Sunday, August 11, 2013

How Central Banks Manipulate Gold Markets

Watch from 2:25 to 11:20.

Though many people are aware that central banks intervene in currency markets, far less are aware that central banks consider gold as just another currency and regularly intervene to cap gold's price relative to a currency.

It should be obvious as to why. Since the end of Bretton Woods the USD, along with other major currencies, is not directly backed by gold. The "exchange rate" between gold and other currencies now floats rather than being fixed. If the US dollar or other currencies were declining in value relative to gold (i.e. the price of gold goes up in that currency) then people may choose to hold gold as a store of value rather than a paper currency. Fiat currency only has value if people believe it does.

Quantitative easing is just printing of more money. Nobody who owned 10% of a company would tolerate that company printing ever more shares thereby diluting the 10% owner's shares down to say 6%. Yet that is, in essence what the Fed has done. The US dollar has lost about 1/3 its value since the year 2000 relative to other currencies.

From 2007 to present, the index seems more stable, but only because other major currencies were also being devalued, making them appear to be "stable" relative to each other. However, one only has to follow the price of gold since 2000 in USD to see how much value has been lost.

Central banks know this and would prefer that the people who get paid and spend in those currencies don't notice the loss of value. Thus, pushing down the price of gold becomes an effective way to keep all but the most sophisticated investors in the dark to what's going on.

The problem is, even central banks, with their enormous resources, can only manipulate markets for sol long. As described in the video above, the US lost a massive amount of their physical gold reserves attempting to defend the $35 per OZ gold price before ending the Bretton Woods agreement.

Currently, the same thing is happening now in slow motion as gold that was leased out by central banks of the Western countries are being delivered to Eastern countries like China where the gold is vaulted and permanently removed from the world market.

This cannot go on forever. Eventually the Western central banks, like to US in 1971, will make the decision that they have lost too much gold reserves and cannot lose more. When this happens the price of gold will have to rise to its real market price.

My belief, is that the current GoFo rates being negative mentioned in the previous post, are the beginning of the end of Western central bank's willingness to intervene in the gold price at the expense of their own gold reserves.

We shall see.

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