There's a villain to the gold crash story

The reason gold fell so far.

The sudden and completely unexpected collapse of gold – down 13.7 per cent in the blink of an eye – was a huge market intrusion or manipulation, or major fiddle, into an overall rising bullion market - but by whom?

The spin was already craftily fed into the ether, along with the price: the fingered culprit was little lowly Cyprus, everyone’s favourite kicking-boy at the moment, as it was forced by the so-called rescuing Troika – the IMF, the EU and its ECB - to sell off its minimal gold hoard of just a piffling €400 million, and in effect send it to Germany.

The Troika isn’t interested in saving the Cypriot economy and its banks’ depositors, you see, but is only out to save the euro and its over-grandiose ambitions for the now over-stretched eurozone. The truth about gold, however, was completely different, and contained menacing overtones for the future of the world economy.

The real villain

So, stand up the real villain: it’s Ben Bernanke, of course! Yes, Helicopter Ben, you have been unmasked as the central banker at the Fed who’s slowly losing his clothes, and now Spear’s will rapidly remove your fig-leaf of a great deception – to reveal a major market manipulation.

And we will attempt to formulate the thinking behind you actions, which isn’t difficult, as we have seen through your QE failing game. Spear’s can see the consequences that so frightened you, that led to your breaking yet another sacred central banking rule: never to manipulate markets with public money.

Even your predecessor Sir Alan Greenspan - unwisely knighted in the UK for his services to (irony of ironies) financial stability - wisely disavowed any Fed interference with the booming dotcom markets of his day, which eventually crashed: but Greenspan didn’t see it as within the Fed’s charter to interfere with stock or bullion markets, or for that matter, to have a QE policy driven by unemployment.

Fake money

Now Bernanke is upholding his own failing and unproven strategy of flooding the economy with printed – or rather fake – money. He may have avoided a wholesale banking collapse, and supported the ongoing bonuses of those who broke the bank back in 2009.

His further attempts to avoid Global Depression II, however, are just stepping-stones to the ultimate disaster, the very result he so earnestly wished to avoid. His concern is that he will fail to prove his monetarist theory that the 1930s Great Depression was caused only by a serious lack of liquidity... for which his simplistic solution is just to print more of the bloody stuff, and throw some of it out of his helicopter over Iowa or wherever else isn’t on the map.

This is Bernanke’s answer to the unanswerable question, but QE doesn’t add one iota to aggregate demand. His QE3+ printing programme, which currently spews out $85.0 billion into the US economy every month, does nothing whatsoever, unfortunately, to increase consumer demand; and demand is what the world economy actually needs to get back to anything recognisable as Growth, as we once knew it.

Why gold tanked

What Bernanke did, on Friday, 12 April, was hit the market with 500 tonnes of naked shorts, knocking $73 off an ounce of gold. That adds up to 16 million ounces, worth $24,800,000,000, producing a loss for the seller(s) of $1,168,000,000: this begs the question of who has $25 trn of walking-around money in his hip pocket, and can afford to drop $1.2 bn on the street?

Answer: only the Fed, which can print money until the cows come home.

But what if it goes wrong? It’s an enormous and uncharted risk that Bernanke is taking, so why did he take it? Obviously, he wants to keep gold at around $1,400 per ounce, but why? Because the fall in value of the dollar against gold is caused by his QE3+ programme, which is designed to reduce unemployment by over one per cent, to seven per cent, but not to weaken the dollar and send import costs up, and lose control of interest rates. Hmm. It all sounds pretty rum.

Bernanke’s actions are the flipside of other central bank actions: Venezuela has repatriated its gold; Germany is doing the same, but the US only agreed to hand it over a seven-year period. So Bernanke now wants the price down, as he is committed to QE3+ until the US economy achieves lift-off.

The economy, however, is still patchy and not yet anywhere near take-off speed, so he daren’t let interest rates rise while he is printing money like a maniac, or he thinks his recovery will falter and fail.

It’s not difficult to see all this nonsense ending up as a nasty mess in the field at the end of the runway... with inflation and slump, slumpflation in a word, and banking and derivative collapses also found at the scene. What price gold then?

Stephen Hill is a businessman who has been published on classical economics and on European philology and philosophy. Read more by Stephen Hill

This article first appeared on Spear's.

Gold! Photograph: Getty Images

This is a story from the team at Spears magazine.

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Erdogan’s purge was too big and too organised to be a mere reaction to the failed coup

There is a specific word for the melancholy of Istanbul. The city is suffering a mighty bout of something like hüzün at the moment. 

