Central Banks Need a Higher Gold Price : Hello GATA

By: Dan_Norcini

A friend sent me some comments from Chris Powell over at GATA (headquarters for the gold manipulation crowd) writing about the possibility of a change in the thinking of the Central Banks in regards to the gold price.

Here is the pertinent part of Chris’s comments:

“…the consensus policy of central banks in regard to gold has changed recently — that they now want gold rising again, most likely to assist in the devaluation of their currencies, particularly now the U.S. dollar, as well as devaluation of the world’s debt, and that the huge short positions of the banks in the futures markets are actually central bank positions that must continue to increase even to unprecedented levels to keep this devaluation “orderly,” to use a favorite term of central banking. (Really, who else but institutions that are authorized to create infinite money and that hold large gold reserves could accept the risk of such shorting?)
This would mean that …far from considering a sharply higher gold price to be the end of the world, central banks consider a sharply higher gold price — at least if it can be accomplished in an “orderly” way — the prerequisite of worldwide debt relief, their own reliquefication, and the maintenance of their power, gold remaining, as the assistant undersecretary of state for economic and business affairs, Thomas O. Enders, explained to Secretary of State Henry Kissinger in April 1974, the supreme “reserve-creating instrument” of governments, the ultimate money, the form of money that underwrites all other forms of money, the form of money whose valuation is control of the world:

To Chris and Bill over at GATA, I can only say: “Welcome to my world. What took you so long?”

I had been saying for some time that the Fed was NOT BEHIND weakness in the gold price ever since the Dollar embarked on its bull run back in 2014. Remember, back during the time frame when I actually subscribed to GATA’s views, the US Dollar was sinking off the charts and was threatening to fall below the 72 level on the USDX. A soaring gold price at that time was a harbinger of inflationary pressures tied to a weakening currency and at that time, AND ONLY AT THAT TIME, did the idea that our Fed would be interested in slowing down any rise in the gold price make sense. After all, a gold price rip roaring to the upside was a most definite sign that investors were losing confidence in the US Dollar.

However, and this is where I parted company with GATA, once the US Dollar began to strengthen and particularly when it was confirmed from a technical chart perspective, that the US Dollar had entered a bull market, there was no longer any fear whatsoever of investor concerns towards the Dollar. As a matter of historical FACT, the main concern of the Fed then shifted to an EXCESSIVELY STRONG DOLLAR.

We all know that the price of gold has an inverse relationship to the US Dollar, ( I have dubbed gold the “antiDollar” [ I have also been dubbed the antichrist by many in the gold bug world because of my bearish views towards gold at that time] ), thus the price of gold was sinking due to the deflationary impact of the surging Dollar. Not only gold, but the entire commodity asset class was sinking into multi-year lows as a result of the Dollar rally. Thus, the entire notion, that GATA continued to perpetuate, that rally attempts by gold during this same time frame, were being stymied by the “evil banking cartel at the behest of the Fed” was completely unfounded by the broader market action of the commodity asset class as a whole.

Some of the longer time readers might be familiar with the “5 Pillars of a Bull market in gold” set forth by a former friend and well known gold bug, Jim Sinclair. I argued USING HIS VERY WORDS, that the conditions for a rising gold price were simply not in place during this time period. After all, if two of those pillars were (1.) a falling Dollar and (2.) rising commodity prices, how or why should anyone who agreed with the “pillars” expect the gold price to be moving higher if (a.) the Dollar was rising and (b.) the entire commodity sector as an asset class was falling?

In other words, I pointed out the contradiction expecting objective readers to grasp my argument and realize that most of the leaders in the gold bug world were “one note Johnnies” who were bullish gold, all the time, without exception and without regard for every-changing market conditions.

Instead of being enlightened, most became belligerent, angry and vile in their responses because I had the audacity to question the claims of their “leaders” and dare to speak negatively of their beloved “yellow metal god”.

Now, all we had to do was to accept the Fed at their own word, that they were struggling with DEFLATIONARY PRESSURES. It was not just the Fed, but also the Bank of Japan as well as the European Central Bank. I said it as recently as early March :

see this post:

https://traderdan.com/?p=3202

The Fed WANTED A HIGHER GOLD PRICE along with higher commodity prices in general and therefore they could not be behind weakness in the gold price especially whenever gold would experience a sharp move lower in price that would bring out all the breathless voices from the gold cult world yapping about “Flash Crashes” caused by “evil, nefarious, sinister” forces. ( I call those market bears).

