Is Gold Being Suppressed?

The topic of gold price suppression has been an intensely controversial idea, but because it carries sufficient ramifications for the financial world, investors need to consider the matter without jumping to a rash conclusion.

As gold's trailing price performance has been strong, it may seem counterintuitive to consider that an unhindered market could have already hit substantially higher prices. But I want Fools to understand that a large and growing number of economists, analysts, and investors are reaching those very conclusions.

Whatever you think about gold, there can be no doubt that gold has dramatically re-asserted its immutable role within the global financial realm over the past decade. Former Fed chairman Alan Greenspan conceded in 2009 that "gold still holds reign over the financial system as the ultimate source of payment." The world experimented with moving away from gold beginning in 1971 with the "Nixon Shock," but extremely poor stewardship of the key paper currencies has ushered gold back as the sole currency immune to the ravages of obscene debt and competitive devaluation. On that point, the case is quite simply closed.

The question remains, however, whether Western central banks may be intervening in the gold market to mitigate or delay the appreciation of gold against their troubled paper currencies.

The motive
The incentive to do so is quite clear, since nothing less than the very survival of the present global currency regime is at stake. As a recent report by QB Asset Management asserts, banks "short gold futures because they have incentive to sustain the current monetary system and maintain control over credit distribution."

A 2009 diplomatic cable from the U.S. Embassy in Beijing to the U.S. State Department -- recently made public by WikiLeaks -- summarized Chinese media as follows:

The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold's function as an international reserve currency. They don't want to see other countries turning to gold reserves instead of the U.S. dollar or euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar's role as the international reserve currency.

The historical perspective
The idea of central banks working together to suppress the price of gold hasn't come out of thin air. To the contrary, the world's major central banks orchestrated just such a suppression scheme during the 1960s -- only its existence was no secret. From 1961 to 1968, eight central banks operated the London Gold Pool in order to keep the gold price pegged at $35 per ounce; the United States provided roughly half of the needed supply of gold to conduct their market interventions. This fascinating example offers a powerful precedent for the sort of surreptitious activity many gold market observers now allege.

In 2004, Japanese periodical The Nikkei Weekly printed former Fed chairman Paul Volcker's fascinating recollection of a global currency intervention led by the United States in February 1973. At the time, Volcker served as undersecretary of the Treasury for international monetary affairs. Volcker recalls:

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.

Gold price suppression in action?
I have already pointed out that gold is one of the least transparent markets on the planet, offering ample opportunity for surreptitious intervention be obscured from public view. Instead of witnessing the action, onlookers must instead settle with scrutinizing market dynamics for signs of potential foul play. In the eyes of the gold market's many seasoned and highly credible observers, the sharp selloffs that occurred immediately prior to and following Switzerland's major currency intervention last week smacks of central-bank intervention in action.

By establishing an artificial floor of 1.20 in the euro/Swiss franc exchange rate, Switzerland effectively sought to remove its currency from the short list of safe-haven currencies that investors and speculators have been flocking to in droves. Logically speaking, the news is immensely bullish for gold, since gold essentially becomes the primary safe-haven asset left standing. However, noting gold's sudden and uncanny drop within hours of Switzerland's announcement, Hinde Capital CEO Ben Davies pronounced: "The central banks will all have been in on knowing ahead of time that the Swiss were going to announce this. So there was central bank selling because they really didn't want the price of gold to skyrocket on what is incredibly bullish news for gold."

Precious-metals trader Dan Norcini noted that 4,000 gold contracts -- representing about $740 million worth of (virtual) gold bullion -- changed hands on the COMEX within just one minute last Tuesday evening. Norcini added: "If it is not obvious by now, it should be -- an attempt by the Central Banks of the West to derail the rise in the gold price is currently underway."

After observing gold's surprising price action, Goldman Sachs' head gold trader Zak Dhabalia reportedly commented:

The immediate aftermath was in complete contradiction to prior recent episodes of intervention and what anyone would have expected. Instead of spurring a further gold price rally on the basis that it was one of the few remaining safe haven "currencies" we saw a 50 usd collapse in minutes. The source of this flow seems hard to pin down with some speculating over whether "authorities" were concerned about the signals of an accelerating gold price and its impact on other fragile markets.

When the head gold trader at Goldman Sachs is sufficiently perplexed by recent gold market dynamics as to reference the possible concern of "authorities" over the signals inherent in gold's advance, that tells me it's time for investors to take this issue seriously and conduct their own due diligence on the matter. The Gold Anti-Trust Action Committee has amassed reams of documentation to support its longstanding claim that central banks regularly intervene to suppress the price of gold -- even taking the U.S. Federal Reserve to court -- and I encourage Fools to take an open-minded and comprehensive look.

What this means for you
My conservative price target of $2,000 gold that I set out for myself and my readers several years ago was never predicated on the assumption that gold price suffers from coordinated suppression by Western central banks. But if there is such a presence in the gold market attempting to derail or delay gold's upward price momentum -- and at the very least, the circumstantial evidence creates a powerfully compelling case -- then I would hasten to suggest that such currency intervention is likely to end in outright failure.

John Embry, chief investment strategist for Sprott Asset Management, recently declared: "The Chinese have a very good understanding of what’s been going on in the gold market, as the Russians have for a long time. The Chinese know full well that the Western central banks have been suppressing the price." If that's true, then Fools can expect manipulation of leveraged paper vehicles representing gold to result in actual physical supply flowing to demand hotspots like China and India until physical gold becomes too scarce to perpetuate such a leveraged house of cards.

