Until a few months ago, the price of gold was held down by government selling as soon as any rally got going. The IMF or various European countries were usually the ones to come in and stop gold’s rise. $1000 gold told people that faith in currencies and governments was over and it made it look bad for the EU and the US that people preferred to hold gold rather than their currencies. It made it look as if inflation was unstoppable. All rallies were quickly defeated.
And confidence in the gold price was quietly shattered in the process.
But now governments have a different outlook. They are no longer worried about collapsing currencies and surging inflation with the commodities boom well over. Indeed it is the price of oil now which is in collapse as economic activity tumbles across the globe.
The thing that governments now need above all else is cash, as their tax revenues tumble and the cash requirements to bail out insolvent states skyrockets. And the only thing they have left to sell is gold.
Instead of European governments being the primary reason gold is being stopped from rising, the same institutions are now the keenest advocates for it to rise. Quite simply, they have only so many bars to sell and they want to extract the highest possible price they can from the market. So this week they have been working hard to engineer a rally. (see previous post)
On the face of it they have succeeded, with gold scraping home at just over $800 close in New York last night. In the current volatile and panicky state of world markets they may well get a price scramble going again, for a while. But when it is realised why the price is moving up, that is, so that western governments can liquidate their gold stocks at higher rates, it is hardly going to be a long term basis for the metal to keep climbing.
In the midst of the severest deflation experienced for generations, with currencies (especially the dollar) buying more and more of nearly every commodity and asset, it will be an extraordinary achievement to persuade the investing world that as far as gold is concerned inflation is still the number one problem. It’s like climate change converts claiming that the cold and early winters around the world in recent years are caused by global warming.
The gold bulls will cooperate for now. But they will be sold down to the floor before long. This will only be a brief summer for the yellow metal I’m afraid. The politicians are not really its friend. They are here for the same reason as they are everywhere else, to collect.