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Is The Gold Bull “For Real?”

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by Aaron Krowne
Founder, ML-Implode.com

Now that 2011 is behind us, it’s worth reflecting on the eleventh consecutive year of the gold bull market.

For those not following closely, gold just put in its 11th consecutive yearly price increase, with an approximately 14% rise on the calendar year. And that wasn’t even nearly a remarkable year — the average price increase over that time span works out to about 16%!

It’s true, there have been some sizeable declines over the last decade plus (such as during the global market collapse of September 2008), but as is obvious from the long-term performance, these declines haven’t broken the back of “the bull” in gold. Plus, calendar-year performance is accorded special significance for various financial reasons, so gold should be granted the kudos it legitimately reserves for this virtually unheard-of feat.

But you (randomly-selected member of the general public) probably haven’t heard of it.  In fact, you probably think that “gold is going down”, based on what you’ve heard in the media recently (if not prevailing for the past 5 years or so).

An interesting question then remains: why has this oddity occurred?

I think there are a few reasons, with one primary and a few secondary.

Secondary are the reactions to sharp pullbacks such as the one in 2006 (from a high of about $700/oz), the one in 2008 (from about $1000/oz), and the one in 2011 (from $1900/oz). There have also been numerous “bearish” signals of interest to technically-driven market traders and analysts (such as a number of downside violations of the “200-day moving average” in the gold price).

The reactions to these events seem to have erected quite the “wall of worry” in gold, and along with the recovery from these pullbacks, have increased volatility in the gold market enough to scare people away from gold as a “safe haven” investment (Jeff Nielson has more on this phenomenon).

But all that still leaves the glaring question of why that particular pattern is happening — i.e., significant (if not “parabolic”) price spikes every few years, which rapidly correct sharply, but always result in a continuation of the bull market (rather than conversion to a “flat” market or “secular” bear market).

Because such a “strange” pattern has persisted so long, I think any honest impartial observer would have to admit at this point that sustained, downward manipulation — by interests powerful enough to do so — very likely plays a major, if not dominating role.

Some argue that manipulation is “immaterial”, if not impossible, because the market has gone up consistently for 11 years now.  True, but that ignores the very question we raised about the particular shape of the bull market (and lackluster media reaction).  Assuming the move is driven by underlying fundamentals, which have clearly not changed (indeed, the global financial problems and the central bank monetary easing response to them have only worsened), then it is odd indeed that an exponentially increasing number of market participants haven’t “caught on”, jumped in, and drawn gold into a major parabolic “blowoff” reminiscent of 1980. This is, after all, the norm, rather than the exception, when the market is presented with a long-term, “one-way bet”.

But that point gets to the core of the issue, doesn’t it? Glaring in our face is the not-so-implicit desire of Western governments and prevailing financial powers to avoid such a macro-parabolic spike for what it would reveal about their bizarre fiat money and banking system. Namely, that it is totally insolvent, with no way out — except by taking advantage of the key “feature” of fiat money; that enough of it can be arbitrarily printed/created to get the-powers-that-be out of trouble.

And were the gold market to really start to run away (and I mean in a way that would cause the media, and hence the general public, to take notice for more than a few weeks), it would not only signal distress for the status quo monetary system, it would illuminate the obvious “escape hatch” that concerned holders of paper assets could take to protect their wealth while they still can: getting the hell out of paper and into gold.  And this especially  includes government debt — with US Treasury debt the most critical of them all. Indeed, after four years of rolling bailouts, Western governments (especially the US) have now stuffed the public balance sheet such that they are more deeply insolvent than they have ever been in history.

And the numbers still show a laughable, less-than-1% global asset allocation into gold, despite a 10% allocation to gold being the “prevailing advice” from the even mainstream financial establishment (a recommendation provided mechanically, but never heeded — almost like a disclaimer — “If the economy collapses and you lose everything you’ve invested with us, remember we told you to put 10% into gold!”).  So it’s clear that there has been little, if any increased movement of investors into gold (visible to Western market statisticians, at least), despite 11 years of relentless gains. This suggests that the “raw feedstock” for a major stampede into gold remains (or “dry tinder for a major explosion”, to use another apt simile). But something first must set it off.

So there’s the motivation. And if we were part of those powers-that-be, we would make suppressing a gold price mega-spike — not a gradual gold price increase — priority #1.

Such a “dampening” of the market is all that is needed to keep the gold bull under wraps as far as the general public is concerned — totally preventing a long-term price increase is apparently unnecessary (certainly this lesson was learned with the 2006 price smash, if it hadn’t been earlier). And semi-regular “beat-downs”, from each of which a major media circus is made, fit the bill beautifully.