I intend to raise my long-term price target for gold once my $2,000 target is breached, but even my subsequent forecast will prove grossly conservative if a scheme to suppress gold prices is confirmed as incontrovertible fact or is defeated by the market (or both). I believe investors are still wise to seek direct exposure to physical gold through trusted bullion proxies like Central GoldTrust (AMEX: GTU  ) or Central Fund of Canada (AMEX: CEF  ) . I think Goldcorp (NYSE: GG  ) offers some of the cheapest available exposure to massive physical gold supply, and Freeport-McMoRan Copper & Gold (NYSE: FCX  ) also commands attention, as its share price has retreated notably this year. Small-cap miner Brigus Gold (AMEX: BRD  ) is forging a remarkable turnaround story, and my top pick for 2011 AuRico Gold (NYSE: AUQ  ) continues to execute a gorgeous growth strategy with the recently announced acquisition of Northgate Minerals (AMEX: NXG  ) .

I'm not recommending that Fools alter their gold investment strategies to account for their own view of whether coordinated gold price suppression occurs. All I seek is an honest public discussion of this high-stakes issue within the broader topic of gold's crucial monetary role within the global financial system. Please get the discussion started by voting in our Motley Fool Poll, and share your thoughts and questions in the comments section below.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of AuRico Gold, Brigus Gold, Central Fund of Canada, Freeport-McMoRan Copper & Gold, and Goldcorp. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Comments from our Foolish Readers

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  • Report this Comment On September 13, 2011, at 1:20 PM, TheDumbMoney wrote:

    With all due respect, nothing in the posts of yours that I have seen, which to my knowledge focus on a wide variety of factors but which to my knowledge (I admit I have probably only read 1/10th of what you have written here though) have never seriously discussed or modeled gold in relation to real interest rates, makes nearly as much sense to me as these links. I'll have to double check to make sure these links work:

    http://www.crossingwallstreet.com/archives/2010/10/a-model-t...

    http://www.crossingwallstreet.com/archives/2011/08/updating-...

    http://peterlbrandt.com/the-dominant-fundamental-theory-expl...

    In short, gold very likely operates in a leveraged inverse relationship to real interest rates. With that in mind, it is important to remember that central banks have the ability to make their currencies more valuable, just as they have the ability to make them less valuable. And they have the ability to raise interest rates as well as lower them.

    As for the substance of this article, it would not surprise me at all if central banks did something -- particularly something timed with the Swiss announcement. As a short term trade, and only as a short term trade, the trend upwards in gold will likely continue until short term real interest rates rise. As this is unlikely to happen within the next two years, both for political and economic reasons, the trend will likely continue.

    One of the best pieces of evidence to look for when gauging potential manipulation is if the price of gold diverges from this long term leveraged inverse relationship to U.S. real interest rates.

    Personally, I have no position in gold nor any intention of initiating one. The gold portion of my portfolio is instead allocated to PM, which has performed similarly to the major gold ETFs since the first time I ever argued with you, about a year and a half ago, and which pays a large dividend.

  • Report this Comment On September 13, 2011, at 2:00 PM, XMFSinchiruna wrote:

    dumberthanafool,

    I enjoy our periodic exchanges, but if you're going to keep score on respective calls, let's keep it fair.

    On February 23, 2010, the earliest interaction between us that I could find, you stated:

    http://www.fool.com/investing/general/2010/02/23/charlie-mun...

    "The only good reason to buy gold is if one believes China and other developing nations will massively up their gold holdings in the coming decade. [...] In my humble opinion, if you're worried about devaluation of the dollar, people, a less risky hedge is to buy companies like PM, available now at a P/E of around 15. PM gets 100% of its revenue outside of the US and converts it to dollars for its profits. Try THAT on for purchasing-power size if the dollar tanks relative to other currencies.... In the meantime you get a great company at a nice value, a 5% dividend, and peace of mind. Or you can follow this genius into SLW at a 145 P/E. Disclosure: I own shares of PM. Do your own research."

    ____________________________________

    For the record, I have always stressed that gold vs. stocks is not the proper argument, but rather that gold (and gold stocks) deserve some consideration within each investors' broader allocation strategy.

    Your selection of PM has performed admirably with a return of 43% since the date of that comment. But it's only fair to point out that Silver Wheaton has appreciated more than 150% over the same period, and has even initiated a small dividend. So your snarky remark of "or you can follow this genius into SLW at a 145 P/E" did not really serve you very well.

    Over the same period, the GLD has returned 65%, the GDXJ has returned 57%, and the GDX has returned 52%.

    Again, I'm not trying to knock PM or any other stock out there. I merely saw fit to check the relative performance given your comment above.

  • Report this Comment On September 13, 2011, at 2:05 PM, jrs1000 wrote:

    Chris,

    Excellent article.

    I have no doubt that the banksters have been massively shorting gold and silver for many years, and I doubt they'll ever quit doing it.

    And don't look for the CFTC to do anything about it as they're about as useless as the SEC was in investigating Bernie Madoff. That's because these government agencies deliberately look the other way for some select outfits like select Wall Street crooks and the banksters.

    The bigger question though is are the banksters shorting the metals for their own accounts or are they just acting as brokers for their government clients???????

    My guess is that the banksters are long the metals for their own accounts, but massively short the metals for outfits like the US government. The banks probably also do a lot of trading in their accounts using their obvious insider information.

    The only solution I can see to this criminal trading in the metals and other markets would be to pass laws to stop banks from trading in the markets. In other words, force the banks to operate as banks, not traders in the markets. It would also help if all buyers and sellers of commodity futures contracts (and their clients) were listed somewhere on a daily basis so that everybody could easily see who's doing what. That way the criminal manipulators could be easily seen.

    Anyhow, the manipulators can slow down the rise in metals prices, but they can't stop the rise over time. The more they manipulate prices down, the more bargains they present to physical buyers and countries like China.

