Saturday, July 14, 2012

Another financial scandal - this time, it's gold

More and more information is coming to light suggesting that governments in general, and Britain's government in particular, may have been complicit in fixing the price of gold for the benefit of troubled banks - a sort of 'disguised bailout'.  Thomas Pascoe at the Telegraph has written two articles providing interesting details.  Here are a couple of excerpts.  Bold print is my emphasis.

1.  Revealed: why Gordon Brown sold Britain's gold at a knock-down price

When Brown decided to dispose of almost 400 tonnes of gold between 1999 and 2002, he did two distinctly odd things.

First, he broke with convention and announced the sale well in advance, giving the market notice that it was shortly to be flooded and forcing down the spot price. This was apparently done in the interests of “open government”, but had the effect of sending the spot price of gold to a 20-year low, as implied by basic supply and demand theory.

Second, the Treasury elected to sell its gold via auction. Again, this broke with the standard model. The price of gold was usually determined at a morning and afternoon "fix" between representatives of big banks whose network of smaller bank clients and private orders allowed them to determine the exact price at which demand met with supply.

The auction system again frequently achieved a lower price than the equivalent fix price. The first auction saw an auction price of $10c less per ounce than was achieved at the morning fix. It also acted to depress the price of the afternoon fix which fell by nearly $4.

It seemed almost as if the Treasury was trying to achieve the lowest price possible for the public’s gold. It was.

2.  The price of gold has been manipulated. This is more scandalous than Libor

The ball of half-truths and downright lies which have surrounded the issue [of manipulation in the gold market] for a long time is beginning to unspool ...

People ask why the issue is important at a time of naked market manipulation of the Libor rate. The answer is simple: the Libor manipulation scandal can be seen as the thin end of the wedge in terms of government market manipulation.

Although Libor manipulation affects the interest rates we pay on all number of credit products, gold market manipulation is more serious still.

The price of gold is traditionally a proxy for the value of money. A soaring bullion price is indicative of a lack of faith in fiat currency.

Our financial system is predicated on the notion that money stands as a proxy for the factors of production – capital, labour, land and enterprise.

In short, the abundance of money in the economy should be related to the abundance of those factors. The harder we work, for instance, the more we create. There is more labour in the economy, therefore a rise in the money supply is legitimate in order to mirror this. There is nothing wrong with printing money per se so long as the printing reflects an expansion in the real economy.

Twentieth and Twenty-First century economics appears to have done away with this. Money is now created ex nihilo to feed both the top and bottom ends of society.

. . .

As with everything in economics, there is a correctional market mechanism for this scenario – the flight to commodities, particularly precious metals like gold. Gold holds its value when paper money loses value, because it is beyond the gift of the government to simply will gold into being and give it to friends in high places or voters in low ones.

If gold has been manipulated downwards and if that process continues, then all recourse to a store of value (other than land and property) has been taken from the individual.

Follow the links to read both articles in full.  It's worth your time to do so, even if you aren't invested in gold.  They illustrate the way in which governments, banks and other authorities have callously manipulated the world's financial markets to their own ends, ignoring - even deliberately working against - the interests of private investors.  Want to know why your retirement savings and/or pension are suddenly not adequate to fund your sunset years?  This is a big part of the reason.


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