James Turk's "Patterns That Reveal Gold Price Capping"

PATTERNS THAT REVEAL GOLD PRICE CAPPINGby James TurkFounder, GoldMoney.comAugust 13, 2007

Sometimes it is helpful to view things from a different angle to get other useful perspectives. That is what the following chart accomplishes. I’ve been watching the patterns in this chart closely ever since seeing a similar version of it a year ago on Bill Murphy’s website: http://www.lemetropolecafe.com/

This chart shows the price of the Dow Jones Industrials Average each day from gold’s bear market low on July 19, 1999 to this past Friday’s close, cross-plotted against the price of gold on the same day. For example, on August 10th the DJIA closed at 13,239.54 and gold closed at $670.30. So if you look at the intersection of these two prices, there is a purple dot marking this data point.

In my view, there are two key messages that we can read from the above chart:
1) The patterns in this chart clearly show the price capping by the gold cartel, which is an unholy alliance of several governments and their selected bullion banks. Led by the US government, they aim to keep the gold price at an artificially low level in a vain attempt to make the dollar look worthy of being the world’s reserve currency. The four different colours denote the four deliberate efforts to cap the gold price, with each capping effort marked by a horizontal red line.

2) Typically the DJIA and the gold price are negatively correlated. But since August 2003, they have been positively correlated. Both are more or less rising together, which is a significant event.

The following explains the above chart and my analysis of it more fully.
The blue dots illustrate the early part of gold’s bull market. As one would expect, gold was negatively correlated to the DJIA during this period. As the DJIA was falling initially after the collapse of the Internet bubble and then from the aftermath of 9-11, the gold price was rising but contained below $325, the first horizontal red line on the above chart.

Though it lasted for more than three years, inevitably the $325 barrier gave way. That price could no longer be defended by the gold cartel, so the second phase of gold’s price capping began with the new barrier at $360. This second barrier eventually gave way in August 2003 for the same reasons that $325 was bettered. Gold was too cheap at that price, so the demand for physical metal overwhelmed the gold cartel’s capacity or willingness to keep supplying metal from central bank vaults at such a bargain basement prices.

After all, as the old saying goes, money is power. Central banks recognize that there is no money more powerful than gold, so they loathe parting with their physical metal. They do so only sparingly, preferring instead to rely upon anti-gold propaganda to influence gold prices and help defend their price capping barriers.

For example, how many times now has the IMF threatened to sell its gold reserve even though one ounce has yet to hit the market? Italy’s recent announcement that it intends to sell gold to reduce its national debt is another example. But Italy’s entire gold reserve only equals an insignificant 2.2% of its debt, so obviously its announcement was not offering a serious way to pay off its debt. Rather, as anti-gold propaganda it was a bald attempt to talk down the gold price.

The hollow rhetoric of central bankers is becoming better understood and more widely recognized, which is one of the factors making it more difficult for central banks to cap the gold price. The other important factor of course is the ongoing destruction of the dollar, which continues to get inflated away and thereby make gold an increasingly attractive alternative to more and more people. Consequently, three gold price barriers defended by the gold cartel have already fallen, which is compelling evidence that their fourth barrier will eventually fall too.

After the second barrier fell, something unusual happened. Both the DJIA and gold began rising together. This relationship – which continues to this day – is unusual because these two asset classes are typically negatively correlated. Their positive correlation can be clearly seen in the third phase of gold’s bull market, which is denoted by the green dots. What’s more, the pace of gold’s ascent quickened during this phase, which is also clearly visible on the above chart.
Finally, the fourth phase began when gold cleared $455 on September 16, 2005. The fourth phase is patently different from the three previous ones. First, note that the gold cartel set its barrier at a much higher price than previously. The $700 level was a stunning 54% above the previous level of $455. Then note the steep rise during the first part of this fourth phase as gold climbed to the new $700 barrier. Why is this fourth phase so different from the previous three?
My view is that the Gold Rush 21 conference sponsored by the Gold Anti-Trust Action Committee in August 2005 was largely responsible for this new pattern. That conference marked an important turning point in the battle against the gold cartel to achieve an unfettered gold market, free of government intervention, influence and control.

At that conference, in which I was privileged to participate, people from countries all over the world gathered to present their findings detailing the gold price suppression scheme, which GATA then publicized. GATA’s success in broadcasting this message far and wide has given gold buyers a good understanding of the gold cartel’s aims and methods. More importantly, the Gold Rush 21 conference made clear the exceptional opportunity available by exchanging dollars into gold. If you haven’t already reviewed the Gold Rush 21 material, I highly recommend that you visit the conference website: http://www.goldrush21.com/

There is one other important point about the current fourth phase. The purple dots marking this phase also make clear that the relationship between gold and the DJIA has become more volatile. This result and gold’s unusual positive correlation to the DJIA I believe arise principally from the weak US dollar. We are witnessing a flight from the dollar that over the past few years has benefited tangible assets and near-tangible assets like the equities of commodity producing companies.

Why do the barriers created by the gold cartel eventually fall? In short, markets are bigger than any cartel or group of governments acting in concert. Governments can influence and distort market prices through their ongoing intervention, but ultimately the market itself determines the value of any asset. When an asset is deemed by the market to be undervalued, money will rush to it, as has been occurring with gold over the past several years.

Because of the capping efforts, the gold market can be compared to a pressure cooker. The buying power eventually becomes overwhelming when gold is undervalued, so central banks need to supply physical gold to the market to keep the pressure cooker – the gold price – from exploding. For example, we have seen this buying pressure building over the past few months, and correspondingly, the pace of dishoarding physical metal from central bank vaults has accelerated. Eventually the weight of metal required to maintain the targeted price cap becomes so significant that the cartel steps back and relieves the buying pressure by letting the price rise, rather than part with more physical metal. Three targeted price caps have fallen and the fourth cap at $700 will fall too.

What does it all mean to us? It is of course discouraging when free-markets are impeded by governments, but government intervention unfortunately has become the norm. There is, however, a beneficial consequence of this price capping.
Gold is much cheaper than it would otherwise be if governments weren’t capping its price. That creates an opportunity for everyone who understands these circumstances to pick up gold ‘on the cheap’ by exchanging their overvalued dollars for it. That’s as true today as it was during any of the three previous price capping phases.

So I expect a year or two from now we will be looking back at the gold that we are now buying in the $600’s in the same way we today look back at the gold bought in phases one, two and three. Those were timely purchases because gold was good value back then, and importantly, gold is just as good a value today.
© 2007 James Turk