Is the gold price manipulated?

One of the most commonly held beliefs among gold investors is that the market for gold is heavily manipulated.  It has become an article of faith among gold advocates that the price is subject to direct control by government, central banks and other parties who have a vested interest in depressing the gold price.  In this commentary we’ll explore this belief and try to arrive at a firm conclusion as to its veracity. 

Nearly four years after the gold bear market began it has become increasingly common to hear gold writers mention the gold conspiracy theory in their commentaries.  I can’t recall as many references to gold manipulation since the late 1990s, when the gold price was nearing the end of its 21-year bear market.  At that time it was quite normal to see discussions of gold market manipulation as gold investors were becoming frustrated by gold’s seeming inability to rally.  Meanwhile the stock market was zooming to all-time highs, which made gold bugs feel even more frustrated for missing out on the equities bull market.

At the time, the rationale behind the alleged gold price manipulation was the prevailing belief that the U.S. government favored a stronger dollar.  The strong dollar policy of then Treasury Secretary Robert Rubin catered to this belief.  It was thought by conspiracy theorists that the U.S. sought to collapse of the vulnerable nations by weakening foreign currencies in order to facilitate a fully integrated global economy.  This theory was given some credence by the near collapse of commodities in the summer of 1998 along with currency crises in Russia, Argentina and several Pacific Rim nations.  As it turned out, the scare was short lived and gold and other commodities soon thereafter established a long-term bottom.

The market for gold is immensely huge and virtually impossible for any one entity to control its price swings.  Beyond the very immediate term, any attempt at raising or depressing gold prices would almost certainly meet with failure.  Even a coterie of interests devoted to pushing gold prices lower would meet with certain failure due to the enormous size and complexity of the market.  As one well known market analyst of the previous century commented, “…the market itself is bigger than all the ‘pools’ and ‘insiders’ put together….the great market movements are beyond the manipulation of the combined financial interests of the world.”

One commonly shared belief among gold bugs who subscribe to the manipulation theory is belief in a global conspiracy. Probably the most famous example of this is the Illuminati concept.  Illuminati theorists believe in a highly organized group of elite individuals within government, industry and finance who share the common goal of undermining the sovereignty of nations and establishing a one-world government.   

This group, moreover, is allegedly unified by centuries of blood ties and political connections.  In his book, “Exploding the Doomsday Money Myths,” Sherman S. Smith observed: “The idea of such total unity and perfect loyalty among relatives and different families and nations is unfathomable.  From what we know about history and the infighting that can occur within even a single family unit, the possibility of such a large group successfully devising and implementing a planned strategy for more than two hundred years is miniscule.” 

While there’s no denying that conspiracies and monopolies do exist, there’s also no denying that for every attempt at controlling an industry or a commodity there is a counterbalance.  Within any group of would-be monopolists there are those who can never agree on a common plan for gaining control; common experience teaches this (as anyone familiar with corporate politics knows).  Further, there are always other parties who would also like to gain total control in opposition to other conspiracy groups.  In other words, there is no one overriding “Illuminati” monopoly group, but multiple groups of would-be controllers competing amongst themselves.  “If this weren’t true,” wrote Smith, “the entire world would already be controlled by the Mafia or other such underworld organization.”

There are several questions which should be asked by those who subscribe to the gold manipulation theory.  To begin with, why would manipulators actively seek to push prices lower when there is less to be gained by a lower gold price than a higher one?  The manipulation crowd is presumably in favor of multinational businesses which comprise the global economy.  It’s well known that higher commodity prices reflect a healthy outlook for big business due to the increased demand for raw materials and industrial inputs.  Gold being the strongest barometer for commodities demand, a falling gold price is more apt to reflect deflation, which is the bane and scourge of big business.  If anything, manipulators would have more interest in raising gold prices, not crashing them. 

Secondly, what interest could gold manipulators have in lowering gold prices when it automatically presumes a stronger dollar?  A stronger currency does no favors to the U.S. economy over the longer term.  It results in lower export prices for U.S. manufacturers and strains profit margins.  As the Wall Street Journal reported on April 24, the strong dollar has been “wreaking havoc” on the profit margins of American multinationals.  A stronger dollar forces multinationals to raise prices in order to offset currency issues, yet as WSJ pointed out, this only tends to depress profits due to lower sales. 