Even at the worst of times Istanbul is a beautiful city, and the Bosphorus is a remarkable stretch of sea. Turks get very irritated if you call it a river. They are right. The Bosphorus has a life and energy that a river could never equal. Spend five minutes watching the Bosphorus and you can understand why Orhan Pamuk, Turkey’s Nobel laureate for literature, became fixated by it as he grew up, tracking the movements of the ocean-going vessels, the warships and the freighters as they steamed between Asia and Europe.

I went to an Ottoman palace on the Asian side of the Bosphorus, waiting to interview the former prime minister Ahmet Davu­toglu. He was pushed out of office two months ago by President Recep Tayyip Erdogan when he appeared to be too wedded to the clauses in the Turkish constitution which say that the prime minister is the head of government and the president is a ceremonial head of state. Erdogan was happy with that when he was prime minister. But now he’s president, he wants to change the constitution. If Erdogan can win the vote in parliament he will, in effect, be rubber-stamping the reality he has created since he became president. In the days since the attempted coup, no one has had any doubt about who is the power in the land.

 

City of melancholy

The view from the Ottoman palace was magnificent. Beneath a luscious, pine-shaded garden an oil tanker plied its way towards the Black Sea. Small ferries dodged across the sea lanes. It was not, I hasten to add, Davutoglu’s private residence. It had just been borrowed, for the backdrop. But it reminded a Turkish friend of something she had heard once from the AKP, Erdogan’s ruling party: that they would not rest until they were living in the apartments with balconies and gardens overlooking the Bosphorus that had always been the preserve of the secular elite they wanted to replace.

Pamuk also writes about hüzün, the melancholy that afflicts the citizens of Istanbul. It comes, he says, from the city’s history and its decline, the foghorns on the Bosphorus, from tumbledown walls that have been ruins since the fall of the Byzantine empire, unemployed men in tea houses, covered women waiting for buses that never come, pelting rain and dark evenings: the city’s whole fabric and all the lives within it. “My starting point,” Pamuk wrote, “was the emotion that a child might feel while looking through a steamy window.”

Istanbul is suffering a mighty bout of something like hüzün at the moment. In Pamuk’s work the citizens of Istanbul take a perverse pride in hüzün. No one in Istanbul, or elsewhere in Turkey, can draw comfort from what is happening now. Erdogan’s opponents wonder what kind of future they can have in his Turkey. I think I sensed it, too, in the triumphalist crowds of Erdogan supporters that have been gathering day after day since the coup was defeated.

 

Down with the generals

Erdogan’s opponents are not downcast because the coup failed; a big reason why it did was that it had no public support. Turks know way too much about the authoritarian ways of military rule to want it back. The melancholy is because Erdogan is using the coup to entrench himself even more deeply in power. The purge looks too far-reaching, too organised and too big to have been a quick reaction to the attempt on his power. Instead it seems to be a plan that was waiting to be used.

Turkey is a deeply unhappy country. It is hard to imagine now, but when the Arab uprisings happened in 2011 it seemed to be a model for the Middle East. It had elections and an economy that worked and grew. When I asked Davutoglu around that time whether there would be a new Ottoman sphere of influence for the 21st century, he smiled modestly, denied any such ambition and went on to explain that the 2011 uprisings were the true succession to the Ottoman empire. A century of European, and then American, domination was ending. It had been a false start in Middle Eastern history. Now it was back on track. The people of the region were deciding their futures, and perhaps Turkey would have a role, almost like a big brother.

Turkey’s position – straddling east and west, facing Europe and Asia – is the key to its history and its future. It could be, should be, a rock of stability in a desperately un­stable part of the world. But it isn’t, and that is a problem for all of us.

 

Contagion of war

The coup did not come out of a clear sky. Turkey was in deep crisis before the attempt was made. Part of the problem has come from Erdogan’s divisive policies. He has led the AKP to successive election victories since it first won in 2002. But the policies of his governments have not been inclusive. As long as his supporters are happy, the president seems unconcerned about the resentment and opposition he is generating on the other side of politics.

Perhaps that was inevitable. His mission, as a political Islamist, was to change the country, to end the power of secular elites, including the army, which had been dominant since Mustafa Kemal Atatürk created modern Turkey after the collapse of the Ottoman empire. And there is also the influence of chaos and war in the Middle East. Turkey has borders with Iraq and Syria, and is deeply involved in their wars. The borders do not stop the contagion of violence. Hundreds of people have died in the past year in bomb attacks in Turkish cities, some carried out by the jihadists of so-called Islamic State, and some sent by Kurdish separatists working under the PKK.

It is a horrible mix. Erdogan might be able to deal with it better if he had used the attempted coup to try to unite Turkey. All the parliamentary parties condemned it. But instead, he has turned the power of the state against his opponents. More rough times lie ahead.

Jeremy Bowen is the BBC’s Middle East editor. He tweets @bowenbbc

This article first appeared in the 28 July 2016 issue of the New Statesman, Summer Double Issue