Should Central Banks manipulate the gold price?
In today's world, perhaps Central Bank intervention to control the gold price may not be counter to the gold investor's interests as the alternative could be a precursor to global economic collapse.
Posted: Sunday , 27 May 2007
"If there is one single element around which civilisations have risen or fallen it is gold. Since the very beginnings of organized society, untold legions of men have toiled for it, fought for it and all too often died for it. Great nations, and even whole civilizations have been known to wither and die for it. Like it or not, gold has occupied a central place in the affairs of man throughout his recorded history and, like it or not, it may yet decide the future of the United States, or even the ultimate destiny of Western civilization itself"
So wrote Donald J. Hoppe in the introduction to his book "How to invest in gold stocks and avoid the pitfalls" back in 1972 - a publication in which many sentiments expressed then may be valid today although of course the whole investment scenario has changed dramatically and some of the good points made in his book at the time are no longer valid.
I was privileged back in the early seventies to have provided some of the figures and ideas on which this book was based as I was then editor of Mining Journal's Quarterly Review of South African Gold Shares which provided information on the great majority of the gold stock investment opportunities at a time when South Africa really dominated world gold production.
Since then, world production patterns have changed, and it now looks like South Africa has not many years ahead of it as the world's largest producer of the metal, and new mine supply is struggling to counteract the fall in production as old mines close or become depleted.
But coming back to Donald Hoppe's statement, a possible lack of increase in new mine supply is dwarfed by the potential impact of the collapse of world currencies - notably the US dollar and those which depend on it - and, as he put it, on ‘Western civilisation itself'. Many gold watchers believe in a ‘conspiracy' by the Central Banks to keep down the gold price - as has been seen recently by the impact of increased ECB sales just as the yellow metal threatened to break back above $700 an ounce again.
If indeed there is a concerted effort by banks to defuse the rise in gold price, it is perhaps not so much an anti-gold move, though, but an attempt to protect currencies and defuse the prospect of a total collapse in the US dollar. Gold investors may see this policy, if it exists, as an unjustifiable intervention in the natural scheme of things but, on the other hand, I don't really think we would want to see a collapse in the dollar with the worldwide financial and political chaos which could ensue.
Does the precious metals market need war or global strife? Neal Ryan of Blanchard & Co. posed this question in a recent research note to clients. His answer to his own question was as follows:
"Short answer, no. In the last six years, gold has nearly tripled and silver and platinum have tripled in price, we've seen one of the largest and longest global economic expansions in history. The reason has been fundamental changes in the market. Less production, more investor demand. Smaller central bank sales, more dehedging by miners. Investors have been looking for diversification, China legalized gold ownership."
"Will war and terrorism and all that other nasty stuff help out precious metals? Of course because of the flight to defensive asset classes, but it's not a necessity for the market to continue appreciating in price."
Ryan's point is that gold investors should not wish for a scenario which could be to the detriment of Western society as a whole. Strife and chaos may be the ultimate in gold price boosters, but in today's world with potential availability of weapons of mass destruction to terrorist organisations, no-one would be safe - not even those sitting at home in the US.
A collapse in the dollar and a corresponding total decimation of the US economy would leave the world rudderless and chaos could ensue. Lets hope it doesn't happen. Gold investors should wish for an orderly rise in the price of gold, rather than a dramatic one. Perhaps Central Bank intervention may help this be achieved. I, personally, do not think that Central Bank activity can significantly depress the gold price long term, but it can mitigate against the kind of dramatic increase which could be the precursor to worldwide financial collapse which would, in reality, be to the benefit of no-one.