In fact if a gold conspiracy did exist, the only conceivable reason for knocking down prices would be for the sole purpose of allowing the manipulators to buy the gold back at bargain levels.  This in turn would allow them to profit from the inevitable bull market which always eventually follows a long-term bear market.  To this end, I can’t recall gold bugs discussing manipulation during the glory years between 2002 and 2011 when the gold price was rocketing to all-time highs.  Indeed, it would seem that cries of “manipulation!” are selectively applied to only those times when gold’s prospects have dwindled.

Finally, if the conspiracy theorists truly believe that the gold price is subject to manipulation then why do they advocate owning gold?  This is probably the biggest inconsistency of their hypothesis.  Why even touch gold if its price is subject entirely to the whims of an elite group of power brokers?  Could it be that the ringleaders of the conspiracy theorists haven’t bothered to smooth out this dissonance because so many of them have a vested interest in promoting gold coins? 

I’ve noticed over the years that many conspiracy theorists advocate owning gold; some of them even sell it as retailers, regardless of whether its price is rising or falling.  In fact, some of the most aggressive marketing efforts of gold bullion coins occur when the gold price is showing its greatest weakness.  It comes across as contradictory that the very people who declaim loudest against gold manipulation are also those who advise owning it even when its investment prospects are dim.  Could it be that there is just as much a conspiracy among gold coin retailers as there allegedly is among the alleged gold market manipulators?

Gold’s greatest attribute is that of a fear barometer.  When investors are concerned about the longer-term economic outlook they invariably turn to gold as a safe haven.  This was true in the 1970s when investors worried over the impact of runaway inflation; it was also evident in the previous decade when they had many concerns about war, terrorism and the global economy.  When investors are less fearful, however, gold loses its luster as safe havens are ignored in favor of riskier assets.  This, and not some well organized gold conspiracy, is why gold’s price has been declining since 2011.  

Clif Droke in TradersWorld Magazine

The July/August/September issue of TradersWorld magazine (#60) features an article by yours truly entitled “Measuring Stock Market Internal Strength.”  It’s available in print format or in PDF at the following web address:  http://tradersworld.com/60.pdf.  

Also contained in the latest issue is a review of my latest book, Mastering Moving Averages.  Special thanks to chief editor Larry Jacobs for the review.

Greece and China: heralding a new bear market?

What started out as typically sluggish summer week quickly morphed into an extremely eventful one.  In just the last five days we witnessed the intensification of the Greek debt roller coaster, the bursting of a mini-bubble in Chinese equities, a temporary shutdown of trading on the NYSE, and a brief but meaningful pullback in U.S. equities.  And to think the summer is still young!

Investors are clearly disquieted over the impact the overseas crises might have on the U.S. stock market.  But are they right to be concerned? 

Before we answer that question let’s take a closer look at the principles behind the latest round of global market turmoil.  Below is a chart showing the Shanghai Composite Index, which shows the primary trend of the Chinese stock market.  As we’ve talked about in the past, China’s stock market also can serve as a leading indicator for the S&P.  It goes without saying that China’s prospects carry an outsized impact on the global economy, including its primary trading partner. 

Coming to the rescue of the broad market this past week was the 200-day moving average, first for China’s Shanghai Composite Index and then for the S&P 500 Index (SPX).  Both indices finished the week above their lows and both made nominal gains for the week.  China’s stock market caught a much needed break as a powerful short-covering rally kicked off, giving the bulls an opportunity to regroup.  It’s worth mentioning that while China’s Shanghai index has relinquished much of its gains in the past month, it’s still up almost 80 percent in the past year.  By any historical measure this is extremely impressive.

As for the controversy surrounding Greece, the last few days have demonstrated the ability of negative news headlines to catalyze market moves when stock market internal momentum is declining.  Under any other technical condition the headline surprises of the past month would have been shrugged off by the broad market.  But with the NYSE internal momentum indicators (based on the new 52-week highs and lows) in steep decline, the path of least resistance for stocks was down.  

