The Pricing of Gold – What Factors Influence it? How is it Manipulated?

To get to the point right at the beginning: The price of gold has been falling victim to manipulation for a long time. Governments or (central) banks used to manipulate their currencies to match the purchasing power of gold, now they manipulate the gold price to match the dwindling purchasing power of the currencies.

If one manipulates the currencies, the Libor and Co., one must manipulate perhaps respectively also the gold price. However, the states and (central) banks are not the only market players who influence the gold price! What or who influences the gold price, who is part of the cartel and what interests they represent and how the manipulation takes place – here is a first insight.

What factors influence the price of gold?
To understand the reasons for the manipulation, one must first look at what influences the gold price in the first place. First, it is important to understand that supply and demand in the gold market do not occur as they do with other commodities. The precious metal cannot be called a commodity in the classical sense, but rather a monetary commodity. Gold, unlike oil, for example, is accumulated and hardly consumed. Manipulating the price of gold is therefore also much easier. Artificially “crashing” the price of oil would only lead to more oil being bought and consumed to begin with. It is different with gold. The yellow metal is primarily a store of value. When the price is low, it is bought less, except by those who (knowingly) pushed it down and may have inside information. Since it is not consumed, but after extraction it hardly ever leaves the world, melted down into bars or coins and stored or worn and kept as jewelry, gold has a large existing stock compared to its rate of increase gained by mining (the “stock-to-flow ratio” describes the period of time a commodity would need to reach the volume of the existing stock at current rates of increase- for gold it is 65 years (for e.g. crude oil , wheat. For example, for crude oil, wheat, etc., the stock-to-flow ratios are in the one- to three-year range). What this actually means is that in the short term, the gold price is hardly affected by changes (such as mine closures due to too low prices) in production volumes.

Even if mine production were to increase sharply, the stock-to-flow ratio would still be extremely high. The gold stock is increasing by 1.5% per year. If mine production were to increase by, say, 50%, which is completely unrealistic, the gold stock would grow by 3% per year. The supply in the gold market is therefore not determined by increasing gold production, but by the trade with already mined gold, e.g. by the central banks or financial investors. When the gold price is weak, the extraction of gold becomes more expensive compared to the profit and therefore in this case the overall production decreases.

The interest rates and the gold price
The price of gold is very much dependent on the level of interest rates. The interest on deposits that one receives at the bank is the opportunity cost of investing in gold. The yellow metal is a store of value, a safe haven that has never lost its value for 5,000 years. The only thing is, there is no interest for investing in gold. So if you get high interest rates on your money elsewhere, much less will be invested in gold. There is still a near-zero interest rate policy in the Western world, and fewer and fewer investors trust the value-preserving qualities of our fiat money (money printed by printing presses, based on trust in the monetary system) in the face of growing mountains of debt – so the price of gold should be rising, but it isn’t. Why?

Gold and the US Dollar
The price of gold and the dollar have a negative relationship with each other, which has earned gold the nickname “anti-dollar.” Gold is predominantly traded in US dollars and when the dollar is weak, gold therefore becomes “cheaper” for buyers in other currencies. As the price of gold has risen steadily over the past decade, observant experts have pointed out to investors “in need of help” that a bubble is forming. There is a bubble forming, too, just not in gold. Perhaps one must turn the picture around once and recognize that possibly not gold more expensively but the US dollar among other things by the money press of the US central bank “Fed” became more worthless. There was no bubble formation in the gold price, but the currency bubble threatened to burst. But what has changed? Dollar printing continues despite taper by $10 billion to:

“Last month the U.S. budget deficit — $864 billion — was larger than the total debt incurred from 1776 through the end of 1979.”

The price of gold should literally explode, but it isn’t. Why?

