Gold Price Manipulation, Money Printing and Inflation

“The gold standard did not collapse. Governments abolished it in order to pave the way for inflation. The whole grim apparatus of oppression and coercion — policemen, customs guards, penal courts, prisons, in some countries even executioners — had to be put into action in order to destroy the gold standard. Solemn pledges were broken, retroactive laws were promulgated, provisions of constitutions and bills of rights were openly defied. And hosts of servile writers praised what the governments had done and hailed the dawn of the fiat-money millennium.” -Ludwig Von Mises

The sharp sell-off in gold and silver these past two weeks has taken many by surprise, including me, especially given the growing shortage of physical gold and silver. Make no mistake, the majority of the price decline in both metals has taken place in the paper derivative trading in London and NYC. We subscribe to John Brimelow’s Gold Jottings report. It’s expensive but contains valuable data on the Indian, Chinese, Turkish, Vietnamese gold market activity on a daily basis. India has been a voracious buyer since November/ December and China has slowly woken up after being dormant since February 2020. Those are two key eastern markets though Turkey and Viet Nam can be significant buyers as well.

It’s been the same pattern almost every day for the last month: gold and silver rise in evening to early a.m. hours driven by enormous import activity from India and now China. This is what I refer to as the physical markets and the eastern hemisphere buyers require physical delivery. Gold (and silver) then typically start to decline once India and China close down for the day (2a.m. – 3 a.m. EST) and the paper traders take over.

There’s also the issue of the widely reported shortage of gold and silver bullion products at the retail level. Most large coin dealers have very little inventory of minted bullion coins – gold and silver. Many products are unavailable. The shortage has spread to the wholesale 100 oz gold and 1,000 oz silver bar market.

It makes no sense that shortages of physical like this have developed while the prices of gold and silver have been declining the past few months. If mints are having trouble sourcing blanks with which to mint coins and bars, they should be raising the price to a level that enables them to buy the necessary quantities to satisfy demands. This is how price-discovery is supposed to work. I believe the U.S./Canada/Australia etc. are not operating their mints like this because bullion banks need to be able to source enough physical bars to deliver to the big buyers in the east. I also believe the aggressive price take-down that occurs in the paper markets is an effort by the banks to discourage buyers from investing in gold and silver.

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This bullion bank fire drill has occurred intermittently over the 20 years of my involvement in the sector. And yet, gold has been the best performing asset from 2001 to present. Silver I believe has been the 3rd or 4th best performing asset. Usually an aggressive effort to push the price of gold down precedes more money printing – or in socially correct circles, “Fed balance sheet expansion.” This time around more money printing will be accompanied by price inflation the likes of which has not been in the U.S. since the late 1970’s. Unlike the 1970s when Paul Volker extinguished inflation by jacking Fed funds up to 20%, the Fed will be helpless to fight inflation without the risk of napalming the stock market.

The fundamental factors that drive gold and silver keep getting stronger by the day. While I don’t know how much lower the sector will go from here – part of that will depend on whether or not a stock market accident occurs, something which I believe has a high probability – at some point the Fed is going to have to unleash another massive round of money printing to finance the coming flood of Treasury issuance or risk losing control of the long end of the yield curve, which in turn will devastate the financial markets.

In this scenario, I see the precious sector getting hit hard in correlation – as in March 2020. But at some point gold and silver will benefit from a big flow of flight-to-quality capital which will push gold and silver much higher, with the mining stocks following. See charts from the fall of 2008 to see how this occurs. This dynamic, should it play out like this, will be “turbo-charged” by the shortage of physical.

But for now, I continue to play “defense” with my positions. I raised cash over the last several weeks and I’m sitting on my hands to prevent myself from adding to positions or engaging in speculative trades. I don’t care to try to time the bottom (or a top). If I can capture the middle 60% of the next move I believe is ahead I’ll be content.

Source: Investment Research Dynamics

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