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Using Gold to Protect Yourself In Advance of the Greatest Wealth Transfer of Our Lifetime

by Chris Martenson
Friday, April 4, 2014

Executive Summary

  • The case for gold's manipulated price, and how that can be used to work to your advantage
  • Calculating the "floor" beneath which gold will likely not fall
  • The coming Great Wealth Transfer, which almost certainly will occur in our lifetime
  • How much to invest in gold
  • How to invest in gold
  • Exit strategies: when will it make sense to sell your holdings? And what should you exchange them for?

The Screaming Fundamentals For Owning Gold

Updated 2014 edition

This report lays out the investment thesis for gold. Silver is mentioned only where necessary, as a separate report of equal scope will be forthcoming on that topic. Various factors lead me to conclude that gold is one investment that you can park for the next ten or twenty years, confident that it will perform well. Timing and logic for both entering and finally exiting gold as an investment are laid out in the full report.

The punch line is this: Gold (and silver) is not in bubble territory, and its largest gains remain yet to be realized; especially if current monetary, fiscal, and fundamental supply-and-demand trends remain in play.

Introduction

In 2001, as the painful end of the long stock bull market finally seeped into my consciousness, I began to grow quite concerned about my traditional stock and bond holdings. Other than a house with 27 years left on a 30 year mortgage, these paper holdings represented 100% of my investing portfolio. So I dug into the economic data to discover what the future likely held. What I found shocked me. It's all in the Crash Course, in both video and book form, so I won't go into that data here; but a key takeaway is that the US is spending far more than it is earning, and supporting that gap by printing a whole lot of new money.

By 2002, I had investigated enough about our monetary, economic, and political systems that I came to the conclusion that holding gold and silver would be a very good idea. So I poured 50% of my liquid net worth into precious metals, and sat back and waited.

So far so good.  But the best is yet to come... unfortunately.  I say 'unfortunately' because the forces that are going to drive gold higher in current dollar terms are the very same trends that are going to leave most people, and the planet, much worse off than they are now.

Part 1: Why Own Gold?

The reasons to hold gold (and silver), and I mean physical bullion, are pretty straightforward. So let’s begin with the primary ones:

  1. To protect against monetary recklessness
  2. As insulation against fiscal foolishness
  3. As insurance against the possibility of a major calamity in the banking/financial system
  4. For the embedded 'option value' that will pay out handsomely if gold is re-monetized

Monetary Risk

By ‘monetary recklessness,’ I mean the creation of money out of thin air and the application of more liquidity than the productive economy actually needs. The central banks of the world have been doing this for decades, not just since the onset of the 2008 financial crisis. In gold terms, the supply of above-ground gold is growing at  1.7 % per year, while the money supply has been growing at more than three times that yearly rate since 1960:

Over time, that more than 5% growth differential has created an enormous gap due to the exponential 'miracle' of compounding.

Now this is admittedly an unfair view, because the economy has been growing, too. But money and credit growth has still handily outpaced the growth of our artificially and upwardly-distorted GDP measurements by a wide margin.  Even as the economy stagnates under this too-large debt load, the credit system continues to expand as if perpetual growth were possible.  Given this dynamic, we continue to expect all the resulting extra dollars, debts and other assorted claims on real wealth to eventually show up in prices of goods and services.

And since we live in a system where money is loaned into existence, we also have to look at the growth in credit, as well.  Since 1970 the US has been compounding its total credit market debts at the astounding rate of nearly 8% per annum:

This desperate drive for continuous compounding growth in money and credit is a principal piece of evidence that convinces me that hard assets, of which gold is perhaps the star representative for the average person, are the place to be for a sizeable portion of your stored wealth.

Negative Real Interest Rates

Real interest rates are deeply negative (meaning that the rate of inflation is higher than Treasury bond yields). This is a forced, manipulated outcome courtesy of central banks that are buying bonds with thin-air money. Of course, the true rate of inflation is much higher than the officially reported statistics by at least a full percent or possibly two, and so I consider bond yields to be far more negative than your typical observer.  Historically, periods of negative real interest rates are nearly always associated with outsized returns for commodities, especially precious metals. If and when real interest rates turn positive, I will reconsider my holdings in gold and silver, but not until then. That's as close to an absolute requirement as I have in this business.

Dangerous Policies

Monetary policies across the developed world remain as accommodating as they’ve ever been. Even Greenspan's 1% blow-out special in 2003 was not as steeply negative in real terms as what Bernanke engineered over his more recent tenure. But it is the highly aggressive and ‘alternative’ use of the Federal Reserve balance sheet to prop up insolvent banks and to sop up extra Treasury debt that really has me worried. There seems to be no way to end these ever-expanding programs, and they seem to have become a permanent feature of the economic and financial landscape.  In Europe, the equivalent is the sovereign debt now found on the European Central Bank (ECB) balance sheet.  In Japan we have prime minister Abe's ultra-aggressive policy of doubling the monetary base in just two years.  Suffice it to say that such grand experiments have never been tried before, and anyone that has the vast bulk of their wealth tied up in financial assets is making an explicit bet that these experiments will go exactly as planned.

Chronic Deficits

Federal fiscal deficits are seemingly out of control and are now stuck in the $1 trillion range. Massive deficit spending has always been inflationary, and inflation is usually gold/silver friendly. Although not always, mind you, as the correlation is not strong, especially during mild inflation (less than 5%). Note, for example, that gold fell from its high in 1980 all the way to its low in 1998, an 18 year period with plenty of mild inflation along the way. Sooner or later I expect extraordinary budget deficits to translate into extraordinary inflation.

Banking System Risk

Reason #3, insurance against a major calamity in the banking system, is an important part of my rationale for holding gold.

And let me clear: I’m not referring to “paper" gold, which includes the various tradable vehicles (like the "GLD" ETF) that you can buy like stocks through your broker. I’m talking about physical gold and silver because of their unusual ability to sit outside of the banking/monetary system and act as monetary assets.

Literally everything else financial, including our paper US money, is simultaneously somebody else’s liability. But gold and silver bullion are not. They are simply, boringly, just assets. This is a highly desirable characteristic that is not easily replicated.