  • Report this Comment On September 13, 2011, at 2:21 PM, TheDumbMoney wrote:

    Silver is a different matter. In my post above I am comparing price performance of PM to gold. Thus, since I was not trying to say my call of SLW vs. PM was correct (clearly it wasn't), I am unsure what the purpose of your purportedly "keeping it fair" comment above is.

    As for gold vs. PM, I said "similar," not identical. I am well aware that PM has not performed "identically," and I am well aware that anyone can very easily compare two charts. (And knowing how thorough you are, as well as having witnessed your rather devastating exchanges with GoldMiningXpert, I know you are likely to do so.) If you add in my dividends, and my reinvested dividends on PM, it is much closer to "identical" in that time period. At the very least, I would even up it to "very similar."

    It's also true that when we first talked, I had no concrete idea what moved the price of gold and silver. I just knew that I did not buy what I perceived to be your hodgpodge of primarily thematic ideas. I can only assume it is true that you have never focused on the long term inverse relationship of gold to real interest rates, otherwise you would no doubt have gone back and posted a hundred and thirty-seven posts about that topic that you have written either attacking it or promoting it. :-)

    I think you have called a major trend in gold and silver, and you called it early. I think you are to be commended. I certainly didn't call it. Gold was not even on my radar. However, I also think it is at least possible you called it for the wrong reasons. (I'm still not any model lacks flaws.) While I don't like some of your more enthusiastic rhetoric, and I don't think it is correct to imply that gold's low-interest-rate-environment reassertion of itself as a currency is likely to be permanent, I think you are very smart, as well as intellectually honest enough that if you have not in fact looked at the real interest rate model, or at the alternative model Bridgewater uses, you will do so, and potentially be able to participate in calling the top, as well as the bottom.

  • Report this Comment On September 13, 2011, at 2:58 PM, TheDumbMoney wrote:

    I should note, now that I double check it, that the last time I had really charted out PM vs. GLD was a few weeks ago. Since then there has been more of a divergence. It suspect it may be temporary, to the extent one can (as I suspect) attribute it to the fact that whenever the dollar index rises in value relative to other currencies, PM drops. Despite the actions of our central bank and our politicians, the dollar has recently been rising in value, likely as a result of what is going on in Europe (both the Euro instability and the actions of the Swiss bank).

  • Report this Comment On September 13, 2011, at 3:57 PM, EllenBrandtPhD wrote:

    Repost From Seeking Alpha, Where They Still Seem to Believe That Gold Equals GLD:

    Once again, veterans in the sector don't care about the dastardly ETFs.

    And re actual bullion, we get not only word about another large Central Bank buy almost every few days, but it is the beginning of the first of two major commercial gold-buying seasons in Asia and the Middle East. Last gold-buying season, we got pretty much constant word of buyers having to pay hefty premiums over the posted prices. Will it happen again? (Hint: Yes.)

    For the MINERS, the only statistic that really counts is the Average Realized Gold Price during a quarter.

    We are two weeks away from the end of Quarter Three.

    In Quarter One, the Average Realized Gold Price was about 1375.

    In Quarter Two, the Average Realized Gold Price was anout 1525, already a mammoth, record jump.

    In Quarter Three, the Average Realized Gold Price may come in at around 1775, which is not only terrific, it's literally astounding.

    And the Average Realized Silver Price this quarter should also come in at a record.

  • Report this Comment On September 13, 2011, at 4:00 PM, EllenBrandtPhD wrote:

    Some Ninnies - possibly working for Street.com - are trying to boost Barrick against GG again.

    Barrick is fine, but GG is by far the fastest future grower among the majors, and its margins are utterly fantastic.

    Many of us believe it's the ONLY Gold stock Cramer ever got right!

  • Report this Comment On September 13, 2011, at 4:20 PM, XMFSinchiruna wrote:

    dumberthanafool,

    You sound more confident in the model's predictive ability than even its author does!

    "Instead of explaining all of gold, my aim is to pinpoint the underlying factors that are strongly correlated with gold."

    Quantitative models like the one you linked to can indeed offer some utility within a more comprehensive process of analysis, but taken on their own without that fundamental understanding they could just as easily yield horrrific results. Another CAPS member directed me to a separate model that found historical correlation between gold prices and a "theoretical gold value" based upon M3 money supply and gold mine production. Both your chosen model and the one advocated by the other community member achieved historical correlation, and of course the factors of money supply, mine production, and real interest rates all are very important factors that impact the gold market, but neither model suffices as a stand-alone means by which to understand, interpret, or much less to forecast gold price dynamics.

    Finally, your dual insinuations that I may have been right "for the wrong reasons", and that I would not be able to "participate in calling the top" in gold without the aid of your preferred quantitative model strikes me as unjustifiably confident and combative given your own admission that you had "no concrete idea what moved the price of gold and silver" in early 2010.

    -----------------------------------

    Please respect the fact that I sought for this comments section to offer an opportunity for community members to discuss their views on gold price suppression. If you wish to discuss further the merits of your preferred quantitative model, or challange my understanding of the fundamental factors influencing gold, I invite you to take any further dialogue between us to my blog:

    http://caps.fool.com/Blogs/ViewBlog.aspx?t=01006124249416869...

  • Report this Comment On September 13, 2011, at 4:41 PM, TheDumbMoney wrote:

    Nope, no interest.

    And, in fact I do acknowledge in a parenthetical that I am not entirely confident in any model, including that one, though there's a typo on the parenthetical. So, as to my confidence, "guh?"

