By Ronald-Peter Stoferle, Incrementum AG Lichtenstein

February 12 (King World News) - Government Intervention & Manipulation Are Destroying Markets

It is a thin line between intervention and manipulation....

“The fatal investment anomaly in today’s world is that nobody knows what anything is worth anymore because nobody is allowed to meet in an unfettered market to determine it.” Bill Buckler

It is a fine line between intervention (usually a governmental / political interference) and manipulation (negative connotation in terms of “exerting influence”).  There have been official and legitimized interventions by central banks in bond rates (Operation Twist, Quantitative Easing) and currencies (Swiss franc, Japanese yen).  Both the quantity and the price of money are managed, i.e. controlled....

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The oil price is subject to interventions (OPEC cartel, release of strategic reserves), as are the food prices (subsidies).  Kevin Warsh has recently confirmed this: “Now that I am out of government, I can tell you what I really believe ... Central banks are now so heavily influencing asset prices that investors are unable to ascertain market values ... This influence is especially evident with the Fed’s purchase of government bonds, which has made it impossible for investors to use bond prices to learn anything about markets.”

Seeing a strong gold price signals a decline in trust in the financial and monetary system, so we believe that it would be naïve to think that gold is exempt from interventions.  However, according to Dow theory, the primary trend cannot be manipulated, because the inherent market forces are simply too strong.  This can also be seen on the following charts, picturing the price of gold during currency crises.

“Inflation can only be prolonged as long as the opinion prevails that it will come to an end in the foreseeable future. If at some point the conviction has taken over that inflation will never abate again, panic breaks out.” Ludwig von Mises

We believe that financial repression will continue to crop up in many shapes and sizes and gain in importance over the coming years.  However, the long-term costs of missing efforts made towards consolidating national finances will be substantial.  While the artificially low bond yields in the short run suggest that the saving measures are on course, one has to bear in mind that this has mainly been achieved by market interventions.

Therefore we regard the gradual transfer of assets – a rather euphemistic term for gradual expropriation – as a disastrous strategy in the long run.  What happens is that none of the previous problems of misallocation are resolved, but instead redistribution takes place (in the beginning mostly invisibly) and problems are dragged out, having to be addressed later.  As the dependence on these measures rises, so does the collateral damage to be expected later, and the seeds for an even bigger crisis have been sown.

Given that the majority of debt was neither redeemed nor written off but has only been transferred, the problem of excessive debt has still not been resolved.  Fiscal problems cannot be (sustainably) solved with monetary measures.  That would be like sorting out a hardware problem with software updates.

As far as sentiment is concerned, we definitely see no euphoria with respect to gold.  Skepticism, fear, and panic are never the final stop of a bull market.  Therefore we believe that our long-term price target of $2,300 an ounce for gold could turn out to be be on the conservative side.

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