Should the banking system suffer a systemic breakdown, to which I ascribe a reasonably high probability of greater than 1-in-3 over the next 5 years, I expect banks to close for some period of time. Whether it's two weeks or six months is unimportant; no matter the length of time, I'd prefer to be holding gold than bank deposits.

During a banking holiday, your money will be frozen and left just sitting there, even as everything priced in money (especially imported items) rocket up in price. By the time your money is again available to you, you may find that a large portion of it has been looted by the effects of a collapsing currency. How do you avoid this? Easy; keep some ‘money’ out of the system to spend during an emergency. I always advocate three months of living expenses in cash, but you owe it to yourself to have gold and silver in your possession as well.

The test run for such a bank holiday was recently tried out in Cyprus where people woke up one day and discovered that their bank accounts were frozen. Those with large deposits had a very material percentage of those funds seized so that the bank's more senior creditors, the bondholders, could avoid the losses they were due.

Most people, at least those paying attention, learned two things from Cyprus:

  1. In a time of crisis those in power will do whatever it takes to assure that the losses are spread across the population rather than taken by the relatively few institutions and individuals that should take the losses.
  2. If you make a deposit with a bank, you are actually an unsecured creditor of that institution; which means you are legally last in line for repayment should that institution fail.

Re-monetization Potential

The final reason for holding gold, because it may be remonetized, is actually a very big draw for me. While the probability of this coming to pass may be low, the rewards would be very high for those holding gold should it occur.

Here are some numbers:  The total amount of 'official gold,' or that held by central banks around the world, is 31,320 tonnes, or 1.01 billion troy ounces. In 2013 the total amount of money stock in the world was roughly $55 trillion.

If the world wanted 100% gold backing of all existing money, then the implied price for an ounce of gold is ($55T/1.01BOz) = $54,455 per troy ounce.

Clearly that's a silly number (or is it?). But even a 10% partial backing of money yields $5,400 per ounce. The point here is not to bandy about outlandish numbers, but merely to point out that unless a great deal of the world's money stock is destroyed somehow, or a lot more official gold is bought from the market and placed into official hands, backing even a small fraction of the world's money supply by gold will result in a far higher number than today's ~$1,300/oz.

The Difference Between Silver and Gold

Often people ask me if I hold goldandsilver as if it were one word. I do own both, but for almost entirely different reasons.

Gold, to me, is a monetary substance. It has money-like qualities and it has been used as money by diverse cultures throughout history. I expect that to continue.

There is a slight chance that gold will be re-monetized on the international stage due to a failure of the current all-fiat regime. If or when the fiat regime fails, there will have to be some form of replacement, and the only one that we know works for sure is a gold standard. Therefore, a renewed gold standard has the best chance of being the ‘new’ system selected during the next bout of difficulties.

So gold is money.

Silver is an industrial metal with a host of enviable and irreplaceable attributes. It is the most conductive element on the periodic table, and therefore it is widely used in the electronics industry. It is used to plate critical bearings in jet engines and as an antimicrobial additive to everything from wall paints to clothing fibers. In nearly all of these uses, plus a thousand others, it is used in vanishingly-small quantities that are hardly worth recovering at the end of the product life cycle -- so they often aren't.

Because of this dispersion effect, above-ground silver is actually quite a bit less abundant than you might suspect. When silver was used primarily for monetary and ornamentation purposes, the amount of above-ground, refined silver grew with every passing year. After industrial uses cropped up, that trend reversed, and today it's thought that roughly half of all the silver ever mined in human history has been irretrievably dispersed.  

Because of this consumption dynamic, it's entirely possible that over the next twenty years not one single net new ounce of above ground silver will be added to inventories, while in contrast, a few billion ounces of gold will be added.

I hold gold as a monetary metal. I own silver because of its residual monetary qualities, but more importantly because I believe it will continue to be in demand for industrial uses for a very long time, and it will become a scarce and rare item.

NOTE: PeakProsperity.com reserves its deeper analysis for our enrolled members, which is usually contained in Part 2 of our reports. Given the importance and widespread interest in this particular topic, we are exercising the rare exception to make Part 2 (below) available to the public.

Part 2: Supply & Demand Are Shockingly Out Of Balance

Gold Demand

Gold demand has gone up from 3,200 tonnes in 2003 to 4,400 tonnes in 2013, and that's even with a massive 800 tonnes being disgorged from the GLD tracking fund over 2013 (purple circle, below):

(Source)

Note the dotted red line in this chart: it shows the current level of mine production. World demand has been higher than mine production for a number of years.  Where has the additional supply come from to meet demand?  We'll get to that soon, but the quick answer is: it had to come from somewhere, and that place was 'the West.'

A really big story in play here is the truly historic and massive flows of gold from the West to the East, with China being the largest driver of those gold flows.

China

Alasdair McLeod of GoldMoney.com has assembled the public figures on China's cumulative gold demand which, notably, do not include whatever the People's Bank of China may have bought. Those are presumably additive to these figures unless we are to believe that the PBoC now purchases its gold over the counter and in full view (which they almost certainly do not).

Using publicly available statistics only, it's possible to calculate that in 2013 China alone accounted for more than 2,600 tonnes of demand, or more than 60% of total demand or, as we'll soon see, almost all of the world's total gold mine production:

(Source)

Of course China has a lot of money to spend, a long and comfortable relationship with gold as a legitimate asset to hold, and has to be very pleased by the repeated bear raids in the western markets that drive the price of gold down, even as gold demand has surged to record highs as a consequence of these lower prices.

Of course the big risk in all that Chinese demand for gold is that China may stop buying that much gold in the future for a variety of reasons.

One could be that the Chinese bubble economy finally bursts and people there no longer feel wealthy and so they stop buying gold.

Another could be that the Chinese government reverses course and makes future gold purchases illegal for some reason.  Perhaps they are experiencing too much capital flight, or they want to limit imports of what they consider non-essential items.

Who knows?

I do know that Chinese demand has been simply incredible and, keeping all things equal, I expect that to continue, if not increase.

