It is common knowledge that in the 1960s a consortium of central banks colluded to maintain the international dollar-denominated gold price at the US government-set rate of $35 dollars per ounce. Known as the London Gold Pool, this consortium sought to control the price of gold by manipulating the London Gold Fix. Twice a day, at 10:30 AM and 3 PM four banks (ScotiaMocatta, Societe Generale, HSBC and Barclays) come up with a fix price for gold that is determined by buy and sell orders that they are seeing for both physical gold (e.g. bars) and paper gold (i.e. futures contracts and other derivatives). This price serves as a benchmark for the price of gold around the world. Although this system may have the advantage of giving investors a widely known price upon which to base their buy and sell decisions, it can also be easily manipulated by placing large buy or sell orders around the time in which the price is determined. Despite the fact that the the London Gold Pool was able to keep gold prices unreasonably low for a long time, once it fell apart, prices of gold fell rapidly, draining the United States of many of its gold reserves.
Some people have serious suspicion that the Gold Fix is being manipulated by big banks today. Since gold had risen from 1993 until 2012, the gold price has risen on an average given day by 0.03%. But just before the AM and especially the PM fixes, we see a sharp spike downward. In fact, the spike before the PM Fix is -0.03%. The PM Fix on average is the lowest price of the day to the minute. This runs counter to what one would expect – a slow steady increase throughout the day that is perhaps greater in the evening, given that there is a significant amount of Asian buying relative to Western buying. Since the above chart was compiled using nearly 2 decades’ worth of data, the odds that this is simply a statistical anomaly are minuscule.
Ever since reform era the Chinese have been accumulating gold and they have been the largest importers in the world for years now. Additionally, China is the largest gold producing nation in the world, yet by law none of this gold is allowed to leave the nation. Some even believe that the Chinese government has been secretly hoarding gold, as it does not publicly report its total gold holdings, yet every statistic indicates they have been buying the precious metal in very large quantities.
Although the nation’s huge private and public demand has fueled gold prices to unprecedented levels, China has now has an opportunity to influence gold prices even further. The aforementioned London Fix banks will be handing over the Fix to the International Commodity Exchange. This will be a platform with greater regulation and oversight. But perhaps most importantly state-owned Chinese banks will be given a chance to participate, and this would break the cartel of HSBC, Barclays, ScotiaMocatta and Societe Generale. This is a big deal even if the Chinese banks don’t come to “dominate” the process. Additionally, China’s own Shanghai Gold Exchange is rapidly growing. In 2010, the SGE began offering ETFs as a way to satisfy growing demand from retail investors in China – Chinese demand for bars and jewelry has more than doubled since before the financial crisis. Satisfying the demand of the Chinese population, who have historically seen gold as the most secure way of saving, have made the SGE a rapidly-growing exchange, much unlike New York’s COMEX.
In conclusion, China looks positioned to influence the world’s gold market like never before. This is a trend that has been building up form a long time. Not only as a manifestation of the nation’s culture, but also as part of the Chinese government’s efforts to hedge its large US treasury debt position. Although China has been hoarding almost every commodity there is to be hoarded, Gold is its favorite choice. Having historically been used as money for centuries across the world, gold has proven to keep its value through periods of inflation and political instability.
Source 1: http://seekingalpha.com/article/2985966-chinas-great-leap-forward-towards-gold-market-dominance?page=2
Source 2: http://www.zerohedge.com/news/2014-01-19/shanghai-daily-china-expected-announce-it-has-more-doubled-its-gold-reserves
It seems to me foolish that a central bank would buy gold. Other than due to a popular fixation, there’s no particular reason for the price to be high — unlike silver and some other metals, industrial demand is minor. Furthermore, for years lots of commodities moved little in price. So I’m skeptical of the conspiracy angle. Fixing a price in tension with market forces takes very deep pockets — which makes me even more skeptical of stories on market manipulation.
There are many who still see gold as money today. While the dollar has lost more than 90% of its value since the introduction of the Federal Reserve System, gold has maintained its purchasing power. Were central banks not constantly devaluating their currencies, gold would only have value for its industrial use. However, the large levels of debt throughout the developed world make gold a safe hedge against monetarization of these debts, for China and individual investors.
Please take a look at the price series for gold in comparison to equities and other assets. If you are good at timing the market, then you can make money in gold. But I’ve never met anyone who is good at that, it’s a crap shoot. Equities pay more! If you bought gold in 1980, it’s worth far less today than if you had invested the same amount of money in a short-term bond fund.
So yes, there is a corner of the financial world that pushes gold. Traders make money; their investors do not. Gold is for fools — which suggests a simple comparison: if you’d bought a stake in an iron ore mine [iron pyrite is fool’s gold], would you have done better than if you’d bought gold?
Finally, if there are systematic intraday price movements, then surely traders are aware of that — it’s the sort of thing technical analysts follow. It’s very easy to arbitrage away, so whenever such patterns have been discovered, they don’t last long. Here, you buy in the morning and sell in the afternoon. It’s unlikely you can actually make money if you try, because it’s such an easy strategy.
PS: FRED does not have a post-WWII price series for iron ore.