Did Central Bank Coordinated Easing Also Include Manipulation of The Gold Market?

On a day when coordinated central bank monetary easing sent stocks and commodities soaring into orbit, the price action in the gold market was curiously muted.

The Dow Jones, S&P 500 and Nasdaq all increased by over 4%.  Gains in various S&P sectors ranged from 4.75% for the transportation sector to 7.51% for the financial sector.  Gold, by contrast, rose a mere 2%.

The massive monetary easing by central banks should have sent the price of gold into the stratosphere.  It has become crystal clear that central banks will continue to create whatever amount of money is necessary to prop up a collapsing, debt saturated system.

Why would central banks collude to restrain the price of gold?  GATA has explored this question in depth and in a recent exchange between Lawrence Williams of Mineweb and GATA, Williams writes  "If one assumes that governments as a matter of course manipulate currency exchange rates, then there is logic in their manipulating the gold price too, as many throughout the world consider gold as money (currency) and a rise in the gold price thus equates to a depreciation in currencies -- notably the U.S. dollar."

Most of the world already suspects that the "emperor has no clothes" when it comes to central bank money creation.  Had the value of gold been allowed to soar hundreds of dollars per ounce today, under free market conditions, the entire crumbling edifice of fiat currencies would have been exposed.

Gold is the only currency that central banks cannot destroy.  If central banks did not suppress the price of gold, the true extent of the debasement of paper  currencies would become blatantly obvious and thereby threaten the entire system of fiat currencies.  Central banks have every motive in the world to suppress the price of gold.  How long they can remain successful at it (as they engage in blatant, massive and world wide money printing) is the question on most gold investors' minds.

More on this topic:

Where In The World Is The Gold?

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Why The Gold Bull Market Is Only Getting Started

According to one market seer who has been a long term gold bull, the fear of higher inflation should not be viewed as the primary factor driving gold prices higher.

In an interview with Fortune Magazine, Stephanie Pomboy explains why she likes gold despite the powerful deflationary undertones of the world economy. Ms. Pomboy is the head of MacroMavens, a firm she founded in 2002. Major institutional investors and giant money management firms have become clients of MacroMavens based on Pomboy's successful ability to forecast major trend moves based on macroeconomic factors.

Ms. Pomboy has correctly been bearish on the U.S. economy since late 2008, predicting a long period of deleveraging due to declining incomes and the deflated housing bubble. Deflated asset bubbles, declining incomes and a slow economy are not the classic ingredients for inflation. Pomboy correctly argued that low inflation, or actual deflation, would not prevent gold prices from surging higher.

Pomboy has a superb track record predicting gold prices. In a December 2008 interview with Barron's, Pomboy prophetically concluded that "We are going to see a secular rotation from paper assets to hard assets like gold. The whole global competitive currency devaluation, including that of the dollar, plays right into that. We are acting as though there are no consequences to basically running the money off the printing press and handing it to the Federal government to backstop financial markets or bail out homeowners or what not. There is no consequence to doing this, unless or until the rest of the world says to us, 'We don't like this game' and We don't want to have all the dollar claims we are holding debased by [Fed Chairman Ben Bernanke] running his printing press."

Those who heeded Pomboy's advice have seen gains of about 100% as gold moved from the $850 range in 2008 to the current price of $1,675.   As a means of protecting capital against the debasement of all major currencies, gold remains the best hard asset to own.

In a follow up interview with Barron's in February of this year, Pomboy made another extraordinarily accurate call on both gold and bonds.  Despite referring to treasury bonds as certificates of confiscation, Pomboy recommended buying U.S. government debt and gold, a seemingly contradictory stance.  As Pomboy explained it to Barron's:

My bullishness on these flimsy pieces of paper is purely opportunistic. It is based on (1) my view that the perception of the economy has run far ahead of the reality and that disappointment will find yields declining. And (2), as I discussed in the interview, my belief that this will find the Fed extending QE--a policy which involves the Fed's outright purchase of Treasuries... Not only is the Fed now the largest holder of Treasuries, but thanks to Ben's printing press, it has unlimited capacity to buy. So this is one market where the fundamental laws of supply and demand do not apply.

Finally, for those who can't fathom going long gold and Treasuries in combination? it's simple. It's the neatest expression of a bet on continued Fed monetization which, again, entails the direct PURCHASE of Treasuries!!! The wisdom of this trade has been on full display for ?oh? the last FOUR and A HALF years! The fact that it is still viewed as some kind of oxymoron only reinforces how much farther it has to go.

The Fed's commitment to further assets purchases was revealed today when the Fed released the minutes of their last meeting.  Although the Fed temporarily stopped outright asset purchases when QEII ended, policy makers are already discussing when to resume the practice.  The Fed has already purchased about $1.6 trillion in government bonds, financed via quantitative easing.  As the economy slows further and government spending continues its upward spiral, anyone who thinks the Fed won't start monetizing the public debt is delusional.

