Guest Post: Gold Manipulation, Part 2: How They Do It (And How To Hedge It)
Submitted by Martin Sibileau of A View from the Trenches blog,
“…The genius of central bankers was not to forbid gold but to morph it into another fiat currency, by adding a credit multiplier to it. …”
This is the second of three articles I am posting on the suppression of gold. In the first article I showed that, under mainstream economic theory, the suppression of the gold market is not a conspiracy theory, but a logical necessity, a logical outcome. This second article will show how that suppression takes place. Those familiar with the gold market will likely find nothing new. The third article will examine the implications of this suppression and support the claim of the gold bugs, namely that physical gold will trade at a premium over fiat gold or gold paper is also not a conspiracy theory, but the logical outcome of the current paradigm.
How they do it: The concept
The popular notion, which central bankers would love to destroy, is that gold is a good hedge against inflation. In its simplest form, gold cannot be printed and, as its supply remains anchored, its price should spike if the supply of fiat money increases. The implicit math behind can be represented as follows:
Given a constant demand for money…
The equation above shows the price of gold, in terms of a fiat currency (in this case, the US dollar) as a function of the relative supplies of gold and the US dollar. In the case of a fiat currency, its supply is the product of two factors: the monetary base created by the respective central bank and the corresponding credit multiplier. This multiplier reflects every single mean by which the original base is expanded, through the banking system and the shadow banking system.
If the equation above was indeed representative of the state of affairs we’re in, there would be no room for manipulation. The supply of gold, in terms of ounces available, could be perhaps capped or confiscated, but not expanded. The price of gold, therefore, could not be suppressed.
Now that we know what cannot be, let’s understand what really is happening. To suppress the price of gold. central bankers, simply, have invented a new currency: Fiat gold. The math involved in it now is:
Given a constant demand for money…
As you can see from the second equation above, the genius of central bankers was not to forbid gold but to morph it into another fiat currency, by adding a credit multiplier to it. With this, it only takes to proportionally expand this credit multiplier faster than the numerator (of the equation) and the price of gold will fall regardless of fundamentals. If they want to go one step further and signal to the public that they can do this with complete impunity and for as long as they please, they then proceed to expand the credit multiplier predictably at specific times of the day (i.e. 8:20am ET).
How they do it: The details
Below, I will describe how the supply of this new currency, fiat gold, is expanded. The motivation for this expansion was already explained in the previous article. Below, I present the steps included in the expansion of the supply of fiat gold. In the next article, I will elaborate on the graph below, addressing its implications and consequences. But today, let’s just look at the mechanics:
The above graph shows the aggregate balance sheets of the central banks, bullion banks and the gold market. Bullion banks handle transactions in precious metals and, in this case, in gold. As you can see, central banks hold gold as part of their assets. However, they can swap their gold holdings for liquidity, for US dollars. This swap is a mere exchange and is shown as step 1, in the graph. The official explanation is that such swaps would have temporary liquidity management purposes, because they remove US dollars from the market (i.e. from the Bullion banks). At a later date, not shown in the graph, the Bullion banks should return the gold to the central banks, and receive US dollars back (including an interest). For this reason, because the swap contract implies the return of the gold at a later stage, central banks are allowed to continue showing the gold they swapped in their balance sheets, as an asset.
Once the physical gold is in the hands (i.e. balance sheet) of the Bullion banks, these banks can create loans against it, supplying the market with fiat gold. This is shown in step 2. Gold is debited and Gold loans are credited. The ultimate amount of gold loans outstanding is obviously a factor of the credit multiplier in fiat gold. The higher the multiplier, the higher the supply of fiat gold in the market and the pressure on the price to come down.
