Of all asset classes, gold seems to attract the most conspiracy theorists. There’s something about gold that draws the same people who think that the United Nations is hiding Elvis on a UFO.
Less implausible, though still considered a conspiracy theory by mainstream economists, is the belief that governments and banks collude to manipulate the price of gold.
So many gold conspiracy theorists felt vindicated in recent days when two events rocked the gold investing world.
First, Deutsche Bank settled lawsuits admitting to the manipulation of gold and silver prices. The settlement seemed to confirm what the most suspicious of gold bugs had long contended: Precious metal markets are rigged by governments and big banks.
Gold prices are set, or “fixed,” twice a day in London. This establishes a benchmark price for the precious metal worldwide. Like the closing price of a stock, the price of gold is fixed at a moment in time twice a day, so that price changes have a reference for comparison.
The fix is used as a basis for billions of dollars’ worth of transactions, and is negotiated every day in a ritual that dates back nearly a century. But in modern times, Deutsche Bank and others rigged the fixing process for their own profit, though only the German bank has admitted guilt.
The other development that has gold conspiracy theorists saying “I told you so” was China’s announcement yesterday that it would launch a yuan-denominated gold benchmark. This means that China will create its own yuan-based mechanism for fixing the price of gold. This will compete with the dollar-based gold benchmark that’s been dominated by London.
China is the world’s largest producer of gold and rivals India as the biggest consumer. China has been on a gold production and importation spree for years.
By creating a Chinese benchmark, China is taking yet another step to assert more influence in global finance. It’s saying that it’s not going to allow the price it pays for gold to necessarily be tied directly to the US dollar (and currency fluctuations) – or to the expensive games played by unethical traders at global banks.
Data suggests Chinese gold imports increased from about 100 tonnes in 2010 to nearly 1,000 tonnes last year. Many conspiracy theorists believe the Communist party’s aim is to amass huge amounts of gold to back the yuan – with the goal of taking over the world’s monetary system. Some think that this new Chinese gold benchmark will lead to greater use of gold in China’s monetary system.
Mainstream economists roll their eyes at such conspiracy talk. They point out that the majority of the country’s gold imports are for retail purposes, and is sold to Chinese citizens. And China has a long way to go before its gold reserves match those of other counties. As the chart below shows, China is a long way from cornering the global gold market.
But it isn’t just China that has gold conspiracy theorists suspicious. Central banks around the world seem to be trying to push down the price of gold, according to the most cynical gold watchers.
Most conspiracy theories – whether they involve UFOs, hoaxed moon landings or vanishing gold – revolve around someone or something trying to control others’ lives. There is a natural tendency to be suspicious of groups that are powerful and potentially hostile. And the actions of many governments around the world are easily interpreted as controlling and hostile.
For thousands of years, gold has been used as an alternative currency, and a tangible repository of wealth. (More recently, nomadic herders in the mountains of the Kyrgyz Republic, in Central Asia, would even have a mouthful of gold fillings to ensure that their wealth stayed close and safe.) However, over the last forty years, no country has used gold to back its currency. The U.S. was the last country to abandon the gold standard, doing so in 1971. All currencies are now “fiat currency” – legal tender whose value is backed solely by the faith of the government that issued it.
When people lose faith in governments as a result of war, inflation, political instability or prolonged stupidity, some people horde gold to protect their wealth. So a rise in the price of gold versus a given currency may be a sign of trouble for the government backing that currency. In the interest of self preservation, governments may be motivated to manipulate gold prices lower.
Since 1971, central banks around the world have printed paper currency free of any attachment to the yellow metal. And since the 2008 financial crisis, the printing presses have been running non-stop, to support quantitative easing efforts in Europe, the US and elsewhere. It’s no coincidence that over that time, gold has been increasingly in demand worldwide.
As you wonder whether there may be some truth in gold conspiracy theories, it’s worth remembering that over the last many thousands of years, all currencies have eventually failed. But every ounce of gold that’s ever been mined still exists.
So owning some gold in your portfolio doesn’t make you a conspiracy theorist. It makes you a realist.
A lot of gold bugs insist on holding the real thing (probably in a safe place that’s not their mouth). They don’t trust that paper markets, like ETFs, will still be working if everything falls apart.
If you want to have some gold in your portfolio, but aren’t inclined to buy the actual thing, there are lots of easily accessible ETFs. One easy way to buy gold is through the SPDR Gold Shares ETF (GLD on the New York Stock Exchange). The SPDR Gold Shares is the largest physical gold exchange traded fund (ETF) in the world. You can also buy it on the Singapore Stock Exchange using symbol O87 and on the Hong Kong Stock Exchange as 2840.