India

India, long a steady and traditional buyer of gold, saw so much buying activity as a consequence of the lower gold prices that the government had to impose controls on the amount of gold imported into the country, even banning imports for a while:

(Source)

Central Banks

Another factor driving demand has been the reemergence of central banks as net acquirers of gold. This is actually a pretty big deal. Over the past few decades, central banks have been actively reducing their gold holdings, preferring paper assets over the 'barbarous relic.' Famously, Canada and Switzerland vastly reduced their official gold holdings during this period (to effectively zero in the case of Canada), a decision that many citizens of those countries have openly and actively questioned.

The UK-based World Gold Council is the primary firm that aggregates and reports on gold supply-and-demand statistics. Here's their most recent data on official (i.e., central bank) gold holdings:

(Source)

Note that the 2009 data is lowered by slightly more than 450 tonnes in this chart to remove the one-time announcement by China that it had secretly acquired 454 tonnes over the prior six years, so this data may differ from other representations you might see. I thought it best to remove that blip from the data. Also, the data for 2012 and 2013 must also be lacking official China data because the last time they announced an increase in their official gold holdings was in 2009. 

In just 2013 alone, the gap between China's apparent and reported gold consumption was over 500 tonnes and the Chinese central bank, for a variety of reasons, is the most likely candidate to have absorbed such a quantity. If true, then China alone increased its official reserves by more than the rest of the world combined in 2013.

The World Gold Council puts out what is considered by many to be the definitive source of gold statistics, which are the source data for the above chart. I do not consider the WGC to be definitive since their statistics do not comport well with other well reported data, but let's first take a look at what the WGC had to say about gold demand in 2013:

(Source)

The big story there, obviously is that investment demand absolutely cratered even as jewelry and coins and bars rose to new heights. And nearly all of that investment drop was driven by flows out of the GLD investment vehicle. That is, gold was chased out of the weak hands of mainly western investors and into the strong hands of Asian buyers who wanted physical bullion and jewelry.

This huge drop in total demand, led by plummeting investment demand, fits quite well with the 15% price drop recorded in 2013. So the WGC tells a nice coherent story so far.

But the problem with this tidy story is that it simply does not fit with the above data about China's voracious appetite for gold, let along India's steady demand and rising demand in Europe, the Middle East, Turkey, Vietnam or Russia.

The summary of the fundamental analysis of gold demand is

  • there is a huge and pronounced flow of gold from the West to the East
  • there is rising demand from all quarters except for the hot money GLD investment vehicle (which I have never been a fan of)
  • all of this demand has handily outstripped mine supply which means that someone's vaults are being emptied (the West's) as someone else's are rapidly filling (the East's)

Now about that supply...

Gold - Supply

Not surprisingly, the high prices for gold and silver in 2010 and 2011 stimulated quite a bit of exploration and new mine production. Conversely, the bear market from 2012 to 2014 has done the opposite.

However, the odd part of the story for those with a pure economic view is that with more than a decade of steadily rising prices, there has been relatively little incremental new mine production.  For those of us with an understanding of depletion it's not surprising at all.

In 2011 the analytical firm Standard Chartered calculated  a rather subdued 3.6% rate of gold production growth over the next five years based on lowered ore grades and very high cash operating costs:

Most market commentary on gold centres on the direction of US dollar movements or inflation/deflation issues – we go beyond this to examine future mine supply, which we regard as an equally important driver. In our study of 375 global gold mines and projects, we note that after 10 years of a bull market, the gold mining industry has done little to bring on new supply. Our base-case scenario puts gold production growth at only 3.6% CAGR over the next five years.

(Source - Standard Chartered)

Since then, the trends for lower ore grade and higher costs have only gotten worse. But the huge drop in the price of gold in 2011 and 2012 was the final nail in the coffin and resulted in the slashing of CAPEX investment by gold mining companies.

Of course, none of this is actually surprising to anyone who understands where we are in the depletion cycle, but it's probably quite a shock to many an economist. The quoted report goes on to calculate that existing projects just coming on-line need an average gold price of $1,400 to justify the capital costs, while green field, or brand-new, projects require a gold price of $2,000 an ounce.

This enormous increase in required gold prices to justify the investment is precisely the same dynamic that we are seeing with every other depleting resource: energy costs run smack-dab into declining ore yields to produce an exponential increase in operating costs. And it's not as simple as the fuel that goes into the Caterpillar D-9s; it's the embodied energy in the steel and all the other energy-intensive mining components all along the entire supply chain.

Just as is the case with oil shales that always seem to need an oil price $10 higher than the current price to break even, the law of receding horizons (where rising input costs constantly place a resource just out of economic reach) will prevent many an interesting, but dilute, gold ore body from being developed. Given declining net energy, that's that same as "forever" as far as I'm concerned.

Just like any resource, before you can produce it you have to find it. Therefore the relationship between gold discoveries and future output is a simple one; the more you have discovered in the past, the more you can expect to produce in the future, all things being equal. 

This next chart should tell you everything you need to know about where we are in the depletion cycle for gold, as even with the steadily rising prices between 1999 and 2011 (going from $300 and ounce to $1,900), gold discoveries plummeted in 1999 and remained on the floor thereafter:

(Source)

Here we see that the 1990's decade saw quite a number of large discoveries that are currently in production but which were not matched in later years. Since it takes roughly ten years to bring a mine into full production following discovery, it's fair to say that we are currently enjoying production from the discoveries of the 1990's. Future gold production will largely be shaped by the discoveries made since then.

In other words: expect less gold production in the future.

Meanwhile, there will be more money, more credit, and more people (especially in the East) competing for that diminished supply of gold going forward.

Let's take another angle on gold supply, but which circles back and supports the above chart showing fewer and smaller discoveries in recent years.

The United States Geological Survey, or USGS, keeps a mountain of data on literally every important mined substance. I think it's staffed by credible people, doing good work, and I've yet to detect political influence in their reported statistics.

At any rate, the latest assessment on gold reveals that their best guess for world supply is that something on the order of 52,000 tonnes of reserves are left. Which means that, at the 2012 mining rate of 2,700 tonnes, there are 19 years of reserves left:

(Source)

This doesn't mean that in 19 years there will be no more new gold to be had, as reserves are always a function of price; but it gives us a sense of what's out there right now at current prices.