The anxiety around this issue is noticeable and the big questions are: How far can central banks go with this manipulation? How long can it last? Is there a mechanism by which the market should revert to fundamentals? I will devote the next letter to the last question. With respect to the first ones, all I can say is that central banks can go very, very far with the manipulation and can last longer than you or I are willing to believe. Why? Because unlike the case of other currencies and their respective credit multipliers, in fiat gold, the players that demand gold loans are also the ones who transact in gold (i.e. Bullion banks) and dominate the repo market to provide funding (to those ultimately speculating with gold). They are all the same and only a handful. They play a cooperative game among themselves and with the central banks. The public that holds physical gold or the central banks that accumulate physical gold but do not enter into swaps with the Bullion banks cannot force a contraction in the credit multiplier. By their actions (i.e. hoarding of physical gold), all they can do is to force the rest of the central banks and Bullion banks involved to take a higher risk in the expansion of the multiplier. But they cannot force a rush for delivery. They are, by definition, outside of the system.
How can we protect ourselves from the manipulation?
One way to protect ourselves from the manipulation described above is to simply trade the expansion of the credit multiplier for fiat gold. At this point, I remind the reader to read my disclaimer. (My comments are not intended to provide personal investment advice and they do not take into account the specific investment objectives, financial situation and the particular needs of any specific person).
If the supply of fiat gold is a factor of the monetary base in fiat gold and its credit multiplier, one can think of proxies for these factors. In my view, the monetary base is represented not only by the stock of physical gold outstanding, but also by the stock that is to be mined: By the gold miners, collectively. Fiat gold, on the other hand is represented by either futures or gold certificates.
When the manipulation succeeds, the credit multiplier expands. In this case, if I am correct, it should be profitable to be long the promise to deliver gold and short the monetary base of fiat gold. When the manipulation is not successful or a rush for delivery is triggered, the credit multiplier contracts. Here, if I am correct again, it should be profitable to be short the promise to deliver gold and to be long the monetary base of fiat gold. There are many ways to express this trading thesis, but I’d rather leave these speculations to the reader.
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My hedge against gold manipulation is to never part with my stack.
My hedge against your hedge is a doublehedge on that, plus zerohedge.
Hedge.
We may be approaching the point where the only true hedge for Au and Ag is Pb.
Some of this bullshit really needs to be called out...
The popular notion, which central bankers would love to destroy, is that gold is a good hedge against inflation.
Publicly many central bankers have stated on the record that gold is the ultimate standard for safety, including Greenspan and Bernanke. The idea that they don't acknowledge this is a myth.
The author is also rusty on their calculus because the function he wrote doesn't make any sense.
As you can see from the second equation above, the genius of central bankers was not to forbid gold but to morph it into another fiat currency, by adding a credit multiplier to it.
It should be stated, out of ~4000T of gold coming into the market every year about half of that winds up in jewellery.
Let's look at the actual gold market for a moment... most of the gold currently existing above ground is held in some form of jewellery, estimates of 50%. The current gold supply market yearly is also dominated by jewellery, the remaining 50% (~2000T yr) winds up in industrial use, investor etc.
As the price of gold has gone up, the demand for gold in jewellery has gone sharply down (over the last decade + lowered industrial demand). On the other hand as the demand for jewellery went down the investor interest went up even more sharply...creating a speculators market.
So two things, there is massive amount of gold sitting around out there currently in jewellery that increasingly is recycled into the market as the price moves up, another factor of the higher price is mine supply which also has increased. These two alone are major headwinds for gold.
The higher the multiplier, the higher the supply of fiat gold in the market and the pressure on the price to come down.
Keep in mind, investors & CB's hold a total of around 16% & 18% of the worlds gold respectively, ETFs hold a total of 1700T of gold. So if there is dilution it is a minor part of the market and certainly more then compensated for by investor speculation.
The much better argument for gold is the simple one - currency debasement. All this bullshit sideshow stuff about manipulation just confuses people about the actual fundamentals of gold. Gold hasn't risen for the past ten years because of CB's manipulating the price down! Gawddamn people use your eyes and brains!
What bullshit? What doesn't make sense of the equation??? The equation only states that the price of gold in terms of USDs is a function of the relative supplies of both. That doesn't make sense? What makes sense then?
