From time to time the manipulation discussion comes up in precious metals. There are many who argue against any such ideas, claiming there is no reason for it to happen. However, there are actually many of them, both economic and political.

Perhaps you’ve read Alan Greenspan’s 1966 comments on gold. It’s very interesting to note how well he understood the implications of a gold based currency. Whether he sold out or later changed his perception is up for debate. But the clarity of what he stated isn’t.

Before we get to his quote, we’ll want to consider where it seems to have become most popular among those who lean toward Austrian economics. Diehard libertarians surely have at least heard of Ayn Rand. She’s probably best known for her book, Atlas Shrugged, a follow up to a much earlier piece, The Fountainhead. She also wrote a newsletter, Objectivist, which seems to have helped give her fodder for her book, Capitalism: The Unknown Ideal, written in 1967.

In some ways Ayn Rand is a personal heroine of mine. Some of her ideas were certainly out there. But her focus on free enterprise, true laissez faire capitalism and a reliance on a good work ethic to drive economies, while allowing failure to reap its own rewards, resonates well with my personal Austrian and libertarian perspectives.

I bring this up because of her quote of Alan Greenspan’s excellent essay, Gold and Economic Freedom (essay linked), in both the Objectivist and Capitalism: The Unknown Ideal. The quotes here are rather lengthy, but I’ll try to keep to the point as much as possible.

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense — perhaps more clearly and subtly than many consistent defenders of laissez-faire — that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society…

Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which — through a complex series of steps — the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy’s books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.

Thus we can readily see the multiple reasons why both government and central bankers would desire to see gold suppressed as a monetary asset. Such perception, indeed recognition, could provide the public with a viable alternative to the manipulated fiat currencies of our day. If the people could unite in this recognition, spurning paper assets in favor of tangible tender, their servitude to the government/banks could at the very least be severely diminished.

Obviously this article isn’t able to offer a full treatise on manipulation in the precious metals’ sector. It can only offer another piece of the puzzle. However, the following chart should also help reveal the verity of manipulation in the London Bullion market.

For instance, notice that if someone started in 2000, buying gold at the London close and selling it at the London open, they would have realized well over 2500% gains during a time in which gold rose approximately 400% against the dollar. Conversely, if someone were to have done the opposite, they would have lost over 75% of their original investment.

If one were a trader, perhaps there is an opportunity to see if this trend continues. For most of us, gold continues to offer freedom from economic oppression while preserving wealth, especially against promissory notes issued by a government that has already proven to care little for the constitutional rights of the U.S. citizenry.

For your prosperity,

J. Keith Johnson
The Gold Informant