Why The Rigging Of The Gold Market Matters
Submitted by Tyler Durden on
09/14/2014 22:03 -0400
Submitted by Alasdair
Macleod via The Cobden Centre,
In a radio interview recently I was asked a question to which I
could not easily give a satisfactory reply: if the gold market is rigged,
why does it matter?
I have no problem delivering a comprehensive answer based on a sound
aprioristic analysis of how rigging markets distorts the basis of economic
calculation and why a properly functioning gold market is central to all
other financial prices. The difficulty is in answering the question in
terms the listeners understand, bearing in mind I was told to assume they
have very little comprehension of finance or economics.
I did not as they say, want to go there. But it behoves those of us who
argue the economics of sound money to try to make the answer as
intelligible as possible without sounding like a committed capitalist and
a conspiracy theorist to boot, so here goes.
Manipulating the price of gold ultimately destabilises the
financial system because it is the highest form of money. This is why
nearly all central banks retain a holding. The fact we don’t
use it as money in our daily business does not invalidate its status.
Rather, gold is subject to Gresham’s Law, which famously states bad
money drives out the good. We would rather pay for things in
government-issue paper currency and hang on to gold for a rainy day.
As money, it is on the other side of all asset prices.
In other words stocks, bonds and property prices can be expected to rise
measured in gold when the gold price falls and vice-versa. This
relationship is often muddled by other factors, the most obvious one being
changing levels of confidence in paper currencies against which gold is
normally priced. However, with bond yields today at record lows and
equities at record highs this relationship is apparent today.
Another way to describe this relationship is in terms of
risk. Banks which dominate asset markets become complacent about
risk because they are greedy for profit. This leads to banks competing
with one another until they end up ignoring risk entirely. It happened
very obviously with the American banking crisis six years ago until house
prices suddenly collapsed, threatening to take the whole financial system
down. In common with all financial bubbles everyone ignored risk. History
provides many other examples.
Therefore, gold is unlike other assets because a rising gold price
reflects an increasing perception of general financial risk, ensuring
downward pressure on other financial asset prices. So while the
big banks are making easy money ignoring risks in equity and bond markets,
they will not want their party spoiled by warning signs from a rising gold
This is a long way from proof that the gold market is
manipulated. But the big banks, and we must include central banks
which are obviously keen to maintain financial confidence, have the motive
and the means. And if they have these they can be expected to take the
So why does it matter if the gold price is rigged? A freely-determined
gold price is central to ensuring that reality and not financial bubbles
guides us in our financial and economic activities. Suppressing the
gold price is rather like turning off a fire alarm because you can’t
stand the noise.