Regulators Looking For Excuses to Intervene in Gold Markets?

Peter Macfarlane comments on the increasingly loud calls for regulation of the gold market, and the unintended consequences it could trigger.

The [commodities regulator] would also have to act to limit the gold acquired individually and by the E.T.F.’s. All of these measures would have to be coordinated and put into effect on a global basis.

I am wondering where to start with my comments this statement, taken from this article published in the New York Times and its sister paper the International Herald Tribune last week, by Steven M. Davidoff.

The full article  includes some sentences designed to make it seem impartial, but it’s clear that the writer is in favour of strict global regulations on the gold market, in order to “protect” investors from a perceived bubble in the gold price.

Worse still for us, there are some elements of truth in it. Perhaps we really do need the regulators to take a look at gold ETFs. And if they start looking in to dark corners, the results – including the unintended consequences – could affect us all.

Is gold in a bubble right now? Hardly!

  • Gold is typically priced in US dollars. What some people see as a rise in the price of gold, I see as a fall in the price of the dollar relevant to gold.
  • Gold is a traditional safe haven in times of turmoil. That is why more and more people are transferring assets into gold. Some people believe gold may be near its peak right now. I put this question to Dirk Steinhoff of Global Gold (who will be attending our Hong Kong Symposium) the other day and his counter-argument used an irrefutable logic. Do you think, Dirk asked me, that all the underlying problems that cause people to look for a safe haven have been solved? Far from it, I replied – things like the US and European debt problems are obviously getting much worse not better. So, investors in gold are hardly going to dump gold suddenly and buy dollars or euros. Quite the contrary – demand for gold will rise, so the price has to rise.

Mr Davidoff’s argument in the NYT seems to be that the price of gold should be limited to protect small investors. He even suggests that the Commodity Futures Trading Commission should try to persuade the media to “talk down the speculation.”

In my view, the media should be helping out individuals by talking down the US dollar. But of course, realistically, this is not going to happen.Too many Americans are sitting there in a bubble, as their life savings are being wiped out by the devaluation of the dollar, unaware of the other options open to them like gold, or stronger currencies held through tools such as multi-currency offshore bank accounts. That is the message we at Q Wealth are trying to get across to people who will listen, but unfortunately we’re a very small voice in all the media cackle. There are two ways to sleep soundly at night: be ignorant, or be prepared. Most Americans unfortunately fall into the former category.

Actually, it’s not small investors driving the gold market. Institutional investors are snapping up gold. Central banks from countries like China, South Korea and even Mexico are dumping dollars to buy gold.

Exchange Traded Funds (ETFs) are, however, certainly a big driver in the gold market. And it is here that regulators really should take a look. See our free Gold Report for more details on the dangers Gold ETFs – click here to download it free.

The danger is that all this could create the perfect storm, to give the government the excuses it needs to intervene. I have never been a believer in conspiracy theories about the government knocking on doors confiscating gold. But articles like this one by Mr Davidoff are now appearing in the mainstream press, and we can expect a lot more of them in the coming months as gold breaches the $2000 and then $3000 benchmarks. Regulators will face a lot of pressure to stick their noses in, and might well do so.

In fact, Mr Davidoff is probably unaware, but regulators in the US did already step into the gold market earlier this summer. The Dodd-Frank Act outlawed certain forms of gold transaction involving Over-the-Counter gold transactions by US citizens, this regulation having come into effect on July 15th this year. This was a relatively minor interference, but prudent investors should take it as a sign of things to come.

The GLD ETF currently claims to hold almost $75 billion worth of gold. If regulators uncover problems with ETFs (problems that basically have already been uncovered, but regulators have ignored the warning signs) then the fallout could be catastrophic.

ETFs are meant to track the gold price. This has been under pressure for a long time, and there have been more and more examples of minor divergences. We could reasonably expect to see a much greater divergence in the future, where the price of real physical gold uncouples from the price that is supposedly fixed by the markets.

Another likely scenario is a temporary suspension of gold trading on COMEX while regulators interfere, perhaps in conjunction with the announcement of the ‘discovery’ that some gold supposedly held by ETFs does not exist in real life. While for sure trading could and would eventually move to other markets, the upset would be enormous and would specially affect those who hold gold in financial accounts, ie bank obligations in gold, since many banks and other financial institutions sell virtual gold to their clients and then hedge these obligations with COMEX contracts.

Solutions? We’ve said it time and time again. Do not buy virtual gold like bank deposits, or ETFs. Do not buy gold certificates or gold obligations. Buy physical gold, in a place you control, that does not depend on the banking system or financial markets in any way. There will always be a strong demand for physical precious metals and they are an excellent way to protect the value of your investment.

One excellent way to hold physical precious metals is through the Global Gold program. Personal referrals are available for our members, or you can just contact them directly. Another way is using the Malca-Amit vaults in Singapore. Another way is through a bank program we know of where the bank actually guarantees real physical gold in a Via-Mat vault – the main advantage of this being that you can use your physical gold as security to borrow dollars or euros, a debt that will hopefully be gradually wiped out by devaluation of those currencies… for the moment we are saving this option for paid members, who may contact our offices for a referral to the provider.

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