L: Right. But back to the matter at hand. You're saying that at least the proximal cause of the big selloff in gold was Europeans getting hit by the demands of their obligations and being forced to hit the bid on gold - or fear of this happening in a big way?
Doug: It's hard to say. I think that's part of the puzzle. Once a selloff starts pushing investors into panic mode, that negative momentum can seem to take on a life of its own, making the downturn longer and deeper than a rational response to the situation merits, or indeed than most people can imagine. In other words, it's a normal - albeit radical - market fluctuation in abnormal times. The sellers are apparently treating gold as a speculation, which is a mistake. They should view it as a bedrock financial asset, something you buy and put away for the very long haul. It's not a trading sardine.
There are, of course, plenty of theories that flood the Internet every time gold sells off when it seems like it should be advancing - mostly conspiracy theories. The proponents don't like it when we call their theories conspiracy theories, but that's what they are. They allege it's all because of the bullion banks, or the Bilderbergers, or the Trilateral Commission, or the Council on Foreign Relations, or the Fed's crash team, or some other nefarious agency. I have good friends who are otherwise quite knowledgeable and rational who sincerely believe that such groups are constantly knocking the price of gold down. I know they mean well, but I have to put these theories in the tinfoil hat category.
L: Some people are saying the Fed hit the market with 500 tons of naked gold shorts. I'm not sure how they could prove that, but the argument that the government wants to see the price of gold go down does have a certain appeal.
Doug: Of course governments want the price of gold lower. They want the prices of everything lower: silver, copper, iron ore, soybeans, corn...everything but housing, which for some reason they want higher. But gold is the least important commodity to these people. Not only don't they understand its monetary role, they don't believe in it or even really care about it.
It's true that the US government tried to suppress the gold price back in the late '60s, back when it was $35. But that was because the Treasury had to redeem its paper money for gold at that price; since 1971 it no longer does that. Actually, if anything, the US should want a much higher gold price now; with a reported 265 million ounces in national reserves, the US is by far the world's largest gold owner.
But the price-suppression theories are quite ridiculous from a practical standpoint as well. The US couldn't even suppress gold's price 40 years ago - when there was only half as much gold in the world as there is now, and twice as much was owned by governments, and it was 1/40 of the price that it is now. And governments were far more solvent than they are today. Yet they are somehow supposed to be able to keep the price of gold down now. So, whatever else it might be, I do not attribute gold's retreat to an official price-suppression conspiracy. The idea gives conspiracy theories a bad name...
L: They have successfully suppressed the price of gold from $250 an ounce all the way down to $1,600 or $1,800 an ounce... until recently.
Doug: [Chuckles] Yes, exactly. Nobody, not even the US government, is stupid enough to fight the biggest bull market in history for the last 12 years. Especially when it's bankrupt; exactly how are the losses being accounted for? And especially when traders talk like high-school girls about who's winning or losing in the markets. They don't get paid bonuses for losing money. I wonder when the conspiracy guys suppose the government will stop trying to suppress the price... at $5,000? $10,000? I wonder why the US would be trying to help the Russians, the Chinese, and lots of other governments buy gold at lower prices? None of this makes any sense.