The price of gold is manipulated to protect the perceived strength of fiat currencies (US Dollar).
How is this done?
While a large portion of the world’s gold is held by private citizens in the form of jewelry, Central Banks also hold gold as an asset in their reserves.
My first question in understanding this topic around price manipulation was:
“If gold is being manipulated, who is behind it?”
Next question was Why?
I went through a lot of material, and this is what I found.
Central banks, which issue fiat currencies like the USD and the Euro, have a vested interest in suppressing the price of gold.
I’ll use the US Dollar as an example, but this applies to other major currencies.
People compare the value of a dollar to value of gold to measure the strength of the currency.
If you could buy an ounce of gold for $100 on day one, but it costs you $200 to buy an ounce of gold for on day two, you would conclude the the dollar is losing value.
Gold didn’t change, but the amount you could buy with a dollar changed.
As the US dollar value has been inflated due to increased money supply, and shortages in essential food and energy items, people get scared when they feel like the dollar is losing value.
When people get scared, it diminishes their confidence in the US Dollar, (which is not backed by any hard assets so faith and trust is important).
The US Central Bank wants people across the world to be confident that the US Dollar is a strong, stable currency.
How do they manipulate the price?
The central banks “lend” their gold to other commercial banks.
However, they don’t lend the actual gold, just a paper certificate that represents the gold. Similar to how poker chips represent money at a casino.
The banks take those paper certificates, Sell them for currency, and buy other yield bearing assets like bonds. After they make a profit from the bond, they sell the bond,
Take the money and buy back the gold paper certificate, And have a net profit from this borrowed gold.
The problem is that the same physical gold can be “lent” many times over, as the paper certificates don’t correlate with specific gold bars held in reserve.
So the paper certificate gold supply exceeds what actually exists in the vaults.
The banks can, when necessary, use those paper certificates to issue “naked shorts”
A short is a contract that basically bets the asset will go down in value.
Naked shorts are different than legal shorts because normally you take possession of the asset being shorted, or at least have proof the asset exists.
With a naked short, no such proof exists, which is why they are illegal.
The naked shorts are placed at a specific time in the futures market, which creates a cascade of selling,
(Some funds have pre-programmed instructions to sell if the price goes below a specific point – called stop losses)
Which further drives down the price because more gold is sold.
Net result is that gold does not appear to be a good store of value, so anyone worried about the value of the dollar, is less likely to use gold to protect their wealth.