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How Long Can They Keep Gold Down?
 | By Patrick A. Heller, Market Update
October 20, 2008 |
Ignoring inflation, gold prices last week reached their all-time highest levels as measured in Australian dollars, British pounds, Canadian dollars, Indian rupees and South African rand.
In India, the world's largest gold consuming nation, the price of gold in rupees is now more than five times higher than it was in the January 1980 peak. In South African rand, the gold price is more than 10 times what it was in January 1980.
If you take inflation into account, gold prices are far from setting record highs in any of these currencies.
The price of gold that gets the most attention is the U.S. dollar price, the currency in which gold is quoted around the world. As measured in U.S. dollars, gold set a record price in March this year, ignoring inflation. Gold's current U.S. dollar price is only around one-third of the January 1980 peak price once you take inflation into account.
Foreign governments and investors have unloaded Fannie Mae and Freddie Mac bonds and other debt of American companies to replace them with U.S. Treasury debt. The net effect has been to push up the value of the U.S. dollar versus gold and other currencies. The U.S. dollar index, which is a comparison against a market basket of major foreign currencies, is up 13 percent in the past 14 weeks. Without this rise, the U.S. dollar price of gold today would almost certainly be higher than its January 1980 peak.
In the current financial troubles, U.S. Treasury Secretary Henry Paulson looks to be the dominant voice of the U.S. government. But that doesn't mean that U.S. financial policy is coherent or consistent. In testimony to the U.S. Congress on Sept. 23, Paulson declared his adamant opposition to the U.S. government taking equity stakes in troubled major banks. Twenty days later, on Oct. 13, he brought the heads of the nine largest U.S. banks to a meeting. Each bank official was presented a one-page contract to sign that agreed to allow the U.S. government to buy equity stakes in the banks. The meeting did not end until all nine banks signed. As a sign of his lesser status, Federal Reserve chair Ben Bernanke later claimed that he did not agree with Paulson's statement on Sept. 23, but chose not to express his opinion at the time.
With so much financial instability, where even those supposedly in charge of solving crises can reverse policies within a few weeks, the U.S. government needs to minimize investor worries to avoid a wholesale flight from the U.S. dollar. One way to persuade investors that they should retain paper assets valued in U.S. dollars is to suppress gold prices. The U.S. government, through its trading partners, has been forced to take ever more blatant steps to manipulate the price of gold. This gold price suppression is now so obvious that every day more analysts and members of the business media acknowledge the evidence.
The suppression of the price of gold has been going on for well over a decade. The U.S. government has a variety of means to use to knock down gold prices. It might arrange to have gold sold or leased in many different ways. It could have trading partners sell gold on the Comex and other commodity markets where the paper contracts can be rolled over indefinitely rather than delivering physical gold at the conclusion of the contracts. It can set limits on how much physical gold can be purchased for delivery on the Comex while allowing unlimited short selling. The U.S. government could even finance the short selling of stocks in gold mining companies.
However, all of this manipulation will someday come to an end. Eventually, physical gold will need to be delivered to settle paper contracts that are not rolled over or bought back for cash. Leased gold will eventually have to be returned if the leases are not renewed. That day is coming. As the physical market trumps the paper gold market, the price of gold is destined to soar to heights never before seen.
The big question: When does this massive manipulation end?
Nobody knows.
The U.S. government (and other governments) has a vested interest in pushing this day as far in the future as possible. When the time comes, there will not be any formal announcements that the price of gold will no longer be suppressed. Instead, what you will see is an incredibly volatile gold price. The price of gold will threaten to explode, only to be blunted by the U.S. government - until the days when manipulations have ceased.
Here are some indicators that the end of U.S. government gold prices manipulation is drawing to an end:
" Gold's rise during this decade from the mid-$200s to current levels.
" Announcements of major gold sales, such as by the International Monetary Fund, that never come to pass.
" Central bank intervention to prop up the value of the U.S. dollar.
" Previous sneaky manipulation tactics are now augmented or displaced by obvious actions.
" Central bank announcements that they are cutting back on gold leasing activities and even calling back in gold from leases as they mature.
" Increased government regulation and restriction of private gold ownership (Canada recently announced additional reporting regulations on private gold purchases that go into effect at the end of 2008).
" Extraordinary demand for physical gold by investors around the world at prices well above the paper contract prices.
" Changes in rules on the Comex making it more difficult or more costly to make purchases on margin.
As you see more of these and other similar events come to pass, that brings the day of soaring gold prices nearer. The U.S. government still has a lot of "ammunition" that it could use to keep suppressing prices for some time. With all the global financial turmoil, the U.S. dollar could fall sharply at any time, or maybe not for a few years.
The ultimate direction for the price of gold looks obvious - far higher than current levels. I expect that anyone purchasing unleveraged physical gold for the long-term today will be very happy down the road, even after paying current high premiums to do so.
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