The Rigging of the Gold Market?
by Adam Richardson
I was taking a quiet spring hike through the woods when my phone went off, a new text from my brother…
He was clearly excited, he didn’t even have time to put the “o” in gold! I almost consider it sacrilege to bring something like a cell phone on a nature walk, but with an infant son at home I am always “on”.
So after a bit of hesitation, curiosity got the best of me and I sat down on a rock in the sun to see what was happening. What was happening (or had happened already by that point) is that Gold was down nearly 200 points
from the last price I had seen only a day or two earlier!
It’s hard to fight the urge to ask “why”, to seek an explanation, to understand the machinations before us. This time I didn’t really care.
I didn’t care because as I sat out in nature, a warm sun overhead, and read the news on my phone – the first headline I saw was, “Is This The End Of The Gold Rally?”
“Nah, not even close”, I thought, “it’s just about to get really interesting!“
So what did happen?
Q Wealth Contributor Nigel “The International Austrian” Shaw has some thoughts:
The Rigging of the Gold Market?
by Nigel Bolton Shaw
On Tuesday, April 16th, the Telegraph’s Thomas Pascoe informed us that “the gold price crash is further evidence of market rigging.”
Pascoe worked in both the Lloyd’s of London insurance market and in corporate finance before joining the Telegraph and obviously has experience to back up his perspectives. His main point is that “facts in the public domain do not justify the sharp fall in the gold price over the past two trading days.”
He continues as follows:
At the time of writing, the price per 100oz is $1363, down over $200 since Friday’s open. The scale of the sell-off was the worst in 30 years, with the volatility index standing at the highest level in its history. John Kemp at Reuters has calculated that based on a normal distribution, you would expect to see movements like Monday’s only once in every 500 million trading days, or two million years. The news which would justify such a price swing is curiously absent – in fact, my view is that the market ought to be bullish for gold. Something doesn’t add up.
In any market, price is determined by the confluence of demand and supply. In many respects supply of gold is relatively fixed. We know the extent of discovered gold reserves and the rate of production. While Cyprus is being forced to dump “excess” gold in order to meet the ever escalating bank bail-out bill, its whole holdings are worth only $750m, hardly enough to move one of the worlds deepest and most liquid markets to this degree.
In fact, most of the selling pressure has come from ETFs dumping holdings. A record $9.2bn of net outflows from gold ETFs in the first three months of 2013 are indicative of a loss of faith on the part of investors, as well as of a structural change in a market which has been opened up to electronic trading by the invention of these instruments.
There are others who agree with Pascoe, mostly in the gold community and such observers claim that that a kind of financial war is being waged between central bankers that want investors to concentrate on accumulating fiat money and a segment of the investing public that trusts neither paper money nor mainstream stocks (excluding mining stocks).
Pascoe puts it this way:
A surge in demand for money over gold (and hence a fall in the demand for/price of gold) can … be very broadly justified by either a contraction in the supply of money or a more general optimism about the economy. Are there grounds to believe either of these has happened?
In fact, the torrents of fiat money released around the world show no signs of contracting, which further fuels the suspicions of observers like Pascoe. The logic is that with so much paper money circulating – and such money can be printed at will by central banks – gold (and silver) constitute a logical alternative because there are limited supplies.
Gold can be dug from the ground but it cannot be manufactured at the push of a button. Pascoe and others distrust current gold prices and believe they do not reflect the reality of the physical gold market. Naked shorting of the gold market is depressing prices beyond any rational calculation – and meanwhile both gold and silver on a physical basis are in short supply.
For those partial to conspiracy theories, the gap between the demand for physical precious metals and the spot price that is subject to the influence of so-called naked shorting is proof positive of something “funny” going on.
No matter where you stand as an investor, this is not an argument that will be resolved quickly or neatly. It’s been going on for decades and the relative popularity of money metals it will continue to be a contentious issue years from now.
Where do you stand?
Nigel Bolton Shaw specializes in international Austrian economic analysis and writes for numerous publications including Without Borders newsletter. Please see here: https://secure.viscountmedia.