Gold and price controls

August 18, 2008

Throughout the Vietnam era gold was fixed at $35/ounce despite rampant monetary inflation aimed at funding imperialist projects abroad – Americans wanted both guns and butter, remember? The end result of course was the disintegration of the Bretton-Woods agreement and a surging price of gold that still until this day gives cause to doubt the ability of central bankers to maintain the value of paper currency over time.

Everybody knows that price controls cause shortages, and shortages ultimately cause prices to rise even faster, but that doesn’t mean all shortages are caused by price controls. You can have temporary surges in demand, temporary interruptions in production, or perhaps even temporary obstructions of delivery. But what if none of these problems existed, and we still have shortages that extend for several quarters?

There are now countless stories of silver shortages dating back to last year and rumors of rampant gold shortages everywhere from Africa to India. Except for some unknown reason despite these shortages gold prices are declining instead of rising…There seems to be a total separation between physical metal market and the paper markets, exactly as occurred in agriculture before prices started correcting on the downside, are we about to experience a similar correction on the upside in gold and silver?

If this were any other commodity I would probably say it’s just a blip in the market and everything will correct itself over time, as it did with wheat and other agricultural commodities, but when we’re dealing with real money I have to ask the question nobody wants to answer… and that brings me back to price controls.

For several weeks now almost every major downward movement in the price of gold has occurred when both London and NYMEX were open together. Are we perhaps witnessing the first shot across the bow by central bankers in Europe and America intervening to defend the dollar? If that is the case, this downward pressure may last longer than a free-market system could sustain, but ultimately when the controls break, and they will break, gold will rise so violently you will cry if you miss it.

Understand the risks and be cautious of a difficult road ahead, but keep your eyes on the ball.