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Unlike Big Banks and Bigger Governments, Gold Doesn't Lie

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In a post-LIBOR world, it becomes very difficult for reasoned and well-informed individuals to argue that powerful bankers won't periodically lie, cheat, or deceive where they perceive an opportunity and a motive to do so. This was, in my view, the key takeaway from that still-emerging scandal.

This applies to central bankers as well as those of the too-big-to fail variety. Former Vice Chairman of the Federal Reserve Alan Blinder could not have been much clearer when he conceded: "The last duty of a central banker is to tell the public the truth."

Similarly, a regrettable subset of our storied financial history reminds us that government officials at all levels, elected or otherwise, are prone to absconding or misrepresenting the truth as it pertains to important economic or monetary matters. When Richard Nixon severed the convertibility of the U.S. dollar to gold in 1971, he presented the move as a "temporary" emergency measure. I hope nobody out there believes Nixon ever intended to restore gold's link to the dollar after revoking it.

Please understand, I am aware that untallied scores of good and honest people work within the big banks. And I have not abandoned hope that there may even remain a handful of honest and trustworthy folks in senior positions of government. But particularly in situations where the interests of banks and governments combine into one shared imperative, that is where I believe citizens are well advised to heighten their vigilance to see that their interests are not being usurped by those of a powerful and moneyed elite.

Deception, money, inflation, and gold
For years, successive secretaries of the Treasury from Rubin to Geithner have notoriously managed to keep a straight face when parroting the mantra of a "strong dollar policy" while simultaneously and knowingly engaging in monetary policies yielding the exact opposite result. But promoting the illusion of strength in the deeply impaired fiat dollar requires a team effort. The Federal Reserve is playing ball by dropping interest rates through the basement floor, and the Bureau of Labor Statistics has been broadly accused over the years of altering its inflation-measuring procedures in ways that understate the real rate of inflation. Legendary commodity investor Jim Rogers considers the Consumer Price Index (CPI) a lie, adding:

It's staggering some of the tortuous reasoning that the BLS has used over the past 25 or 30 years. When the price of gasoline goes up, they say it's not really going up because it's better gasoline, better quality; therefore you're getting more for your money. I mean, it's endless, the stuff that they say and for some reason people sit there [...] and accept what the government says.

Let's have a look at what is accomplished through conservative (to put it mildly) official estimates of inflation by examining 44 years of data relating to average hourly wages. In the following chart, the blue line along the top depicts wages, as adjusted for CPI, from 1968 to the present. The resulting picture is one of remarkable wage stability over the period, such that one might expect to enjoy similar purchasing power for an hour's wage today as one would have enjoyed in the late 1960s.

To challenge that notion, let's look to the red line in the chart, which depicts hourly wages as expressed in terms of physical gold. In other words, if your employer were to compensate you in physical gold rather than in U.S. dollars, the red line shows the quantity of gold you could expect for an hour's work over the same 44-year period. As you can see, hourly wages as measured in gold have plummeted more than 80% and are retesting a multigenerational low set in 1980. Perhaps now you can see why former Fed Chairman Alan Greenspan calls gold "the canary in the coal mine," and why it's in the government's clear interest to slow gold's unstoppable ascent in order to foster a rosier assessment of the dollar's performance.

You see, the rising price of gold and silver over recent years resonates through the financial world like an alarm bell, broadcasting the devaluation of the U.S. dollar and the very unfortunate outlook for further degradation to come. In a world of unbacked paper currencies engaged in a competitive race to debase, gold stands as the primary means for assessing currencies on a fundamental basis rather than merely in relation to the stable of similarly depreciating currencies.

Turn your gaze to honest money
Permit me to return your attention to the following statement by Jean-Marie Eveillard, who oversees $60 billion in assets at First Eagle Funds. Reacting to one of the most blatant single-day interventions ever witnessed in the gold market, Eveillard remarked: "Central banks acknowledge they intervene in foreign exchange markets. They (central banks) sort of don't exactly deny, but they are very quiet about the fact that obviously they also intervene in the gold market." The Gold Antitrust Action Committee (GATA) has amassed a huge volume of documentation in support of its long-standing claim that central banks did not discontinue their gold-suppression operations when the London Gold Pool fell apart in 1968.

