By Ziad K. Abdelnour, President & CEO Blackhawk Partners, Inc. On 12 Sep 2011
Wikileaks recently released a U.S. State Department cable stating:
“China increases its gold reserves in order to kill two birds with one stone”. China’s increased gold reserves intent is to act as a model and lead other countries towards reserving more gold as large gold reserves are also beneficial in promoting the internationalization of the RMB.
The U.S. and Europe on the other hand have always suppressed the rising price of gold. They intend to weaken gold’s function as an international reserve currency. They don’t want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar’s role as the international reserve currency.
James Conrad; a PhD economist and former Dean of the University of Indianapolis School of Business recently said that the gold market is manipulated. Specifically, he wrote an essay on the gold market by pointing out:
There is no other leveraged commodity market where short sellers increase their positions, materially, as the price rises, and increase them even more when prices are exploding, except gold and silver. The reason traders don’t normally do that is that it exposes short sellers to unlimited liability and risk. Yet, in both March and July 2008, and on countless occasions over the past 21 years, vast numbers of new gold and silver short positions were temporarily opened up, with the position holders seemingly unconcerned about the fact that precious metals had just risen exponentially, and that there was a very real potential they would bankrupt themselves with unlimited upside potential. Normal traders would not expose themselves to such unlimited risks.
I conclude, therefore, that over the last 21 years or so, “fake” precious metals supply in the form of promises of future delivery have habitually been increased when prices increase until increased “supply” managed to overwhelm increased demand, leading to a temporary price collapse.
On June 3, 1975, Fed Chairman Arthur Burns, sent a “Memorandum For the President” to Gerald Ford, which among others cc:ed Secretary of State Henry Kissinger and future Fed Chairman Alan Greenspan, discussing gold, and specifically its fair value, a topic whose prominence, despite former president Nixon’s actions, had only managed to grow in the four short years since the abandonment of the gold standard in 1971.
In a nutshell Burns’ entire argument revolves around the equivalency of gold and money, and furthermore points out that if the Fed does not control this core relationship, it would “easily frustrate our efforts to control world liquidity” but also “dangerously prejudge the shape of the future monetary system.” Furthermore, the memo goes on to highlight the extensive level of gold price manipulation by central banks even after the gold standard has been formally abolished.
The problem with accounting for gold at fair market value: the risk of massive liquidity creation, which in those long-gone days of 1975 “could result in the addition of up to $150 billion to the nominal value of countries’ reserves.”
One only wonders what would happen today if gold was allowed to attain its fair price status. And the threat, according to Burns: “liquidity creation of such extraordinary magnitude would seriously endanger, perhaps even frustrate, our efforts and those of other prudent nations to get inflation under reasonable control.”
Is there an international arrangement to maintain a control over gold prices in the international arena? Go figure.....
If we want to have a chance to remain the masters of gold, I believe an international agreement on the rules of the game seems to be a matter of urgency.
We would fool ourselves in thinking that we have time enough to wait and see how the S.D.R.’s will develop. In fact, the challenge really seems to be to achieve by international agreement within a very short period of time what otherwise could only have been the outcome of a gradual development of many years.
Your feedback is as always greatly appreciated.
Thanks much for your consideration.
vijay singh said...
Gold will continue to rise, Paper currency will continue to slide, People are more conscious about monetary issues and prefer to keep their wealth in gold, China is the biggest producer and continues to buy gold and has increased its investments in mining. India too has been buying gold and has been very successful in buying gold in fairly large volumes. I have been involved both in Gold and diamond mining for over 20 years in South America and I see gold prices will continue to climb. Investment in gold/diamond mining has become quite lucrative with modern technology making exploration much easier. Canada continues to lead the world in gold exploration and mining and has invested several billions of dollars in The Guyana Shield.
On Friday, September 16, 2011 12:25 AM
Matt Sammut said...
It is clear that silver has been manipulated down (suppressed) but not as clear with gold. Lets remember that the US has a huge reserve in gold bars, so as gold rises so do their reserves. Also, a weakening dollar devalues their debt. It would be an interesting thought to think that they would like to see gold continue to rally and the US dollar fall, unless inflation gets out of control. Only time will tell.
On Monday, September 12, 2011 11:12 AM
Lawrence Haddock said...
Thought provoking and a pleasure as always.
Without question the price of gold has been suppressed by Western democracies for many reasons. From time to time the Asian Cartels put short term negative pressure on gold, but their influence is only creating opportunity to acquire gold at cheaper prices, a practice of any skilled trader who is looking to accumulate.
The larger article which you quote from, published on ZH in 09, is itself manipulative in how it selects quotes from the Burns Memo. In the overall memo, Burns projects a future where there are no Gold Reserves at any Central Bank, the Fed included. With the goal of achieving this objective, he sees the lifting of the ceilings of Gold Reserves that Central Banks had at the time as potentially counterproductive.
One of the great challenges in attaining any such future, was the way in which gold was officially severed from the system. As Martin Armstrong recently wrote," when the Floating Exchange Rate System was born in 1971, it was a temporary trade negotiating point. There was no grand scale economic summit with a whole bunch of people gathering around and pontificating on the structure of the world monetary system as was the case at Bretton Woods in 1944..."
The price of gold may no longer be officially tied to the International Monetary System, but it is a clear contra-indicator of the confidence which the global community has in the current system. And as an asset, it plays the role of insurance against political/monetary tyranny. Regardless of the ongoing manipulations, as the tyranny continues unabated, so shall the inevitable rise of gold.
For those who are keenly interested in the history of gold price regulation, I highly recommend the late Ferdinand Lips' third book, GOLD WARS, in which he chronicles the modern regulation and manipulation of gold. One of those rare books which truly sheds some light on an eternally dark space.
On Sunday, September 11, 2011 12:37 PM
Roger Akl said...
It's too complicated for me. It is not the gold that is increasing in value, it is the dollar that is becoming cheaper and cheaper because of this policy of spending a lot in wars, military equipment and bases for the empire, without having the money for that. Instead of getting taxes from the rich and the corporations, instead of producing wealth in the US we are allowing our corporations to produce in foreign countries where labor is cheap and we buy our needs by printing more dollars. Unless we decide to produce what we need and to stop our expensive interferences abroad, the dollar will run down and the gold as well as everything else will seem going up. If we want the dollar to remain the world currency, we have to change completely our policies, not only economic but political, military, industrial, social....
On Sunday, September 11, 2011 12:23 PM
Omar A. Rizvi said...
Its about time that our Federal monetary policy be reshaped given these rising challenges. Plain and simple, if a Gold Standard is used, the US will likely have to rally the dollar. Geo-politically, we have been very astute as a Nation and Sovereign in crafting such Geopolitical initiatives. Something luminesces in the Mid-East that can certainly reshape our Trillions in debt and I think there is a way that can be implemented in getting away from the Gold Standard and tying the dollar closer to the ultimate world currency.
On Saturday, September 10, 2011 11:38 AM