Sunday, October 26, 2008

Buy Gold NOW!


I have absolutely no formal training in economics. You can take my advice or leave it, and I don't care either way. If you take my advice and get screwed that's your problem. If you don't take my advice and end up wishing you did, don't blame me. Either way your on your own in this jungle we euphemistically call the "free market".

My advice... for what it's worth

I don't get into giving out investment advice much. Mostly I think the stock markets are rigged and are a rich man's game. The rest of us mostly get screwed. So I keep my money in a money market account. But once in a while I observe a trend that is so glaringly obvious that it seems crazy not to take advantage of it.

So call me crazy but... I think this is a huge opportunity right now to buy gold at a relatively low price and make some money. The last time I gave financial advice like this was September 20 after the stock market had rallied. I suggested that this was due to government intervention and that eventually the market would prevail. At that time the S&P 500 was at 1255. Today it's at 876. That's a 30% decline. So call me crazy but...

The price of Gold

Right now the price of gold is $733 per ounce. Here are some charts.

You can see that gold peaked at around $1000 per ounce in March. And you can see that it's been declining ever since. What I find interesting is that the price is repeatedly driven down and then comes back up. And this is the part where I wildly speculate about what is going on, so call me crazy or clairvoyant... or just use your own brain and see if any of what I'm about to say makes sense.

What I think is going on is that the price of gold wants to go up, but that the Central Banks around the world are conspiring to keep it artificially low. Did I say conspire? I meant to say "taking coordinated action". What's the difference?

Your probably as surprised as I was when I first looked at the gold charts that the price of gold is not rising as we head into this financial crisis. The only explanation is that there is more supply of gold than demand, and the most likely source of that supply is the World's Central Banks.

Who owns the World's Gold?

Just go to the Wikipedia page for "Official Gold Reserves" and you'll immediately see that the Central Banks have huge hoards of gold. By the way, keep in mind that these are the "official" numbers and presumably not the real numbers. China's Central Bank for example says it has 600 tonnes of gold. The problem is I found a quote from 5 or 10 years ago and guess what? China reported 600 tonnes of gold. My guess is that by this time China has double that amount but the "official" figure has not changed. And then of course there is the "official" US figure of 8,133 tonnes which hasn't changed in years. But of course there has been no audit of the gold in Fort Knox for many years and some people actually think that it may be empty of gold.

And there is another surprise in this table. The IMF is the 3rd largest holder of gold in the world according to this chart at 3,217 tonnes. Where did that gold come from? Did the US Federal Reserve and other Central Banks contribute this gold, or has the IMF been stealing this gold from nations in financial distress in exchange for lending them the money to bail them out?

But regardless, the point is that the Central Banks have huge sums of gold, and if they want to keep the price of gold from going up they simply need to sell some part of it into the market to artificially lower prices. The World's Central Banks are the OPEC of gold. They are a cartel which seeks to manipulate the price of gold.

What happens if Gold prices take off ? PANIC!!!

So why would they want to keep the price of gold down? Very simple. To avoid a panic. If the price of gold is seen to be going up dramatically in a short period of time, then that would tend to make people lose confidence in the World's Fiat Currencies. And then people would rush out and buy more gold and there would be an all out panic. After all the value of a fiat currency is largely based on confidence.

The evidence of a Gold Price manipulation

Now for my "proof". While I can't prove what I have said above I can point you to some information which is what got me thinking about this in the first place. And here it is.

Exhibit A - The Central Bank Gold Agreement (CBGA)

This is a 5 year agreement between Central Banks to limit the sale of gold to 400 tonnes per year. It was signed on September 26, 1999. This agreement expired in 2004. CBGA 2 was signed on March 8, 2004 and limited annual gold sales to 500 tonnes. What this proves is that the Central Banks are essentially a Gold Cartel and they do "conspire" to control the gold market.

You will notice that the US is ostentatiously missing from the list of signees. Even though the US does not appear on the list of signees, it has informally agreed to abide by the deal.

So why did the Central Banks require a Gold Agreement? Ostensibly it is to stabilize the gold market. Before 1999 the price of gold was depressed and had fallen below $300 per ounce. This was not to the advantage of the holders of gold. The Central Banks represent about 20% of the "gold above ground". Just like OPEC, the Central Bank Gold Cartel attempts to manipulate prices. So much for a "free market".

My guess is that China was emerging as a key buyer of large amounts of gold. And the Cartel was trying to ensure that large sums of gold did not end up in the Chinese Central Bank, and that what gold did end up there would have to be bought at a higher price. (Just like OPEC controls the oil market.) Here's an interesting analysis.


In the current financial crisis, it is natural that there would be an increased demand for gold which would tend to push up prices. The Central Banks have an interest in stabilizing gold and therefore are probably engaged in a conspiracy (I mean a "coordinated effort") to keep prices from going up to quickly. Probably the policy is to keep the price of gold from rising much faster than inflation. But in order to keep the price stable, the Central Banks will need to sell increasingly large amounts of gold as long as the world's currencies are seen as vulnerable.

Eventually it seems to me that the Banks will want to hold on to their gold reserves and will not be able or willing to continue selling at an artificially low price. In other words the price of gold will rise. That price will be capped by the Central Banks. It seems clear that the gold price will not be allowed to rise over $1000 per ounce, if only because of the psychological effect that this produces. That effect is one of financial panic, which must be avoided at all cost during this financial "crisis". Once the immediate crisis is over, then the price of gold can be allowed to go above $1000. But right now when stock markets are crashing is not seen as a good time.

There are 3 things to take away from this discussion.

  1. The price of Gold is controlled by the Central Bank Gold Cartel.
  2. Gold is currently at an artificially low price and will probably go up in the short term.
  3. In the long term Gold will go probably up faster than inflation.
So by all means... buy gold low now.

Is it legal to own gold in the US?

Yes. From 1933 to 1974 it was not, but currently it is. In 1933 under Roosevelt during the Great Depression, the US government confiscated all gold in private hands and made it illegal for Americans to own gold. But in 1974 after the US got off the Gold Standard, it was made legal for US citizens to own gold. There is a caveat that the gold cannot be used as money, whatever that means exactly. Anyway, the result is that you are free to buy as much gold as you like and store it in a safe in your house or a safe deposit box at a bank, or do whatever you like with it.

How to buy gold

There are some funds that track gold like IAU and GLD. This is probably the way I would buy gold if I was smart enough to take my own advice. You can also buy physical gold, but from what I saw you will pay a considerable differential in the buying price vs. the selling price. A quick search of the internet will come up with various options. As always, watch out for scams.


Mark Herpel said...

Good post, try GATA for all the info on the manipulation and don't forget digital gold currency (GoldMoney, Bullionvault) is a great way to own actual gold bullion. The ETFs are a paper form of gold ownership, not the actual gold.


Frank Hope said...

Hi Mark,

Thanks for your kind comment. When I wrote this story I had no previous knowledge about how the gold markets worked. I've since learned about GATA. I just written a new article that talks about gold titled "China wins Gold and Silver and Bronze". I assume that you linked to this ancient post through that one.

Frank Hope