After gold trading closed in New York on Friday $13.70 lower from the previous day, a Reuters article gave the following reason for gold's rout: "Gold tumbled 3.5 percent in New York on Friday as the first rise in U.S. payrolls in eight months lifted anxiety about economic growth and undermined the safe-haven case for bullion days after it had hit seven-year highs."
Their point of view sounds plausible I suppose, though I think the recent "seven-year highs" in gold are far more telling about gold's prospects than any one month's economic data. But regardless of whether Reuters conclusion makes economic sense or not, the payrolls data was released at 8.30am, and gold's sell-off didn't start until 12.10pm, almost fours hours later. Therefore, did we see a delayed knee-jerk reaction to the data? Or was some other factor at work?
In my view, it was clearly the latter. It is now becoming a well-known 'secret' that governments are trying to manage the gold price by actively intervening in the gold market, and Friday's trading was a good example of their fiddling with the free-market process. Here are some pointers for everyone interested in learning how governments intervene in the gold market.
(1) Work with a proxy. The US Exchange Stabilization Fund is the ringleader of the government's manipulation efforts, but it never enters the market directly itself, regardless whether it is intervening in the currency or the gold market. It works with proxies in order to cover its tracks. The secretive ESF places its orders to intervene with the Federal Reserve Bank of New York, which carries out all intervention for the US government as well as all orders from foreign central banks placed for execution during US market hours.
When asked about its activity, the FRBNY never discloses for whom it is acting, claiming that its account agreements bind it to respect the confidentiality of its customers. But this approach is still not enough to hide the tracks of the ESF and the various governments who intervene to distort normal market forces. They want more cover, so the FRBNY places these government instigated trading orders with the big New York banks. Because these banks have such huge trading volume, the logic is that government instigated trading will be hidden amidst the huge order flow handled by these banks.
This line of attack to hide the government's trades works, except when the government's orders are so huge and one-sided that they overwhelm normal market forces. So it stands to reason that the repetitive and continuing entry by banks like Morgan Chase and Morgan Stanley on the sell side of the gold market at particularly critical market junctures and at unusual times smacks of government intervention. This unholy alliance, also known to some as the Washington/Wall Street Axis, demonstrates that these two forces are in bed with each other to serve their mutual benefit. The banks that act as government agents aim to make money anyway they can, even if it means taking despicable steps that are unfair and harmful to those unaware when the government intervenes. For its part, the government aims to distort markets from operating normally. Why does the government do this?
Because market prices communicate information, sometimes that information runs counter to what governments would like us to hear and believe. So governments intervene in a market by preventing it from alerting us of the market-message that governments don't want us to hear. For example, we all know that the message of a rising gold price means that the dollar is headed for rough times, which is useful and important knowledge. But the government is more concerned about protecting its own interests and those of the banks who help it manipulate markets, rather than letting us receive a useful market-message to help protect our wealth.
Copyright©2004 Gold-Horizons
