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Gold trading or gold hoarding – which will win out?

“The old order changeth yielding place to new”- Tennyson. As the West relinquishes its gold through manipulative trading and China picks it up, the global financial order will likely move East.

There are, and always have been since I’ve been following it, strange goings on in the gold and silver markets. Manipulation is rife – but whether this is by traders, commercial bankers, central banks, other government entities – or a combination of all of these remains unclear.  Probably all have had a hand in the continuing volatility of the gold price – and through its close association that of silver too.  But then manipulation is rife in any open market you care to name.

That’s the way the game is played in these days of high frequency trading with absolutely enormous quantities of paper assets being used to manipulate virtually any market for the purposes of financial gain – or perhaps for political reasons too in the case of gold.

GATA – the Gold Anti Trust Action Committee – has been pushing its gold manipulation theory for a number of years now and is perhaps one of the true prophets of what was beginning to take place in financial markets, although it has only really been wholly focused on gold, and by association, silver.  Here it theorises that governments, central banks and their bullion bank allies have been working together to control the price of gold – probably with the aim of trying to stabilise the global financial system in these days of fiat currencies. 

For years, scorn was heaped on the GATA ideas, despite some substantial evidence being produced to support  them.  But, of late, given some increasingly strange gold market movements flying in the face of political and financial events which would at any other time have had the effect of leading to an upwards run on gold, GATA’s views, and those of a number of others on the fringe, are becoming mainstream – particularly as these adverse price movements in gold appear to have been orchestrated by massive ‘sales’ of paper metal in volumes that have absolutely no relation to the amounts of gold being mined or available to the markets in physical form.  “There are no markets anymore, only interventions.” says Chris Powell, GATA’s Secretary – apparently some 5 years ago as it has been pointed out to the writer.  How time flies!  All markets are open to manipulation for those with the political and/or financial backing to do so – as are government statistics which may be aimed at helping move markets in the way governments wish.

Here at Mineweb we have often expressed the view that it is far from surprising that gold may be being manipulated by central banks and their allies.  After all, if you view gold as money – i.e. a currency in its own right – one already knows that governments have openly manipulated exchange rates (money) ever since countries’ currencies went off a gold standard which would have maintained fixed valuations.  So why would they not try and control the price of gold too, given the underlying history of gold as a bellwether of government financial prudence. 

Central Bankers may quote John Maynard Keynes’ statement that adhering to a gold standard was a ‘barbarous relic’ (often nowadays attributed to the precious metal itself) – but deep down, built into their psyche, is the inherent understanding from hundreds, perhaps thousands, of years of history, that gold remains the currency of last resort.  They may not, in themselves, even recognise this understanding, but it is there, instilled from fairy tales and historical fact from their mothers’ knees and early schooling. And if, perhaps, they can control this key element in terms of their own currencies then they can make the world believe that all is right with the system – when patently it is not.

How long can this go on?  In theory indefinitely as far as the West is concerned, but the West may well be running out of the physical gold necessary to maintain the pretence that all is well.  After all the mighty dollar is nowadays only worth a fraction of its value in terms of buying power than it had when President Nixon took the U.S. off gold convertibility.  If paper money has no physical gold backing at all then it is just worthless paper and will eventually be seen as such bringing the whole house of cards crashing down.

But the growing powers of the East – the hoarders – do not see gold as an asset that can be readily manipulated, although they may be party to some kind of manipulation themselves for their own financial and political ends until they can totally dominate the global market.  China is the main proponent of this view nowadays and is building itself into a position where it can use its financial power to usurp the U.S.A.’s position as top dog in global trade. 

See also: Unpacking China’s gold surge – Skoyles

China’s policy on this is not wholly transparent – it likes to keep the world guessing as to its true position.  There is a strong body of opinion that believes that China has been building its official gold reserves substantially, but without announcing this.  What we do know for sure is that Chinese banks have been actively encouraging Chinese citizens to buy precious metals for some years now – and the Chinese banks are effectively arms of the state.  And the belief is that the Chinese state, which invented paper money and has a long history of reliance on gold as the principal recognition of wealth, believes that the more gold the state and its citizens can accumulate, the stronger its position will become in the world order.

