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.Is the Price of Gold Really Being Manipulated?

Craig Harris
Harris Capital Management, Inc. CTA
January 14, 2002

There remain many skeptics out there when it comes to the idea that the price of gold is being manipulated. Personally, I have no ax to grind. I just call it like I see it. In this short essay, I'm going to analyze this question from the point of view of an investigator.

If we look to dissect this puzzle, there are only three key issues we need to analyze.

1.) motivation
2.) willingness
3.) ability

In general, if you have a strong motivation to do something, a willingness to do so and the means to make it happen... it will be done. I doubt that anyone would question that logic.

So, if we can all agree on that, let's tackle motivation first.

The question of motivation is an easy one for me to answer.... We now live in a world with increasingly few alternatives for the storage of wealth. As the Euro comes into being, the G7 would like us to feel like there are only 3 viable choices for the global investment community in terms of wealth storage. That would be the Yen, the Euro and the US dollar. I'm going to call these currencies X Y and Z as we do a thought experiment together.

Now, let's assume for a minute that all of these currencies had problems... in other words, for each of the three currencies there was some grave concern that made investors not want to store their wealth in that currency. Let's call you Bob (EDITOR'S NOTE: Craig is referring to Bob Doe, not Bob Moriarty ;) and let's say you are concerned about storing your wealth in X but that you were equally concerned about storing your wealth in Y or Z. If these are the only alternatives, what would you do? Well, you pick one or more of these three and you hope for the best, right? That's all you can do. Well, that works out just fine for the issuers of X, Y and Z because no matter what happens, no matter what policies lead to a loss of confidence in X, Y or Z, the global pool of money is stuck wallowing around in one of those three alternatives.

Now, what if there was another alternative? What if there was some asset that had a real intrinsic value... an asset that was convenient for the storage of wealth, one that has a value based on it's intrinsic properties? Let's assume there is and call it a widget (why not).

So now Bob can store his wealth in X,Y,Z, or widgets. He has the flexibility to store his wealth in widgets if he chooses to do so. Bob will make that decision based on his comfort level and confidence in X, Y and Z, versus widgets. When we expand this thinking to the entire population, we can now see that as investors become increasingly concerned about X,Y and Z, some of the global pool of capital goes outside X,Y and Z and into widgets. As that happens, the price of widgets rises compared to X, Y and Z. So, now we have a mechanism to gauge the health of X, Y and Z...because there is an alternative. The less you like X,Y and Z...the more you like widgets. The more you like widgets, the higher the price of widgets compared to X,Y and Z and less global capital is invested in X,Y and Z.

So, leaving this thought experiment, we can see that a viable tangible alternative to 3 fiat currencies is a bad thing for the central bankers. If there is no alternative for the storage of wealth, then they can adopt whatever policies they like without suffering any ill effects. When there is an alternative however, then they have to be much more careful.

So, that's the motivation. If you artificially suppress the price of widgets (gold), that does a number of things for you. It indicates to the financial markets that there is no concern building regarding the storage of wealth in paper fiat currencies. It eliminates any concern regarding inflation because investors can see for themselves that the paper currencies are worth just as much "real stuff" today as they were yesterday. It establishes a mindset that these 3 fiat currencies are the only choices needed and that there is no reason to go outside these boundaries for the global pool of capital. On the other hand, if the price of gold were allowed to move freely, gold would act as a barometer for investor confidence in fiat currencies. As confidence waned, the price of gold would move higher reflecting global capital moving out of paper and into gold. It would hold central bankers accountable because a rising gold price would indicate policies that were spooking investors out of paper and into gold.

To summarize the motivation issue, by suppressing the price of gold, the central bankers have more flexibility and freedom to adopt whatever policies they choose, without negative consequences.....they can have their cake and eat it too.
Now let's discuss willingness. This one is relatively easy thanks to Mr. Greenspan himself. Mr. Greenspan himself publicly made the statement that the central bank was "ready to lend gold in ever increasing quantities should the price rise". That's really all I need to say on the willingness issue....a public admission from the man in charge that he is willing to do so.

Now let's move on to the topic of ability. It seems to me that few would question the ability of the FED, the Treasury and the rest of the G7 to attempt to control the price of gold. Compared to the paper asset markets, gold is a very small market. There have been many people looking into this issue to determine exactly how the manipulation is taking place. On this issue I'll direct you to the latest analysis concerning the ever increasing evidence that has been gathered by the people who are digging for the answers on this question. Here's the link.


So, there we have it. The key ingredients of motivation, willingness and ability are all there.

January 14, 2002
Craig Harris
Harris Capital Management, Inc. CTA

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