Expected CB intervention in the gold market

Discussion in 'Commodity Futures' started by drsteph, Jan 5, 2006.

  1. Ok...

    Gold is getting hotter lately, but from previous experience, I'm a little concerned about CB intervention in the gold market.

    Right now, gold prices (about USD 525) are high enough to allow for producer profits, probably not enough for them to take lower yield mines out of mothballs, but enough to encourage production at a reasonable clip.

    However, the supply is being bought largely by middle east and chinese/indian individuals who regard it as a store of value, particularly against their own not too stable political environment.

    Of course, we're along for the ride. And now the goldbugs are gaining a bit more currency, if you will pardon the pun.

    The reality is, however, that the CB's have a vested interest in maintaining the purchasing primacy of fiat money, and still hold massive gold reserves, which could (and probably will) crush the market at some point.

    Why haven't they intervened yet? Well, I surmise that there may be some advantage to allowing the producers to produce some more to increase supply (which they will only do at prices above $480 ish). More importantly, consider who is buying & hoarding - there may be a perceived advantage to allowing them to buy at higher levels and then crashing the price back down towards 400, to diminish the value of the holdings by 25% and make that wealth simply evaporate! Finally, as gold goes negative, 'smart money' moves back into equities (rather than bonds) which inflates equities & earnings further.

    So, where and when? Frankly, I don't have a clue. I would guess that it will be after a major CB meeting (when is the next G7 or basel, etc...) and at a price target of $600 or higher. This is not based on any good information other than an educated guess.

    Any ideas?
  2. DrChaos


    I have an idea.

    Central banks won't care about gold.

    Why would they? What's the value to them?

    Unlike the rest of us, they can create money by pushing a button. Why would they really care about having more gold in the vault?

    In the future if they wanted more gold, they create money and buy it. Wham, they now have more gold.

    They do look at oil since oil prices have a direct effect on large scale economic behavior. Gold doesn't.

    They will look at their own statistics, exactly as they say they will. Bureaucracies are slow to change.
  3. plugger


    Two different but interesting viewpoints.

    Drsteph, maybe the genie is out of the bottle? Are central banks truly effective at controlling or manipulating any market in the longer term? I think of the currency markets where their intervention has short term effects but is essentially useless.

    Can they really keep the gold price down? Yes, but only through credible policy. Is Ben "dropping dollars from helicopters" Bernanke up to the job? I guess we'll see.
  4. Thank God they can't manipulate the price of oil!
  5. tomcole


    goldbugs have no clue and write some of the dumbest things I have ever read.

    Please provide us with details as to which CBs manipulate gold prices and which of their accounts reflect this activity. Or are CB financial statements simply fabrications?
  6. Here's a way to look at it

    The macro markets that central banks are commissioned to stabilize tend to either be in one of three states.

    The first state is stable which is ideal from a central banks perspective. Low volatility in currencies and interest rates allows people to invest in the "real economy" across global markets. This means building factories, houses and investing in new technologies.

    The second state is a benign cycle. This is were things going good makes things go better. That is loose money, a big labour pool, cheap energy and new technology come together to make a economy very hot. Greed induces people to invest in "paper assets " that are rapidly appreciating. People start to over pay for every thing planting the seeds for the last type of cycle.

    The third state is a viscous cycle. The is things going bad make things get worse. The worst case scenario is a forced liquidation of collateral as a result of declining asset prices. This creates a deflationary spiral were people are not motivated to invest in "real" or "paper" asset grinds capital markets and the economy to a standstill.

    The cycles are never as clear cut as that. With gold the question must be asked "Is the destabilization of the price and benign or viscous cycle?". It could be said the more Asian savings in gold gives more flexibility for changes in exchange rates. In this sense you could say it is benign. The thesis "The increase in Asian savings as a result of global trade imbalances has made more money available for the purchase of gold therefore driving up the price, this process both raises US interest rates (this bullishly effects the US dollar) and makes exchange rate adjustments less politically sensitive" seems valid in this light.

    What do think?
  7. tomcole


    I think the world has moved beyond economic theories to reality. There is no shortage of vultures who buy depreciating asetts and can hold them until the cycle turns up again.

    I think gold has turned up as its (1) an illiquid market, with few large players, allowing orders which would hardly cause a ripple in bonds, become tsunamis in the gold market and (2) the GLD ETF appears to act like a sponge, making the swings less wide. Yesterday they bot 20 tonnes of gold which on the way down.

    Lets see what their holding power is. DeBeers bot and bot until their banks wouldnt lend them anymore and the diamond market unravelled.
  8. Deflationary influences continue to be a concern in the global economy, but I think that the CB's job is to prevent that (as well it should - we have operated for 100 years on an inflationary paradigm, we all know how to deal with it, so why muck things up now when we can export our inflation productively to places that need it like Japan and Europe).

    The only thing is that the Asian savings glut is on 2 levels - 1) the consumer, who is buying gold to preserve the new found wealth that they have never had before (you might too in such a circumstance) and 2) the foreign governments who are buying US treasuries to finance the national debt but perversely keeping US long term rates inappropriately low and diminishing the risk premium. This is a problem for our own markets.

    According to your example, China is in the first stage, we are in the second stage, and Japan was in the third stage (perhaps finally re-entering the first stage).

    I'm not sure how the asian consumer hoarding gold or gold jewelry would improve exchange rate flexibility - its really a hedge against their own government breaking down. A massive divestment of US debt and sale of USD would depress the dollar temporarily and bring china's economic miracle to a shutdown, as the buyers of their foreign goods stopped and internal demand didn't exist (because those with any wealth had bought gold with it and weren't likely to buy expensive tschotsckes like us dumb westerners). Perhaps some divestment out of the dollar might be good for us all, come to think of it.

    Last I checked, deflation was bad for gold, too.

    I'm no student of the central banks, but it seems to me that TPTB have asked, pleaded, cajoled, and warned foreign governments about excessive bond purchases and yet the asian world refuses to listen. Therefore, they have simply thrown up their collective hands, said "OK, if you want to lose money its your business" and gone ahead and spent like no tomorrow, realizing that they will be pay back those debts for 75% or so on the dollar. I can understand no other rationale.

    So, I vote benign for us and not so benign for china.

    Although I am afraid I am somewhat off topic.

    & tomcole - I think that the gold ETF will probably only serve to add liquidity into the system, and may be responsible for a good portion of the run up in prices lately. We'll see how this pans out after January once people stop allocating their IRA's and first of the year buying.
  9. tomcole


    "...The only thing is that the Asian savings glut is on 2 levels - 1) the consumer, who is buying gold to preserve the new found wealth that they have never had before (you might too in such a circumstance) and 2) the foreign governments who are buying US treasuries to finance the national debt but perversely keeping US long term rates inappropriately low and diminishing the risk premium. This is a problem for our own markets..."

    I see that as a vote of no confidence by the people in their countries and by the countries own CB - if you see someone investing in your house and not his own, you have to wonder why.
  10. DrChaos


    The people in China have no choice in the matter: foreign investment is strongly regulated and difficult.

    As for the Japanese, 4% is better than 0.1%.
    #10     Jan 7, 2006