There’s this notion put forth by the majority in the precious metals community that the Fed and Central Banks control the market price of gold. I have even heard that some analysts believe the Fed could push the gold price any where they saw fit…. even to zero. While I agree that the Central Banks do play a role in gold market intervention, they most certainly CANNOT push the price of gold anywhere they want. This is an absolute falsity…. and I have the data to prove it.
To understand how the market determines the price of gold, we must first dismiss the economic principle of SUPPLY & DEMAND. While supply and demand forces are factors in the short-term price movement of gold, they do not really factor all that much over the longer term.
Here is a chart showing the relationship of the gold and oil price since the 1940’s:
The gold price is in DARK ORANGE while the oil price is in BLACK. We can plainly see the price of gold and oil have moved in tandem, especially after Nixon dropped the Dollar-Gold peg in 1971. While the oil-gold price movements are not exact, they parallel each other quite nicely. Thus, when the oil price skyrocketed during the 1970’s, so did the gold price. The same thing took place in the 2000’s.
Interestingly, the same thing took place with the silver price below:
In both of these charts, the volatility in the oil, gold and silver price increased significantly after 1971. There was an underlying reason for this… and it just wasn’t the dropping of the U.S. Dollar convertibility into gold in 1971. It was also due to the fact that the United States peaked in domestic cheap oil production in 1970. This was actually the peak of the U.S. Empire, even though we have continued to dominate the world by exchanging PAPER (U.S. Treasuries) for physical OIL-GOODS.
So, if we look at these two charts above, we can plainly see the oil price was more the LEADING DRIVER in the gold and silver price than were supply and demand forces. Again, supply and demand forces add volatility to the gold and silver price over the short-term, but the energy cost (mainly oil) has been the leading driver over the longer term.
Who Really Controls The Gold Price??
If the gold price has paralleled the oil price, then who really controls the gold market price?? While I agree that the Fed & Central Banks are intervening in the gold market, they can really only control the UPWARD movement in the price of gold. Why? Well, if we look at the chart below, we find our answer:
This chart shows the difference between the total production cost of the top two gold miners, Barrick and Newmont, versus the annual average gold market price. The chart clearly shows that the production cost is always less than the gold market price.
In the early 2000’s, the top two gold miners production cost was closer to the market price. However, after the U.S. Housing and Banking Market collapsed in 2008, the gold market price moved up considerably higher than the cost of production. My analysis suggests that the gold price was starting to head towards its high-quality STORE OF VALUE properties, rather than its COMMODITY PRICING mechanism.
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