Is the Price of Gold Being Manipulated?

A recent article by Brad Zigler at Seeking Alpha argues that it is not. Zigler runs a site called Hard Assets Investor, and has a lot of interesting things to say about commodities.

I like that Zigler marshals some evidence for his claim, by looking at some of the short positions relative to the long positions that banks take on.

But I find myself unpersuaded by his overall case.

Zigler argues that the ratio of shorts to longs in the gold futures market is 3.7 to 1, and that this is therefore hardly the strongest case that banks are manipulating gold. Perhaps they merely believe that gold prices will head downward. I agree with his skepticism in principle, but I don't follow his interpretation of the evidence.

Just to take the other side of the story, notice that 3 US banks hold nearly one-third of all short positions in gold. That seems at least a bit suspicious. Non-US banks holdings are much more evenly balanced between long and short. Why would these three banks do this? Perhaps they've decided that gold is overvalued, and they hope to reap massive profits as gold corrects downward. I don't think that will happen, but surely banks are allowed to lose money if they choose, right?

I'm surprised that Zigler didn't take a look at some of the arguments put forth by the Gold Anti-Trust Action Committee. For instance, a recent article by James Turk, author and President of Goldmoney.com, argues that central banks lent considerable quantities of gold (between 12,000 and 15,000 tonnes) to create what he calls a 'gold carry trade', where investors borrowed at low rates in order to invest at higher rates elsewhere.

Reading Turk's article, I'm struck by how sensible his argument is, but also by how little hard evidence he has. Yes, central bank officials have made statements in the press that they manipulated gold or should have; yes, Barrick Gold has admitted to assisting in such gold manipulation; yes, the motive is there: central banks want to support the value of fiat currencies, and gold is the main competitor. But where are the hard numbers? Where is the smoking gun?

All of this shows that it's very hard to prove that someone is manipulating a price of anything. So perhaps this argument will never be decisively won or lost, and people will take whichever side they find most convincing. It seems likely to me that the Fed and the Treasury are manipulating the price of gold through the cooperation of some of the big investment banks and gold producers like Barrick. But honestly, who really cares? Markets are behaving strangely these days.

In a sea of overvalued financial assets and fake wealth, gold will sustain.