Editor’s Note: The article below is from The Daily Reckoning with author Jim Rickards, an American lawyer, economist, and investment banker who brings 35 years of experience working in capital markets on Wall Street. His fascinating take on manipulation in the gold market is a must-read. The impact of gold manipulation on other currencies is something we’re tracking here at Wall Street Daily. In fact, if you’re subscribed to our email list, you know that we’re also tracking the impact of digital currencies on the broader market – and the incredible investment opportunity these cryptocurrencies are creating right now.
Is there gold price manipulation going on? Absolutely. There’s no question about it. That’s not just an opinion.
There is statistical evidence piling up to make the case, in addition to anecdotal evidence and forensic evidence. The evidence is very clear, in fact.
I’ve spoken to members of Congress. I’ve spoken to people in the intelligence community, in the defense community, very senior people at the IMF. I don’t believe in making strong claims without strong evidence, and the evidence is all there.
I spoke to a PhD statistician who works for one of the biggest hedge funds in the world. I can’t mention the fund’s name but it’s a household name. You’ve probably heard of it. He looked at COMEX (the primary market for gold) opening prices and COMEX closing prices for a 10-year period. He was dumbfounded.
He said it was is the most blatant case of manipulation he’d ever seen. He said if you went into the aftermarket, bought after the close and sold before the opening every day, you would make risk-free profits.
He said statistically that’s impossible unless there’s manipulation occurring.
I also spoke to Professor Rosa Abrantes-Metz at the New York University Stern School of Business. She is the leading expert on globe price manipulation. She actually testifies in gold manipulation cases that are going on.
She wrote a report reaching the same conclusions. It’s not just an opinion, it’s not just a deep, dark conspiracy theory. Here’s a PhD statistician and a prominent market expert lawyer, expert witness in litigation qualified by the courts, who independently reached the same conclusion.
Now, where is the manipulation coming from?
There are a number of suspects but you need look no further than China.
China wants to do what the U.S. has done, which is to remain on a paper currency standard but make that currency important enough in world finance and trade to give China leverage over the behavior of other countries.
The best way to do that is to increase its voting power at the IMF and have the yuan included in the IMF basket for determining the value of the special drawing right (SDR).
China accomplished that last September when the IMF added the yuan to its basket of currencies.
The rules of the game also say you need a lot of gold to play, but you don’t recognize the gold or discuss it publicly. Above all, you do not treat gold as money, even though gold has always been money.
The members of the club keep their gold handy just in case, but otherwise, they publicly disparage it and pretend it has no role in the international monetary system. China is expected to do the same.
Right now, China officially does not have enough gold to have a “seat at the table” with other world leaders. Think of global politics as a game of Texas Hold’em.
What do want in a poker game? You want a big pile of chips.
Gold serves as political chips on the world’s financial stage. It doesn’t mean that you automatically have a gold standard, but that the gold you have will give you a voice among major national players sitting at the table.
For example, Russia has one-eighth the gold of the United States. It sounds like they’re a small gold power — but their economy’s only one-eighth as big. So, they have about the right amount of gold for the size of their economy. And Russia has ramped up its gold purchases recently.
The U.S. gold reserve at the market rate is under 3% of GDP. That number varies because the price of gold varies. For Russia, it’s about the same. For Europe, it’s even higher — over 4%.
In China, that number has been about 0.7% officially. Unofficially, if you give them credit for having, let’s say, 4,000 tons, it raises them up to the U.S. and Russian level. But they want to actually get higher than that because their economy is still growing, even if it’s at a much lower rate than before.
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Here’s the problem: If you took the lid off of gold, ended the price manipulation and let gold find its level, China would be left in the dust. It wouldn’t have enough gold relative to the other countries, and because the price of gold would be skyrocketing, they could never acquire it fast enough. They could never catch up. All the other countries would be on the bus while the Chinese would be off.
When you have this reset, and when everyone sits down around the table, China’s the second largest economy in the world. They have to be on the bus. That’s why the global effort has been to keep the lid on the price of gold through manipulation. I tell people, if I were running the manipulation, I’d be embarrassed because it’s so obvious at this point.
The price is being suppressed until China gets the gold that they need. Once China gets the right amount of gold, then the cap on gold’s price can come off. At that point, it doesn’t matter where gold goes because all the major countries will be in the same boat. As of right now, however, they’re not, so China has though to catch-up.
I’ve described some catastrophic scenarios where the world switches to SDRs or goes to a gold scenario, but at least for the time being, the U.S. would like to maintain a dollar standard. Meanwhile, China feels extremely vulnerable to the dollar. If we devalue the dollar, that’s an enormous loss to them.
China has recently sold a portion of its dollar reserves to prop up its own currency, which has come under tremendous pressure. But it still holds a large store of dollar reserves.
If China has all paper and no gold, and we inflate the paper, they lose. But if they have a mix of paper and gold, and we inflate the paper, they’ll make it up on the gold. So they have to get to that hedged position.
China has been saying, in effect, “We’re not comfortable holding all these dollars unless we can have gold. But if we are transparent about the gold acquisition, the price will go up too quickly. So we need the western powers to keep the lid on the price and help us get the gold, until we reach a hedged position. At that point, maybe we’ll still have a stable dollar.”
The point is that is that there is so much instability in the system with derivatives and leverage that we’re not going to get from here to there. We’re not going to have a happy ending. The system’s going to collapse before we get from here to there. At that point, it’s going to be a mad scramble to get gold.
The price of gold will go significantly higher in the years ahead. But contrary to what you read in the blogs, gold won’t go higher because China is confronting the U.S. or launching a gold-backed currency…
It will go higher when all central banks, China’s and the U.S.’ included, confront the next global liquidity crisis, worse than the one in 2008 — and individual citizens stampede into gold to preserve wealth in a world that has lost confidence in all central banks.
When that happens, physical gold may not be available at all. The time to build your personal gold reserve is now.
We need to mention Russia here too. Russia is also amassing gold. And since Russia and China aspire to be true gold powers, it’s not enough to have physical gold. It’s also critical to create gold exchanges and gold markets for price discovery and trading.
Currently the price of gold is set in two places. One is the London spot market, controlled by six big banks including Goldman Sachs and JPMorgan. The other is the New York gold futures market controlled by COMEX, which is governed by its big clearing members, also including major western banks.
In effect, the big western banks have a monopoly on gold prices even if they do not have a monopoly on physical gold. But that could be about to change.
Russia and China are not only building up physical reserves and exploring for more, they are building trading systems that allow for price discovery and leveraged trading in gold.
It may take a year or so to attract liquidity, but once these new exchanges are fully functional, the physical gold market will regain the upper hand as a price maker.
Then gold will commence its march to monetary status, and its implied non-deflationary price of $10,000 per ounce.
The time to buy is now, before that happens.
for The Daily Reckoning