What's behind some of the odd moves in the gold market? Bengt Saelensminde points the finger at central banks, and outlines three reasons why gold could come roaring back.
Governments and central banks may be behind the odd gold price movements
We're told that markets generally behave rationally over the long run.
And when you look back on things, it's true that you can usually see logic and reason. Method in the madness.
With the benefit of 20/20 hindsight, for example, we see that the main indices have reacted favourably to the global interest rate cull. Five years of rates on the floor, five years of an upwardly trending market. See, easy!
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
But over the short run, things aren't always so easy to fathom.
And to my mind, no market has been more unfathomable than gold.
I just can't get my head around the gold price
I've lost count of the occasions that central banks have reacted in a way that should have been favourable to gold, and yet the price went down.
And bad news doesn't seem to have the expected effect either. Just last week, the Swiss announced the result of their national referendum on whether the central bank should focus more heavily on gold backing.
The result came in with a resounding non' and yet, by the end of trading on Monday, the gold price had gone up!
I'd been expecting downward pressure on gold after Sunday's no vote. After all, a shock vote to increase Swiss gold would have (logically!) seen the price shoot up. More demand and all that. Shouldn't the inverse be true when the Swiss rejected Old Yella?
So you can see why gold is difficult to work out at the moment. Recently it's been much stronger than many in the investment community have reckoned on. I mean, with the background of the Fed's tapering action (bad for gold), Goldman Sachs was predicting gold at eight hundred bucks, some 30% lower than we're at today. It never came true or, at least, it hasn't yet.
It all seems very counter-intuitive. What's going on?
Author and hedge fund manager Grant Williams has a theory.
Here's one possible explanation
It all comes down to the central banks and government initiatives.
"If you think about normally functioning markets, they have minimal (and ideally zero) government involvement. The fact that we have the government as the biggest participant, most notably in the bond market, means that natural market forces are being corrupted."
Essentially, Williams is saying there's a massive hedge fund in the market (the Fed) and it can move the market, all on its own. Hence the maxim: "Don't fight the Fed!"
Let's not forget that the central banks have been the biggest players in both the bond and gold market for years now.
In fact, only the IMF itself has sold more bullion than the central banks. And there's little doubt that the bond market (where the central banks have been massive purchasers) has in turn, provided a prop for equities.
Like I say, the effects of these things are easily seen in the medium to long term. But they're much more difficult to ascertain in the here and now.
Not least because there's undoubtedly some skulduggery going on as well.
Conspiracies abound in the markets
Up until a couple of years back, it would take a fruitcake loony to call a conspiracy in the currency and interest rate markets. But, of course, we now know that the big banks have been screwing clients on a massive scale.
And hey, if that's possible in such large markets as currency and rate repos, then how easy must it be to manipulate the much smaller precious metals markets?
Earlier in the week I was talking to an oil trader and we discussed, among other things, the absolute rout in oil over recent weeks. He mentioned rumours of an anti-Russian conspiracy.
Apparently there's talk in the industry that the oil rout has, in no small part, been concocted to give the Russians, who are heavily dependent on oil, a bit of a prod.
Think about it. USA is now pretty much self-sufficient in oil... they have no problem seeing lower prices. And Russia is as isolated as we've seen it in years.
Could Opec be playing to the tune of the US? I mean, for heaven's sake, it was only last year that Opec was insinuating that there was a sort of base price' for oil, in and around the $90 to $100 mark. And yet, now they're suddenly happy to pump and dump!
That was slightly off-topic but it's good food for thought. And isn't it funny that it's brought us full circle back to gold? Russia's central bank has dumped roubles (which are becoming more worthless by the day) and dollars (where US strings are attached) in preference for gold.
With Russia filling up its gold coffers could it be that vested Western interests don't want to let it fill up too cheaply?
Three reasons why gold could come roaring back
As I said at the start, it's undoubtedly easier to make logical conclusions about markets over the long-run.
For example, there's a logical sense behind gold ticking up from $250 to around $1,900 as the world was printing its funny money. And perhaps (with the powers of hindsight) it's now easy to see that the market had got ahead of itself at $1,900.
But on a day-to-day basis, things are difficult to make sense of. I should think as we look back at today with the benefit of tomorrow's hindsight, we'll see that gold made a bottom as a result of three core factors:
Though the US is reining in its funny-money spree (for now!), it's becoming clear that other nations will take the money-printing baton. Waging economic war on Russia is sending it, and others, into the hands of gold. With the world gradually getting used to the idea of perma-low interest rates, the prospect of gold looks better. With nothing paid on cash, then why not hold gold in the hope of a capital gain instead? It's also a useful insurance against some kind of nasty financial blow-up!
The truth is that nobody can tell the day to day rhythms of the markets especially not in gold.
But if we try to make sense of the long-term key fundamentals, then we should stand a good chance of being on the right side of the move.
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.
He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.
Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.
Will “Liberation Day” strike again?
Israel claims victory in the '12-day war' with Iran
