By Alasdair Macleod via The Cobden Centre
a radio interview recently I was asked a question to which I could not
easily give a satisfactory reply: if the gold market is rigged, why
does it matter?
I have no problem delivering a comprehensive answer based on a sound aphoristic analysis of how rigging markets distorts the basis of
economic calculation and why a properly functioning gold market is
central to all other financial prices. The difficulty is in answering
the question in terms the listeners understand, bearing in mind I was
told to assume they have very little comprehension of finance or
I did not as they say, want to go there. But it behooves those of us
who argue the economics of sound money to try to make the answer as
intelligible as possible without sounding like a committed capitalist
and a conspiracy theorist to boot, so here goes. Manipulating
the price of gold ultimately destabilizes the financial system because
it is the highest form of money. This is why nearly all central banks
retain a holding.
The fact we don’t use it as money in our
daily business does not invalidate its status. Rather, gold is subject
to Gresham’s Law, which famously states bad money drives out the good.
We would rather pay for things in government-issue paper currency and
hang on to gold for a rainy day. As money, it is on the other side of all asset prices.
In other words stocks, bonds and property prices can be expected to
rise measured in gold when the gold price falls and vice-versa. This
relationship is often muddled by other factors, the most obvious one
being changing levels of confidence in paper currencies against which
gold is normally priced. However, with bond yields today at record lows
and equities at record highs this relationship is apparent today. Another way to describe this relationship is in terms of risk.
Banks which dominate asset markets become complacent about risk
because they are greedy for profit. This leads to banks competing with
one another until they end up ignoring risk entirely. It happened very
obviously with the American banking crisis six years ago until house
prices suddenly collapsed, threatening to take the whole financial
system down. In common with all financial bubbles everyone ignored risk.
History provides many other examples.
Therefore, gold is unlike other assets because a rising gold price
reflects an increasing perception of general financial risk, ensuring
downward pressure on other financial asset prices. So
while the big banks are making easy money ignoring risks in equity and
bond markets, they will not want their party spoiled by warning signs
from a rising gold price. This is a long way from proof that the gold market is manipulated.
But the big banks, and we must include central banks which are
obviously keen to maintain financial confidence, have the motive and the
means. And if they have these they can be expected to take the
So why does it matter if the gold price is rigged? A freely-determined
gold price is central to ensuring that reality and not financial
bubbles guides us in our financial and economic activities. Suppressing the gold price is rather like turning off a fire alarm because you can’t stand the noise.