The price of
physical gold has lately surpassed US$1,510/oz and likely to remain on upward
trajectory in the near future. Efforts are often made to bring the price of
precious metal driven down, but it recovers quickly and moves on up. Analysts
either don’t have any plausible explanation or are too afraid to talk the
truth.
It is not a
secret that many central banks around the world have been converting their
dollar reserves into gold, which reduces the demand for dollars and increases
the demand for gold. Existing stocks of gold available to fill orders
are being drawn down and mining output is not keeping pace with the rise in
demand, perhaps this could be one of the explanations for the rise in gold
price.
During the
many years of Quantitative Easing the exchange value of the dollar was protected
by the Japanese, British and EU central banks, also by printing money to insure
that their currencies did not rise in value relative to the dollar. The U.S. Federal
Reserve needs to protect dollar’s value so that it continues to play its role
as the world’s reserve currency in which international transactions are
conducted.
If the
dollar loses this role, the US will lose the ability to pay its bills by
printing dollars. Dollar decline in value relative to other
countries would cause flight from the dollar to the rising currencies. Catastrophe
quickly occurs from increasing the supply of a currency that central banks are
unwilling to hold.
The dollar has
been depreciating relative to gold. Rigging the currency market was
necessary but not sufficient to stabilize the dollar’s value. The gold market
also had to be rigged. To stop the dollar’s depreciation, naked short selling
has been used to artificially increase the supply of paper gold in order to
suppress the price.
Unlike
equities, gold shorts don’t have to be covered. This turns the price-setting
gold futures market into a paper market where contracts are settled primarily
in cash and not by taking delivery of gold. Therefore, participants
can increase the supply of the paper gold traded in the futures market by
printing new contracts. When large numbers of contracts are suddenly dumped in
the market, the sudden increase in paper gold supply drives down the price, this
seems to be happening now.
If flight
from the dollar is beginning, it will make it difficult for the Fed to
accommodate the growing US budget deficit and continue its policy of lowering
interest rates. With central banks moving their reserves from dollars (US
Treasury bonds and bills) to gold, the demand for US government debt is not
keeping up with supply. The supply will be increasing due to the US$1.5
trillion US budget deficit.
The Fed will
have to take up the gap between the amount of new debt that has to be issued
and the amount that can be sold by purchasing the difference. In
other words, the Fed will print more money with which to purchase the unsold
portion of the new debt.
The creation
of more dollars when the dollar is experiencing pressure puts more downward pressure
the currency. To protect the dollar or make it attractive to
investors and central banks, the Fed would have to raise interest rates
substantially. If the US economy is in recession or moving toward
recession, the cost of rising interest rates would be high in terms of
unemployment.
With a
rising price of gold, who would want to hold debt denominated in a rapidly
depreciating currency when interest rates are low, zero, or negative?
The Fed
faces an impending crisis that it has set up for itself. It is being said
that the Fed is accountable to the elites who want to rid themselves of President
Donald Trump. Collapsing the economy on Trump’s head is one way to
prevent his reelection.
