Gold and Bubbles
Figures About the Managed Gold Price and About Bubbles
As a safe investment, one could rely on a good performance of gold in times of financial crises and imminent sovereign defaults. But often the price suddenly drops. It does so without visible reason and even when the panic reaches its peak. But why? Dimitri Speck knows the answer. He has examined in detail how central banks secretly manage the gold price with the intention to calm the markets and to control inflation.
There is an even bigger issue behind this manipulating: Since the abolition of the gold standard in 1971 the indebtedness of the global economy is increasing. It has now reached a level which is way beyond comprehension. What are the mechanisms that have led us to this mega bubble? Is it possible to avoid a catastrophic outcome like deflation or strong inflation?
Dimitri Speck’s book “Geheime Goldpolitik” (“Secret Gold Policy”) is about the managed gold price and about bubbles. It is currently only available in German, a Chinese edition will follow. Following the intensive research, the book contains over one hundred mainly unique figures. For the English speaking world, we present here some of the figures together with a short description. The figures depict gold intraday patterns, the amount of worldwide leased central bank gold or the ratio of worldwide total debt to global gdp. The first group of figures is about the gold interventions, the second group is about credit bubbles.
Gold Price Intervention Figures
Fig. 17: Average Intraday Price Trend of Gold 1986–7/1993
Price anomalies are living proof of secret gold price interventions. There were no abnormalities in the daily rate fluctuations before the start of systematic interventions, as shown in the figure below. This so-called intraday seasonal chart provides the typical intraday trend of the gold price before the beginning of systematic interventions on 5th August 1993:
Fig. 18: Average Intraday Price Trend of Gold 8/1993–3/2009
Since the beginning of systematic gold price interventions, the picture is quite different. In most cases the interventions occur suddenly. Since then, the average intraday gold price which is calculated from millions of minute by minute prices shows frequent dips at 10:00 New York time:
Fig. 34: Location of Bundesbank - German Federal Bank – Gold Reserves
Where is the German gold kept? It is predominantly stored at foreign central banks and only a tiny fraction is kept at the Bundesbank in Germany, as shown in the chart below:
Abb. 37: Worldwide Leased Central Bank Gold
Despite the fact that leased gold is entirely different from gold reserves, the federal banks do not publicize how much they have leased. However, the amount of leased gold can be estimated on the basis of the gold stored at the New York Federal Bank.
Fig. 39: Gold Price and Worldwide Central Bank Gold Supply
The price of gold has largely been influenced by the policy of the central banks. Since the start of the systematic interventions in 1993, the supply of the central banks increased and the price of gold fell. Since 2001 the amount of gold sold by central banks equaled the amount of lent gold they got back. Thus basically no gold has come onto the market and its price has risen. The figure below shows the price of gold and (under the line) the amount of gold which has come onto the market through sales and leasing.
Fig. 43: Gold-Intraday on 5th August 1993
Every gold market observer knows this phenomenon only too well: unexplained, sudden decreases in price. This cost-efficient type of intervention is meant to cause investors to close their position (through uncertainty, through execution of stop-loss-orders).This method was already used on the very first day of the systematic interventions. After opening, the gold price fell by five percent within minutes, as can be seen in the following intraday figure from 5thAugust 1993:
Fig. 49: The Phases of the Gold Price Interventions
The interventions can be divided into (at least three) phases. In the first phase, the central banks prevented an increase in price above the threshold of 400 dollars. In the second phase private leasing was key and the prices fell mainly because of their desire for profits. In the third one the price increase was merely slowed down. Despite the fact that the interventions were carried out in secret, there is enough evidence in documents and prices to date precisely (to the minute) every phase of the gold price interventions.
Fig. 50: Three-monthly Gold Leasing Rate
Apparently the central banks lease gold to private commercial banks to create interest revenue. The amounts are, however, very small, often making up less than one percent per year. Do the central banks really bear the risk of loss of their gold only for this small income?
Fig. 62: Gold and Net Positioning of the Commercial Traders
The structure of the futures market has changed exactly since the start of the third phase. According to the statistics of the US regulatory bodies the “commercial traders“ are clearly and permanently positioned on the short side. The figure below shows the positioning of the „commercial traders“ on the futures markets:
Mega Bubble Figures
The second extract shows a selection of figures from the second topic of the book, credit-financed bubbles and mega bubbles.
Fig. 72: South Sea Bubble of 1720
Credit-financed bubbles are created when the prices of assets rise due to purchases based on additional credit. In the classic scenario the price of assets falls shortly afterwards and the debtors become insolvent and the credits disappear when the bubble burst. The figure shows the South Sea Bubble of 1720, the first bubble which can be accurately traced using records of daily share prices.
Fig. 79: Germany: Ratio of Overall Debt to GDP
In the classic scenario the debtors are unable to repay their loans when the bubble burst causing an economic crisis. As the debts of one are the claims of the other, the knock-on effect is a downturn in demand and a resulting economic crisis. Recognizing this many countries took precautions decades ago to soften the blow of potential recessions. However, in this way the indebtedness remained. As a result, the amount of debts vice versa the amount of claims in relation to economic power increased. This figure shows the amount of all debt; those of private individuals, companies and the state itself in Germany since 1950.
Fig. 80: Japan: Ratio of Overall Debt to GDP
The Japanese mega bubble started to burst in 1990. In order to prevent an outright deflationary collapse, the government took on the debts of the private sector. Something similar began unfolding on a worldwide scale in 2008, bringing many countries close to bankruptcy. This figure shows the total of all Japanese debt in relation to economic power, broken down into debtor categories.
Fig. 81: World: Ratio of Overall Debt to GDP
Since the 1960s the worldwide overall indebtedness, that of households, companies and governments, has more than doubled in relation to economic power. This signals both an increased deflationary risk (as more claims can default) as well as an increased inflationary risk (as there are more claims, that can come into circulation and flee to tangible assets).
The figures of interest relating to gold price interventions and mega bubbles can be downloaded here: Abbildungen.zip