As much as I like the folks at the USGS, I will point out one glaring discrepancy in their data as a means of exposing why I think these reserves, like those for many other critical things like oil, are probably overstated.  And that story begins with South Africa (highlighted in the table above with the blue dotted line.)

There you'll note that, at 6,000 tonnes, South Africa has the largest stated reserves of any one country. However, according to official South African data, they claim to have an astonishing 36,000 tonnes of reserves.  Which is right? 

Neither as it turns out.

First, the true story of South African gold production is completely obvious from the production data. It's a story of being well and truly past the peak of production:

(Source)

And not just a little bit past peak, but 44 years past; down a bit more than 80% from the peak in 1970.  The above chart is simply not even slightly in alignment with the claims of the South African government to have 36,000 tonnes of reserves. But pity the poor South African government which knows that gold exports represent fully one third of all their exports. Of course they will want to claim massive reserves that will support many future years of robust exports.

Instead, the South African production data can be modeled by the same methods as any other depleting resource and one such analysis has been done and arrived at the conclusion that there are around 2,900 tonnes left to be mined in South Africa.

(Source)

The analysis is quite sound; and the authors went on to point out that the social, economic, energy, and environmental costs of extracting those last 2,900 tonnes are quite probably higher than the current market value of those same tonnes. If they are extracted, South Africa will be net poorer for those efforts. This is the same losing proposition as if it took more than one barrel of oil to get a barrel of oil out of the ground - the activity is a loss and should not be undertaken.

For lots of political and economic reasons, however, gold mining will continue in South Africa. But, realistically, someone in government there should be thinking this through quite carefully.

The larger story wrapped into the South African example is this: perhaps there are 19 years of global gold reserves left (at current rates of production), but I doubt it.

Instead, the story of future gold production will be one of declining production at ever higher extraction costs -- exacerbated by the 80,000,000 new people who swell the planet's population every twelve months, the hundreds of millions of people in the East who enter the ranks of the middle class annually, and trillions of new monetary claims that are forced into the system each year.

And this brings me to my final point of this part of the public part of this report.

Scarcity

If we cast our minds forward ten years and think about a world with oil costing 2x to maybe 4x more than today, we have to ask ourselves some important questions:

  • How many of our currently-operating gold and silver mines, or the base metal mines from which gold and silver are by-products, will still be in operation then?
  • How many will simply shut down because their energy costs will have exceeded their marginal economic benefits?

After just 100 years of modern, machine-powered mining, all of the great ore bodies are gone, most of the good ones are already in operation, and only the poorest ones are left.

By the time you are reading stories like this next one, you should be thinking, Why are we going to all that trouble unless that's the best option left?

South African Miners Dig Deeper to Extend Gold Veins' Life Spans

Feb 17, 2011

JOHANNESBURG—With few new gold strikes around the world that can be turned into profitable mines, South Africa's gold miners are planning to dig deeper than ever before to get access to rich veins.

The plans raise questions about how to safely and profitably mine several miles below the surface. Success would mean overcoming problems such as possible rock falls, flooding and ventilation challenges and designing technology to overcome the threats.

Mark Cutifani, chief executive officer of AngloGold Ashanti Ltd., has a picture in his office of himself at one of the deepest points in Africa, roughly 4,000 meters, or 13,200 feet, down in the company's Mponeng mine south of Johannesburg. Mr. Cutifani sees no reason why Mponeng, already the deepest mining complex in the world, shouldn't in time operate an additional 3,000-plus feet deeper.

"The most critical challenges for all of us in South Africa are depths and depletion of reserves," Mr. Cutifani said in an interview.

The above article is just a different version of the story that led to the Deepwater Horizon incident. Greater risks and engineering challenges are being met by hardworking people going to ever greater lengths to overcome the lack of high quality reserves to go after.

By the time efforts this exceptional are being expended to scrape a little deeper, after ever smaller and more dilute deposits, it tells the alert observer everything they need to know about where we are in the depletion cycle, which is, we are closer to the end than the beginning.  Perhaps there are a few decades left, but we're not far off from the day where it will take far more energy to get new metals out of the ground compared to scavenging those already above ground in refined form.

At that point we won't be getting any more of them out of the ground, and we'll have to figure out how to divvy up the ones we have on the surface.  This is such a new concept for humanity -- the idea of actual physical limits -- that only very few have incorporated this thinking into their actions.  Most still trade and invest as is the future will always be larger and more plentiful, but the data no longer supports that view. 

We are at a point in history where we can easily look forward and make the case for declining per-capita production of numerous important elements just on the basis of constantly falling ore grades. Gold and silver fit into that category rather handily. Depletion of reserves is a very real dynamic. It is not one that future generations will have to worry about; it is one with which people alive today will have to come to terms.

The issue of Peak Cheap Oil only exacerbates the reserve depletion dynamic by adding steadily rising energy input costs to mix. Should oil get to the point of actual scarcity, where we have to ration by something other than price, then we must ask where operating marginal mines slot onto the priority list. Not very highly, would be my guess.

Part 3: Protecting Your Wealth With Gold

For all the reasons above, it's only prudent to consider gold an essential element of a sound investment portfolio.

In Part 3: Using Gold to Protect Yourself In Advance of the Greatest Wealth Transfer of Our Lifetime we detail out the specifics of how much of your net worth to consider investing in gold, in what forms to hold it, which price targets are gold and silver most likely to reach, and which eventual indicators (likely years away) to look for that will signal that it's time to sell out of your precious metal investments.

The battle to keep gold's price in check is truly one for the ages. Not because gold deserves such treatment, but because the alternative is for the world's central planners to admit that they've poorly managed an ill-designed monetary system of their own creation. As a result, price manipulation is an additional important factor to be aware of, and to address in your accumulation strategy.

Make sure you're taking steps today to ensure that the purchasing power of your wealth is protected, if not enhanced, when the trends identified above arrive in full force.


