If you ever want to get a strong response out of somebody in finance, just ask them if the gold price is manipulated.
It’s a question that’s incredibly divisive, especially on the fringes of the financial world.
As the gold price is a measure of faith in paper money to some degree, it’s easy to imagine how certain interests could conspire to move it up or down (probably down).
The identity of such manipulators varies depending on who you ask. Accused villains include the government (or a rogue government agency), the central banks in unison (or individually), to a cartel of private banks (or just one big one).
This divide exists within our own editorial staff. Charlie Morris over at The Fleet Street Letter doesn’t buy it, while Tim Price at The Price Report is more open to the idea. I put the question to some of the experts we’ve brought in for our 2019 Gold Summit and the answers they gave were illuminating – make sure you tune in next week.
These theories often rely on the idea that there is far more “paper” gold in existence than there is physical gold, or “phyzz”, to back it. The way “the powers that be” rig the price, it’s alleged, is by selling unbacked claims on gold in huge quantities. “Paper gold” can refer to gold futures settled for cash, “unallocated gold” receipts issued by a bullion bank, or shares in a gold exchange-traded fund (ETF). As this “paper gold” is trusted and traded the same as physical gold, it can be sold in almost unlimited amounts to force the gold price down.
I bring this up today, because such theories claim that when people stop trusting paper gold and demand the physical, the entire rigged system will collapse and gold will soar in price.
As Harald Malmgren, senior economic adviser to presidents John F. Kennedy, Lyndon B. Johnson, Richard Nixon and Gerald Ford, said on Twitter on Wednesday:
[The] time is coming when markets search frantically for physical collateral to find that paper far exceeds underlying collateral for several metals & other resources.
If this is the case, it sure as hell ain’t looking good for the UK…
All outta phyzz
We’ve written in this letter before about the curious phenomenon of British gold being sucked into China through a Swiss straw. For some time, vaults in London are being drained of their gold by Chinese buyers, who send it on to Switzerland to be re-refined into a higher purity before taking it home to China.
As I said back in August, this is a situation that won’t matter, until it matters. And we may be seeing signs that it’s beginning to matter…
Take a look at this from Sharps Pixley, a bullion dealer in Mayfair:
Sharps Pixley is currently seeing tightness in the availability of physical gold coins and bars in the UK.
The recent rise in gold prices reflects solid demand from investors and, given that there is a relatively thin supply pipeline of metal between miner, refiner and trader, this is leading to a shortage of physical gold.
It is a matter of some speculation, but this story echoes reports that physical gold demand by Central Banks are at the highest since 1967, while institutional gold ETF offtake hit an unprecedented 145 tonnes in December and January.
Could we finally be seeing the damage of the Chinese gold hoover? Or is this just the Brexit doomsday crowd buying it all? I’m inclined to entertain the former idea.
Ross Norman, the CEO of Sharps Pixley, continues on to describe just how scarce physical gold is here in the UK:
Sharps Pixley estimates that there is only about 2 tonnes of small bars and coins in the UK – given the UK population is 66 million, this suggests there is only £1 per person readily available at any one time. Should an economic ‘event’ occur, then we would expect demand would overwhelm the limited supplies which would dry-up overnight. For example, should there be a “no-deal BREXIT” then we would anticipate local demand for physical gold would quickly absorb all the available small denomination gold ; Sharps Pixley are currently speaking with the major Swiss refineries for additional supplies.
To support its campaign to replenish stocks, Sharps Pixley is launching a media campaign to attract any old bars and coins that clients might be minded to sell. As one of the UK’s largest bullion traders, we are now offering to pay 99% of the fine gold content to any sellers of gold bars and coins.
While its offer to pay you 99% of the value of your gold is generous, we here at Capital & Conflict would caution you against it. Especially when you consider what’s on the horizon.
£1 of gold per member of the British population. Damn. Now there’s a situation where you really don’t want to be average.
All the best,
Boaz Shoshan
Editor, Capital & Conflict
Category: Investing in Gold