Who cares about the numbers of tons in jewellery or industrial use?? They are part of the monetary base, not the multiplier! Do you think that providing calculations on volumes will give authority to your claim???
How do you know gold has really risen in the past ten years to where it should have risen? Had there not been manipulation, the rise would not have been from the $300s/oz to $1,600s/oz, but perhaps to the $15,000/oz...WHO KNOWS????
Ask yourself this: What do you think would happen if the stock of Berkshire Hathaway got slammed down $10 every day at 4am ET or 8:20am ET. There would be a massive investigation with people in jail. Do you see the same happening in the precious metals markets?
Over to you....by the way, you sound like my kids trying to come up with an explanation of how Santa Claus is able to make all deliveries in one night...Guess what, there is no Santa Claus! Oh...yes, I forgot, that is a conspiracy theory too!
Does Gernany have it's gold yet?
Just checking.
When was the last time the US audited Fort Knox?
Just checking.
*
gold or gold coated tungsten.... maybe that's how they do it .... roman "silver" coins got down to 1% before the shit hit the fan...
Confundido: "How do you know gold has really risen in the past ten years to where it should have risen? Had there not been manipulation, the rise would not have been from the $300s/oz to $1,600s/oz, but perhaps to the $15,000/oz...WHO KNOWS????"
Comment
You do realize that works both ways. How are are YOU to know that gold shouldn't be much lower because of manipulation? After all, if I were a PM company and I had such inventories and I knew gold were going to $5000/oz, why would I sell it to you at this low price of $1600/oz?
I don't know and nobody knows what the price should be. But the movements that have NOTHING to do with normal practice: Sell off at 4am ET or 8:20am ET are movements to take the price down. You never see, consecutively every fucking day, someone purchasing gold or silver at the same time... or do you??
On the other hand, to your last point, storing a commodity for an increase in the price is absolutely normal and it would be a mistake to think that that is manipulation.
"What bullshit? What doesn't make sense of the equation???"
In a technical sense author tries to write a function and fails.
"Who cares about the numbers of tons in jewellery or industrial use??"
Yeah, who cares about the dominant use of the commodity?
"Had there not been manipulation, the rise would not have been from the $300s/oz to $1,600s/oz, but perhaps to the $15,000/oz...WHO KNOWS????"
There's nothing in the market that suggests this is anywhere within possibility. Even if it was suddenly discovered all the central banks had zero gold, ETF holdings were zero etc., you wouldn't see a move anywhere near that because of the huge supply that would immediately move into the investor market.
Also, everyone here more or less agrees gold is moving up on speculation - so consider the fundamental (jewellery) when looking at whether gold is overbought or manipulated down.
"Ask yourself this: What do you think would happen if the stock of Berkshire Hathaway got slammed down $10 every day at 4am ET or 8:20am ET. "
First, if BRK moved $10 no one would notice. But on your point, yes many stocks move in 'unnatural' ways for a variety of reasons, particularly on OI. Aapl is famous for it's high level of manipulation from huge option market. There are lots of people who devote their trading research to what's called 'max pain.'
Gold as a commodity is heavily hedged on the futures market (all miners have to etc.) so of course you'll see 'manipulation' in the price, but it's two totally separate issues.
Not so fast Cole.....
If I recall my Bernankeisms......I believe he likes the word "Tradition". Not "Safety".
Check the numbers James. Gold scrap has fallen 50% in the last year.
Crap! I shoulda sold the stuff when it was worth $27. Now I'd only get $13.50 of inflated Bernanke Bucks.
You sound a lot like Jon Nadler. How's that Rhodium trade going where you were prostituting yourself on CNN, recommeding a buy at $3000/oz in 2010?
That trade is probably doing about well as trading on the numerous predictions that gold would hit $2k in 2012.
James Cole, you are truly a trollish piece of work.
In one sentence, you manage to spit out two classic Nadlerisms --- that is quite a feat.