    It does not matter to me whether you or Eddy Elfenbein or Bridgewater is correct about the fundamental factor(s) influencing gold. Nor do I pretend to have greater knowledge than you do, which is of course precisely why I'm citing the work of others, not myself. Bridgewater, however, is confident enough in their model that they have risked and made hundreds of millions if not (more likely) billions of dollars on it this year. Me confident? I am not confident enough in any of it to trade gold in real life at all, as is reflected in this CAPS account. However, I am at least temporarily kicking a$$ in my other trading CAPS profile (with a ton of gold and gold miner and silver picks). So I refer again back to my supposed confidence. Guh?

    But I do have to ask, can your model or models produce a chart that quantifiably lines up as well with the price of gold as Eddy's or EconomPIC's does? That's not a rhetorical question. If you have a chart or have posted it in some prior article I'd love to see it and I'll certainly look at that and perhaps implement that in my non-money trading account as well.

    Finally, given your statement herein that there "can be no doubt that gold has dramatically re-asserted its immutable role within the global financial realm over the past decade," I think all of this is quite appropriate here, though this is about all I have time for today.

    Best of fortune to you and fool on and all that stuff.

  • Report this Comment On September 13, 2011, at 5:16 PM, barniebrains wrote:

    Lots of the information in this article is taken from King World News interviews with top precious metals experts. BTW: Great source of information.

    Its difficult to prove that the central bankers are in fact causing this, but there is no other good explanation for the price going down when the Swiss Franc being pegged to the Euro is clearly bullish for gold. Also, the down movements all happen during off-hours within a matter of minutes. During normal trading hours, the price tends to move higher at an orderly pace. It definitely seems like its being manipulated.

    But as you say, manipulating the price downward makes the price of gold less expensive than it would truly be, thereby giving a discount to all those who are buying physical gold. So take advantage and stock up on physical before central bankers no longer have the ability to manipulate the price down. Their ability to suppress the price cannot last forever.

  • Report this Comment On September 13, 2011, at 6:26 PM, JJJ111 wrote:

    Following a $400 rise in less than two months, I think a consolidation in this area is extremely healthy. It shakes out all of the people which probably shouldn’t be in gold that were using levered positions. Now having said that, there still is so much counter-intuitive price action that you know the central banks are in there (manipulating gold). There is no question that at the time of the Swiss franc devaluation, when gold dropped on either side of the devaluation by over $100, that was totally orchestrated because in a rational world the gold price, as the other safe haven, should have rocketed higher.

  • Report this Comment On September 13, 2011, at 7:01 PM, JJJ111 wrote:

    Institutional Gold Holdings Will Increase 12 Fold

  • Report this Comment On September 13, 2011, at 7:04 PM, JJJ111 wrote:

    Gold’s “perfect storm” is expected to continue on renewed investor demand for haven assets, potentially driving the metal to its 1980 inflation- adjusted record, according to Morgan Stanley.

    The firm retains a positive view on gold for its role as portfolio insurance against a “formidable cocktail” of macro challenges including financial systemic risk, concern of a double dip recession and sustained low interest rates.

    Bullion now has an estimated 85 percent probability of trading between $1,819 an ounce and $2,085 an ounce next year, according to Morgan Stanley’s calculations. Gold is still below its nominal high after accounting for inflation. Spot gold’s $850 an ounce peak in January 1980 is equivalent to $2,330.51 today after adjusting for inflation, according to the U.S. Labor Department’s inflation calculator.

  • Report this Comment On September 13, 2011, at 7:32 PM, ETFsRule wrote:

    "Quantitative models like the one you linked to can indeed offer some utility within a more comprehensive process of analysis, but taken on their own without that fundamental understanding they could just as easily yield horrrific results. Another CAPS member directed me to a separate model that found historical correlation between gold prices and a "theoretical gold value" based upon M3 money supply and gold mine production. Both your chosen model and the one advocated by the other community member achieved historical correlation, and of course the factors of money supply, mine production, and real interest rates all are very important factors that impact the gold market, but neither model suffices as a stand-alone means by which to understand, interpret, or much less to forecast gold price dynamics."

    I'll go out on a limb and assume you're referring to Paul van Eeden's analysis.

    His analysis does not use the M3 money supply (it hasn't used the M3 since he updated his model in 2008). This indicates to me that you did not take the time to fully understand his model before dismissing it.

    It's nice that you've had such a great run over the past few years (as you frequently remind your readers), but of course past performance is no guarantee of future success.

    In this article you mention the use of gold in global finance - but, you haven't shown how you converted this abstract concept into a price target of $2000.

    The fundamental flaw in your own method is that any of your arguments could be used to justify a bullish position on gold at any price. If you don't include the current price of gold in any part of your analysis, then you could claim that gold is underpriced regardless of whether it is currently trading at $1000, $2000, $3000, or any other amount.

    This criticism has been brought up several times before, by myself and others. You have disagreed with this point before, but you still have not shown where you account for gold's current price in any of your valuation methods.

  • Report this Comment On September 13, 2011, at 7:55 PM, SN3165 wrote:

    Sinch, when can we expect another Microcap article? Although I must say I am pretty set on a trio of Alexandria-Tyhee-Caza, after doing my own DD. And it's possible other stocks I own will be in the series. I guess we'll just have to wait and see?

  • Report this Comment On September 13, 2011, at 8:15 PM, ETFsRule wrote:

    Another point: if you're going to use qualitative arguments, such as the use of gold in international finance... shouldn't you also point out the fact that US debt has re-established itself as the ultimate safe haven in the financial world, with the yields on 10-year treasuries recently hitting all-time lows?

  • Report this Comment On September 13, 2011, at 9:05 PM, XMFSinchiruna wrote:

    ETFsRule,

    If you continue to seek a definitive valuation of gold based upon a single quantitative approach, you might as well be seeking the holy grail. No single quantitative means of determining a definitive fair value for gold exists. This is one of the reasons that a hybrid analytical approach to gold is so important: one that begins with a thorough, critical, and ceaseless examination of all relevant macroeconomic factors influencing the market for gold, one rooted in a comprehensive knowledge of supply and demand dynamics, and one also appropriately informed by multiple technical and quantitative means.

