My Two Cents - "Suppression in Gold Prices?"

 

9/15/2006

 

We have heard a rising crescendo in recent weeks about manipulation with regard to the price of gold. Theories run the gamut from central banks flooding the market to save their gold shorts to institutional dumping. Some folks, myself included feel that it is generally to the benefit of fiat currencies if gold flounders with regards to its value expressed in terms of paper money. True, gold has been getting its share of positive news lately with inflation fears, geopolitical concerns and strong physical demand driving a rather nice rally. Governments for obvious reasons have a motive to knock the price down a few pegs. The price of gold is perceived by many to be wise to government taxation via inflation and tends to telegraph inflationary monetary activities.

All of the above scenarios are of great concern if you're in the gold market as more of a speculator than a fundamental investor. The 'end' of the bull market is critical because you will want to get out on top. If this is really the 'end', then you'll want to have your fiat dollars tucked tightly in your fist when the last teardrops are wrung out of the proverbial handkerchief. And all of this makes total sense and is smart speculating.

However, I would and do contend that this is not a market for speculation, but one for serious long-term investment as a hedge against inflation, turmoil and other situations which normally cause steep declines in the values of other assets. In other words, when the 'stuff' hits the fan, people buy gold because it is real money and needs nothing to vouch for it. While there may come a day rather soon when the words "Backed by the full faith and credit of the US Government" might not buy you a cup of coffee, gold is like a good dog; feed it and it will always love you.

With regard to 'full faith and credit", the credit card bill for our country is near $9 trillion if you DON'T count all the bills in the future that have no matching revenues or hope of any. We continue to borrow heavily to finance a consumer debt driven economic train wreck. These two undisputed facts alone should cause the 'price' of gold to explode. This may give some credence to the idea that there is some funny business going on in the pits or elsewhere. It has also become crystal clear that the markets are drinking the government Kool-Aid right to the last drop on inflation measurements. The August 'core' CPI was up a modest .2%, giving the Fed another excuse to pussyfoot around on rates, and also giving the bond market the green light to keep pushing yields down. My opinion is that all this gerrymandering is for the purpose of preventing an absolute crash in the housing market by closing the rate gap before those ARMs begin to reset en masse. This may or may not work; only time will tell, however, I tend to be of the opinion that many households are too overleveraged for it to even matter.

There is also something to be said for the fact that central banks are selling gold rather than accumulating it. It means that they now recognize paper as real money. This gross oversight on their part will prove fatal at some point in the future. The short-sighted strategy of trying to mask monetary inflation by putting downward pressure on the gold market will only serve to create an absolute explosion in gold prices in the future. This, however, is one fraud that we can profit from. My advice to anyone who has been a fundamental buyer of gold would be to keep accumulating and hope that prices keep going down. You'll be able to purchase more ounces with the same pieces of paper. Trading inherently worthless paper for REAL money is the best bargain I can think of. And when the price corrects upward in response to the price suppression, the rewards of sticking by real money will be enormous.

 

Until Next Time,
Andy

 

Graham Mehl is a pseudonym. He is not an ‘insider’. He is required to use a pseudonym by the policies of his firm when releasing written work for public consumption. Although not an insider, he is astonishingly bright, having received an MBA with highest honors from the Wharton Business School at the University of Pennsylvania. He has also worked as an analyst for hedge funds and one G7 level central bank.


Andy Sutton is a research and freelance Economist. He received international honors for his work in economics at the graduate level and currently teaches high school business. Among his current research work is identifying the line in the sand where economies crumble due to extraneous debt through the use of economic modelling. His focus is also educating young people about the science of Economics using an evidence-based approach.