The headlines are dramatic, ugly and depressing to anyone who holds gold right now. Broad market sentiment has shifted from disdain and dismissive to highly negative. Hedge funds are shorting gold aggressively, hedge funds that own gold are being “outed”. The market pundits are are sticking the proverbial knife in and twisting it with glee. The Financial Times published an interesting article over the weekend.

“Why gold has lost its shine for investors”

by Mohamed El-Erian. He is one of the world’s most respected investors and market commentators. In his piece he makes a number of interesting observations.

According to El Erian gold is falling because:

• In a world of ETFs investors can mange risk more effectively and therefore do not need a traditional safe haven such as gold.
• Gold does well in inflationary environments, we don’t have one right now, ergo, gold does poorly.
• Central banks are not buying gold as aggressively as they once did; lower demand, lower prices.
• Gold has not reacted as a safe haven as it should. Greece should have sent the price soaring but it did not.
• Official and institutional demand for gold has not materialised.
• Physical market demand at lower prices is not strong enough to create a firm bid for gold, there are not enough small guys in the market.
• Gold’s recent price move up $1,000 from $700 in 2008 was the outlier and not the norm and gold is now priced more correctly then it was then.
• But then he drops the biggest bomb of all. He states that gold could buck its recent trend and the reason he gives should give you all reason to take notice.

“This situation is unlikely to change soon but it need not be terminal. A shift would probably require a broader normalisation of financial markets, including a diminution in the direct and indirect role of central banks in determining asset prices and their correlations.”

Does this not strike you as a particularly insightful statement, from one of the world’s foremost investment minds no less?

I read it as follows, “the game is rigged until it is not rigged and then and only then will gold normalise to its true market value (straw poll please), as will other assets.”

Nearly all his previous points are rendered mute if in fact the market is rigged and we lack an effective fair price discovery mechanism.

The fact is the markets are massively dependent on central bank funding, central bank benchmark rates and central bank meeting minutes. The small matters of risk premia, allocations, efficiencies, debt levels, productivity, ROCE, even dividends are not so important any more. Just look at the rise of the Fed balance sheet and the S&P500. Literally, they are one for one.

Nope, its the unelected masters of the universe that now control the financial destiny of every human on the planet. Not one of them was ever elected. We are witness to the most extraordinary concentration of power that has ever existed, and our political representatives have allowed this to happen.

If you are foolish enough to trust in the markets’ internal risk pricing mechanism, efficient market theory, think again.

For example do a search on “Alladdin”. You will find that it is a centralised risk management service and asset manager monster that now controls a massive, circa $17 trillion, of the global capital market, or circa 8% of the world’s stocks, bonds and loans. 17,000 traders the world over rely on its risk models directly or partially.

We may all be witness to the first chapter of the MBA class of 2025’s required course “Failed Monetary Theories of the Last 100 Years”. Your grand kids may even ask you what it was like…. before the great reset.

Trust me this will get a lot worse before it gets better. I would wager that the central bank officials of the Fed and the BOE, BOJ and that intellectual vacant organisation that is the ECB, wear with great unease the new found power that they have.

If you need proof look at the number of market mechanisms that have been wholesale rigged for the past 15 years. These operators never operated in absolute secret. The watchers that watched knew and their silence implied unofficial sanction. Soon the banks again will be recapitalised, this time not with nameless tax payers but with your pensions and your savings. Bail-ins are coming, google “bail-ins” and read up.

Gold may well fall further in the near term and the powers that be may well keep the bus on the road for the near future, but if history teaches us anything is that you never bet against the wisdom of the crowd. Ultimately, these markets will be freed up and when they do gold will be bid up aggressively. On the other hand, the markets can stay irrational longer then you can stay liquid, so don’t put all your money into gold but do keep a small percentage (5% – 20%) and look at it as a firm of financial insurance. If it is falling in value then the rest of your assets should be rising and that is the essence of investing: asset diversification.