    I believe I have clarified before that my $2,000 price target for gold was never derived from any single magic formula or quantitative method used to divine a fair value. I selected $2,000 as my conservative long-term price target after giving ample consideration to: existing and (accurately) forecasted fundamental developments, multiple potential correlative factors (USDX and other key exchange rates, silver, oil, US debt, money supply, real inflation, etc., etc.), technical analysis (Fibonacci, trend extrapolation, examination of the previous gold bull market and consideration of the inflation-adjusted 1980 peak, etc, etc.), and a survey of myriad well-reasoned price forecasts by sources whom I deemed credible on the topic (Sinclair, Rogers, etc.).

    Is the result subjective? Positively. It's my gold price target, and I wouldn't have it any other way! I suppose you may continue to decry my subjective price target even long after it has been successfully breached. That is your prerogative, as it is the prerogative of every reader to assign whatever significance they see fit to my forecast. What comes across, I believe, is the unshakeable confidence with which I have maintained my conviction over the course of several years that $2,000 gold was a foregone conclusion within this ongoing bull-market trend. You are free to malign my methodology all you wish; I care only that my price forecast has helped some number of investors to come along for a profitable ride.

  • Report this Comment On September 13, 2011, at 9:12 PM, TheDumbMoney wrote:

    Note, apropo of this talk about a money supply model, that's actually Bridgewater Associates' model, apparently, or a similar one. That's a $100 billion hedge fund (the largest in the world, I believe) that has returned around 25% or so this year so far, in part with big bets on gold based on this model. Their model, if Peter Brandt is correct, is the ratio of gold stocks above ground to the world's reserve currency supply. Of course, it doesn't take a genius to see how that model actually highly corrolates with Eddie's model, and why both might yield a similar result. It also isn't irrational to speculate that things like mine production are simply tails being wagged by this dog, or the sources of shorter-term deviations from the dominant model (just as the 2008 liquidity event was in retrospect). That all depends upon some acceptance of Peter Brandt's (my third original link) idea of the "Dominant Fundamental Theory," which may or may not be a true way to look at things, but which has appeal to me, and which has been articulated in different ways by many people. I too am much more suspicious of qualitative sausage grinding than I am of a quantitative graph that lines up well. I'm a total nobody, but I follow many professional traders on Twitter, via Abnormal Returns, and generally on their blogs. In my limited experience, they will accept qualitative explanations if they are good enough, even if they can't build a clear model, but a model is always preferred, and the simpler it is, the better.

    Also, I voted "maybe" in the poll, and I agree with barnie that any manipulation is likely to create nothing more than a buying opportunity for medium term (1 year or so out from here) speculators, unless the manipulation is truly severe. There are of course many ways central banks could manipulate the gold price, including for example, at the most extreme end, banning the holding of gold, beyond a certain amount. It's highly unlikely things will go that far though. Unless, I'm mistaken, central banks disclose their gold holdings though, so I don't know there is a conspiracy. For example, we all knew when South Korea bought a bunch. Yes there is the whole "audit the fed" issue (http://www.gao.gov/products/GAO-11-768T?source=ra) But the Fed's balance sheet (as opposed to that issue, which involves the Mint, and the Treasury department) is fairly transparent, and shows it holds holds around $11 billion in gold stock, which is unchanged, unless you think the Fed is simply lying. See here: http://www.federalreserve.gov/releases/h41/current/h41.htm.

    All of the other central banks disclose their holdings as well. So to buy this argument, you would have to buy that there is a massive conspiracy amongst the world's central banks (who are, at the same time, at least in part, manipulating down their respective currencies in a race to the bottom with each other) to sell gold that is presumably not on their balance sheets in the first place, in order to keep prices down. (Or to set up some sort of un-backed derivative instrument that could accomplish this.) Anything is possible I suppose.... The most likely and obvious co-conspirators would have to be the Bank of England and the ECB. There are all kinds of alternative explanations though for the drop in gold that coincided with the Swiss franc announcement, including the fact that holders are gold (at least institutionally) are likely to be somewhat correlated with holders of Swiss francs. And holders of gold and francs may have had to sell gold in order to cover losses on Swiss franc holdings, which could have been severe, given the obscene (I think around 9% 1-day change) in the value of the Swiss franc vs. the Euro that accompanied the announcement, and especially if they were employing leverage. (Which, let's face it, some probably were employing.) Nine percent 1-day changes in two major currencies like that are news. That just doesn't happen. That's a big, big deal. And the franc dropped like 8% against the dollar. Thus, the post-franc gold action is also consistent with the idea of another temporary liquidity event. I would rate this as more likely than manipulation. But I am, as Mr. Barker is certain to point out, not an expert.

  • Report this Comment On September 13, 2011, at 9:54 PM, XMFSinchiruna wrote:

    dumberthanafool,

    You may not realize it, but I do respect and enjoy your perspectives, even if I do not agree with all of them. Now that I know your aversion to my hybrid analytical approach is based more upon personalo preference than some specific aspect of my particular analyis, I will take care not to take your criticism so perosnally next time. :)

    ETFsRule,

    Likewise, you made an insightful point with respect to Treasuries above. Current yields do indeed show that u.s. debt, notwithstanding the recent downgrade, continues to attract safe-haven interest. How those two choices perform for haven seekers from here forward is another question, and as you might imagine I give gold the edge as the more likely to deliver effective wealth preservation over the next several years.