The most scandalous aspect of gold-price suppression, if ever all of the facts from this notoriously secretive corner of the financial universe ever come fully into the light, will be the revelation that widespread collusion between central banks and too-big-to-fail banks forms a necessary prerequisite for such manipulation to occur. Today's gold and silver markets are not what most casual observers might expect. The gold market is dominated by an obscenely leveraged trade in futures and derivative contracts that may represent 100 times the actual underlying physical supply!

This presents the opportunity for the so-called "bullion banks" to exert enormous influence through positions backed by only modest or even a hypothetical supply of the actual metal. In his 2009 report Pirates of the COMEX, GATA board member Adrian Douglas deduced from government data that JPMorgan Chase (NYSE: JPM  ) and HSBC (NYSE: HBC  ) held massive positions in precious-metal derivatives at the time, accounting for 85% or more of all such contracts held by banks. And here's some food for thought: HSBC serves as the custodian for gold held within the enormous SPDR Gold Trust (NYSE: GLD  ) , and JPMorgan Chase is the custodian for the iShares Silver Trust (NYSE: SLV  ) . Five of the six bullion banks, furthermore, have been implicated within the emerging LIBOR scandal.

Because we know for a fact that both big banks and even bigger governments have been known to deceive the public regarding important economic and monetary matters, I for one am glad to hold investment exposure to honest money via the miners of silver and gold like my top pick: Primero Mining (NYSE: PPP  ) . I believe the truth about surreptitious manipulation of gold and silver will one day be plain for all to see, and until that day comes I urge all investors to investigate this topic to their own satisfaction. Thank you for sharing your own thoughts below, and for following me on Twitter to track all my gold and silver coverage.

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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 Primero Mining. The Motley Fool owns shares of Primero Mining and JPMorgan Chase. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (25)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 25, 2012, at 12:17 PM, Nickwb5600k wrote:


    One of the more chilling sentences you wrote:

    'Today's gold and silver markets are not what most casual observers might expect. The gold market is dominated by an obscenely leveraged trade in futures and derivative contracts that may represent 100 times the actual underlying physical supply!'

    Since whatever gold Primero mines will to be evaluated by the manipulated system you discribe,

    what makes your investment any safer? Your gold to wages chart is a frightening eye opener. So what is the true value of a troy oz. of gold?

    Thanks for the thought provoking, yet very disturbing insight.


  • Report this Comment On July 25, 2012, at 12:33 PM, pedorrero wrote:

    An old saying from "hard money" guru Gary North (perhaps stolen from elsewhere, as are all words of wisdom?): "Buy gold. Pay cash. Take delivery." If/when the feces does hit the fan, woe to the person whose "hedge" is in an ETF and a paper (or computer bits & bytes) trail.

  • Report this Comment On July 25, 2012, at 12:54 PM, XMFSinchiruna wrote:


    I encourage you to invest some time clicking on some of the hyperlinks within the above article to dig a little deeper, and to dig into the archives at GATA as well.

    With respect to the miners, the idea is that at the market will come to place the appropriate premium on actual physical supply, and will move away from treating leveraged paper "supply" as if it were the real thing.

    When that time comes, the banks' capacity to suppress gold prices will rapidly wane. Gold is not a theoretical or abstract construct that can be replaced by ones and zeroes on a computer screen... it's a metal. And when the big scandal breaks, one will want to have the investment exposure to the actual metal that the mining stocks provide.

  • Report this Comment On July 25, 2012, at 3:42 PM, XMFSinchiruna wrote:

    Well, this is timely:

    "former Assistant Treasury Secretary Paul Craig Roberts says the Federal Reserve is probably manipulating gold and silver prices to prevent them from further undermining the value of the dollar while the Fed does so itself with its policy of zero interest rates. The interview with Roberts is headlined "All Investment Avenues Are Rigged" and it's posted at GoldSwitzerland here:"

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