An added benefit to these powers-that-be with this kind of manipulation is that they, of necessity, need use far less “financial firepower” to pull it off. Were they to instead go for the goal of causing overt price declines (as they apparently did in the latter half of the 90s, barely concealed), they would probably need to resume selling off (or leasing) even more of their puny official gold hoards.

And who would want to sell gold heading into what they certainly know is coming — the ultimate denoument of their decades of monetary expansion and recent bailouts?

The upshot is, we reckon that because of this “wind resistence” style of market manipulation, they will end up either doubling the length of the gold bull from the typical run of a decade, or will have simply delayed (but not prevented) a final “blow off” phase.  Such a blow-off always dwarfs the “base”; i.e., everything up till now would still be simply the “base” — which isn’t so strange considering that the 4x plus increase in gold so far, by most measures, does not even keep up with broad central bank monetary expansion.   And after such a blow off, gold will likely remain permanently higher, to factor in all the money printing that has taken place.

So to answer the titular question, no, this gold bull is not for real — the reality is, and will likely be in the fullness of time, much more bullish.

We suggest you allocate your wealth accordingly.

NOTE: We have made repeated references to manipulation in this article without really citing specific “evidence.” That was on purpose, since the main argument is that the overall pattern of the gold bull market, when taken with the background macro-economic fundamentals, screams bloody murder. But if you’d like an inventory of specific skullduggery towards gold manipulation, we direct you to the work of the fine folks at GATA. Here’s a direct link to a summary report on the first decade of their work.

We would also suggest waking up to the obvious facts which are in full public view, such as how the IMF and individual Western central banks handle their gold sales in a way that no sane, high price-seeking private seller, would ever replicate. Or, perhaps even more glaringly, how the US overtly nationalized gold in the 1930s, kept it illegal for US citizens until the 1970s, and then publicly fixed the price (repeatedly) until the gold-backed dollar standard was totally abandoned. When you consider all this, the real question is not whether governments manipulate the gold price, but rather, did they ever really “free” the gold price?

And so we leave you with an insight from Goethe: “No man is ever so fully enslaved as the one who has been convinced he is free”.

There Are 5 Responses So Far. »

  1. […] The article may start off quietly, but it doesn’t end that way. This very well written piece by Aaron Krowne over at the ml-implode.com website, is a must read in my opinion…and the link is here. […]

  2. An excellent article but not surprising. Ever since the run-up in 1980 I’ve known that precious metals (and stocks and bonds) were being manipulated. Anyone who has done an in-depth study of the mechanics of Federal Reserve Open Market Committee Operations could not escape that conclusion.

    Governments and central banks can not control an economy in which gold and silver circulate freely. Hence the necessity for fiat paper money. Since money control is people control, will governments and the central banks abandon their control of money? Not if they can avoid it.

    Of course the manipulation of paper money will eventually come to an end because it is inherently self-destructive. When the manipulators have created so much of it that it is no longer accepted by the producers, it will cease to circulate as media of exchange a-la Germany 1923.

    When the total economic and social collapse arrives, will starving people support government’s attempt to confiscate gold and silver from those who have it? And what kind of social disintegration will that bring? Are we destined to follow Rome into another dark age?

    Of course at this point in time we have no way of knowing the exact answers to these questions, but history and basic economics provide insights that are very disturbing to say the least.

    Of course Rome was not the first civilization that destroyed its medium of exchange (the Denarius) with manipulation. It goes back at least to Babylon; Hammurabi’s dual barley and silver medium of exchange manipulations. But Rome is the best documented monetary destruction and Emperor Diocletion’s reign provides a very frightening preview of things to come.

  3. […] Is The Gold Bull "For Real?" […]

  4. This is missing the point of what gold is — merely a store of value. Obviously, valuing gold in dollars coming hot off the press is going to send the apparent price soaring. But at the end of the day you want to trade your gold in for something useful — land, housing, oil, food, clothes etc. So based on housing prices since 1990, which are up 2-fold in the US and 3-4 fold in the UK, Spain, and Australia, gold is fairly valued (up 4-fold in the same time frame. Similarly, oil is 4-fold since 1990. So gold’s buying power is virtually unchanged, meaning it’s probably fairly valued right now, while US housing is undervalued.

    The only question you really have to ask yourself is, “Will the ECB, BOJ, BOC, and Fed keep on printing money?” If your answer is yes, then gold prices will go up. If your answer is no, then you probably need to dust off a history book.

  5. […] Resource Investor After a Rough Year for Gold Stocks, What’s Next? – Resource Investor Is The Gold Bull “For Real?” – Implode-O-Meter Is $5,000 Gold a Myth? – […]

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