In my opinion the world of finance is the most important systemic lynchpin in our lives, enabling commerce and thus the ability to rise above the poverty that self-autarkist behavior will inevitably bring.
Gold played and still plays a vital role in this system, and I thus I think it will be important to spend a bit of time and space to discuss its role in the context of trust.
Gold has been used as money by the humankind for quite some time, because it fulfilled the characteristics of being durable, portable, divisible, uniform, being in limited supply, and being generally acceptable. After 1971 however, gold ceased de-jure (if perhaps not de facto) being part of the financial system. In 1971 Nixon has decreed that the U.S. dollar will no longer be convertible to gold, and because every other currency at that time was fixed at a certain rate vis-à-vis the dollar, every currency became a fiat currency, i.e. not backed up by gold.
Leaving aside for now the question whether Nixon’s decision has been wise or not, this change has been based largely on population’s trust in the system. After all, theoretically, fiat currency if prudently managed, can be a proper substitute for gold. Citizens trust the government not to debase the currency by printing too much, and if this trust is maintained, the boat is not rocked to the point of capsizing.
Nevertheless, gold remains a good barometer of citizen’s distrust. As shown by Dmitri Speck in his book “the Gold Cartel”, The U.S. government and the Federal Reserve considered rising gold prices as a signal indicating weakening status of the U.S. dollar. In order to send a different signal to the market, U.S. government has in the past periodically intervened in the gold market by selling gold, thus lowering its price.
Obviously, lowering the price of gold solves nothing of the fundamental issues that increased its price in the first place. However, as a trust management tool, such a move can indeed be effective, provided that the underlying issues (such as too low interest rate) are being addressed as well.
If the government will grossly misjudge and mishandle the situation (say, will engage in money printing on a great scale that will bring hyperinflation), the price of gold can suddenly skyrocket. In that case, the loss of trust will be immediate, and, more importantly, broad, spilling to other areas as well, either due to over reaction, or due to connectivity between the “finance universe” and our regular lives. At an extreme scenario, with finance system in shambles, other parts of citizens’ lives will follow suit and cease to function. In Venezuela, for instance people were reduced to killing animals in the zoo for food. Somehow, I doubt that people there are especially trusting.
Therefore, it is imperative for the government to ensure that the loss of trust will never, ever, be a sudden one, and that mistakes can be reliably and conveniently blamed on somebody else.
Thus I view with great suspicion current RICO charges leveled up at J.P.Morgan, which is charged with systemic precious market manipulation. At this point, the regulator has for decades (!) received complaints about precious metals manipulation, and it is not all that difficult to notice the ridiculous concentrated position of the bank at the silver market.
Assuming the regulator did not suddenly decide to keep the law (this may happen with an individual but not with an entire bureaucratic system), I can only assume that this is done for trust management purposes. The price of gold after the brutal 2011 correction started to climb up again. The finance system is risking the loss of trust, and the government correctly decides to limit the damage to the finance sector alone, by shifting the blame to the agent.
On gold and trust 