kpc
3rd November 2008, 12:53 AM
The Myth of Gold Conspiracies
A short essay on economic logic by KPC
Throughout modern history, there persists a rumour that somehow Central Banks of many countries are conspiring to suppress the price of gold in world markets.  Somehow, these rumours are easily believed by those who wants very much to believe in them.
After all, my gold hoard should have been worth much more than what it's worth now, it should have been worth it's weight in gold.
Sometimes when we speculate (gamble), we get too excited, we can't think straight.
Our thinking tends to be skewed towards the bets we have made earlier, after all who wants to admit that his/her previous convictions was wrong?
If you read economic news, there would always be two sides to a story.
We tend to absorb the side that reinforces our earlier convictions.
A lot of people think that gold is a very liquid asset.
It is.  Except that it is not as liquid as paper currency.
For example, try to buy something from Ebay and offer to pay for it in gold.  It wouldn't work.
To trade, we need to convert our gold to USD first.
This is why the world's major currencies have an inherent value built-in even though it is backed by almost nothing.
We need them to trade.
Let's put a little thought into this conspiracy theory.
To suppress the price of gold, you need to "corner" the gold market.
It takes a lot-lot of money ( gold? ) to corner a widely available metal like gold.
If you try to sell gold at a lower than market price without cornering it first, your gold would be eaten up in a few minutes, then you would have no more gold to sell.
Historically, many attempts to corner much smaller markets like silver and copper failed miserably.
The gold market is too big and wide to be cornered, even by central banks.
Let's say a group of central banks agree to suppress the price of gold.
Countries that did not join in the conspiracy will know that the price of gold is artificially low. 
Traders and everybody else would also know. 
The whole world would surely then take up the opportunity to stock up on cheap gold.
When this happens, the artificially low prices become unsustainable and the whole scheme would become undone very quickly.
Central banks that are part of the conspiracy would soon run out of gold stocks.
Gold that can be used to back their currencies, to prevent it from weakening.
Gold that can be used to purchase foreign currencies that is required for trading.
So, as you can see, gold conspiracies have been demonstrated to be false.
So finally, what should be the actual current price of gold?
How much gold is worth is actually quite accurately defined by its current market price,
balanced by basic supply and demand economics, buffeted by a little bit of speculation.
A short essay on economic logic by KPC
Throughout modern history, there persists a rumour that somehow Central Banks of many countries are conspiring to suppress the price of gold in world markets.  Somehow, these rumours are easily believed by those who wants very much to believe in them.
After all, my gold hoard should have been worth much more than what it's worth now, it should have been worth it's weight in gold.
Sometimes when we speculate (gamble), we get too excited, we can't think straight.
Our thinking tends to be skewed towards the bets we have made earlier, after all who wants to admit that his/her previous convictions was wrong?
If you read economic news, there would always be two sides to a story.
We tend to absorb the side that reinforces our earlier convictions.
A lot of people think that gold is a very liquid asset.
It is.  Except that it is not as liquid as paper currency.
For example, try to buy something from Ebay and offer to pay for it in gold.  It wouldn't work.
To trade, we need to convert our gold to USD first.
This is why the world's major currencies have an inherent value built-in even though it is backed by almost nothing.
We need them to trade.
Let's put a little thought into this conspiracy theory.
To suppress the price of gold, you need to "corner" the gold market.
It takes a lot-lot of money ( gold? ) to corner a widely available metal like gold.
If you try to sell gold at a lower than market price without cornering it first, your gold would be eaten up in a few minutes, then you would have no more gold to sell.
Historically, many attempts to corner much smaller markets like silver and copper failed miserably.
The gold market is too big and wide to be cornered, even by central banks.
Let's say a group of central banks agree to suppress the price of gold.
Countries that did not join in the conspiracy will know that the price of gold is artificially low. 
Traders and everybody else would also know. 
The whole world would surely then take up the opportunity to stock up on cheap gold.
When this happens, the artificially low prices become unsustainable and the whole scheme would become undone very quickly.
Central banks that are part of the conspiracy would soon run out of gold stocks.
Gold that can be used to back their currencies, to prevent it from weakening.
Gold that can be used to purchase foreign currencies that is required for trading.
So, as you can see, gold conspiracies have been demonstrated to be false.
So finally, what should be the actual current price of gold?
How much gold is worth is actually quite accurately defined by its current market price,
balanced by basic supply and demand economics, buffeted by a little bit of speculation.