As long as the daily number of new 52-week lows on the NYSE remains well above 40 the stock market’s weakened internal condition will leave it vulnerable to negative headline surprises.  Despite this negative short-term variable, however, it’s a testament to the overall strength of the U.S. broad market that the major indices haven’t taken worse hits despite the bad overseas news lately.  I think we can chalk this up to the underrated impact of the Year Five Phenomenon.  This is another way of saying that the 10-year equity market cycle is in the ascent as are several of the other major long-term Kress cycles. 

With so many long-term cycles in the “up” phase, the bears are having a difficult time creating downside momentum for equity prices.  The Year Five Phenomenon should be even more favorable for the bulls beginning around the fourth quarter of 2015.  This is why the crises in Greece and China are unlikely to bring the bear out of hibernation for the U.S. anytime soon.

If the Greek debt drama in that country truly poses a serious threat to the global economy, however, it should be evident in the price of gold.  Gold as a barometer of investor fear is nonpareil; it responds whenever informed investors foresee situations which threaten global market stability. 

Instead of a concerned response among gold investors, what we find is that the yellow metal is singularly unconcerned with the recent goings on overseas.  As the ultimate fear gauge, gold’s failure to rally in the face of global market turmoil strongly suggests informed investors don’t foresee a global recession anytime soon.  I maintain that if gold isn’t unduly concerned with foreign market turbulence, neither should we be alarmed. 

While Greece’s economy remains in tatters, China’s economy is still quite strong.  The popping of the mini-bubble in Chinese equities is nothing if not a growing pain for the world’s manufacturing powerhouse.  Meanwhile in the U.S., the consumer is slowly beginning to flex his muscles after years of remaining dormant.  The state of the retail economy can be quickly gauged by looking at a composite stock price of the leading U.S. consumer retail, business service, and business transportation stocks.  This composite picture is encapsulated in the New Economy Index (NEI).

As the following picture shows, the U.S. retail economy is still in good shape, though it’s hardly growing by leaps and bounds.  The two trend lines in the NEI chart reflect the 12-week (red line) and 20-week (black line) moving averages.  As of July 10, NEI has equaled an 8-year high made earlier this year.

If you’ll indulge me, I’d like to offer some anecdotal evidence on the state of the economy in my neck of the woods.  Living as I do in a tourist-dominated regional economy along the North Carolina coast, I have the unique perspective of being able to observe the yearly changes in tourist spending patterns.  The first few years following the tumultuous housing crisis were understandably subdued.  Housing construction and real estate sales declined appreciably while the demand for summer housing rentals was also down for the next few years after 2008.

Gradually the real estate and tourism outlook in the coastal Carolinas began improving, though, and by 2013 it was clear that the region’s economy had turned a corner.  The summer of 2015 has been a stellar summer for the region’s tourism and the best one I’ve observed in some time. 

June and July have been record tourism months for many ocean communities along the North Carolina coast.  As someone has observed, this summer’s increase in shark attacks is a backhanded compliment to the success of the Chambers of Commerce in drawing people to the beach.  The pace of new home development has dramatically picked up this year, too, and appears to be accelerating.  The region’s economy is clearly on the upswing.

I mention this because what bodes well for Carolina coast real estate and tourism typically augurs well for East Coast real estate in the aggregate.  Considering that the West Coast has seen most of the improvement in the real estate market in recent years, it looks like the East is about to experience its own resurgence.  This in turn will further stimulate an economy in need of an extra boost. 

Should investors worry about Greece, China?

To briefly address the concern many investors are having, I don’t believe that either the Greek crisis or the collapse of China’s stock market will ultimately hurt the U.S. economy.  

As economist Scott Grannis pointed out in his informative blog post (“China stock crash: index up only 72% in the past year): “China is not collapsing, it’s learning how to deal with prosperity.”  He further cautioned investors that “ instead of worrying that the collapse of stock prices is going to trigger a collapse of the Chinese economy, I’d be thinking that what was a crazy-overvalued, bubble market just a few months ago is now coming back down to earth.”

As for Greece, if the debt drama in that country was truly posing a serious threat to the global economy it should be evident in the price of gold.  Instead, what we find is that gold is singularly unconcerned with the goings on overseas.  As the ultimate barometer of fear, gold’s failure to rally in the face of global market turmoil strongly suggests that informed investors don’t foresee a global recession anytime soon.  I maintain that if gold isn’t concerned, neither should we be unduly alarmed.