Gross error #1: There is NOT ~4000 tonnes of gold coming into the market every year, the true number is ~2600 tonnes as a result of mining. The difference between the two figures is that you deceptively and dishonestly add recycled gold into the total supply, but that gold can only "enter the market" by LEAVING the market in the first place, so the net effect of it is cancelled out. Total annual gold supply is and can ONLY be derived from mining.
Gross error #2: Just like Jon Nadler and other anti-gold shills love to do, you disingenuously dismiss all the gold going into gold jewelry as mere decoration and frippery, when in fact well over half of that "jewelry" is actually INVESTMENT GOLD as well, merely being fashioned into the form of jewelry, as is customary in southern Asia and the Middle East. You could just as easily, and speciously, dismiss all the investment gold that happens to be fashioned into coins as "collectables", when we all know that claiming so would be absurd.
"There is NOT ~4000 tonnes of gold coming into the market every year, the true number is ~2600 tonnes as a result of mining. The difference between the two figures is that you deceptively and dishonestly add recycled gold into the total supply, but that gold can only "enter the market" by LEAVING the market in the first place, so the net effect of it is cancelled out. Total annual gold supply is and can ONLY be derived from mining."
It's the same in all commodities markets, for instance take copper - is recycled copper "leaving" the market?? However you want to look at it it is part of the supply.
Let me try and write this simply... As the price goes up gold that has been purchased in the past is coming back into the market from whoever is selling it. Old gold is not like a used car, it's exactly the same as the new stuff - you're not getting a discount on the old gold (outside of pawnbrokers etc.) so of course it's going to be a drag on the price.
"You could just as easily, and speciously, dismiss all the investment gold that happens to be fashioned into coins as "collectables", when we all know that claiming so would be absurd."
The article is about manipulation as "fiat" gold, since it wouldn't make any sense to argue that this jewellery-investment market is turned into fiat gold we can conclude at least half the annual market demand is not sourced from fiat. Your point here is totally separate to the argument.
And I'm not anti-gold.
Hedgehog
Yes, the manipulation does not matter to me at all. If it has helped keep my cost basis lower through the years, well then that is great.
Never sell your gold.
The ultimate checkmate on the gold manipulation are the manipulators themselves. They WILL destroy all confidence in fiat. Without CONfidence the fiat cannot stand alone with only air under it. Understand this game DOES end. Do not underestimate how CLOSE you may be to the end.......and bullion IN POSSESSION is the ultimate hedge.
+ 1
Gold bullion is independence.
Gold is portable independence.
sssshhhh
dont tell anyone its being manipulated
just buy the fucking dips
(stop talking about fight club for fucks sake)
Better check that DoChen: never trade wealth for fiat. There I fixed it for you. ;)
Indeed you make the general case. I always look forward to your comments on gold. And wealth.
Correct. At some point I may trade gold for some productive farm land out in the country. But as you say, not for fiat dollars.
good one
your wife, kids, etc. will sell it for you when you go tits up
"My hedge against gold manipulation is to never part with my stack."
this
ill part with my silver - one round at a time into werewolf bankster heart
Fuck that Dio...why waste the silver. A wooden stake in the heart will do just fine. Heck, I will hold the bankster down while you drive it in.
You might be confusing werewolves with vampires.
Best to use silver tipped arrows to the heart. Works in either case and they're reusable.
I knew it ! I did confuse the two.
Then again Banksters = Vampires/Werewolves/swine/(insert favorite here) so no matter what mechanism we use to kill them, in the end they are still dead.
"My hedge against gold manipulation is to never part with my stack."
Got Hedge?
gold is going down, the bubble is over
Trenchant analysis. Many thanks.
No, I think he's talking about his boat that runs on Alka-seltzer tablets..
Pulling an iceberg
Writing the 16 trillion dollar check and starting over like a virgin....could happen...but not likely.
We've got fake money flying out the wazzoo.
