Gold as a surrogate for inflation

[Gerald]

With some more study, I have a partial answer to my question above. My argument rests on the assumption “central banks can suppress the gold to USD exchange rate only until they run out of gold,” which is strictly true. However, if the central bank has access to an unlimited supply of money, then they can postpone the “running out of gold” event to the end of the universe. IOW, never.
With sufficient funds, you can buy gold at a higher price and then immediately turn around and sell it at a lower price. With such transactions, your net hoard of gold does not change over time. As long as you keep selling at the lower price, the market price of gold cannot rise. In these circumstances, you will be constantly draining your monetary supply, but if you have the ability to print new money, then your money supply never runs out.

I was disappointed when I realized this flaw in my original argument. And while the gold price has increased by an average of ~15% over the past _20_ years, a closer look at the graph of historical prices shows that it has increased by an average of nearly 0% over the last _10_ years. So in the last decade, central bank manipulation of gold prices has greatly increased. The suppression of gold is financed through inflation of our fiat currency — IOW, it is paid with a hidden tax on everyone who holds dollars. The central bank pays no penalty.

My next question is about similar manipulation of Bitcoin, and I will put that into a fresh thread.

[Ken]

I’m not sure that is possible if there is one gold market. If there is only one market, then there is only one price for gold at any one point in time. Dumping gold onto the market at a low price would indeed act to suppress the price of gold, but then when you buy to replenish your supply you drive the price back up again. It seems like the net effect would be that the central bank prints money and pumps it into the gold market, which would on average raise the price of gold.

In the past central banks have partitioned the market into two, one for the central banks and one for everyone else. One could imagine the Fed buying gold at high prices from other central banks, driving up the price in that market, and then turning around and dumping it into the other market to suppress the price there. Other central banks could then buy on the open market at a discount and sell back to the Fed at an inflated price. As crazy as this ‘buy high sell low’ strategy is, it does seem like something the Fed might do.