    Sorry if I mixed up Van Eeden's money supply metric of choice. I did take a fairly lengthy look at his site and several of his articles at your request, and I thank you for bringing his work to my attention. Even though I do not share your enthusiasm for his theoretical gold price calculations, I did enjoy reviewing his commentary.

  • Report this Comment On September 13, 2011, at 10:21 PM, skypilot2005 wrote:

    Reading the dialogue here the article below, came to mind. An acknowledged “suppression”:

    http://online.wsj.com/article/SB1000142405311190490090457655...

    · SEPTEMBER 7, 2011

    WSJ

    Euro Woes Stir Currency Fears

    Switzerland Acts to Shield Franc From Skittish Investors Fleeing Europe Debt Crisis

    By DEBORAH BALL

    Excerpts:

    ZURICH—In a new sign of how turmoil in financial markets is convulsing economic policy around the world, Switzerland's central bank said it would seek to repel the floods of capital pouring into the country by capping the surging Swiss franc.

    In one of the most audacious moves in its history, the Swiss National Bank said it would buy euros in "unlimited quantities" whenever the single currency fell below 1.20 francs, setting the stage for what could be a long battle with the financial markets.

    The franc has soared in recent months as investors have sought a haven from the debt crisis in the euro zone.

    The SNB said Tuesday it would "no longer tolerate" the euro falling below 1.20 francs. It said it will enforce the limit with "the utmost determination and is prepared to buy foreign currency in unlimited quantities."

    The Swiss move pushed funds into the few other currencies still considered safe. Norway's krone Tuesday hit its highest level against the euro since February 2003, and the Swedish currency also strengthened.

    "There is a lack of safe havens, and people are turning their eyes to Norway with its rock-solid finances and good growth," said Kari Due-Andresen at Handelsbanken in Norway.

    "This could be a bloody battle for the SNB over the next few months," says Jane Foley, currency strategist for Rabobank. "It's a battle of the SNB against the search by investors for safe havens."

    Others point to the strong language in the SNB's Tuesday statement as a sign of the bank's determination, which could bolster its credibility in the market. The language is far starker than the bank's communiqués to the market during its 2009-2010 interventions.

    "The SNB is now completely committed," says Alessandro Bee, currency strategist with Bank Sarasin. "There is no going back. They will do everything to defend this. They have to resist the pressure. Otherwise, they can just close the SNB."

    Sky Pilot

    Official Web Link Assistant to Sinch

  • Report this Comment On September 13, 2011, at 10:31 PM, ETFsRule wrote:

    "No single quantitative means of determining a definitive fair value for gold exists."

    I disagree. Paul van Eeden already did it. And it's not magic, it's just numbers and logic.

    Regarding your $2000 "price target"... I feel the need to put it in quotes not to be obnoxious, but because I don't consider it too be a true price target - you have admitted yourself that you really expect gold to go higher than $2000... so this number is really just a temporary place-holder.

    Anyway, I know you are planning to do a lot of gloating once gold reaches $2000, so I just want to point out one thing: I have never said that gold will not reach $2000. Whether a person chooses to use van Eeden's model, or a model based on interest rates, or whatever else, it is obvious that gold will reach $2000 at some time on another. The price of gold has always had a long-term upward trend, expressed in $/oz.

    This doesn't mean that gold will be a good investment, or that its real rate of return will be positive, or that it will even be a good store of value: it just means that the nominal price of gold will continue to rise against the US dollar. I agree with that idea completely, and as a result, it is inevitable that gold will hit $2000 at some unspecified point in the future.

    I think the main difference is that if gold has a large pullback (probably 33-40%) and returns to its long-term correlation with the money supply, van Eeden will know why this happened, whereas people who ignore his quantitative analysis will be left scratching their heads.

    Anyway, good luck.

  • Report this Comment On September 13, 2011, at 10:46 PM, ETFsRule wrote:

    Skypilot: No offense but I'm pretty sure you are misinterpreting that story. Switzerland is intentionally trying to devalue its currency and PREVENT people from using it as a safe haven. If anything, that would push more people into gold and out of Swiss francs. I don't see how you could possibly view that as price suppression of gold.

    I think the recent actions by the Swiss really illustrate the very real dangers of deflation. It's quite illuminating to see a country as fiscally responsible as Switzerland desperately trying to prevent its own currency from being used as a safe haven. If Americans would stop and think about that what that means for a second, it might give them a new outlook on economics and on monetary policy in general. But, who am I kidding.

    For anyone who cares: Switzerland's annual inflation rate is currently 0.2%.

  • Report this Comment On September 14, 2011, at 7:01 AM, SanityChecker wrote:

    I have to admit that I cracked a wry smile when I saw dumberthanafool's comparison of gold funds to PM. Correct me if I'm wrong, but PM is Phillip Morris, the cigarette maker. Cigarettes have a history of serving as currency, most recently in WWII, but they also have a tendency to burn up their own inventory. So essentially, from this perspective, dumberthanafool is choosing to invest in cigarettes as an alternative currency to the dollar rather than in gold or silver. Quite amusing!

  • Report this Comment On September 14, 2011, at 7:18 AM, skypilot2005 wrote:

    On September 13, 2011, at 10:46 PM, ETFsRule wrote:

    “Skypilot: No offense but I'm pretty sure you are misinterpreting that story. Switzerland is intentionally trying to devalue its currency and PREVENT people from using it as a safe haven. If anything, that would push more people into gold and out of Swiss francs. I don't see how you could possibly view that as price suppression of gold.”

    I don’t. I meant it has a timely example of how governments CAN ACT to suppress Swiss Francs, Gold, etc. It really goes to answering the title of Sinch’s article: Is Gold Being Suppressed?