Using Gold to Protect Yourself In Advance of the Greatest Wealth Transfer of Our Lifetime

A how-to guide

Market Manipulation

Before we can address the idea of storing some of your wealth in gold (and/or silver) we have to visit the topic of market manipulation. As many of you are aware this is an area of exceptional controversy, although I am not entirely sure why given the distressing laundry list of recently proven, and often grotesquely brazen, market manipulations performed by big banks in many other market areas.

Big banks have been proven or alleged to have manipulated energy markets, LIBOR, currency markets, the global oil market, and aluminum, among other things and all of these transgressions happened after they got caught engaging in forgery and fraud during the mortgage swindles of 2005 to 2007.

On one side of the manipulation debate, we might place the Gold Anti-Trust Action (GATA) organization alleging constant official manipulation to suppress the price of both gold and silver, and on the other we might place Jeff Christian, managing director of the metals research firm CPM, whose position is that all price movements can be explained by ordinary market forces.

I happen to be somewhere in between those views as I think both legitimate and illegitimate forces are part of the landscape. But I am heavily tilted towards market manipulation as the explanation for why gold (and silver) tend to move downwards violently from time to time and why the prices for each are not higher than they currently are.

The SEC has a clear definition of market manipulation and I’ve reproduced it here but swapped out the words ‘security’ and ‘stock’ with ‘gold’ to make it that much clearer:

Manipulation

Manipulation is intentional conduct designed to deceive investors by controlling or artificially affecting the market for gold. Manipulation can involve a number of techniques to affect the supply of, or demand for, gold. They include: spreading false or misleading information about gold; improperly limiting [or expanding] the supply of gold; or rigging quotes, prices or trades to create a false or deceptive picture of the demand for gold. Those who engage in manipulation are subject to various civil and criminal sanctions.

(Source)

I also added the two words "or expanding" because that condition also applies to commodities. 

How likely is it that some firms have been trading in gold in such a way as to create a false, rigged, or deceptive picture of gold (and silver) prices?  It’s all but proven in a court of law, but don't hold your breath waiting for that final proof, as the US court system has vigorously defended banks from such lawsuits for decades. 

I also happen to believe that gold is officially suppressed in price because it's what I would do if I were at the helm of the Fed and cared only for bolstering confidence in the dollar specifically, and fiat currencies generally, making the stock market a more attractive alternative, and also lending credence to political and monetary decisions (for the record, I am merely placing myself in the mind of the enemy here). Given that set of mandates, I would order up some hefty gold suppression because gold has a very bad habit of casting a bright light on rotten monetary and fiscal policy. 

Suppressing the price of gold just makes so much sense that I would consider it a form of derelict strategic weakness if the Fed et al. were not doing it.

One of the more important times to suppress the price of gold would be when the Fed's FOMC meets and announces its thinking and decisions to the world.  That's when I think they would most want gold to signal investor's faith in their decisions and statements, which it a falling gold price would signal. 

It's here that we find strong circumstantial evidence that this has been happening.  

This chart below shows that the cumulative losses for gold during each of the 7 weeks in 2013 when the FOMC meetings took place added up to a whopping loss of -$266, and a full -$331 if we include the week before the Sept meeting. 

(Source)

Gold lost a lot of ground during each and every one of the seven FOMC meeting windows in 2013.  No exceptions.  The statistical odds of this being random are quite low.

To be clear, I think the Fed's larger aims of propping the stock market and creating confidence in the dollar are badly misplaced and so I don’t endorse such behaviors and nor do I endorse the practice of gold manipulation (or any central planning efforts at creating specific asset prices), I simply can understand it given their assumed mandates and given their interventionist mindset, however defective those may be.

Recently European regulators have dug into one fairly persistent but annoying and obvious form of gold price manipulation which involved the daily London gold ‘price fix’:

Gold Fix Study Shows Signs of Decade of Bank Manipulation

Feb 24, 2014

The London gold fix, the benchmark used by miners, jewelers and central banks to value the metal, may have been manipulated for a decade by the banks setting it, researchers say.

Unusual trading patterns around 3 p.m. in London, when the so-called afternoon fix is set on a private conference call between five of the biggest gold dealers, are a sign of collusive behavior and should be investigated, New York University’s Stern School of Business Professor Rosa Abrantes-Metz and Albert Metz, a managing director at Moody’s Investors Service, wrote in a draft research paper.

 “The structure of the benchmark is certainly conducive to collusion and manipulation, and the empirical data are consistent with price artificiality,” they say in the report, which hasn’t yet been submitted for publication. “It is likely that co-operation between participants may be occurring.”

The paper is the first to raise the possibility that the five banks overseeing the century-old rate -- Barclays Plc, Deutsche Bank AG (DBK), Bank of Nova Scotia (BNS), HSBC Holdings Plc (HSBA) and Societe Generale SA (GLE) -- may have been actively working together to manipulate the benchmark. It also adds to pressure on the firms to overhaul the way the rate is calculated. Authorities around the world, already investigating the manipulation of benchmarks from interest rates to foreign exchange, are examining the $20 trillion gold market for signs of wrongdoing.

Large price moves during the afternoon call were also overwhelmingly in the same direction: down. On days when the authors identified large price moves during the fix, they were downwards at least two-thirds of the time in six different years between 2004 and 2013. In 2010, large moves during the fix were negative 92 percent of the time, the authors found.

(Source)

The data is really quite clear and demands an inquiry.  The data says there are overt signs of manipulation, that the manipulation started in 2004, that 92% of all large moves were in the down direction in 2010 and 66% of the time over the entire nine year period between 2004 and 2013, and that there’s no obvious explanation for why this might be, especially during a bull market.  

Of course, the explanation is very easy – the banks were making money at it.  And they were not investigated because this was the right direction as far as the western central banks and governmental regulators were concerned.  Trust me, if the banks had been manipulating the price of gold to ever higher numbers they could not possibly have done it for so long without being properly investigated.  

Perhaps we’ll find out more because now there are lawsuits against the manipulators and if they manage to go all the way through the discovery process, much could be revealed:

Hedge fund sues five banks over gold ‘manipulation’

Mar 11, 2014

Barclays, HSBC, Société Générale, Deutsche Bank and Bank of Nova Scotia are being sued by US hedge fund AIS Capital over allegations that the banks manipulated the gold price.

