The major long-term driver of the gold price is confidence in the official money and in the institutions (governments, central banks and private banks) that create/promote/sponsor the official money. As far as long-term investors are concerned the gold story is therefore a simple one: gold will be in a bull market when confidence in the financial establishment (money, banks and government) is in a bear market and gold will be in a bear market when confidence in the financial establishment is in a bull market.
In real time it often doesn’t seem that simple, though, because on a weekly, monthly or even yearly basis a lot can happen to throw an investor off the scent. However, the risk of being thrown off the scent can be reduced by having an objective way of measuring the ebbs and flows in the confidence that drives, among other things, the performance of the gold market. That’s why I developed the Gold True Fundamentals Model (GTFM). The GTFM is determined mainly by confidence indicators such as credit spreads, the yield curve, the relative strength of the banking sector and inflation expectations, although it also takes into account the US dollar’s exchange rate and the general commodity-price trend.
An alternative to objective measurement is to rely on gut feel, but gut feel is notoriously unreliable in such matters because it is, by definition, influenced by personal biases. For example, it will be influenced by “projection bias”. This is the assumption that if you perceive things in a certain way, then most other people will perceive them in the same way. Projection bias plays a big part in a lot of gold market analysis. The market analyst will observe central bank or government actions that from his/her perspective are blatantly counter-productive, and go on to assume, often wrongly, that most market participants will view the actions in the same way.
Another alternative is to assume that gold’s fundamentals are always bullish and therefore that any large or lengthy price decline must be the result of a grand price-suppression scheme. Given its absurdity it’s amazing how popular this line of thinking has become in the gold market. Then again, it’s a line of thinking that has been aggressively promoted over the past two decades and has a certain emotional appeal.
Due to the effects of market sentiment the gold price occasionally will diverge from its ‘true fundamentals’ (as indicated by the GTFM) for up to a few months, but ALL substantial upward and downward trends in the gold price over the past 15 years have been consistent with the fundamental backdrop.
Does this invalidate the idea that manipulation happens in the gold market?
Of course not. Every experienced and knowledgeable trader/investor knows that all financial markets have always been subject to manipulation and always will be subject to manipulation. It does, however, invalidate the idea that there has been a successful long-term gold-price-suppression program.
The current situation (as at the end of last week) is that gold’s true fundamentals, as indicated by the GTFM, have been bearish for the past 10 weeks. Also, the true fundamentals have spent more time in bearish territory than bullish territory since the second half of last September. Refer to the following chart comparison of the GTFM and the US$ gold price for details.