As a gold bug, and even as a free market economic student in general, it is your duty to hate central banking and everything it entails - even with gold backing a currency, gold bugs hate central banks because the price of gold is fixed and can't "rocket to the moon" based on market forces.
With fiat currency, gold bugs should hate central banks even more, because they have a monopoly on the issue of worthless pieces of paper that are only assigned value because two people agree on it (legally, hence the signatures on the bills), all debts settled in court must be denominated in legal tender, and people actually buy into this crazy paper system.
My question then: Why is it that the very institutions that cause such economic malaise and mayhem in the long term are celebrated for their "wisdom" in purchasing gold? Why is this always treated as a bullish signal for gold?
My thinking is that central banks are generally the last ones to the party - they are essentially an extension of government and as such are guilty of acting "after the fact" and at peaks in the general mood of society. For example, the Federal Reserve has thrown $1 Trillion of debt-backed securities right onto their own balance sheet, leaving them in an extremely vulnerable position. Despite the fact the "market value" is not 0 on an exchange, the securities are essentially worth 0 dollars in real terms.
So why is it that when the Fed or any other central bank throws something on its balance sheet it is worthless trash, but as soon as the world's central banks are net gold buyers, they are the brightest guys in the room?
For the record, gold will never be worth "0" dollars (unless dollars cease to exist one day), because it is not a promise to pay and for all those other wonderful reasons. However, a quick look at central bank activity relative to price for the past 30 years shows that central banks are a pretty good contrarian indicator relative to gold's price action. See here:
Seen here, the bullish case for worldwide net central bank selling doesn't hold much weight.
The trend up indicates a response to increasingly pessimistic mood towards gold. It also coincides nicely with the market bottom in the gold price.
Clearly, the trend for the past 5-6 years has been down for net selling activity, coinciding with highly elevated optimism towards gold.
To me this flashes a warning signal that there is a lot of positive psychology that needs to be unwound in gold.
And besides, unwinding this positive psychology in the midst of the coming deflationary environment might just yield the most positive long-term results for the metal that we could hope for.
In regards to manipulation in the markets, price suppression, central bank's open market futures operations, etc, GATA has done some excellent work - the very best in terms of what they do. However, for some reason, they just keep getting stonewalled and people really don't pay attention to the reams and reams of data that they have put together.
Why the heck is that?
Well, it all goes back to the overall level of optimism or pessimism towards an asset - a good example is the case of Bernie Madoff. As long as the assets in his fund were going "up" in value (on paper), and optimism towards stocks was rising, he was sailing smooth. People just don't care about that kind of stuff in bull markets - they don't ask questions and they certainly see no reason to question why their shrewd investment is climbing in value.
In bear markets, however, when people are unconsciously becoming more negative towards particular assets, the conscious part of these people want to know why is this losing value?. And so they start asking questions. Generally the data is already there, it's just waiting to be accepted and acted upon by the general investment community. I remember reading an interview in the WSJ with a fund manager who had purchased a good chunk of Madoff's investments, and this fund manager saying something along the lines of "a lot of us in the finance industry knew his numbers were too good to be true, and that something wasn't quite right, but it was still making us money so we didn't really look into it".
So if gold bugs are truly gold-buggish, they should welcome and embrace the prospect of a decline in the price of gold, now that many investors are using paper trading vehicles to own gold, and gold has an elevated level of positive psychology (along with its price). Once the bear market is complete and the gold price has dropped substantially, the various frauds for which there is so much documentation will be forced into the light by a plethora of angry gold investors. This will take gold one step further from being an "investment" and one step closer to being money. And it will really stick it to the central banks that they hate but also love (see above) at the same time.
As to the gold price itself, in the mid-term. It looks as though there is one more high to be made in gold before a resumption of the downtrend to lower lows. $950/oz is our minimum downtrend target for the correction, with the potential for further downside being very high still. Ultimate gold should make a lower-low than it did in 2008, at around $650 per ounce.
All the Best!