A Washington-based law firm has filed a class-action lawsuit on behalf of AIS Capital Management against the five banks on Monday.

The lawsuit alleges that the banks “conspired or agreed with one another to restrain trade through collusively manipulating prices of gold and gold derivatives contracts”.

“Defendants engaged in this conspiracy for the purposes of profiting from this manipulation, both individually and collectively,” the legal filings stated, adding that gold investors “suffered substantial financial losses” as a result of the allegations.

(Source)

The manipulation of the London gold fix could not have been more obvious or easily detected and yet it went unhindered for decades, only noted by traders and other parties interested in the price of gold.

Sadly, this is not even the largest and most obvious of price manipulation behaviors we see in the gold market, but it’s the first to get officially investigated.  The investigation did not begin in the US, of course.

For quite undeserved reasons, the US market is still perceived by many as being the largest, freest and safest in the world.  Well, it may be the largest, but it increasingly fails on the other two points; and the utter lack of regulatory oversight of and penalties for obvious criminal actions is really quite striking.

But such manipulations are not limited to gold and silver.  Such shenanigans are seen routinely in all sorts of markets and virtually none of them get investigated, at least by US authorities.

Even though gold manipulation exists, there's only so long that official and/or unofficial intervention can hold back the tide. This puts me in the camp with Erik Sprott of Sprott Asset Management, who told me in an interview:

"We have seen it all along in gold. I mean, I cannot tell you how many raids we have seen from the gold price over the last eleven years; they occur with great regularity, but ultimately they fail. And again I refer to James Turk, and he describes the gold prices as a measured retreat by the central banks and the bullion shortage. They just know that there is a shortage of physical gold."

"A measured retreat" is the perfect analogy to describe how I see gold and silver's prices at this time. Neither really under official control, nor entirely free. My best guess is that the price manipulation is being done by certain bullion banks operating in both the US and London markets for their own monetary benefit, and the official support comes in the form of regulatory officials studiously looking the other way while these suppressive activities are carried out because driving down the price of gold is part of the official plan.

The complete failure of the CFTC to seriously investigate the silver raids of 2008 and the more recent ones in 2011 and 2012 are prime examples of situations where solid, official inquiries were clearly warranted. The 2011 raid was as obvious and worthy of investigation as any I've ever seen. Begun in the ridiculously thin Sunday night markets during a weekend when China's trading was closed, silver was taken down by 20% on a relatively tiny amount of volume. The next morning, those new prices largely stuck in the major markets. An analogy would be if cattle prices fell by 20% in Hawaii one night, and the next morning all of Oklahoma woke up to find that their cattle was suddenly worth 20% less. It really just makes no sense from a market perspective, was an obvious fraud apparent to those paying attention, and yet it remains completely unquestioned and unexamined by the authorities.

Such shenanigans are now routinely part of all sorts of markets besides silver and gold, so I see these games as merely threads in a larger tapestry of fraud and deceit that expose the US equity and futures markets as anything but free and fair. It's a blood sport, and those with better access to the trading floor and regulator's hearts and minds have an enormous advantage over everybody else. This is true all across the trading landscape now.

As an aside, I am fairly convinced that if the opposite had happened, if silver's price had spiked upwards by 20% in the thinly traded overnight market, that the very next day there would have been an inquiry initiated, crimes exposed, and people punished. This is what I mean by 'official support' for intervention; the regulators are likely to only be on the job when gold and silver prices move up in price.

Now here's the good news...manipulation simply means that something is being mispriced.  Rather than focus on the dollar amounts of this thing or that I prefer to focus on the value that I perceive for something.  The very best investments are made when everybody is distracted by whatever story is being pitched, and valuing something either too highly or too low.

I am fully convinced that the suppression of the price of gold was being done for what the Fed considers to be sound, logical and necessary reasons.  Otherwise they would not have done them.  History tells me that the Fed really has no clue about some things, and is completely ignorant about energy, resource limits, and the fact that bubbles' destructive effects dwarf their positive moments.

So I think the Fed, et al., have erred in pricing gold so low?  Yes, and the vast flows from west to east confirm that for us with every month of fresh data.  Do I think gold will have to be re-priced at a much higher level at some point in the future?  Absolutely. 

The Floor

The one place that I most like to buy something is as close to its replacement value as I can.  And the replacement value for gold is both very close to its current price of $1,300 and rising steadily.There's a floor under the price of gold which, like any mined substance, is determined by the cost to get more of it out of the ground.

As has been true for all mining and oil production, the all-in costs of getting gold out of the ground have been rising, and rising sharply, for many years.  Currently the all-in cost to produce gold, across the whole industry, is more than $1,200 per ounce.

(Source)

The two reasons that the cost of gold mining has been rising so steadily and for so long are (1) gold ores are falling in quality and (2) higher energy costs have seeped into every crevice of the mining process from steel, to equipment to fuel itself.

It's hard for me to see how either of those two factors are going to turn positive any time soon.

The Coming Wealth Transfer

Our view at Peak Prosperity is that there's an extraordinary wealth transfer coming and we'd very much like to help you be on the right side of that event.

History is full of periods when well-meaning and self-interested leadership tried to cover up past mistakes with money printing.  We have loads of history to study on the matter and the only thing lacking here is general awareness of, and interest in, those lessons.

Fortunately it's all there for the learning, and so we do.

Consider the Weimar Germany experience.  A set of bad decisions, a prior war and a punitive reparations treaty all combined to create a period when printing more and more money made sense to those in power.  And so they did with much applause from seated politicians and much of the populace too, it should be noted.

At least for a while.

But you know how it turned out, vast fortunes were lost, savings were entirely wiped out, and the moment is still referred to by many as a period of great wealth destruction.  And, indeed, many experienced it that way.

But the truth is that wealth was not destroyed, it was transferred.  It passed from the unwary to the alert and it did so in enormous and magnificent amounts.

It's true that the money claims against true wealth were destroyed, but money and debt are not wealth, they are claims on wealth.

Real wealth is factories and farms, buildings and houses, raw land and minerals and water and food.  There were just as many of these things before the Weimar hyperinflation as there were afterwards.  That is, the amount of real wealth did not change all that much.

