Think Gold Price Is Not Manipulated? Think Again!

On Wednesday August 17th the CME came out with an announcement that they would be raising margin rates on the purchase of future contracts on gold. They reported that this was an effort on their part to cool off the price of gold which has enjoyed a parabolic run since August 1st. They said that there would be more rate hikes to protect gold from becoming a bubble. When I read this I laughed at the arrogance of the CME. There is only one reason that that they want to stop gold's parabolic run. They simply do not have enough gold to fulfill the future contracts that they have already sold. Let's not forget that one future contract is sold in lots of 5,000 ounces.

That means if we use a proxy price if $2,000 an ounce, to make the math simple, we are talking about $10 million for one contract. Add to that, the CME gets a fee of $50.00 an ounce above the spot price, so for every contract sold they earn $250,000.00. Delivery and shipping are the buyers concern. This would lead me to conclude that the only possible reason to slow down gold's parabolic run would be that they simply do not have the gold to satisfy the contracts sold.

Let us also not forget that last April the CME raised the margin rate on silver not once but five times to get silver to finally capitulate. The fact is that the CME does not have the physical gold to satisfy the future contracts that have already been sold. Do you really think this will play out differently than it did with silver last April? Some may call it a bubble but I do not agree. Call it whatever you want. The fact remains that there is simply not enough gold to satisfy the thirst for the prospective buyers.

George Soros, the hedge fund investor who called gold the ultimate bubble, has divested his portfolio of nearly its entire investment in the gold, inciting many to fear that the price will very soon plummet, devaluing the specie-heavy portfolios of millions of investors.

Agree with him or not, like it or not, like him or not, attention must be paid to his movements. It can be very expensive to ignore the predictions of Soros. For example, on September 16, 1992 (a date subsequently known as "Black Wednesday"), one of the investment funds of Soros sold short more than $10 billion worth of pounds sterling, profiting from the British government's reluctance to adjust its interest rates to levels comparable to those of other European Exchange Rate Mechanism countries. Defiantly, the UK withdrew from the European Exchange Rate Mechanism, triggering an unsettling devaluation of the pound. Not everyone was harmed by this plummet, however. George Soros earned over $1 billion in the ordeal. Consequently, he was described by the media as the man who broke the Bank of England. In 1997, the UK Treasury estimated the cost of Black Wednesday at 3.4 billion pounds. This latest move to take a position against gold may have similar repercussions around the globe.

Soros, the Hungarian-born financier made the move to cut his holdings of gold only in the first quarter of 2011. As with most things this King Midas touches, the price per ounce of gold had skyrocketed during the period of his investment in it. While at the beginning of last year gold was trading at $1,100 an ounce, the trading price in 2011 has risen to as much $1,800.

The exact date of the dramatic divestment by Soros is unknown. It is known that the majority of those holdings are managed through the Soros Fund Management Company. Filings to the Securities and Exchange Commission (SEC), the American regulator showed that he had sold 99% of his holding in the SPDR Gold Trust (GLD), an exchange-traded fund (ETF) backed by gold bullion, by the end of March. The New York-based fund sold its entire holding in GLD but Mr. Soros bought shares in two mining companies, Freeport-McMoRan Copper & Gold and Goldcorp.

Despite the potential for a devastating global impact of such a move by one so influential, there are those on Wall Street praising the insight of Soros. Historically, it is typical that as the precious metals rally ends, you will get transition toward related equities. Indeed, the gold mining stocks have lagged the underlying asset as people would rather hold gold and silver above the ground rather than these metals still in the ground.

As I write today it looks like Mr. Soros did not get this one right and there are those not entirely convinced of the wisdom of Mr. Soros.

Filings to the SEC showed that Paulson & Co, the US hedge fund run by John Paulson, left its holding in the SPDR Gold Trust (GLD) unchanged. It was reported in Bloomberg online that Hal Lehr, a commodity trader at Deutsche Bank, said he remains bullish on gold despite its current levels and believed it could reach $2,000 an ounce by year's end. The report went on to say that gold ETF holdings fell by 3.3 percent in the first quarter of 2011 and there are reliable indications that some of that investment was used to purchase physical gold bullion.

As if there is not enough uncertainty, a worldwide devaluation of gold could create a ripple of financial insecurity. There can be no doubt that gold is viewed by a majority of the world as a very safe and trustworthy investment, one that only increases in value. This sort of reasoned speculation has undoubtedly fueled the bullish ballooning of the price per ounce of the metal.

If the actions of Mr. Soros and other global power brokers have the effect of devaluing gold, then the legitimacy and appeal of the call of many to return to a gold standard for the value of paper currency or to abolish the Federal Reserve and other similar central banks around the world will be similarly devalued.

Once the worth of both gold and paper currency is wiped out by the conspiring plotting of financiers, globalists, multinational corporations, central bank boards, and other likeminded and equally influential monied interests, there will be nowhere to turn for an object of value. This complete obliteration of precious metals and paper currencies will leave those who create such catastrophes as the sole site of economic refuge for those cast headlong into the storm of boom and bust cycles and the devastation that comes in their wake.

