Is the gold price being manipulated?

When oil prices rise, many economically illiterate people will say something like this:

“Speculators and oil companies are manipulating the market to drive up the price of oil.”

When there is a price change that people don’t like, it’s often blamed on “manipulation.” Did the price of gas rise in the summer? It’s those monopolistic oil companies.

Of course, no one ever blames the manipulators when the price of oil falls.

When it comes to gold and silver, people behave in a similar way. The difference is that people decry the “manipulators” and “conspiracies” when the price goes down.

I read Ed’s Gold and Silver Daily in the morning because I like the charts. I find it hard to read his commentary, because he is always blaming “da boys” for any price decline. Price declines which, he claims, are “impossible” in the free market. (For example, it’s claimed to be utterly incomprehensible that gold would fall in the post-Cyprus crisis, unless the cause of the decline is manipulation.)

Yet you will never hear Ed, or anyone like him, use manipulation to account for a price increase.

Gold and oil often move together. If gold is down, see if oil is down as well. If you think manipulators are driving down oil prices, then at least you are being consistent if you claim manipulators are driving down gold also. Yet no one ever blames manipulators for driving down oil prices.

In my opinion, people should not worry themselves over gold manipulation. So short-term futures traders might cause the market to move around a bit. But every short has a long. Futures traders do not want to manipulate the price downward if prices “should” be going up with massive shorts, because if so the market will rape them when price rises. Secondly, the banks that are supposedly manipulating gold prices lend huge amounts of money to gold producers. None of the board members of mining companies that I know believe there is manipulation.

And really: if the price of gold is being manipulated to a lower-than-otherwise level, why not just buy more? If someone drives the price of a commodity below what its market price “should be”, it would be… below the price at which it should be. Good deal. If some idiot like Gordon Brown (who sold half of Britain’s gold at hilariously low prices) wants to drive the price down, good luck. They obviously can’t keep it the price down forever.

Forget the manipulators. Here is why I think the gold price is falling: the economy is slowing down. Europe, Japan, and China are in recession. I believe North America is fighting hard to avoid one, but by the end of the year there will be nowhere left to run.

A panic will cause central bankers to inflate even more, and gold will move up in response to new monetary expansion. Otherwise, slowing economies are rough on investments. People want to avoid losses and gather cash, so they sell stuff like gold and stocks. When  demand deteriorates, prices drop. This is totally normal and not at all related to “manipulation.”

Investing: Silver vs. Gold

Many people want to know about silver. They want to know how it compares to gold as an investment.

Some call silver a “poor man’s gold.” In other words, the average man on the street is more able to go to a dealer and buy a few ounces of silver than he is a few ounces of gold. Yet “poor man’s gold” is not a fair characterization, because it assumes silver and gold belong in the same category simply because they are both precious metals. The reality is that silver and gold are different in important ways.

I recommend that one’s precious metal holdings be MAXIMUM 25% silver. 15% is probably better. Gold should make up the rest.

First, I invite you to check out the Kitco charts and look at recent price behavior.

In April 2011, silver reached a high of $49. But by June 2012, it hit $27. As I write this, it is $29. Measured from the 2011 highs, this is a massive loss. Nearly 50%.

Now look at gold. In September 2011, gold hit a high of $1895. In May 2012, it bottomed at $1540. As of right now, it is $1580. Measured from the 2011 highs, this is a moderate loss. Nearly 20%.

The idea reflected here is that silver is much more volatile.

Look back to 1980. Silver fell from $50 to $3.60 in 1991. Gold, at its worst, fell from $850 in 1980 to $255 in 2001. It’s like losing your house and all your money, instead of just all your money.

So when gold sells off, silver will sell off  harder and faster. Silver bulls will argue that the potential gains are much, much higher with silver than with gold. This is plausible, if only because silver is 40% down from its all time high and gold is 17% down from its all time high, and there are strong reasons to believe that both will move upwards.

Why the volatility? The primary reason is industrial demand, which for gold is very small. It is significant for silver, however. During a panic, the price for raw materials plummets.

Gold is different. You could say it commands a premium. This is essentially because gold is regarded as a monetary metal even though it is not money. Central banks buy and sell gold. They have it in their vaults. Central banks don’t stock silver. Wealthy people want gold in a crisis, and silver is much less interesting. Indian families buy it when their daughters get hitched. Asians use it to protect against inflation.  Silver really doesn’t serve that purpose, and I do not believe it will in the near future.

Silver will probably have a bigger bull market than gold by the time Great Depression 2 hits. But if you want to buy precious metals because you are afraid of people like Bernanke and Carney, then you want gold. Silver is a higher risk trade. Gold will perform better in a panic, which is when silver will perform horribly.

