Thomas Pascoe: The new media and the 24-hour news cycle have a great deal to answer
for, not least encouraging a political class which would otherwise be
happily engaged expensing duck houses into the belief that it should
demonstrate perpetual action on our behalf – hence the endless stream of
badly drafted legislation from the corridors of Whitehall.
It does, however, reveal things that would otherwise be ignored. The issue of manipulation in the gold market which
I wrote about last week is a case in point. The ball of half-truths and
downright lies which have surrounded the issue for a long time is
beginning to unspool in an issue internet activists kept alive long
before it was acknowledged by the mainstream media.
People ask why the issue is important at a time of naked market
manipulation of the Libor rate. The answer is simple: the Libor
manipulation scandal can be seen as the thin end of the wedge in terms
of government market manipulation.
Although Libor manipulation affects the interest rates we pay on all
number of credit products, gold market manipulation is more serious
still.
The price of gold is traditionally a proxy for the value of money. A
soaring bullion price is indicative of a lack of faith in fiat currency.
Our financial system is predicated on the notion that money stands as
a proxy for the factors of production – capital, labour, land and
enterprise.
In short, the abundance of money in the economy should be related to
the abundance of those factors. The harder we work, for instance, the
more we create. There is more labour in the economy, therefore a rise in
the money supply is legitimate in order to mirror this. There is
nothing wrong with printing money per se so long as the printing
reflects an expansion in the real economy.
Twentieth and Twenty-First century economics appears to have done
away with this. Money is now created ex nihilo to feed both the top and
bottom ends of society.
Money printing or Quantitative Easing is mainly of benefit to two
parties. Firstly, the Government, which is able to borrow more and
borrow cheaper than it otherwise would have done. This is because QE
money is used to buy bonds, forcing down yields.
The Government uses this money to finance both existing debt and an
expansive welfare state which bribes large portions of the population to
accept a life of hellish boredom and dribbling docility in exchange for
£70 a week in dole money. Such payments are not a genuine transfer of
the fruits of existing production within an economy; they are borrowed.
They help governments electorally at the cost of the vigour of society.
At the top end, Quantitative Easing money goes directly to banks, who
are able to sell their government bonds at a profit. In theory they may
use this to even up their balance sheet. In reality they frequently use
it as stake money at riskier tables.
In both cases, paper money has been stripped of meaning. It is no
longer a reflection of production nor any of its components. It now
simply exists of its own right – but it can survive as a measure only
for so long as the government keeps such printing in small enough doses
that the de-leveraging does not become apparent to workers.
As with everything in economics, there is a correctional market
mechanism for this scenario – the flight to commodities, particularly
precious metals like gold. Gold holds its value when paper money loses
value, because it is beyond the gift of the government to simply will
gold into being and give it to friends in high places or voters in low
ones.
If gold has been manipulated downwards and if that process continues,
then all recourse to a store of value (other than land and property)
has been taken from the individual.
The value of our money is falling thanks to Quantitative Easing.
Fixing in the gold market takes away one of the key hedges for those
with cash assets but no property.
The true fall in the value of money is probably better seen through
the rise in house prices since the 1980s – a much better reflection of
the market mechanism thanks to the suppliers being so large and because
of the lack of a two-way interplay between house prices on the street
and derivative products for traders.
In any case, it would appear that the Libor scandal at Barclays has
acted to draw out more market figures willing to claim openly that
organised price fixing has occurred in gold.
Ned Naylor-Leyland, investment director at Cheviot, a British
investment firm, had the following to say on CNBC the other day (H/Tt
Chris Powell):
In the aftermath of the Libor scandal, the Bank of England complained that it had received no forewarning from the marketplace.
Gold price manipulation may well be the next big scandal to break –
if it does, this time nobody can say that they were not warned.
Finally, a mea culpa – the tonnage figure quoted in the original
article certainly undershot the true extent of the short position held
by the US bank in question. It was very difficult to get accurate
tonnage figures from anyone I spoke to for the article, and I took a
pithy aside relating to a “couple of tonnes” rather too literally in a
desire to include some. The true extent would have been far greater as
many of you pointed out in the discussion board below the article.
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