But who owned it changed a lot.

And this is the hidden part of money printing - the inevitable destructive events are always presented to us as if it were some form of natural disaster, unseen and unforeseeable, just an accident that happened.

But they are neither unforeseeable, nor are they unavoidable.  The trick is to not be holding any of the paper claims when they enter their period of destruction.  You want to be holding real wealth and gold is one of the very best forms because it is valued in every country and it has distinct money qualities that have been recognized all throughout history.

The summary here is this; we are still printing and borrowing enormous amounts of money and credit, but the world is not growing any larger in response.  The pressure is building.  Nobody knows when all of that money and credit will have to be 'trued up' against the amount of real stuff out there, but it will. It always does.

And that moment will be referred to by most as a period of wealth destruction - 401ks will be shredded, bonds will lose value, defaults will spike, institutions and entire countries will fail - but the truth is that all of that 'wealth' was an illusion and people's faith in it had been betrayed long before.

After the dust settles, there will be winners and losers, and those with the proper framework will understand that what actually happened was that all of the wealth was transferred from those who thought they owned it, to those who actually did.

How Much to Invest

How much anyone should invest in gold and/or silver is a personal and potentially complex matter, but I had a rather simple formula when I decided to invest. I merely asked myself how much of my net worth I wanted to be absolutely certain would never go to zero.

For me that number was 50%, and it has since climbed to over 70% due to price gains since I purchased, mainly because I cannot really find anything else in which to invest that is compelling. Yes, I've sold some gold along the way to buy a house, perform improvements thereto, and to try and rebalance my portfolio towards real estate somewhat, but other than that I've been parked in a wait-and-see mode when it comes to investing.

Over the years, I've had the opportunity to interact with numerous gold and silver investors ranging from the very small to the very large. For most who choose to go this route, the typical investment proportion seems to be a range of between 20% and 50%. Some are higher and some are lower, but I've run across very few who hold less than 10% and plan to keep it that way.

My advice on how to invest in gold and/or silver mirrors that of James Turk, who said this in an interview with me:

The best way to do it is through a dollar-cost averaging program. In other words, determine what portion of your portfolio you want to put into gold. And then divide it by six or 10 or 12; some number representing months at which you will accrue or accumulate. You know, maybe you want to do it just over three months.

So you decide that – let’s say, for example, you have $100,000 dollars that you want to put into gold, and you want to do it over four months. So you divide that by four, you have $25,000 and you choose to make the purchase, by sake of argument, the 20th of each month. So regardless what the price is on the 20th of the month, on the first month you buy $25,000 on the 20th of the month, the second month another $25,000 on the 20th of the month, the third month and fourth month you do the same thing, regardless of what the price is, and you will have averaged in.

Because what we are talking about here, Chris, is a major bull market, and one thing that a bull market does is that regardless of when you buy, you are going to come out or you are going to have your position improved as the bull market continues to move forward.

I would amend his views ever so slightly by adding that if you happen to have no position in gold, you should get your core position established as soon as possible, without regard to what day it is or the dollar amounts involved. If your core position is defined at 10% but you want to eventually move that to 25%, then go ahead and obtain the 10% as soon as you can and then work your way to 25% according to a fixed buying schedule.

I will note here that buying gold at $1,300 (the current price) is going to be mentally difficult for some people, because it will feel like buying a falling asset tht could fall further.

Here I will note that buying gold was extremely hard for me to do every time I did it. It was hard at $300, $400, $500, $600, and all the way up the price ladder. Every single time, there were a lot of people saying why gold had topped, was about to top, and was sure to lose 50% of its value soon. Had I listened to any of them, I would still be sitting here, without gold, waiting for the right time to get in. Such is the nature of bull markets. Hard to get in and even harder to stay in.

We're not even close to the end of this bull market and, like any bull market, its main job is to shake off as many riders as possible.

Where To Invest

I have outlined the basics of investing in physical gold and silver in this buying guide. For many, holding physical in their personal possession (say, at a bank in a safe deposit box) is only part of the equation.

While I strongly recommend staying away from the exchange-traded funds (ETFs, such as GLD and SLV), I do recommend using the full-service online solution provided by The Hard Assets Alliance. Or a combination of purchases made through an online dealer like GoldSilver or APMEX, and/or independent coin dealers in your local area. Besides The Hard Assets Alliance, GoldMoney and BullionVault are good solutions for owning physical bullion remotely. (Full disclosure: Peak Prosperity has affiliate relationships with many of these firms and receives compensation when people establish accounts with them. Clients never pay more because of this arrangement.  We only develop such relationships when we truly believe in both the offering and the people running the show.)

Another option is to use a private vaulting service, preferentially out of your home country, to spread out the jurisdictional risk.

When using any of these solutions, the proper firm will have a fully-allocated, insured, and audited offering providing the utmost in security at competitive rates.

Trading in gold/silver by skipping in and out of various paper vehicles is not something I recommend for any but the most experienced of participants. I used to do this quite extensively, but gave it up a while ago to focus on writing and speaking. My experience was that these markets have a reputation for being notoriously difficult to time, and for a good reason: They are.

Exit Strategies

Okay, so you've got your gold and/or silver position established; now what? When will it be time to take these inert lumps of metal and do something useful with them?

I do not plan to hold these metals forever; they are merely transition elements that will enable me to ride out the global transition from a pure, debt-based fiat paper currency system to something else. My plan is for them to enable me to preserve my purchasing power, and possibly a little bit more, if things go well.

But the primary purpose of investing in any hard assets is to avoid being on the wrong side of the coming wealth transfer.

But eventually I will be selling or trading them, perhaps for dollars, perhaps for something else. Here are my thoughts on that:

I originally converted my traditional stock and bond holdings for gold and silver, in part because the ratio between gold and the Dow had gone off the charts into extreme territory. At one point, it took over 40 ounces of gold to buy one share of the Dow. Today that ratio is around 12.