This year, China looks likely to import perhaps 1200 tonnes of gold through Hong Kong.  (It has so far retained Hong Kong’s transparent statistical reporting set up by the British).  It will also produce around perhaps 420 tonnes of gold in its own right this year.  Together this accounts for around 60% of all the world’s new annual gold supply.  What we don’t know is whether Chinese gold imports also come in through other centres than Hong Kong too.  If they do, the percentage could be far higher.  With India reckoned likely to import close on 1,000 tonnes of gold this year too, despite the government’s attempts to control imports for trade balance reasons, these two countries alone will account for perhaps all of 2013’s global new gold production. 

Strong gold imports into other eastern nations too – Thailand, Indonesia, Vietnam, Singapore etc. as well as into former Soviet bloc countries, Russia, Kazakhstan and into the Middle East, – suggests that perhaps substantially more gold is being shifted to firm hands than is being produced, with the balance coming out of Western holdings, as witness the decline in ETF gold holdings, the dive in COMEX gold inventories – and, some surmise, a steady flow of leased gold from the central banks, perhaps never to be returned.

The flow of gold into firm hands in the East, MidEast and FSU coffers seems to be accelerating year on year with the logical conclusion that the West will end up with little or none of the precious metal if this trend continues over time.  What this will do to the world financial order no-one really knows, but the Eastern, Mid Eastern and FSU countries, and China in particular, reckon it will put them at the head of the world order once it becomes recognised that they control virtually all the global gold.  Chinese companies (all effectively arms of the state)  are also investing in mid tier Western gold miners too, further consolidating their control on global gold production.

I remember seeing, in my distant youth, a 1950s film called the Million Pound Note – based on a Mark Twain story.  The brief plot was that the Bank of England, back in 1903 when one million pounds was worth enormously more than it would be today, was persuaded by two eccentric millionaire brothers to issue a 1 million pound banknote, giving it to a penniless American seaman (Gregory Peck) with the condition that if he returns it unspent at the end of the month they will give him a job.

The Peck character is, of course, unable to spend the note as no-one has the funds to offer change and, assumed to be an eccentric millionaire, he has no trouble getting food, clothes and a hotel suite on credit, just by showing his note. The story of the note is reported in the newspapers and he is welcomed into Society while he is also persuaded to give his name to supporting a company that is, coincidentally, trying to develop a new gold mine.  His mere association with the company is enough to enable the financier to raise the money to start the mine.

The story gets a little more complicated, but to cut it short, Peck still has the note at the end of the month, is by then effectively a wealthy man in his own right without actually spending anything and is able to return the note, unused and claim his job.

To an extent, controlling the world’s gold is likely to have the same result, but on a huge global scale.  You may not have to use it, just have it.  The U.S. built its position as the keeper of the world’s reserve currency on such a basis with its initially convertible stock of gold in New York and Fort Knox which has dominated world official gold holdings.  The then hoarder of last resort!  Officially it still has all this gold, but increasingly there are those expressing doubt of this provenance.

If China usurps this position as the hoarder of last resort, through its official holdings and those of its citizenry (and to an extent the Western gold traders, looking to the short term only, are perhaps unconsciously colluding in this by keeping the gold price low), then logic and history suggests it will win out in the end.  China looks to the long term – the west to the profits to be made next week!  In the process gold will likely remain hugely volatile, but once the perception that the West is running out of physical metal becomes understood, and the paper gold merchants have nothing with which to back their market manipulations, there will be a period when the gold price will likely soar.  And then, maybe, some other form of manipulation will be ultimately be reintroduced under Chinese dominance.  What goes around comes around.

iPad Version: Picture – An employee arranges gold jewellery in the counter as her arm is reflected in the mirror at a gold shop in Wuhan: REUTERS/Stringer China

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