Sometime in the past 10 years, you've probably heard the serious claim that the government "manipulates" the price of gold.
The basic claim is that the government fears unusual spikes higher in the gold price. If gold spiked too high, too fast, it would alert global bankers and the U.S. population that something has gone terribly wrong with our monetary system. So the government either dumps gold or loans its gold out to sell into the market... which keeps the price depressed.
These claims often come from groups the investment industry describes as "on the fringe"... or "conspiracy theorists"... and they've done plenty to earn that label. But over the past several years, one of the world's most respected and successful investors has made headlines as a believer in gold manipulation. His name is Eric Sprott.
Sprott is the founder and CEO of Sprott Asset Management. He's one of the most respected names in natural resource investment. While Eric has been a successful investor and business owner for decades, his fame and fortune have exploded in the past 10 years. Folks who invested in his funds made huge returns from his bullish outlook on precious metals, agriculture, and energy. When his company went public in 2008, Eric was reportedly worth more than $1 billion. Some folks call him the "Warren Buffett of Canada."
Eric Sprott believes the U.S. government has manipulated gold... which has huge implications for gold investors...
So last month, I spent 45 minutes on the phone with Sprott to get his take on what's happening. Sprott is certain the prices of gold and silver are being manipulated. He told me the evidence strongly suggests central banks have suppressed the price of gold.
Consider... in 2000, global gold production totaled about 2,600 tons. Central banks sold about 400 tons. So central bank gold made up 13.3% of the market – a big chunk. The central banks maintained that rate of selling for most of the decade. In some years, the banks sold even more gold. Looking back, those trades look criminally stupid. The price of gold rose from about $275 per ounce in 2000 to $1,100 per ounce by 2009.
Now realize... during that period, the value of all paper assets fell. Meanwhile, central banks were telling the world they were selling tons of gold.
Sprott argues the banks feared that, as paper currencies declined in value, people would rush to buy gold... So they kept selling it and shouting their intentions to the high heavens.
"You wouldn't announce it unless you were trying to suppress the price of gold," Sprott told me. "There's no doubt they were trying to suppress gold as an alternative to fiat currency. There's no doubt in my mind that's what the philosophy was."
And the banks' strategy succeeded... partly. During the last decade, gold enjoyed a one-day spike of more than 6% only three times...
- September 11, 2001: Terrorists attack the U.S.
- September 17, 2008: The U.S. government bails out Lehman Brothers.
- March 19, 2009: The U.S. government details the $275 billion recovery act.
Those days were big emotional events. It's predictable they would trigger big trading days for gold. But what about the rest of the time? Is gold's trading pattern atypical? Let's compare it with what a few other commodities have done over the last 10 years...
Gold's trading is suppressed compared to its peers in the commodities complex. It's clear from these numbers either gold is the most sober commodity out there, or someone's manipulating the market...
"Even though the gold market's one of the most emotional markets there should be, it never acts emotionally on the upside, which is very bizarre," Sprott said.
"Gold should be more emotional than oil, for example, or corn or wheat, but it's not... [The central banks] just don't want it to flare up too much so there's no mania that develops. If you and I saw the gold price up $100 in one day, we'd say, 'What the hell is going on? Is there a war? Is there a financial crisis?' Because gold is the canary in the [coal mine]... So it just never is allowed to do that."
Here's the thing: Even with day-to-day manipulation, the gold price rose 425% over the last decade. According to Sprott, a lot more is yet to come...
In a January 2011, report titled "Gold Tsunami," Sprott and co-author David Franklin point out demand is on the rise in India and China. Both countries encourage their citizens to buy gold.
Chinese demand for gold rose 70% from October 2009 to September 2010, equal to 168.6 million tons of gold. And according to the report, ICBC, the largest bank in China, set up "gold accumulation" accounts. Customers can accumulate small amounts of gold on a regular basis. It went on to say Chinese demand alone could increase global demand by 330 tons per year.
Also, Sprott believes we could see central banks create an 800-ton swing in the gold market... from selling 400 tons to buying 400 tons. Remember, only 3,000 new tons enter the market each year. Exploding demand plus lack of new supply equals much higher prices.
I have to admit. I used to disregard talk of gold manipulation. But Eric is a brilliant guy... and one of the most respected investors in the world. He makes a convincing case, and gold's unusually low volatility to the upside is suspicious.
Yes, gold has become more of a currency these days than a commodity, but it's still an asset that tends to trade on emotions. As central banks reverse their policy of selling gold... and more people wake up to the fact that something has gone wrong with our paper money... it's going to trade a lot higher.