The Government Attacks the Price of Gold

It’s hard to read any investment or economics blogs without being bombarded with recommendations to buy gold. The conventional wisdom is that it’s the only safe investment banks stop paying interest and stock prices are vastly overinflated due to the current Wall Street bubble and unstable real estate market. While real estate and other investments linked to specific currencies (such as the US dollar) can become virtually worthless the currency collapses, gold supposedly has intrinsic value as a precious metal. Unless, of course, food and other necessities are in such short supply that no one will trade them for gold. With so many Americans, and governments such as China, India and Russia buying gold, investors have been baffled that the price of gold has been dropping. According to supply and demand, the price should rise. In a recent essay in Global Research, former Reagan economic adviser Paul Craig Roberts reveals that the Federal Reserve has been actively suppressing the price of gold through “naked” short selling.  In short selling an investor sells a stock or commodity he expects to drop in price, then buys it back at the lower price. In “naked” short selling, an investor sells a stock or commodity he doesn’t own. The effect of a large number of investors selling short is to drive the price of a stock or commodity down. According to Roberts, the Fed short sold 500 tons of gold on April 12th, at a cost of $1.16 billion (remember they didn’t own the gold to begin with).  No individual or bank could handle that kind of loss, but it’s no problem for the Fed. They just print the money, via Quantitative Easing, to cover it.

In the video below, Greg Hunter interviews Roberts about his recent article. Roberts explains that the US government has no choice but to suppress the price of gold to protect the value of the US dollar. In the last four years the Fed has “printed” one trillion dollars pure year, using “quantitative” easing to purchase bad bank debt. This would be fine if there were sufficient demand with the US economy or overseas to soak up $5 trillion and thus prevent inflation. Thus to prevent a run on the dollar, through massive conversion of dollars to gold, the Fed discourages investors from buying good by effectively capping the price.

According to Roberts, attacking the price of gold helps the dollar by propping up bond prices (especially of bonds based on derivatives) that are the life blood of investment banks. Because private banks, rather than government, have primary responsibility for issuing money (by issuing loans not covered by reserves) the health of the US dollar is intimately connected to the health of investment banks and the bonds they issue and hold.

Other mechanisms the US uses to prop up the dollar include persuading other governments to inflate their own currencies by printing more money. If the euro and yen are also over inflated, currency traders aren’t tempted to exchange all their dollars for European and Japanese currency.

He mentions that Australia, which has much closer ties with China than the US, has refused to print money by engaging in the quantitative easing game. All you need to do is look at the exchange rate to get a real sense how rapidly the US dollar is losing value. When I first moved to New Zealand, $1.00 Aus sold for $0.90US. Now it sells for $1.03 US.

The change in New Zealand’s exchange rate (China has just exceeded Australia has our major export partner) is even more extreme. In 2002 $1.00 NZ sold for $0.50 US. Now it sells for $0.88 US.

The most interesting part of the interview is toward the end, in which Hunter and Roberts discuss the likelihood the US dollar will collapse and the US government will seize depositors’ savings accounts (like they did in Cyprus) and private pensions. Hunter asks if this is why the government is trying to restrict citizens’ access to guns. Roberts makes the very astute observation that no police state can operate in a society with an armed population.  “As we move closer and closer to a police state, they’re going to have to take the guns away. . . The police state has doomed the 2nd amendment. It’s just a question of time.”

 

photo credit: digitalmoneyworld via photopin cc