Who has an interest in driving down the price?
Besides countries like China – Russia and India, which are demand-drivers, the central banks are the main players in the gold market. But why would they want to be part of a cartel to depress the price of gold, which they themselves essentially hold as foreign reserves? Sure, the FED might have an interest in keeping the price of gold artificially low to make the U.S. dollar appear stronger. Ultimately, it can print dollar notes at will, but it cannot multiply gold bars like alchemists. A significant increase in the price level of the crisis metal could possibly make citizens think that they are in a crisis.

A second reason could be that the published gold stocks have long since been exhausted and must now be painstakingly bought up again in order to fulfill delivery obligations, for example to Germany. Why else would it take many years to deliver a few thousand tons, especially when you consider the quantities that go to Asia every month via the world market. This leads to the suspicion that there is no more gold in the vaults of the U.S. Federal Reserve. Interesting is in this connection also the rumor that the bars, which were supplied recently to Germany (ridiculous 37 tons) were only remelted. Why then, one may ask? Were the original bars no longer available, or are they talking their way out with quality control? We will probably never know.

But as is so often the case, there are of course other market participants who represent their interests: the large bullion dealers and classic investment banks can hope with great confidence to reap high profits due to the high fluctuations and the resulting difference between the buying and selling price. Also, the analysts of the banking houses often give the march of the gold price through price targets. The price fixing in London by few banks actually a joke and is now finally also examined by the supervisory authorities. Who also believes that it goes here with right things. Let’s just remember the Libor scandal. The past teaches us one thing: When there’s money to be made, banks will stop at nothing.

What mechanisms are used to influence the price of gold?

  • Central banks can officially sell gold in a very legal way. If demand remains constant, large sales then influence the price in a healthy way, as supply and demand always move toward equilibrium.
  • However, central banks can also lend the gold, which can then end up in so-called “short-selling” and influence the price in an unnatural way. In this case, the central bank lends the gold to bullion banks, which then sell the gold they hold but do not own on the market to make other investments with the cash before having to buy gold again to return it to the owner. Therefore, something is being traded that the owner does not want to sell at all, but the higher supply still affects the price. This in itself is very questionable, but it is far from all!
  • In nearly all over-the-counter (unregulated markets) gold sales in London, at the largest gold market in the world, it is not a matter of gold stocks determinable to the respective owner. Thus, if one maintains a gold deposit, one does not receive a claim to specific bars that can be clearly identified with mint stamps, but only the paper claim to any bar from the total stock of the bank acting as a depository. So what happens in the gold market then is exactly what actually drove the gold buyer away from holding fiat money. After all, he wanted to gain more security by acquiring physical goods. This is also exactly the problem with trading gold ETFs. Simply put, one only has a claim, but not to the investor attributed and clearly identifiable bars. That is then nothing else, as the minimum reserve system with the paper money. Gold holdings that customers have acquired are held by the bank as a total stock, but without specific allocations to the actual owner. Of this, as with fiat money, apart from a reserve, holdings can be lent on, creating an additional artificial supply that affects the price of gold. The bank thus lends gold that does not actually belong to it to someone who does not want to hold it, but only wants to trade it, so that he then sells it without ever having owned it, in order to then buy other gold and return it to the bank, which does not own it at all, and to make a profit on the loan. The actual owner of the bar, however, is firmly convinced that he is the proud and sole owner of this particular means of preserving value, while, among other things, the price has fallen due to trading in HIS gold.
  • Investment banks often use the mechanism of high frequency trading to also get a piece of the manipulated gold pie. They have insight from their trading platforms at what price level other players in the market have positioned “sell stops”. So if they throw enough gold, or in most cases just paper gold, onto the market via the futures exchanges to cause the price to collapse, they then only have to catch the automatic sales of the stopped out “stone age investors” who do not have such computers that work in nanomilliseconds.

DepthTrade Outlook

The future will tell if gold can hold on to its 5,000 year old reputation as a store of value.
Highly recommended to read is Precious metals markets manipulation: Watch out! by Ben Schaack, who is going into more detail on the topic of latest gold manipulation.

Back to top button