Not many people want to talk about it. And those that do, are generally far removed from where the manipulation they claim is actually taking place.
Last week, we noted the interesting incidence of gold breaking away and upward from a metric it had been correlated to on the very day that JP Morgan was criminally indicted for rigging precious metals prices.
Now this may just have been a coincidence, and no manipulation was taking place… but the smell of rat is hard to ignore.
Perhaps the other banks saw the government on the prowl, and decided to stop keeping the price down.
Or perhaps the US government wanted the gold price to go up for some reason, and so put a cat amongst the pigeons…
But why would Washington want the gold price to go up?
It’d be highly unusual for any government with a fiat currency to desire a higher gold price. After all, if the everyman sees the price of gold going up in value for long enough, it’s only a matter of time before he realises he’s being stiffed; that the paper money system is leeching his purchasing power.
So it’s in the best interest of governments that the gold price stays down.
In the 1960s, this was such an important concern that eight governments banded together to ensure the gold price stayed down in the gutter. The US brought the cartel together – the UK, Germany, France, Belgium, and Switzerland – and they all brought their gold reserves here to London to dump on the gold market when necessary.
The plan worked well to begin with. By pooling their vast stores of bullion together to dump on the gold market at a moment’s notice, they could break almost every rally in the gold price when it appeared. And when the price fell hard enough, they could buy it up on the cheap.
But the insatiable desire of governments to spend beyond their means proved too much even for this grand gold-crushing scheme.
Washington wanted a war in Vietnam, and was busy burning money on munitions faster than it was growing gold reserves. Whitehall wanted somebody else to pay its debts, and handed the honour to British citizens with a 14% overnight devaluation of the pound.
By then the French had already bottled it, taking their gold back to Paris.
The value of gold in paper became impossible to keep down, even when the cartel was dumping its gold heavily into the market. Even when the UK declared bank holidays and shut the gold market in London, prices kept rising elsewhere.
With the cartel finished and prices on the rise, Washington had to make sure that if the price of gold was indeed set to rise, the US Treasury was no longer on the hook for it. In 1968, Congress repealed the law stating the USD required any gold backing.
In 1971, with far more dollars in global circulation than the US government could redeem for gold (at a price of $35 an ounce, anyway), President Richard Nixon opted simply to break the promise, and devalue the dollar against gold. While the US would no longer provide gold in exchange for dollars for any country that wanted it, the White House insisted that gold was worth $38 per ounce.
Two years and a whole lot more government spending later, the Nixon administration insisted that gold was now worth $42 an ounce.
It should be noted that at this point in the US, while the rest of the world was suddenly unable to get gold from the US government, Americans had not been able to own gold since 1933.
Following Nixon’s exit from the White House, the oblivious Gerald Ford took over, who had no idea it was illegal to own gold. Ford happened to be watching TV one time, when an advert of arch gold bug Jim Blanchard came on to the screen. “Why can I not own this?” asked Blanchard, illegally brandishing a two troy ounce gold bar.
Ford’s subsequent decision to legalise gold ownership presented a whole new problem to the men in charge of maintaining the paper money system.
The government had been off the hook first from having a low gold price courtesy of the London cartel. When that failed, it at least had the safety of US citizens being unable to own gold.
Now the citizenry could start hoarding the metal instead of the rapidly cheapening paper currency. They might realise the inherent absurdity of paper as a permanent “store of value”.
The Feds needed a way to deter physical gold ownership, and keep that gold price down. And so they found one.
This is a telegram from a US Treasury official in London to the US State Department at 7.08pm, three weeks before gold ownership was going to be made legal in the US. It was revealed in a batch of State Department cables dumped online by WikiLeaks:
… TO THE [London gold market] DEALERS’ EXPECTATIONS, WILL BE THE FORMATION OF A SIZABLE GOLD FUTURES MARKET. EACH OF THE DEALERS EXPRESSED THE BELIEF THAT THE FUTURES MARKET WOULD BE OF SIGNIFICANT PROPORTION AND PHYSICAL TRADING WOULD BE MINISCULE BY COMPARISON. ALSO EXPRESSED WAS THE EXPECTATION THAT LARGE VOLUME FUTURES DEALING WOULD CREATE A HIGHLY VOLATILE MARKET. IN TURN, THE VOLATILE PRICE MOVEMENTS WOULD DIMINISH THE INITIAL DEMAND FOR PHYSICAL HOLDING AND MOST LIKELY NEGATE LONG-TERM HOARDING BY U.S. CITIZENS.
Gold futures began trading on 31 December 1974, a day ahead of US citizens being able to buy gold in unrestricted quantities.
We don’t know for sure what efforts, if any, were made to try and hold down the gold price after 1975. Whatever the case if there was an effort, it wasn’t successful – inflation pulled gold very high as stocks were trashed. But importantly the price of gold was not set by physical supply and demand for it. Instead, it was set by the much larger gold futures market, which was controlled instead by whoever had the largest balance sheet to throw at the futures.
It’s here that the stories about banks, or even government institutions, selling gold futures to suppress the price come from, and clearly, if the JP Morgan indictment is to be believed, some such manipulation does indeed happen on the bank side.
It’s important to note how right the telegram was that futures would disincentivise physical gold ownership – something which prior to 1933 would have been very common in the US. With few people owning physical gold, content with “paper gold” like futures, even if there is far more paper out there than physical, it doesn’t matter because nobody is actually demanding physical metal instead of paper (it’s very rare for somebody to take physical delivery of a futures contract – the overwhelming majority of the time they are cash settled).
When bitcoin showed up on the scene, it was also given the gold treatment of 1974. And there isn’t nearly so much cloak and dagger mystery surrounding it either – this time, it’s much more blatant.
Hardcore bitcoiners knew there would be some kind of attempt to get bitcoin out of the picture when it was only just emerging on to the scene. But rather than the overt banning of it in the Western world, the much less aggressive means of dealing with it through cash-settled futures was employed once more – with orders that came right from the top.
Christopher Giancarlo, who left the U.S. Commodity Futures Trading Commission (CFTC) at the end of his five-year term as chairman in April, told CoinDesk in an interview:
“One of the untold stories of the past few years is that the CFTC, the Treasury, the Securities Exchange Commission and the [National Economic Council] director at the time, Gary Cohn, believed that the launch of bitcoin futures would have the impact of popping the bitcoin bubble. And it worked.”
It doesn’t get much more blatant than that.
Bitcoin futures began trading on 10 December 2017. The bitcoin price peaked exactly a week later, before crashing for a year.
Were banks or even the government involved in rigging the price down? Or did they just let the futures market take the wind out of its sails?
Ultimately, I don’t know. But if the price keeps going up as it has so far this year, I think we’re likely to find out…
All the best,
Editor, Capital & Conflict
Category: Market updates