In her recent interview with Fortune Magazine, Pomboy remains bullish on gold and forecasts higher oil prices as emerging nations reduce dollar reserves.  According to Pomboy, "I'm really interested in strategic resources -- commodities that emerging nations like China are trying to stockpile.  Oil would be at the forefront. I think it will continue to be a beneficiary of this global debasement of currency and the need for emerging nations to diversify the foreign exchange resources that they're sitting on, which are being debased every single day. Why not take that money and spend it on building strategic oil reserves rather than watching it go up in smoke?"

Pomboy's perfectly logical theory that emerging nations will sell dollar assets to buy oil implies that demand for U.S. treasuries will drop dramatically since emerging nations such as China have been one of the biggest purchasers of U.S. debt.   The absence of sufficient bids at Treasury auctions will immediately cause the following two events to occur:  1) the Fed will be forced to monetize ever greater amounts of debt in order to keep U.S. interest rates from rising and 2)  the price of gold will soar.

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Smart Money Investors Assess Gold Market

Given the recent extreme volatility in worldwide financial markets, Barron's interviewed their Roundtable Panelists for an assessment on where we are headed next.   Three of the smart money investment pros interviewed gave their insights on where they think gold is headed next.

Here's what they had to say:

1.  Investor Felix Zulauf thinks that the stock market will see new lows in the fall and that eventually both the Fed and the European Central Bank will step in to support the financial system.  Although Felix feels that providing additional liquidity is not a solution, "if we don't do it the system will break down."  According to Felix, at some point, as the problems get bigger, central banks may hit the panic button and wind up "like Zimbabwe".  The increasing price of gold reflects the loss of confidence in policy makers, central banks and the currency.  Felix's recommendation for a bleak future - "own a lot of gold, and don't have debt."

2.  Fred Hickey, who is editor of The High-Tech Strategist, also sees the Fed being forced to initiate more quantitative easing as economic conditions deteriorate.  The drawback of more money printing, however, is that "the Fed...can raise the nominal prices of assets - but not the real prices, because inflation will rise."   Hickey, who owns both bullion and gold ETFs think the better play right now is in gold mining stocks since they have lagged the price increase in gold bullion.  Hickey is recommending Agnico-Eagle Mines (AEM), Newmont Mining (NEM) and Yamana Gold (AUY).

3.  Marc Faber, Editor of The Gloom, Boom & Doom Report, sees a short term bounce in stock prices and a possible correction in gold of $100 to $150.  After a rally off oversold levels, Marc thinks stocks will drift lower due to concerns over sovereign defaults, a dollar crisis, continued social upheaval in the Middle East and developed countries in the West, recession, lower corporate profits and the possibility of a "bust in China."   As for the gold market, Faber remains long term bullish saying that "As long as the trio of Obama, Geithner and Bernanke are in power, gold is destined to move higher.  Long term treasuries have no value.  They will default by paying interest in a worthless currency."

Bill Gross, head of investment firm Pimco, while not specifically addressing the gold market, is also bearish on the economic outlook for the the United States and implied that the more quantitative easing is the only option left.  According to Gross, the recent Fed announcement that it will keep interest rates at zero for another two years "indicates that monetary policy has been exhausted, while fiscal policy is hammerlocked by the results of the debt ceiling debate."

Gold is beginning to look more and more like the only safe haven in a dangerous world.

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Silver Market Correcting or Crashing?

Despite predictions of the silver market’s strength, prices fell from an impressive 30 year high of $30.68 recently. As of the today, COMEX silver futures have fallen about 7% from their recent peak

Likewise, the silver ETF experienced a similar fall in higher volume. From its intraday high of $30.00, it has fallen below $28.00 on higher volume.

It seems like, for the moment at least, silver prices are falling. Will they rise again? And why?

In reality, the news is conflicting. After all iShares Silver Trust is the world’s largest silver backed exchanged traded fund and it has just reported reaching an impressive record. On the 7th, it announced that holdings had reached a record 10,941.34 tons, up from 10,816.69 tons on the 6th.

The question is: has silver regained its strength? Is the market simply correcting? Or are we about to experience a major collapse in silver prices despite expert predictions of strength and growth? In any case, how should investors respond to its new movements?

In the end, the best thing investors can do to protect themselves is to simply be careful. Its important to be mindful of the many pressures that the market is under, as well as the predictions of its potential long-term growth. Silver has been sold past the point of availability and as a result significant shortages of the physical metal are developing.

This is in part due to attempts at manipulation that have recently begun to turn on the manipulators. Companies that have traded silver futures in an effort to keep prices low are now being stressed by the rising investor interest in silver. As a result it seems clear that the short-term silver market is about to get truly exciting.

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