The Gold Destruction Team19. April 2013 by Joachim Goldberg
Let me get my disclosure statement out of the way first: I do not own any gold, nor have I done for quite a few months. I confess to being somewhat biased where the precious metal is concerned. Some might accuse me of smugness in regard to the recent sell-off, but this goes too far. In fact, the recent gold crash has left me feeling very troubled. This is largely because none of the experts seem to have any explanation for the extraordinary selling orgy apart from the usual throwaway arguments. For instance, the absence of rising inflation on the horizon was widely recognised long before last Friday. Similarly, neither a Chinese GDP growth figure 0.3 percent below analysts’ expectations, the anticipation of Cypriot gold sales, nor the prospect of the US Fed tapering its QE program seem adequate justification for the steepest slump in the gold price in thirty years.
There has been one extraordinary explanation circulating in the internet over the last couple of days, though. It is championed by Paul Craig Roberts, a former Assistant Secretary to the Treasury during the Reagan Administration. According to Dr Roberts, the Fed is behind the gold rout. He accuses the US central bank of selling short some 500 tonnes of bullion, which at last Friday’s prices is equivalent to approximately $24.8 billion. This is a transaction only a central bank like the Fed could have done.
The entire idea is reminiscent of the conspiracy theory that surrounded the shadowy Plunge Protection Team (PPT) – just in reverse. The PPT was supposedly a group of stock traders, coincidently, formed during the Reagan era. Their task was to protect the US stock market from a crash using timely interventions and lots of Fed money. Even now, the existence of PPT is still discussed in some circles. If such a team had existed, it would indeed be a simple matter to form such a team to control the gold market, perhaps under the name Gold Destruction Team (GDT).
I am no conspiracy theorist, but the motivation for the Fed is undeniable. In order to influence economic outcomes with its policies, the Fed has to defend the monetary system based on dollars and maintain the status of the money as a safe-haven. As soon as an alternative form of money within the Fed’s jurisdiction starts to replace the dollar, be it gold, bitcoins or whatever, the Fed loses it influence. In the past, undermining gold as a competitor was achieved by banning gold ownership. These days, however, confiscation is hardly necessary; one only needs to destabilise the market to a point where gold holders chose to abandon it and return to dollars. One could even extrapolate this logic to the recent crash in the price of bitcoins. It is sufficient for the Fed to accumulate slowly any emerging money alternatives with the intention of dumping it later at a moment when sales would do the most damage.
Now I can hear you moaning: “You are a conspiracy theorist after all.” Yet this is still not true. There is a well-known market wisdom that goes: “Don’t fight the Fed.” With or without a GDT, there should be no doubt that the Fed will defend the primacy of the US-dollar in the monetary system using all of the resources at its disposal. So for all of those who take comfort from the ownership of money alternatives like gold or bitcoins, beware. You are fighting the Fed.