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Why Bother Investing in Gold If the Price Is Manipulated?

By Al Korelin      Printer Friendly Version
Oct 1 2007 11:04AM

www.kereport.com

Crazy Bill Murphy, the founder of GATA and one of my favorite websites LeMetrople Cafe , emphatically tells everybody who will listen that the price of gold is “rigged by the cabal” and that in the end they will fail. Newsletter writer Jay Taylor completely agrees as does public relations genius Peter Grandich.

James Turk puts it differently when he says, “the price of gold is clearly managed.” I like the word “managed” because it connotes an action that is, at least theoretically, not malicious.

After considerable study and numerous conversations with my guests on The Korelin Economics Report, I personally am convinced that the price of gold is managed. 

I believe this is the true for one simple reason. It is managed because it has the status of being the best indicator, along with consumer confidence, of economic conditions.

Now, there are a lot of people out there who don’t think that the financial health of our country is all that great. They believe economist John Williams, the originator of the website found on the Internet at www.shadowstats.com, when he claims to have concrete evidence that inflation, among other things, is greatly mis-reported and that the number is not around 3% but actually something north of 10%. He feels that same way about the unemployment numbers and the debt figures put out by the federal government. 

Now, it is a known fact that the U.S. economy is driven by the spending habits of the individual consumer. Okay, that makes sense. Now, if people stop spending money, the economy slows down and when that happens, unless something turns this situation around, things simply get worse and worse.

Case in point, when gold’s price escalated to the $800/ounce level in the early 1980’s the U.S. economy was really suffering and consumers were nervous, curbing a lot of their spending. I remember those days because our mortgage was around 15% and, you better believe, Kathy and I weren’t spending money the way people have been spending during the past ten years or so buying new cars, boats, jewelry, expensive restaurant dinners, etc.

So why is the American consumer so free with his or her money today? Well, for a couple of reasons. First of all, the typical consumer is not convinced that there is anything at all wrong with the economy. The reported consumer price index is within a tolerable range, the unemployment figures are low and the gross domestic product is growing at a fairly respectable rate.  Or so they believe. Also, the price of gold is appreciating, but not at the rate that it would if the emperor was really wearing all of his clothes.

Okay, there is some concern on the periphery about the reported economic statistics, but the level of concern is not particularly high.

Let’s now assume that the price of gold was truly the result of the law of supply and demand. Since the beginning of time, one of the factors affecting this basic economic law has been the perception of economic well-being or lack thereof.  The demand for gold increased when people were nervous. When demand increases significantly as it did in the late 1970’s and early 1980’s, the intersection of the supply and demand curves is at a much higher level.

I believe that if we saw a significant increase in the price of gold over the past five years or so, the U.S. economy and many of the other economies of the world would have stopped dead in their tracks.

They would have done that because the consumer spending that fueled this growth would not have been there because people would have stopped throwing their money around. They certainly would not have borrowed large amounts of cash to fuel their spending. They would instead have followed the example of the squirrel and put some away for the hard winter that they knew was coming.

It may sound simplistic, but I believe that had a significant increase occurred in gold’s price consumers would have gotten frightened and saved cash and not borrowed at ridiculously high levels. The savings rate, instead of being negative, would have been strong.

It is obvious to me that it is in the best interest of those attempting to control our economy, in their eyes for our own good, to make sure the price of gold is suppressed so that no one gets nervous.
If you buy that, you would have to ask, “why then does it make any sense to invest in gold or gold-related investments?”

There is one simple reason. I maintain that conditions have gotten to the point where it will soon be impossible to maintain the artificially low levels of today. Too many things are going sideways. The U.S. dollar continues to drop, U.S. debt levels on the part of both the government and the individual continue to escalate and the huge influx of foreign capital coming into our country could stop any day.

We are simply to close to the edge. When we cross over that edge, you will see normal supply and demand take effect and as James Turk said last week, “you could easily see gold spike upwards $100 in a single day followed by a four digit price level.

Take a listen to the internationally syndicated Korelin Economics Report. You can do that by listening to one of the many stations around the world that carry the program or you can listen on the Internet by going to www.kereport.com. On my program I discuss this very important issue with the proven experts in the field. Listen and come to your own conclusion.

A.B. Korelin

 

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"The Korelin Economics Report" features discussions with political figures, newsletter writers, analysts, portfolio managers and company executives. None of the guests appearing on the program pay any fees and if Mr. Korelin or any of the guests own shares in any company that is discussed, that fact is clearly disclosed. Mr. Korelin’s firm, A.B. Korelin and Associates, Inc., has been providing regulatory consulting services to public companies for the past twenty five years.