One of the most toxic elements present in this pool of bitter water is a worthless money supply. The Federal Reserve creates this non-potable problem by engaging in a practice known euphemistically as quantitative easing. It is a policy that plain-speaking men would call printing worthless money.

There is no governor on the engine of the Federal Reserve's printing press and the speed with which it can crank out reams of worthless paper money is dizzying. However, unlike paper money, gold cannot be manufactured and it is of finite quantity. While this bodes well for the eventual rebound of the price of gold (assuming that it soon begins to descend), there can be little expectation that those who benefit most from a world marketplace dependent on dollars and pounds will allow gold to supplant these currencies as the coin of the realm. From their point of view, access to that resource must be restricted and dependence on printed money must be perpetuated.

The current debt crisis in Europe is an example of how the price of gold can benefit from currency's shortfall. The millions upon millions of dollars owed by Greece, Ireland, Portugal, and others in the eurozone devalues paper currency while artificially (perhaps) propelling the price of gold into the stratosphere.

That said, there is a good chance that any effort to sell off holdings in the precious metal by George Soros and others may convince others to dump their own investments in gold rather than run the risk of being found on the outside of the trade looking in.

In fact I'm sure this is exactly what that cagey cat George Soros is betting on.

Up to WW II any creditable currency was pegged to a gold/silver standard, which would have included the money of Washington’s time as President. During the Revolution the Continental Congress tried printing paper currency not backed by real assets to pay for the war, and hence the term “not worth a Continental”. Then during the Civil War, both the Union and Confederacy issued paper currency unsupported by real assets. Depending on Union fortunes, the paper traded as low as 40% in relation to gold coins. By 1864 Confederate currency had a gold value of five cents on the dollar. The U.S. didn’t try anything like that again until FDR confiscated gold coins during the Depression, but silver coins were still minted and still freely circulated.

While WWII destroyed most economies of the world, the United States prospered. The only way to restart international economic activity was for the U.S. to take the lead, which it did with the Bretton Woods Agreement. Every currency had a fixed value in relation to the dollar, and the U.S. kept everything functioning by buying and selling gold at $35 an ounce. Therefore, once again there was a U.S. gold standard and the dollar became the world’s reserve currency. However, Americans could not take their Federal Reserve Notes to a Fed bank and trade them for gold.

The U.S. unilaterally abrogated the agreement in August 1971, allowed the dollar to float in relation to the trading whims involving all paper currencies. Until about 1968 people could still trade their Federal Reserve notes for Silver Certificates and trade those for packets of silver from a Federal Reserve Bank. When the government renounced that option, silver coins quickly disappeared from circulation. At this time the working careers of a single generation comprise the totality of comprehension for how the international community was to function economically without currencies emerging from things people can touch and see.

Unlike God’s spoken creation, money has no substance at any time. In spite of that people do exchange items of real value such as labor, cars, and food for words spoken over a phone by a twenty something Fed bond trader. This person calls a company such as Goldman Sachs that has an inventory of securities brokered for the Treasury Department, and pays let’s say $1 billion for securities. Until the trader speaks “$1billion”, the money to pay for the notes or bonds does not exist. Anyone else purchasing the bonds does so with dollars already in circulation.

One analogy to explain the looming inflation might be to consider a flood control dam. The water that builds up behind it during the winter and spring could be considered QE1, QE2, QE3, etc. The face of the dam would be the current moribund economic activity indicating a very low velocity of money as exampled by such questions as “Why do I want to borrow if no one wants to buy? or “Why do I want to buy when I don’t have a job?” Now stagflation happens when the reservoir gets so full with QE’s that some water just has to go over the top, even though economic activity remains anemic.

But when the economy picks up money begins to actively circulate. Now the increased velocity of money exponentially multiplies the QE’s, and the increased pressure shatters the face of the dam. Just as a wall of water scours out the stream bed and washes all before it, inflation now rages through the economy and destroys people’s financial asset values and their purchasing power.

Now all this seems fairly insane, until you realize that every member of the G-20 behaves in much the same way, and do understand their precarious situation. The national debt now exceeds GDP joining that of Iceland and Ireland. By 2037 the CBO reports national debt will become 200% of GDP to reach that of Japan. Since all currencies have about this same connection to reality, finding one or several of sufficient magnitude and viability to replace the dollar as a worldwide medium of exchange and store of value becomes perplexing. An individual country might think they have a solution, but they know they must also survive during the resulting chaos as all countries seek similar solutions. They see the daunting specter of disaffected holders sending trillions of dollar denominated bonds to the marketplace when there are no buyers unless prices are severely discounted. They are also frightened by the image of a devastated U.S. economy, because feeding the insatiable desires of U.S. consumers has been a mainstay of their prosperity.

I imagine something like the final scene in “The Good The Bad and The Ugly”. The members of the G-20 are standing in a circle with open graves behind them. They are all contemplating how they are going to successfully outdraw the other nineteen members and survive the resulting mayhem, which Lee Van Cleef’s character did not. I do not expect to survive the chaos undamaged, but I do intend mitigate the damage by eliminating debt and buying real assets as paper dollars become available to me.

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