Few things attract as many conspiracy theories and theorists as gold does. The most enduring conspiracy theory seems to be that central banks around the world are colluding to keep a lid on gold prices. The logic here presumably is that a spike in gold prices could be construed by market participants as a harbinger of inflation, and if it occurred, would force central banks to raise interest rates from their artificially low levels (2009 – circa 2014). Another sub-plot is that the biggest gold exchange-traded funds (ETFs) have a huge shortfall in the amount of gold they hold. Here are three reasons why the noble metal is a favorite subject for conspiracy theorists everywhere –
- Enduring store of value: Despite its price fluctuations over the decades, gold has been an enduring store of value for centuries. It probably retains the same allure for present-day consumers in India and China – the world’s biggest gold markets – as it did for citizens of the great empires millennia ago. Any item whose appeal has remained undiminished over thousands of years is bound to attract more than its fair share of controversy (and conspiracy).
- Price fluctuations: Gold’s price moves in recent years have only served to stoke the conspiracy fire. As an example, conspiracy theorists point to gold’s steady decline in 2013 and 2014 – a time when record amounts of monetary stimulus were being pumped into the economies of the U.S., Europe and Japan – as proof that central banks were colluding to depress gold prices. It doesn’t help that gold’s bull run from 2001 onwards only commenced a year or two after central banks had concluded a program of heavy gold sales from their reserves.
- Archaic price fixing system: The price of gold continues to be fixed by an archaic ritual that is almost a century old (see “The Insiders Who Fix Rates for Gold, Currencies and Libor"), involving a teleconference between the five banks involved in the gold fix and their customers. Some reputed researchers have concluded that the gold price-fixing process is rife with conflicts of interest and potential for abuse. In May 2014, an options trader at Barclays Plc became the first person to be fined for manipulating the fixing of gold prices by Britain’s Financial Conduct Authority.
The Bottom Line
Change is already afoot with regard to the gold price fixing process. In July 2014, the four banks involved in the process (Deutsche Bank exited the group in 2014) said they would appoint an independent administrator to revamp the price-setting ritual. Whether that does anything to diminish the scale and scope of gold conspiracy theories remains to be seen.
Disclosure: The author did not own any of the securities mentioned in this article at the time of publication.