for oil. This argument holds very little weight and instead appears to be a weak cloak for the true purpose. It seems apparent that the unprecedented increase in gold prices surprised central banks and they believed that measures must be introduced to suppress them once again. The notes from these meetings are extensive and rather complex. However, the general sentiment can be judged from the wording of certain parts. Quotes such as “there is a need to break the psychology of the market” and “it would be easy and nice for central banks to force the price down hard and quickly” indicate exactly how these central bank governors view the gold market.
The 1990s: Proposed changes to accounting practices relating to gold, put forth by the IMF, were aggressively contested by the BIS. Central bank gold is never independently audited, so the true amount/value held is unknown. The proposed changes consisting of separating gold and gold receivables into two different items in balance sheets would somewhat alleviate this mystery. This increased transparency would increase the information available to the market and therefore may have led to an increase in prices. Unsurprisingly it is for reasons such as these that large and powerful banks rejected the proposed changes.
The 2000s: Much of the evidence for gold price manipulation after the turn of the decade has centred around the BIS. William R. White was quoted as saying that aims of central banks included “joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful” in 2005 while he was working for the BIS in Switzerland. Three years later at a presentation given to central bankers at its headquarters in Basel, Switzerland, the BIS claimed that it offers a service which involves intervening in gold markets. Much more recently, in 2016 Deutsche Bank admitted that it, along with other significantly important financial institutions, had been manipulating precious metal markets for many years.
The Secretive World of Gold
Central banks have no obligation to report many balance sheet components relating to gold, and as a result, there is no informational efficiency in gold lending between banks. Central banks claim that information on gold is “highly sensitive” and therefore most freedom of information requests are denied, as central banks believe that they should not be required to disclose this information. This does nothing to help the perception that the gold markets are shady corners of financial markets where a select few exploit the many for profit. Central banks often sell large quantities of gold, and while details surrounding these sales are often very limited, central banks will announce that such sales occur to further suppress gold prices. Examples of such sales include those undertaken by the Bank of England in the latter parts of the 1990s and the Swiss gold sales in the 2000s. The announcement of the former drove gold prices down 10% before the first auction in July 1999. The secrecy which shrouds these transactions indicate that they may be undertaken for unethical reasons and highlights central banks’ ability to manipulate gold prices while remaining undetected. The graph below shows the influence that an extremely small number of traders have on all precious metal markets and adds further support to the idea that this power is potentially exploited for the benefit of the few. A short position is when a trader borrows an asset and sells it with the hope that the price will decrease. If it does, they can repurchase the assets to return to the original owner at a lower price and therefore profit from the price decrease. As the graph below shows, the four largest traders’ short positions are so large that they are equal to 50 days of the world’s production of gold. The impact this can have is discussed above in the ‘derivatives’ paragraph.
Although gold is considered insurance against the complete collapse of the financial system by those who are sceptical of the current system, events which should theoretically increase this scepticism rarely have the expected impact on the gold price. The ‘great recession’, one of the worse recessions in decades, did not result in the upward movement of gold prices as one would anticipate. In fact, between 2008 and 2009, when the recession first gripped the US economy, the price of gold fell sharply before finishing the year almost flat only decreasing by 0.17%. It is these nonsensical movements of gold prices which may be the largest piece of evidence that gold prices are not solely determined by the ‘invisible hand of the market’ first penned by Adam Smith.
With the total trading volume in the London OTC gold market being estimated at the equivalent of 1.5m tons of gold, while only 180,000 tons of gold have actually been mined to date, it appears as though gold futures have successfully produced a market for ‘paper gold’ which greatly exceeds that of tangible gold. With such a disparity, the idea that powerful central banks are able to suppress gold prices to their advantage appears to become more of a reality. It, therefore, becomes apparent that if financial markets were as strict on the futures gold market as it has become on cryptocurrency markets then the artificial prices we see today would be crushed and true prices re-established once again. Armed with this new information one may assume that the demand for gold will once again skyrocket, as it did in the latter stages of 1979 and the early 1908s before it was suppressed, resulting in the loss of faith in the current financial system, which will only further increase its demand and, along with it, the gold price. With gold remaining relatively stable, today may very well be the time for the sceptics to prepare themselves for this future possibility.
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