    See below, from Sinch’s piece, above:

    “The historical perspective

    The idea of central banks working together to suppress the price of gold hasn't come out of thin air. To the contrary, the world's major central banks orchestrated just such a suppression scheme during the 1960s -- only its existence was no secret. From 1961 to 1968, eight central banks operated the London Gold Pool in order to keep the gold price pegged at $35 per ounce; the United States provided roughly half of the needed supply of gold to conduct their market interventions. This fascinating example offers a powerful precedent for the sort of surreptitious activity many gold market observers now allege.”

    When I read it, I recalled the article I am quoting from and used information from the article to support Sinch’s piece, above.

    Sinch also, writes:

    “The question remains, however, whether Western central banks may be intervening in the gold market to mitigate or delay the appreciation of gold against their troubled paper currencies.”

    I posted the information to show that there is intervention by the Swiss government to suppress the Franc. Therefore, “Western central banks may be intervening in the gold market to mitigate or delay the appreciation of gold against their troubled paper currencies.” I feel it’s entirely possible.

    Fool On

    Sky Pilot

    Official Web Link Assistant to Sinch

  • Report this Comment On September 14, 2011, at 7:35 AM, skypilot2005 wrote:

    Sinch wrote:

    “Is the result subjective? Positively. It's my gold price target, and I wouldn't have it any other way! You are free to malign my methodology all you wish; I care only that my price forecast has helped some number of investors to come along for a profitable ride.”

    For the record, I am one who has profited handsomely from Sinch’s “methodology” over the years.

    Sky Pilot

    Official Web link Assistant to Sinch

  • Report this Comment On September 14, 2011, at 7:58 AM, skypilot2005 wrote:

    September 14, 2011, at 7:01 AM, SanityChecker wrote:

    “I have to admit that I cracked a wry smile when I saw dumberthanafool's comparison of gold funds to PM. Correct me if I'm wrong, but PM is Phillip Morris, the cigarette maker. Cigarettes have a history of serving as currency, most recently in WWII”

    As an aside, I have first hand knowledge of one of PM’s products; Marlboro “Reds” being used as a medium of exchange throughout Nam’ and most of Asia 40 years ago. They were “Good as Gold”, literally. :)

    So, you can confidently change "most recently" to 1975.

    Sky Pilot

  • Report this Comment On September 14, 2011, at 10:21 AM, XMFSinchiruna wrote:

    ETFsRule,

    $2,000 is so much more than a "place-holder" to me. Let me shift gears in this discussion and make it personal for a moment. When I began investing in gold and silver in 2005, I had no price target to guide my long-term strategy. I was already sufficiently confident in the trend to hold a major allocation to precious metals, but I was still in the process of building my long-term outlook.

    So I spent the next two years researching and investigating the topic more thoroughly than I've ever delved into a topic in my life (which is saying something for a life-long researcher and overall fastidious guy). By the summer of 2006, clearly I still wasn't there, because when that 2006 correction hit I sold some positions into relative weakness rather then retaining the long-term perspective. I resolved not to let that happen again, and continued my research until I found the number that I knew I could rely upon. Expecting that prices could ultimately continue much higher was part of the beauty of the $2,000 target; because even though I was routinely roasted in virtually every public forum for having what was perceived as an outlandishly lofty target for gold, I knew that that the opposite was true ... that it was actually eminently conservative in nature. The conservative nature of the target was where the confidence came in. It was not a "place-holder" but rather a lowest common denominator of forseeable price scenarios.

    Thereafter, my allocation to precious metals grew in accordance with my confidence in the $2,000 target. Before long, I was 75% to 85% long precious metals, which is roughly where I've remained ever since. [I have never advised or encouraged investors to mirror my allocation, taking care always to state that allocation is up to each individual investor to decide for themselves.]

    So, if you can imagine it, I was not the least bit shaken in 2008 when gold and silver carved that horrific correction into the guts of unsuspecting investors. Even though I underestimated the correction in the early going and failed to raise cash in a timely way, that missed near-term call yielded only a missed opportunity, and not a disaster as likely could have ensued had I not remained 100% convinced that $2,000 gold was a foregone conclusion; not in the manner of blind determination, but rather as a result of constant and vigilant research and analysis. I watched in horror as my equity portfolio collapsed to unimagineable depths. But I never sold a single position into weakness. Instead, I used the opportunity to help my fellow Fools select memorable bargains like SLW at $2.51, AUY at $3.89, etc.

    Since you have a penchant for quantitative analysis, perhaps you can quantify for me just how much sheer negativity I have had to wade through in order to help some of my fellow investors find confidence in the long-term outlook for gold. Over the past several years, I have been called every nasty name in the book, and been slighted at nearly every turn with ignorantly judgemental labels and outright character assassination. All because I was convinced the price of a metal was going higher and I sought to help fellow investors get into position. Sounds ricidulous, right? But that has been my journey.

    http://www.fool.com/investing/general/2010/09/29/take-it-bac...

    And consider this, if you please. Because of the underlying ramifications for the the global economy, my country and its currency, and the welfare of its people, the rise of gold has for me always been a somber affair. I saw it coming, and prepared accordingly, but I can not celebrate the trajectory. I take personal offense to your use of the term "gloating" above; that is not who I am or what I am about. I will mark the occasion of my realized long-term price target in a wholly appropriate manner.

  • Report this Comment On September 14, 2011, at 10:21 AM, XMFSinchiruna wrote:

    SkyPilot,

    Thank you for your service!!

  • Report this Comment On September 14, 2011, at 11:11 AM, richthegeek wrote:

    I am not at all an expert in this area, but I have yet to find a model that is quantitatively accurate at predicting the market - the forces are just too complex. I think Sinch's comment about the holy grail is appropriate, because if such a model existed it would ensure wealth like nothing can. In reality all models are based upon a certain amount of assumptions and it only takes one inaccurate assumption to throw the model off.