In either case, your objective is to hold until the error cycle reaches its final moments before we enter a deflationary depression. Because at that point, you want to unload all your gold and silver and get currency and bonds from institutions that won’t go broke. It’s a trade that would be harder to time correctly with silver than with gold.

All this being said, there is one other important advantage gold has over silver: your wife or girlfriend will like gold jewelry more than silver jewelry.

What is up with the gold price?

The first two months of 2013 have erased gold’s price gains from 2012.

So what? The gold market is a bumpy ride. Are you sure you are man enough to own gold until Great Depression 2?

If you’ve been buying gold coins throughout the last decade, you probably don’t even care much about the current situation. You might even welcome a bit of weakness in the market as a chance to get more value.

I’ve been telling people to buy and hold gold coins for ten years. I still recommend doing so. The latest developments in the gold price don’t upset me much. I barely think about it.

Late-comers to the gold scene are the ones who are stressed out. You might be upset if you purchased your first gold coin last year, or bought into some gold ETF at the mid-2012 lows. You’ve heard bullish predictions for $2000 gold, $2500 gold, $3000 gold, but you’ve seen the price action over the last 12 months. You hear all the news stories reporting bearish sentiment on gold, and you worry. Your “Get Rich Quick” scheme has failed.

People get frightened when their holdings fall 5%, 10%, and 20%. I consider price changes, even big price changes, to be normal. But then again, most of my trades are in highly speculative stocks that frequently rise or fall 20% in one day. So price volatility upsets me less than most.

I would not be surprised if gold fell another 20% from its current point. Actually, I predict this will occur within a year. Recession will drive down asset prices. Asia is in recession. Europe is in recession. The US is going into recession. As the US goes, so goes Canada.

Also critical is Federal Reserve policy. Much has been made of the Federal Reserve minutes from February 21, where it was suggested the economy was improving and the size of their bond purchases may need to be “adjusted” — which was interpreted to mean “lowered.” I don’t think this holds much meaning. It’s just talk. The Federal Reserve has no “exit plan” prepared.

Instead, it is highly significant that the Federal Reserve did not inflate last year. In terms of gross open market operations, the Fed was busy. But on net, the balance sheet did not increase. This puts downward pressure on gold’s price. QE3 is now underway, but gold’s price already jumped last year in anticipation of the inflation that would create.

Other central banks are inflating and buying gold — mainly Asian central banks, and Russia. The trend indicates these purchases will continue — but in the grand scheme of the gold market, these deals are small. Japan’s central bank has gone into “suicide mode” and seems eager to ruin the yen.

Bernanke recently testified in Congress that interest rates had risen and that indicated improvement in the economy. Let us assume that is true — what interest rates have risen? Two-year to 30-year rates have been falling. Only the shortest-term rates have risen, and not significantly. 90-Day went up five-hundredths of a percent in February, and nobody cares.

The economy is getting worse, not better. Central banks’ money printing will become more frenzied.

Don’t worry about short-term fluctuations in the gold price. If you believe that there will be long-term worldwide mass inflation, then you should continue to accumulate  gold coins until it comprises a significant (25% to 40%) of your net worth.

From Libya to Uganda! The battle for Africa’s resources.

The resource rush is on for Africa. China was ahead of the American Empire in Libya, and look what happened there (even though Obama was buddies with him two years ago).  China’s commercial deals with Libya are toast. The next imperialist target in Africa is clearly Uganda. Pepe Escobar writes:

 

That brings us to Uganda as a new land of opportunity. Ah, the sheer scale of humanitarian warmongering possibilities. For a semblance of success, the initial steps of Obama’s African surge would have to include a military base with a long runway attached, and a mini-Guantanamo to imprison the “terrorists”. If that sounds too good to be true, that’s because it is; think of the Pentagon’s Africom headquarters soon entertaining the possibility of time-traveling from Stuttgart, Germany, to somewhere in Uganda.
Any student of realpolitik knows the US doesn’t do “humanitarian” interventions per se. Africom’s surge parallels the real name of the game; precious minerals – and mining. Uganda – and nearby eastern Congo – happens to hold fabulous quantities of, among others, diamonds, gold, platinum, copper, cobalt, tin, phosphates, tantalite, magnetite, uranium, iron ore, gypsum, beryllium, bismuth, chromium, lead, lithium, niobium and nickel. Many among these are ultra-precious rare earth – of which China exercises a virtual monopoly.

The mineral rush in Africa is already one of the great resource wars of the 21st century. China is ahead, followed by companies from India, Australia, South Africa and Russia (which, for instance, has set up a fresh gold refinery in Kampala). The West is lagging behind. The name of the game for the US and the Europeans is to pull no punches to undermine China’s myriad commercial deals all across Africa.

