All That Glitters Is Not Gold

BY CHRIS PETHERICK

Gold’s value as a hedge during times of economic uncertainty has taken a hit recently, leading some analysts to admit that all that glitters is not gold. 

Since the world found itself in the midst of one of the worst financial crises in the past 100 years, the price of the precious metal has been on a rollercoaster ride, settling in late December at a little over $800.

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With the value of the U.S. dollar steadily falling against Asian currencies, one would think that the price of gold would be through the roof. But, much to the dismay of all of the gold bugs out there, this has not been the case. In fact, in the past few months, the price of gold has been up and down like so many other commodities. 

Today, it’s down significantly from a high of over $1,000 an ounce in March 2008. Analysts are scratching their heads at these quirky ups and downs, leading some to ask whether gold is being manipulated. 

The fact that the price of gold is artificially set by bankers is certainly not some secret conspiracy. Twice daily the value of gold is set in London by what is known as “the Gold Fixing.”The Fixing is made up five mega-banks and bullion traders—Scotia-Mocatta, Barclays Capital, Deutsche Bank, HSBC and Société Générale—which set the price in regular telephone conference calls. The first fixing occurred in 1919 and was isolated to the London market. Today, however, world markets look to the Fixing to value gold for that day and price it accordingly. 

The Fixing is certainly a huge part of the story of gold. But a prominent group contends that there has been a broader gold-fixing conspiracy, and it is getting a great deal of press now that the markets face significant turmoil. For the past 10 years, the Gold Anti-Trust Action Committee (GATA) has argued that a cartel of superwealthy investors and private bankers have been working outside of the Fixing to force the price of gold down. They act at the behest of U.S. government officials, whose goal it is to keep the dollar strong and fool investors into believing the U.S. economy is plugging along. 

GATA’s argument makes sense. After all, high gold prices are usually viewed as an economic barometer—a sort of financial canary in the coalmine. They signal that inflation is on the rise and that currencies are tanking. So, it would be in the U.S. government’s interest to get in on the fix in order to keep a lid on a faltering economy. 

GATA says the conspiracy started with the Clinton administration’s “strong dollar policy” carried out by the secretary of treasury at the time, Robert Rubin.As a formerWall Street executive, Rubin was integral to getting Wall Street’s help in manipulating the price of gold. According to GATA, Rubin worked with investment goliaths Goldman Sachs and Morgan Stanley to act as the government’s economic “hit men,” short selling gold, or pumping up the price with large purchases and then dumping it to force the price down. In effect, both sides were happy: the government could keep the price of gold down and the investment firms made billions. 

Today, the fact that suppliers have had trouble keeping up with demand for gold coins and bullion gives credence to GATA’s claim. The law of supply and demand and the invisible hand means that the price of gold should be going up as demand is increasing. Yet, we regularly see the price of gold go up before plummeting back down. 

For months now, financial writers have been speculating on the apparent mysterious supply-and-demand dynamics of gold. Respected precious metals guru Ted Butler blew the whistle on three major U.S. banks, which shorted gold over the summer and made a tidy profit. At the time, the price of gold fell by $150—which, in this economic climate, was counter intuitive. In other words, if gold is a good hedge against uncertainty and demand is up, why would the price fall unless something or someone was conspiring to force it down? 

Still, could there be a much simpler explanation for price volatility of gold? The price of gold could be down today for the same reason that other commodities have dropped in value in the past six months: Hundreds of billions of investor dollars, which originally drove up prices in commodity and currency markets, have now gone to perceived safer bets, like treasury bills. But with the federal government $10 trillion in debt and the Federal Reserve printing money like there’s no tomorrow, U.S. investors are facing a real problem: There are no safe bets.

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