The reason for this was simple – I had postulated that the Fed INITIALLY welcomed the falling crude oil price along with falling food prices, because they viewed such occurrences as beneficial to the economy due to the stimulative nature of such things. As a matter of fact, Yellen repeatedly stated that they viewed the lower crude oil ( energy ) prices as “transitory” in nature and stimulative.

The problem started when the oil price continued to sink and sink and sink. At that point, I argued, that the falling crude oil price had passed the point of being beneficial and had entered the stage of being harmful, in the Fed’s mind. Why? Because the falling oil price was CRUSHING JOBS in the oil patch, one of the best performing sectors of the US Economy when so much of it was seeing mediocre job creation and only relatively low paying ones at that. Same thing goes for the mining sector – at some point, the necessary job cuts were having a negative impact on economic growth here in the US and thus feeding the narrative that deflation was gaining ground and that the Fed’s reflation policy was failing.

That meant that the Fed had to respond to these growing deflationary pressures and make an effort to REVERSE the rise in the Dollar and undercut the greenback in order to bring speculative flows back into the commodity asset class. Such flows would entail a HIGHER GOLD PRICE along with a general improvement in the price of the overall commodity complex.

We have seen what has happened to not only the gold price but to the entirety of the commodity sector as a result of this Fed-induced weakness in the US Dollar. Thus the Fed has managed to halt, at least for now, the sharp decline in commodity prices.

As a side note _ I also argued that if the Fed wanted a lower gold price and was behind the moves lower in its price, all that they needed to do was to simply sound a hawkish note when it came to interest rates and the market would knock the gold price lower for them. There would be no need for secretive gold selling at the Comex by some supposed agents among the bullion banks. Hedge funds and other macro-related funds would knock the stuffing out of gold, and silver for that matter, without them lifting a finger.

I have taken the time to write all of this is make the point that if GATA has now come around to adopting my view, then I say “Welcome”. Maybe their views will be more balanced and more attuned with what is actually happening in the marketplace than their habit of knee-jerk, reflexive diatribes against the “gold cartel” whenever gold moves lower in price. Then again, perhaps I am overly optimistic in this regard. As they say, “the proof of the pudding is in the eating”.

Lastly, I just recently wrote some comments about the Dollar this past weekend in which I noted that at some point the thinking in the Forex markets will be that the Dollar movement and price level has essentially factored in all of the Fed dovishness. When it does, the Dollar will bottom. Why? Because the odds still favor a Fed hike in interest rates sooner than we will ever see one in the Eurozone and Japan. Also, the massive interest rate differential being paid by comparable maturity Treasuries here in the US will continue to attract foreign investor flows into US government bonds from those seeking yield. That is a force that will continue to benefit the Dollar.

As soon as we get any sort of indication that the Fed is changing its current dovish attitude and moving towards a more hawkish one, the Dollar will move higher, and gold will of course see selling pressure. The key test for GATA, if indeed this scenario plays out like I expect it to at some point, will be how they react to this. Will they go back to their old ways of crying foul and complaining once again about gold price manipulation or will they have evolved enough to understand that a change in the market conditions and underlying sentiment entails a necessary change in the price of gold. We’ll see.

Also, now that Chris Powell has come around to my way of thinking, will the same people who have accused me of “being an agent of the gold cartel”, “an establishment shill”, “the antichrist” and other assorted descriptions have the integrity and sense of honor to retract those insults and issue public apologies for their vile insults or will they also accuse Chris of the same thing and of going over to join the dark side?

Based on what I have seen of far too many of these people, I am not holding my breath waiting. Gold is supposedly valued for what it is because it is a rare and precious commodity. Based on my personal experiences with members of the “gold cult”, integrity, honor, virtue, objectivity and common decency are even more rare among that group.

Dan Norcini

http://traderdan.com

Dan Norcini is a professional off-the-floor commodities trader bringing more than 25 years experience in the markets to provide a trader's insight and commentary on the day's price action. His editorial contributions and supporting technical analysis charts cover a broad range of tradable entities including the precious metals and foreign exchange markets as well as the broader commodity world including the grain and livestock markets. He is a frequent contributor to both Reuters and Dow Jones as a market analyst for the livestock sector and can be on occasion be found as a source in the Wall Street Journal's commodities section. Trader Dan has also been a regular contributor in the past at Jim Sinclair's JS Mineset and King News World as well as may other Precious Metals oriented websites.

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