Gold Price Manipulation
how is the price of gold suppressed?
Is the price of gold manipulated?
If so, why?
I recently dug deep into this topic,
and here is what I learned.
The price of gold is manipulated to protect the perceived strength of fiat currencies (US Dollar).
While a large portion of the world’s gold is held by private citizens in the form of jewelry,
central banks also hold gold as an asset in their reserves.
My first question was,
if gold is being manipulated,
who is behind it?
Next question was why?
I went through a lot of material, and will share a few of the best resources in the comments.
Central banks, which issue fiat currencies like the USD and the Euro,
Have a vested interest in suppressing the price of gold.
I’ll use the US Dollar as an example,
but this applies to other currencies.
People compare the value of a dollar to value of gold to measure the strength of the currency.
If you could buy an ounce of gold for $100 on day 1,
and buy an ounce of gold for $200 on day 2,
You could conclude the the dollar is losing value.
As the US dollar value has been inflated due to increased money supply,
and shortages in essential food and energy items,
People get scared when they feel like the dollar is losing value.
When people get scared,
it diminishes their confidence in the US Dollar,
(which is not backed by any hard assets so faith and trust is important)
The Central Bank wants people across the world to be confident that the US Dollar is a strong, stable currency.
How do they manipulate the price?
The central bank “lends” their gold to other banks.
They don’t lend the actual gold,
just a paper certificate that represents the gold.
Similar to how poker chips represent money at a casino.
The banks take those paper certificates,
Sell them for currency,
And buy other yield bearing assets like bonds.
After they make a profit from the bond,
They sell the bond,
Take the money and buy back the gold paper certificate,
And have a net profit from this borrowed gold.
The problem is that the same physical gold can be “lent” many times over,
As the paper certificates don’t correlate to specific gold bars in reserve.
So the paper certificate gold supply exceeds what actually exists in the vaults.
The banks can,
when necessary,
use those paper certificates to issue “naked shorts”
A short is a contract that basically bets the asset will go down in value.
Naked shorts are different than legal shorts because normally you take possession of the asset being shorted, or at least have proof the asset exists.
With a naked short,
no such proof exists,
which is why they are illegal.
The naked shorts are placed at a specific time in the futures market,
Which creates a cascade of selling,
(Some funds have pre-programmed instructions to sell if the price goes below a specific point)
Which further drives down the price.
Net result is gold does not appear to be a good store of value,
So anyone worried about the value of the dollar,
Doesn’t accumulate gold to protect their wealth.