Thursday, October 6, 2011

Why the Fuss Over Gold and Central Banks?

Is gold money or is it just a commodity? What part do Central Banks play in the gold market? Important questions for you and your present and future wealth.

Ok, so let us stand back from all the noise of 'gold being in a bubble' and 'gold bugs are weird' and 'gold is just a lump of metal' and calmly look at a few factors that make gold and silver important right now.

What is actually happening to gold and to a lesser extent silver (as silver is an industrial metal as well as precious)? Silver has it's own issues. It is a very tiny market and price swings are often dramatic. Silver is not for the fainthearted, but in a secular (long-term) bull (going up) market nevertheless. One owns silver for the extra leverage it may provide.

Do Central Banks manipulate the price of gold? According to Ben Bernanke, gold is held by Central Banks as collateral because of 'traditon' and 'gold is not money'. I would disagree. Do I know more than Ben Bernanke? No, not by far, but I have an alternative view. Does this view stack up with reality or is Ben's view going to become reality. That's the big question.

Or are simple money printing and innocent buying and selling of Central Bank physical gold the only causes of gold price movements? Yes, this obviously happens, but it may not be the full story. If you have that much influence (print at will, sell, buy at will), then innocent buying and selling becomes less of a factor.

I see gold as ultimate money (see a description of gold as money at the bottom of this page). Primarily because it best describes the qualities that money needs to be classed as such; especially scarcity. Fiat paper money is not scarce. Ever typed a 1 followed by a bunch of zeros on a computer? That is how easy it is for Central Bnaks to 'print' your money. Scarce it isn't. Infinite it can be.

The other side of this is that gold reflects the mismanagement of the fiat money system. Now Ben isn't going to admit to mismanagement. He may not genuinely know that it is occurring. Let's assume he has good intentions. You see, gold reflects mismanagement in its price. As more dollars chase the same amount of this scarce resource its price increases. Gold also reflects people's fear of losing their wealth. They see it as an insurance.

If you don't think Central Banks have a stake in keeping a lid on the gold price then read this:

"That day the U.S. announced that the dollar would be devalued by 10 percent. By switching the yen to a floating exchange rate, the Japanese currency appreciated, and a sufficient realignment in exchange rates was realized. Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake."

Paul Volcker, Nikkei Weekly 2004

So there it is, Central Banks do make joint interventions in the gold market. How? Now that's complex, but here's a simple explanation. They lease (lend for a rental) some of their gold into the market to primary bullion market dealers who then sell it. (GATA describes this better.) This massive sellin,g in one hit, can cause huge price down trends. The reason this is done is to control an actual or impending uptrend in the gold price as huge amounts of money printing is, or about to, occur. Perhaps the recent large gold and silver price decreases were caused by Central Banks planning to devalue their currencies via printing to prepare for the large bailouts of European Banks. Save the system and sacrifice wealth.

This behaviour by Central Banks is quite understandable if you accept the premise of gold as ultimate money. Otherwise, it's just another fuss being made by the gold bug conspiracists. Decisions we make on the basis of information received is how we go forward (or not) in life. Certainly, in this blog, there is not enough information to make life changing decisions. But is does exists out there.

It's always up to you? Don't leave it to your financial advisors alone.

Gold in New Zealand dollars: $2142.50 per oz
Previous all time high: $2284.16 per oz (19 Aug, 2011)

Silver in New Zealand dollars: $39.89 per oz
Previous all time high: $59.19
per oz (30 Apr, 2011)
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