Guest Post: Would It Make Sense For The Fed To Not Manipulate The Gold Price?
Submitted by Lucas Jackson
Would It Make Sense For The Fed To NOT Manipulate The Gold Price?
“Oh, what a tangled web we weave
When first we practise to deceive!”
-Sir Walter Scott, Marmion, 1808
I was having a conversation with a client the other day and we were discussing all the machinations going on in the markets and politics today. Without being too unnecessarily long, let’s review a few of the latest “conspiracy theories” turned “conspiracy facts” shall we:
|Conspiracy Theory||Conspiracy Fact|
|The TBTF banks are committing fraud in the RMBS market.||Turns out they were. Linda Green was quite busy. Potentially millions of Americans were evicted from their homes by the banks knowingly submitting falsified documents. Fines were paid and settlements made but not a single banker goes to jail. Fact.|
|The TBTF banks are manipulating LIBOR.||True again. Case is ongoing but manipulating LIBOR had apparently become old hat for many years. Mid-level executives and traders will be sacrificed but unlikely any CEO or central banker is indicted although they all had to know and approve.|
|The TBTF banks are facilitating global money laundering activity for Mexican drug cartels.||True. HSBC. Again, fines paid and settlements made but not a single person indicted. DOJ is scared prosecuting anyone at the TBTF might upset the economy. This position, in my humble opinion, is beyond ridiculous.|
|The IRS is targeting the President’s political rivals.||True. Heaven help you (and your wallet) if you decided to exercise your constitutional rights to form a Tea Party or Patriot-type political group.|
|The Justice Department is wiretapping reporters whose views contradict the storyline the White House wants in the public.||True. Heaven help you (and your wallet) if you decided to exercise your constitutional rights to form a Tea Party or Patriot-type political group.|
|The White House lied to the public about what happened in Benghazi.||The uprising was caused by an anti-Islamic video that was circulating on Youtube. That’s all. Uhhh, you sure? This had nothing to do with the very same shady rebels we had been funding?|
|The Fed, in coordination with other Western central banks is suppressing the price of gold artificially||???|
Et tu, aurum?
The big question that many investors want to know is what is going on with the gold price? The big smash down recently, at some stages reaching 8 sigma down moves on essentially no news (hmmm, fishy, but I’m sure the ‘hear no evil, see no evil, say no evil’ folks at the CFTC are on the case), has many investors tending to their wounds.
However, even with the Fed pumping trillions into the market in an obvious effort to manipulate asset prices, to suggest the Fed, BIS and other central banks are actively conspiring against gold is still seen as heresy.
But should it be?
When the client to whom I was speaking said, “What proof do you have that the Fed is suppressing the price of gold?”, I got to thinking, why don’t we consider the question from another angle.
If I was Bernanke and was risking my entire reputation and a nasty place in history if things go badly, (nice to meet you Herr Von Havenstein) on engineering a recovery and a rising gold price could potentially unravel all my printing largess and solvency schemes, why wouldn’t I manipulate the price of gold?
Does it really make any sense at all that Bernanke would leave gold to trade in an open and transparent market? Hardly.
Consider. The Fed has conjured multiple trillions of digital dollars out thin air in the last five years. These efforts have propped up the Treasury market, the domestic TBTF banks, the foreign TBTF banks, the ECB, the BOE, every European sovereign bond market, the RMBS market, the CMBS market, the equity market, the housing market and the entire industrial and soft commodity complexes, to name a few.
Since the price of gold we see on our Bloomberg screens is set via derivatives and overwhelmingly settled in USD, the ability for central banks and bullion banks to manipulate the price of gold is way too easy. All the bullion banks have to do is coordinate (as in LIBOR), sell in size and punish anyone in their way.
Take losses? No problem, more fiat can be conjured post-haste. So long as no one is taking physical delivery, the band(k) plays on. (Actually, physical demand delivery IS becoming a major new problem for the banks but this is a topic for a different note.)
A quickly rising gold price upsets this fiat-engineered, centrally planned, non-market based recovery. Gold left to its’ own devices would signal the unwinding the rehypothecated world of shadow banking where latent monetary inflation goes to summer (think of it as the monetary Hamptons where only the Wall Street elite get to play).
It would signal the true rise of many emerging market countries at the expense of their creditors in developed markets.
But most importantly, it would signal a huge lack of faith in the US dollar. A currency backed by nothing more than faith in central banking.
A faith which is dying a little every day. Just ask the Japanese or Europeans how confident they are in their own Oracles of Delphi. This loss of faith in central banking immediately translates into a loss of faith in the currency and just as quickly works its magic on bond prices – meaning lower bond prices and higher rates.
So without being too ranty, I’ll end this one short today. Just remember, the next time someone is questioning why the Fed would be manipulating gold, turn the question around and ask them what incentive Bernanke has to NOT manipulate the price of gold.
And fortunately for Bernanke, as the list above illustrates, he’s living in Washington D.C. at exactly the right moment to do whatever he wants, lie about it and get away with it.