For his website, Dr. Paul Craig Roberts, former Assistant Secretary of the Treasury and associate editor of the Wall Street Journal, enlisted the help of Dave Kranzler, co-founder of Golden Returns Capital LLC, where he manages the Precious Metals Opportunity Fund, to dig into the recent allegations of price manipulation in the precious metals market. They specifically focused on gold prices, which closed Friday 1/31/14 at $1,243.79 an ounce.
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Dr. Roberts and Mr. Kranzler trace the manipulation back to the financial deregulation that occurred throughout the Clinton and Bush presidencies which ultimately led to banks being “too big to fail.” In order to save the banks, the Federal Reserve had to take drastic measures after the 2008 economic collapse, the main step being the creation of the Quantitative Easing (QE) policy. QE allowed the Fed to buy up the banks’ bad debt, lower interest rates to near zero, all while pumping money into the economy through a billion-dollar bond buying program.
The bond-buying program and all the money pushed into the system put a lot of pressure on the value of the U.S. dollar. As the U.S. dollar began to lose value in 2011, gold prices climbed to $1,900 an ounce as investors used the yellow metal as a hedge against the impending inflation. According to the article, the Federal Reserve thought that gold hitting $2,000 an ounce would have a “psychological impact that would spread into the dollar’s exchange rate with other currencies, resulting in a run on the dollar as both foreign and domestic holders sold dollars to avoid the fall in value.” Roberts and Kranzler claim that to avoid this scenario, the central bank leased gold to bullion dealers in order to artificially boost supply which kept gold prices from rising.
To pull off the manipulation, the Fed buys up a large number of gold futures on the New York Comex exchange (where the world trades gold futures). Whenever gold begins to rally, the Fed then sells a massive amount of futures leading to an immediate price drop. Roberts and Kranzler blame a sudden price drop that occurred on January 6, 2014 on this practice. Gold futures had rallied over $15 in the Asian and European markets, when suddenly the price of gold plunged $35 when over 12,000 contracts traded, more than 10% of the day’s volume. A similar drop happened back in October 2013.
The article claims that this type of manipulation, along with manipulations on other trading systems, has been happening since the start of the bull market in gold in late 2000. It has ramped up over the last 2 years, however, as the Fed has been trying to taper QE. Any sign that the bond-buying program may be reduced has sent the market tumbling. By driving down gold prices, the Fed can drive investors back to the market by increasing the positive perception of the value of the U.S. dollar.
Fortunately, the manipulation may soon come to an end. Roberts and Kranzler believe that as the real physical gold moves from New York and London to Asia, that this method of price manipulation will no longer be possible and “the West will be left with paper claims to gold that greatly exceed the available supply.” Gold should then start to get back to its actual market value.
The article ends by summing up the situation and with a prediction…
“What we are witnessing is our central bank pulling out all stops on integrity and lawfulness in order to serve a small handful of banks that financial deregulation allowed to become ‘too big to fail’ at the expense of our economy and our currency. When the Fed runs out of gold to borrow, to rehypothecate, and to loot from exchange traded funds, the Fed will have to abandon QE or the US dollar will collapse and with it Washington’s power to exercise hegemony over the world.”