The charts suggest that someday the ratio will once again approach 1 to 1. Perhaps the Dow and gold will each be at 10,000, or 5,000, or 20,000, or 1,800 - who knows? Before that time, after taking a good look at the actual economic, regulatory and monetary conditions, I will make a decision as to whether it is time to unwind some of my gold and silver in favor of investing back in stocks.

More immediately, I have been tracking the ratio of gold to land, particularly productive land such as agricultural and woodlot parcels. A long time ago, the going ratio between gold and productive land was 1 ounce for 1 acre. I have been patiently tracking the closing spread between gold and productive land, and we are close enough that I am beginning to look at actual parcels.

My plan is to specifically seek out woodlots that could be managed for cord wood, as this will be a play on both obtaining a favorable ratio and on Peak Cheap Oil realities, which hold that wood will be burned for heat as oil climbs in price.  In places where oil is used for heat, the price of cord wood will roughly track the price of oil.

Besides the ratio plays described above, I also keep a very close eye on certain fiscal, monetary, and economic conditions that would cause me to dis-invest my gold holdings.

The six signs I watch to know when it's time to get out:

  1. Interest rates turn positive, by my own measure, not the functionally useless CPI. Here the Federal Reserve would have to raise rates by at least 3% in order to capture my attention and by 5% in order to get me to begin considering lightening up my holdings. And that's at today's inflation rate. Should inflation heat up in the future, as I expect, then the required interest rates would have to be higher as well. There's almost no chance of this indicator sneaking up on me by surprise. The Fed will telegraph any and all interest rate hikes well in advance and raise them by fractions of a percentage point each time. What I watch here are Treasury interest rates, especially the ten-year, which is my preferred bellwether issue for keeping track of this indicator.
     
  2. The Federal Reserve drains money from the system in earnest. After doubling their balance sheet, the Federal Reserve is holding steady after the end of QE II. Should it do the responsible thing and begin to withdraw that money before inflation takes hold, it will drag down the prices of everything; stocks, bonds, and commodities. This is a view that I have expressed extensively in The Coming Rout and other recent reports.
     
  3. The federal government runs budget surpluses. Here I would want to see revenues and expenses match. I know, that's a complete fantasy at this time, but I could imagine a number of market forcing functions that could really accelerate that prospect. But before I get too worried about the dollar price of gold, I'll need to see fiscal sanity return to DC. This is a slow indicator to track, but I do mainly via the debt-to-the-penny website where I follow actual cash-based Treasury flows, not the official pronouncements on the deficit.
     
  4. The US trade deficit turns positive. Right now the US is currently running a trade deficit on the order of -$30 billion to -$40 billion each month. The way this gets financed right now is through the twin miracles of thin-air money printing and deficit spending. That's what puts the required cash out into the economy that finds its way off-shore to balance things out (at least during a time of stagnant overall credit, like right now). This is a monthly indicator, well-publicized and worth tracking. It's easy.
     
  5. The dollar role as the reserve currency is preserved. Or at least does not lose any more ground. Here I track this by proxy via the USD index and the Federal Reserve custody account, and by anecdote by reading about dollar sentiment among central bankers, especially the Chinese, who have the largest stash of dollars. This is not a very clean indicator to track, but it's useful to keep in the front of one's mind. Should the dollar lose its reserve currency status entirely, the US will rather suddenly find itself quite far from where it thought it was.
     
  6. Gold and or silver enter a truly blow-off period of price gains. By this I mean there's some form of a detectable bubble in the prices for gold and silver. We'll know this is happening because it will be all over the news, your friends will be telling you about the genius gold/silver purchase they just made, lines will form outside of coin stores, and kiosks will be found at the mall selling microscopic flecks of gold to the retail hoards. We are not even remotely close to that day yet.

The summary of the above is that there's an endgame to the debt-based fiat experiment that has yet to play out.  And until it does, I plan to have the bulk of my wealth safely sequestered in gold and silver.

When it is time to unwind my gold and/or silver, I will do it in the exact reverse of the accumulation strategy. I will select dates, amounts, and places to sell, and then stick to that schedule.

There is a lot of time between now and then, however. As things currently stand, I expect that we are still several years, if not a decade or more, away from the time when I will consider exiting my holdings. Too many of the five indicators are either non-existent or heading in the wrong direction.

As always, I will stay on top of the developments and let you know if or when anything changes.

Conclusion

Gold and silver have represented "money" for thousands of years across diverse cultures. It is only very, very recently that humans have experimented with abandoning fixed points of reference for money. It's always worth remembering that on August 15, 2011, the current monetary system turned 40 years old, having been born on that date in 1971 when Nixon slammed the gold window.

40 years is pretty close to the average lifespan for debt-based paper money. So we might tip a glass on each 15th of August and nod solemnly at a great, but ageing, experiment.

I hold gold for fundamental reasons tied to surging demand and supplies being squeezed by declining ore grades on one side and rising energy costs on the other. I also hold gold because the West's central banks are fighting the unwinding of the largest and most ill-considered credit bubble in world history while the East amasses enormous wealth.

And, as if we needed more reasons, the world's largest developed economies are running truly staggering deficits as governments pitch in to help prop up levels of consumption that are out-of-proportion to their underlying economies thanks to that very same credit bubble.

In short: these attempts to sustain the status quo are fuel for continued price gains for gold, silver, and other commodities.

There will come a time to exit from your gold and silver holdings, but that day is a long way off. Between here and there, it would not surprise me at all for gold to hit $5,000 or $1,000 or  $8,000 per ounce.   The battle to keep gold's price in check is truly one for the ages.  Not because gold deserves such treatment, but because the alternative is to admit that we've rather poorly managed an ill-designed monetary system.

Along the way it is also not inconceivable that gold will be re-monetized, which will result in a gold price that is several multiples higher than where it currently stands.  But that's just a low-probability, high payoff scenario, at least in the short term.

Over the short haul, there will be lots of volatility in the price of gold and silver, partly because that's just the nature of those markets and partly because of the shifting, distorted landscape created by too much thin-air money printing and deficit spending. Until and unless those practices come to a sudden stop, gold and silver are the way that you can protect your wealth and sleep better at night.

At least that's been true for me over the past eleven years, and I expect for the next nine as well.

~ Chris Martenson