    Models are guides, but have to be taken with an eye on the bigger picture. That is why I like Sinch's approach. We are at a bit of a crossroads here where many people - and in fact many countries - are over-leveraged and in trouble. I sure wouldn't bet my hard earned money on just a quantitative analysis or model in this climate.

    Rich

  • Report this Comment On September 14, 2011, at 12:25 PM, ETFsRule wrote:

    "Over the past several years, I have been called every nasty name in the book, and been slighted at nearly every turn with ignorantly judgemental labels and outright character assassination. All because I was convinced the price of a metal was going higher and I sought to help fellow investors get into position."

    I think your articles and blogs are fawned over and praised more than any other writer on TMF. But yes, I suppose there is the occasional negative comment.

    I don't condone personal attacks, but I think you make yourself a target by doing things like digging through old posts in an effort to publicly ridicule someone with their missed calls (ie: GMX). Or, by bringing politics into it - doing things like speaking negatively about "currency devaluation" without providing any evidence that currency devaluation is bad for the economy. The Swiss are desparately trying to avoid further appreciation of their currency... shouldn't that tell you that maybe currency appreciation isn't always such a good thing?

    Lastly, I think your analysis tends to be incredibly one-sided - which is where the term "gold bug" probably comes from. According to your analysis, there are dozens of factors that affect the price of gold: interest rates, macroeconomic factors, etc, etc. Yet, from what I have seen of your articles, it always seems that 100% of these factors are bullish for gold. Maybe the occasional look at bearish factors for gold, like the recent flight to T-Bills, would make your analysis seem a bit more balanced.

  • Report this Comment On September 14, 2011, at 12:44 PM, ETFsRule wrote:

    richthegeek wrote: "I think Sinch's comment about the holy grail is appropriate, because if such a model existed it would ensure wealth like nothing can."

    In my view, comparing the gold supply to the money supply gives you a valuation, in much the same way that a PE provides a valuation for stocks.

    Everyone has access to PE values of the stock market - that certainly doesn't mean that everyone is guaranteed to get rich. But you can use these valuations to identify bubbles.

    Does that guarantee that you can perfectly predict the direction of stocks, or of gold? Of course not. A lot of investors lost quite a bit of money during the Nasdaq bubble, even though they correctly identified that stocks were overpriced. If you initiate a short position too early, you can go broke as a bubble continues to inflate higher and higher.

    So, I wouldn't advise anyone to short gold now, or ever, really. But I certainly wouldn't want to own gold either.

  • Report this Comment On September 14, 2011, at 12:53 PM, XMFSinchiruna wrote:

    "Maybe the occasional look at bearish factors for gold..."

    The second I find any, I'll be the first to let you know! ;) A lack of discussion of bearish factors for gold does not equate to a one-sided analysis unless there are legitimate bearish factors working against gold. And in case you hadn't noticed, the above article is precisely directed toward one major factor that may be working against gold.

    Please take it to my blog if you have anything further to say about this, but there was no malicious effort to ridicule that individual; there was only a commitment to truth and the best interest of community members who may not have been aware of the individual's highly relevant track record.

  • Report this Comment On September 14, 2011, at 1:09 PM, TMFKopp wrote:

    "A lack of discussion of bearish factors for gold does not equate to a one-sided analysis unless there are legitimate bearish factors working against gold."

    Good point, there are no bearish factors at all on gold.

    Matt

  • Report this Comment On September 14, 2011, at 1:43 PM, Valuefirst wrote:

    Chris,

    Betting against Western central banks that control seemingly endless supplies of FIAT money to short gold with, is eerily similar to betting against the Fed. I'm long gold stocks, but am not holding my breath that the truth will set us free.....or sadly make me rich.

    Fool on,

    ValueFirst

  • Report this Comment On September 14, 2011, at 1:57 PM, XMFSinchiruna wrote:

    Valuefirst,

    I understand the sense of trepidation. Perhaps this will shore up your resolve:

    http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/...

    John Embry:

    “What could be most important going into next year will be the revelation that the paper gold market is a complete and utter fraud. For every $100 of paper gold claims, there are probably only $1 or $2 worth of real gold backing it. That could be the thing that basically blows the top off of the gold market.”

  • Report this Comment On September 15, 2011, at 12:23 AM, Frankydontfailme wrote:

    Another excellent article Sinch.

    Heh. Swiss are attempting to depreciate therefore depreciation is good. Nice logic ETFs.

  • Report this Comment On September 15, 2011, at 2:19 PM, wantingtoretire wrote:

    Is there price suppression or more correctly do "authorities" intervene in the gold market to influence the price. Well yes they do. If you watch the spot price through each day, week after week, it obvious that this happens. It did today at the favorite 8:00 am New York time.

    Manipulation is even more obvious and frequent in silver, where it is blamed on the bullion banks.

    But this is all part of the game.

    Today is a good day to buy gold...................

  • Report this Comment On September 15, 2011, at 8:26 PM, NDallas40 wrote:

    I am a rookie to your foolish website, as well as a new investor in metals. I have thoroughly enjoyed this article as well as all of the insightful comments. It hurts a little each time I learn something that teaches me how little I truly know. I am shocked, however at the poll results. To see so many intelligent citizens believe that strongly that the gold market is being suppressed is rather......shocking. The thought never crossed this reader's little pea brain. Thanks fer the schoolin'.

  • Report this Comment On January 15, 2012, at 8:40 AM, TheSavageNation wrote:

    Questions I haven't heard asked and answered:

    How & When would the suppression stop working and cause a Gold price explosion?

    What would happen if Government(s) decided to Peg the Gold price again below market value?

    How much has the high Gold prices affected the Electronics Industry's manufacturing costs?

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