A_S is a true gold bug
talking the good stuff down, while buying it hand over fist on every fucking dip
thats what i'm talkin 'bout
gettin it on the DL
shiiiit....why would i want any of that barbaric relic?
a penchant for being trenchant :3 ?
Lemme no when it gits to three digits...only then might I be "down" against my WAC...
(I've got 17 Trillion reasons and counting why it's not a bubble)
You go down on horses.....
Surprised you got so many down arrows on your comment, A_S.
All the gold stackers claim they don't care about the price of gold so why care if it's in a bubble? In fact, posters should be giving up arrows out of sheer delight the gold price is coming down so they can accumulate more at a lower price. Guess gold bugs really do care more about making a profit than accumulation. Hmmmm....
No, Michelle, he got all the down arrows (mine included) for repeating the nonsensical and dishonest bit of tripe so beloved by Jon Nadler, namely, that "gold is in a bubble". I challenge anyone to point to any characteristics of the gold chart over the past 10 or 12 years that characterize it as a "bubble", other than the fact that it has been rising (from an incredibly and artificially low base).
Is the price of copper in a bubble because it was $0.05/lb in 1935 and is now $3.50/lb today? Is milk in a bubble because it was $1.00/gallon in 1980 but today is ~$3.50? Is gasoline in a bubble because it was 29 cents per gallon in 1960 but today is $3.85? Are you catching on yet?
My folks bought silver at $13.65/oz
with all my college money
during my senior year of high school
back in 1982
at the end of the last bubble
I bought silver at about $5/oz
I bought gold at about $600/oz
during the 2000's
and sold all my silver holdings the very day
silver hit $50 back in April 2011
and sold all my gold
when gold neared $1900/oz several months later
I know nothing about bubbles.
Setting aside from my skepticism of your (ostensibly) impeccable market timing, the fact that you (purportedly) managed to sell your metals at recent market tops does not in any way define those tops, or those markets, as "bubbles". A top and a bubble are two entirely different and unrelated market phenomena. I would have expected somebody with your apparently very profound market sense and knowledge to understand that elementary fact.
The very fact that the Fed does not want a competing currency, exposes their fiat ponzi scheme, and contradicts the true rate of inflation the government continually lies about is the primary reason why pm's will be suppressed.
Hyperbolic moves up usually indicate tops, yes.
Studying the pm bubbles of past helps identify one.
Tulips anyone?
I only take newly printed unbacked paper.....cause the old musty stuff is just icky.
has michelles parents sold their silver yet?
did they sell it at the top of 50/oz with her?
or are they still holding it?
has she paid off her student loans yet?(now theres a bubble)
Michelle, my mother in laws best friend bought silver coin during the Hunt run up. In fact he had more than, I shit you not, 12 filled to the top five gallon pails of it. Of course silver colapsed but he held it. Because he had no family except a jerk great nephew, he made a deal with my mother in law. She was to take care of him in his elder years and upon his death, live off the earnings until her death and then the principal would go to the nephew. The silver was never to be sold per their agreement. His estate was $700,000 without the silver but all he cared about was those coins. He had built a secret panelled compartment in his house where he kept it. He told her no one knew about the stash but, immediately wanted her to move it when he died. At 72 years of age she knew she couldn't physically move it so she had mr miffed agree to fly to Spokane and help her when the time came. Unfortunately she spent 3 days in the with him before he died and after he passed, she rushed to his house only to find it was gone. This was about 10 years ago. We knew the jerk nephew got it and very likely sold it immediately, all he ever wanted from his great uncle was money. People of the depression era have an innate sense of what has real value. Here was a man not very sophisticated but really knew what mattered.Funny thing is ten years ago I was more impressed with the $700,000 and didn't give a damn about the coins. I was actually relieved it was stolen so my husband wouldn't have to fly to Spokane and hurt his back moving some crazy old man's silly obsession. God what a shithead idiot I was. If I could only go back in time!
Miffed;-)