Political Metals

This is my response to the article A challenge to debate: How safe is gold? by Sam Chee Kong of Malaysia Chronicle. Since links in the comments section don’t work, here’s the fully linked comment.

“But despite having one less competitor in the safe haven basket, the price of gold did not rocket up as expected. Instead it went down about $50 when the CHF news hit the streets.”

That’s because the price of gold as we know it is manipulated, although its value remains untouched. The “gold price” that the market uses is influenced largely by gold futures and options trading at the CME, which are essentially gold derivatives or “paper gold”. High Frequency Trading (HFT) by bullion banks largely determine the price of paper gold which in turn is adopted as a basis for this debate.

Because of this, gold’s price action does not make sense most of the time, and the case in point is the one you cited above. If you assume that the gold price is a reflection of the value of physical gold in a free market, your observation and conclusion is spot on. If however, you factor in the issue of manipulation, you will come to a totally opposite conclusion.  In the event cited above, gold was taken down five minutes before the announcement and the subsequent plunge of CHF. See this minute-by-minute chart of CHF and gold price actions.

If one argues that the gold price action was because of leaked news, should not the same apply for the CHF/EUR chart? To understand what happened behind the scene, listen to the comments by fund manager Ben Davis of Hinde Capital (4mins into the audio clip) and read the analysis by professional commodities trader Dan Norcini.

For in-depth discussion on manipulation of gold (& silver), visit politicalmetals.com to understand the political nature of gold and silver. Only then can you understand why gold (& silver) prices behave the way they do and why you should view them as the ultimate safe haven and store of value compared to fiat currencies or any financial instruments and paper derivatives.

I could do a point by point rebuttal of the whole article, but it’ll be quite pointless if this fundamental premise upon which the whole debate is based is not sorted out first. In the interim, just ignore the minute-by-minute, hourly, daily or even weekly price of gold. They’re all noise due to massive manipulation. To make sense of the place of gold (& silver) in the larger scheme of things, look at their prices on a monthly and yearly chart. While the powers that be are able to do massive manipulations to paint the tape on short term charts, this effect is less pronounced in long term charts.

Conclusion:

The current price discovery mechanism of gold is akin to the tail wagging the dog (paper gold influencing physical gold). Coupled with central bank manipulations, it will be a futile exercise to engage in a debate over gold’s role in one’s portfolio based on short term price actions. However, things are looking brighter going forward. With the expected opening of the Pan Asia Gold Exchange (PAGE) in China by the end of this year, Comex will no longer have the monopoly to determine the price of paper gold, and by extension, that of physical gold. When we finally see the dog wagging its tail, the proper price discovery mechanism for gold would have been in place. By then, gold’s role will be so evident this debate becomes unnecessary.