What if the price of Gold is manipulated? First, some background.
Gold has virtually no industrial demand. Its value derives almost solely from its use as a currency or currency substitute. For over 5,000 or so years it has been the ultimate money because its supply is relatively fixed. It is beyond the ability of politicians to manipulate the supply. In a world of fiat money, where supply is controlled by the government or Central Banks, there is an inevitable political tendency to increase supply (an increase in the money supply is the proper definition of inflation). To contrast the two standards, during the 19th century under a gold standard, the US had virtually no inflation. The value of the dollar as measured in purchasing power remained constant. Since the creation of the Federal Reserve in 1913, inflation has been a way of life. The purchasing power of the dollar since 1913 has declined by 93%.
As “the canary in the coal mine,” free market gold prices are a reasonable measure of the amount of true inflation in the economy. (Measures such as the CPI are inadequate proxies for inflation, and have consistently been manipulated to under report price increases as detailed by John Williams among others.) As such, gold is the ultimate nemesis for fiat currency regimes. For the past several years, gold bugs have maintained that Central Banks have suppressed the price of gold in order to hide the real deterioration in the purchasing power of fiat currencies. The Gold Anti-Trust Action Committee (GATA) has been on a crusade to expose the price suppression of gold and has produced various evidence of such manipulation. Now, new evidence of gold price suppression has been uncovered that is unequivocal. It is in the form of a memo from Chairman of the Fed, Arthur Burns, to President Gerald Ford written June 3, 1975. (Recall that the dollar was redeemable in gold up until August 15, 1971.) Thus, the suppression of gold prices appears to have been going on almost from the time the world went to fiat currency.
This memo was publicized by Tyler Durden and can be viewed here. One of the damning quotes from the memo follows:
I have a secret understanding in writing with the Bundesbank that Germany will not buy gold, either from the market or from another government, at a price above the official price.
What are the implications of such a finding? First, we once again find the government lying to its people. There are innumerable instances where Fed Chairmen have denied manipulation or suppression attempts of the price of gold in any way. Is gold the only market manipulation that occurs? Does anyone believe that the same manipulation does not go on in other markets? After all, President Reagan formed the “Plunge Protection” team after the 1987 market crash for the purpose of “stabilizing” markets. Perhaps a better question might be: “What markets have not been manipulated?” Additionally, is there anything that government tells us that we can believe? Is this currently going on in the Treasury market? Could some of these or similar questions be the reason why the Fed is so adamant against an audit by Congress?
The second implication involves investment considerations. Does this mean, even at a price of $1,000, that gold is grossly undervalued? If so, what should its price be if this manipulation were not ocurring? Further, what might be a realistic outlook for inflation? What implications might this have for all fiat currencies? We know there is great concern regarding the dollar as the international currency. Replacing it with some world currency has been bandied about. Does such talk reflect more than weaknesses associated with the dollar?
These questions are all valid. But valid questions do not necessarily have valid answers. The fact that they can be raised and not seem outrageous should make one cautious. There is enough risk and challenge to investing when markets are honest.