Shining downsides: the gold market and the accusation of manipulation – how much is there to the suspicion? | message
Raw materials in this article
How it went from the gold standard to the dollar standard
The role of gold for central banks at a glance
Manipulation in the gold market could be possible
Gold is probably the oldest means of value – emperors, states and other powers, without exception, have measured their own wealth in the course of history. In 1844, the Bank of England finally introduced the gold standard, creating a uniform basis for the first international monetary system. More and more central banks followed this concept over the course of the next few decades, until the system began to crumble at the time of the First World War and exactly a hundred years later a new world currency system was introduced: the US dollar replaced the precious metal as the main element. The US undertook to be able to exchange every note for gold – but this obligation was lifted in the 1970s.
As a sought-after commodity, gold continues to be of importance in terms of assets and has always been popular as a safe investment. In the current situation, this became clear once again: the gold price climbed to a new all-time high. But there are some phenomena in the gold market that create incentives for speculation around manipulation.
The gold and the central banks
Central banks around the world hoard large stocks of physical gold. The shiny yellow precious metal is stored as a currency reserve by central banks in order to create a financial reserve that can be converted into liquidity. The largest gold reserves are owned by the USA, followed by Germany and the International Monetary Fund IMF. Meanwhile, China and Russia are expanding their portfolios at record speed – some of the reasons given here are that the massive purchase is being made as a measure in view of “political and legal risks,” reports Gevestor.
Presumably as a result of the gold / dollar history, the US Federal Reserve has no great interest in seeing gold in competition with the dollar, which is ultimately established as the world currency, in view of the expanding market and rising prices. A few years ago, the head of GATA (Gold Anti-Trust Action Committee) made it clear: “Gold competes with other currencies. Gold is the ultimate currency. The central banks want to maintain their power.”
It seems as if large participants in the gold market have a considerable influence on the development of the gold price. In this regard, FOCUS Online quotes the precious metals expert at asset manager Incrementum Mark Valek: “Today’s economy is characterized by price interventions and manipulations. The central task of a central bank is, for example, to set the price for interest and – as we know today – down to an absolutely unnaturally negative level to press. ” An identical approach is therefore also conceivable for the gold price.
Conspicuous gold chart intensifies suspicion of manipulation
A real case involving the London gold fixing shows that it is possible to intervene in the gold market. At this conference the benchmark is set daily at 10:30 am and 3:00 pm London time by the five largest gold dealers. Unusual patterns had been observed several times at the afternoon prices, which ultimately led to incorrect settlement rates which also influenced gold-related securities – the signs of a vote prompted a review. Because of the systematic bias, some of the commercial banks involved were convicted in 2012; the case went down in history as the LIBOR scandal.
The online edition of the world quoted from the study Libor Manupilation? From Rosa Abrantes-Metz, professor at the Stern School of Business at New York University, and Albert Metz, Managing Director at Moody’s Investors Service: “The structure of the benchmark is certainly suitable for coordinated behavior and manipulation, and the empirical data is correct with artificially set prices. ”
However, over the years there have been several unusual price movements in the gold price. For example, on October 1, 2013 – initially there was a lot of buying, the price of gold rose. But within a few minutes, the exchange rate dropped by $ 40. In 2016, too, such a sharp bend around 60 US dollars can be seen in percentage terms, which was accompanied by the statements of the major central banks. A look at the historical chart raises questions, because at these times the question about gold was actually high.
Gold price manipulation as a banking business?
The drop in gold prices also took place during extended trading hours. For manipulating the courses, comparatively little effort was necessary, according to an article on FOCUS Online. A downwardly provoked price movement can be a profitable business for banks. Similar to short sellers, they can bring a gold loan onto the market at the even higher prices and buy it back at the later lower prices.
Intervention in the gold market is not only possible, but also has a lucrative streak. But there are more reasons for it: GATA said that the Western governments and central banks were pursuing a common gold policy to counteract a loss of confidence in investors’ government bonds. Because high gold prices could make this worse. Such agreements have apparently already been confirmed by a US court, according to FOCUS Online.
Gold price benefits from weak dollar and uncertainty
Still at a much higher level, but below 2,000 US dollars per troy ounce, the gold price is currently benefiting primarily from this year’s uncertainties about the wake of the pandemic. In times of crisis, gold is seen as a safe haven to protect assets from excessive losses. In addition, interest rates are at a record low. One of the few disadvantages that a gold investment usually entails, namely that it does not generate any income through interest or dividends, does not apply to this background.
At the same time, the weak dollar acts as a support for the price of the precious metal. Traditionally, the shiny yellow raw material is traded via the greenback. If the dollar rate falls, the demand for gold outside the dollar area increases.
Since the beginning of the year, the gold price has gained around 30 percent (as of August 31, 2020). Whether this is a thorn in the side of the currency authorities and ultimately tempts them to intervene in the gold market will depend on the further performance of the precious metal in demand. It is clear that trading in the popular raw material, due to its position, like so many other things, also has its downsides.
Finanzen.net editorial team
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