Then there’s the inescapable Pipelineistan angle. Uganda may hold “several billion barrels of oil”, according to Heritage Oil’s Paul Atherton, part of a recent, largest-ever on-shore oil discovery in sub-Saharan Africa. That implies the construction of a $1.5 billion, 1,200 kilometer long pipeline to Kampala and the coast of Kenya. Then there’s another pipeline from “liberated” South Sudan. Washington wants to make sure that all this oil will be exclusively available for the US and Europe.

 

Guest Piece: Is gold mining coming back to the Yukon?

Notes from the Field: Yukon
By Louis James

I’ve just returned from another trip to the Yukon. Details on the companies I saw I’ll have to keep for Casey International Speculator subscribers, but there is a broader observation I can share that I think is of value.

The Yukon has a long and famous history of exploration and mining – especially for gold – but currently there’s been little actual mining going on in recent years. Capstone Mining’s (T.CS) Minto mine was the first new hardrock mine built in the Yukon this millennium, with first concentrates shipped in 2007. Until Minto proved it could be done, the prevailing wisdom seemed to be that the Yukon was geologically interesting, but a remote and expensive place to work, as well as a difficult political environment that made the effort questionable. The success at Minto attracted a lot of exploration dollars, with Underworld Resources making a new discovery that was quickly snapped up by major gold miner Kinross Gold (KGC, T.K) in March of 2010. This really put the place high up on t he radar screen, and exploration dollars flooded in.

However, a couple of months later, Western Copper (WRN, T.WRN) was delivered a surprise setback when the final permit it needed for its Carmacks copper project was rejected by the Yukon Water Board. This decision is being appealed, but the company is also seeking to address the regulators’ concerns, hoping to finally get the project permitted one way or the other. This has not slowed exploration in the territory, but it does have people wondering if the Yukon is really such a great jurisdiction for mining after all.

One answer to this is that Alexco Mining (AXU, T.AXR) was able – post-Camracks – to permit its Bellekeno mine in the Keno Hills district of the Yukon; it just went into commercial production. Now, Bellekeno has a much smaller footprint, being a high-grade underground mine with ore milled in a plant, rather than Carmacks’ heap-leach operation that would be the size of a mountain (sprinkled with scary-sounding chemicals), so it was much easier to permit, but it still shows that the government is not opposed to mining.

Well, not opposed so far; there is an election coming up, and it seems too close to call.

However, while my plane was grounded in Whitehorse due to weather, I bumped into a consultant who has worked with both the regulators and the mining industry. We had, I believe, a very sincere conversation (on that day, I was there to see another company, not hers) and she explained to me that the permitting process actually changed during the efforts to permit Carmacks. She also told me that, unlike British Columbia, most of the First Nations land claims have been settled in the Yukon, so dealing with native populations is much simpler. That’s a great advantage that removes a lot of uncertainty. Also, the Yukon being a relatively small territory with the government concentrated in Whitehorse, the actual logistics of dealing with regulators are simpler, and there’s less turf conflict between regulators. There was and always is a lot of politics involved in such things, but her take is that the Yukon is definitely a place where miners can work.

This perception fits with information I’ve gathered over the years from other sources. Permitting is always a challenge everywhere, but I think the average Yukoner wants to see the territory benefit economically from responsible mining. And the rocks sure look good. I think we’ll see more discoveries coming from the Yukon soon and more mines being built. I’ll be looking for more opportunities to profit if I’m right… and I’m looking now, while prices are down.

[Louis circles the world, applying Doug Casey’s 8 Ps to promising companies so that only the best speculative plays are recommended in Casey International Speculator. You can put his expertise to work for you: a trial subscription is completely risk-free for ninety days.]

What will happen to commodities in 2011?

First, consider the following:

Commodities are up across the board, in some cases quite dramatically. This boom is international — manufacturers are bidding up prices and there are strains on available supplies.

Yet consumer prices are not rising significantly. Canada currently has a higher official inflation rate than the US, but not much more. Commodity prices have been bid up in anticipation of rising consumer demand, a prediction which is not panning out.

Remember the insight of Austrian economics — consumers set final prices, not producers. Consumer spending is weak. Unemployment remains high. Without a surge in consumer spending, these prices are unsustainable. If there is a recession in Asia, and I think there will be (probably next year), then these prices are likely to tank.

Western banks are stockpiling excess reserves. If this money does not get lent out, unemployment will remain high and consumer spending will continue to suffer. There are no signs that bankers will suddenly become optimistic. China is slowing down. Same with South Korea and Japan.

What about gold? Gold follows a different set of rules. Central banks buy and sell gold. It is a hedge against the currency crises and mass inflation, rather than recession, where currency appreciates. China is encouraging its citizens to buy gold. When Austrian business cycle theory bites back at China’s bubble, there may be less drive to build shopping malls where no one buys or sells anything, but people will still yearn to preserve their savings with the precious metal as their government devalues money like its going out of style.

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