It is my pleasure to write this bonus chapter to this special edition of The New Case for Gold printed exclusively for clients of Goldco Precious Metals.

One question I am frequently asked as I write and speak about gold is, “Why should I own gold if the market is manipulated by central banks?” The implication of the question is that central banks are cooperating to suppress the price of gold and deprive investors of the price increases that might otherwise be expected in our uncertain and volatile world.

As I explain in this book, gold is certainly subject to market manipulation. This can come from many sources including central banks, finance ministries, multilateral organizations such as the International Monetary Fund, and sovereign wealth funds.

The manipulation may arise for many reasons. These reasons include a desire to maintain orderly markets

and avoid signs of panic or rampant inflationary expectations. Another reason is to facilitate the smooth transfer of gold from West to East, especially to China.

The government of China needs to acquire several thousand more tons of gold in order to reach equality with the United States. If the price of gold were to rise materially, it would be difficult for China to complete its purchases with the reserves available to it.

This creates a community of interest between the United States and China. The U.S. wants to avoid disorderly markets in gold because it creates the appearance of runaway inflation. China wants to avoid price spikes in gold because they are still buying large quantities. All buyers like low prices – at least until they are done shopping.When the world’s two largest economies – the U.S. and

China – agree on a policy goal, they and their trading partners can usually find a way to achieve their goal; at least in the short-run.

That said, we return to the original question. Why would an investor want to own gold if the U.S. and China are suppressing the price? There are two answers. The first is that the U.S. – China arrangement is temporary. The second is that all price suppression schemes fail in the end.

Think of price suppression as a tightly coiled spring being held down by a large weight. Once the weight is removed, the spring unwinds violently and spikes into the air. When the U.S. and Chinese pressure on the gold price is relaxed, which it will be soon, gold investors can expect a similar violent spike to the upside.

The reason the U.S. – China arrangement is temporary is that both countries will eventually need and want inflation to deal with their non-sustainable debt burdens. The current

debt-to-GDP ratio in the U.S. is 100%, the highest since World War II. The debt-to-GDP ratio is China is almost 200%. In the U.S., the deficit is currently growing faster than the economy. This means the debt-to-GDP ratio is getting worse, not better.

Chinese growth appears to be greater than the increase in its deficits. But those numbers are deceiving. Chinese growth is almost certainly overstated by its reliance on wasted investment. When an adjustment is made for such waste, real growth is closer to 3%, rather than the 6.8% currently reported.

Also, a lot of Chinese debt is denominated in dollars rather than local currency. As capital flows out of China, the central bank will depreciate the currency to stem the

In the U.S., the deficit is currently growing faster than the economy. This means the debt-to-GDP ratio is getting worse, not better.

outflows. When the Chinese currency depreciates, the real burden of the dollar-denominated debt goes up.

For different reasons, both China and the U.S. need inflation to make the debt burdens disappear in real terms. However, China fears inflation because it will not only reduce the value of its debts, but also reduce the value of its reserves. Those reserves are overwhelmingly denominated in U.S. dollars. If the U.S. inflates the value of dollars to deal with the U.S. debt burden, China will be hurt by the devaluation of its U.S. dollar reserves.

The U.S. Treasury does not fear the impact of U.S. dollar inflation because over 70% of U.S. reserves are in gold. In China, the comparable figure is about 2%. China’s reserves are in U.S. paper. The U.S. Treasury’s assets are in gold.

The obvious solution is for China to increase its gold reserves. This is exactly what China has been doing for the past ten years. The problem is that China’s economy keeps growing while its paper dollar reserves are enormous. China needs equally enormous quantities of gold to catch-up with the U.S. in regard to reserves. But gold markets are thinly traded. If China attempted to play catch up by buying thousands of tons of gold at once on the open market, the gold price would explode.

China’s dilemma therefore is to acquire large amounts of gold without having a major market impact on the price of gold. The way to do this is with secrecy and patience.

China has been acquiring between 500 and 1,000 of gold tons per year for the past ten years. Some of this has been made available for private investors in China; not all of the gold has gone to government reserves. Still, it is reasonable to assume that China has added at least 3,000 tons to its gold reserves (although this has not been acknowledged publicly).

Sometime in the next year or two, China should achieve “gold parity” with the United States. Once that happens, there will no longer be a reason to suppress the price of gold. China’s buying spree will be over. At that point, both

countries can let the inflation genie out of the bottle. Steady inflation will melt the real value of U.S. and Chinese debt burdens. Large gold hoards will protect the real value of the U.S. and Chinese reserve positions. The only losers will be investors who do not have gold.

The second reason to expect that gold price suppression schemes will fail is that history shows they always fail. Governments run the gold price manipulations through a variety of means including short sales of paper gold in the futures, options, ETF, and derivatives markets and through gold leasing. However, all paper gold schemes require at least a small amount of physical gold to back them up. Physical gold is starting to disappear from the floating supply. Soon there will not be enough physical gold in the float to support the inverted pyramid of paper gold contracts.

This has occurred many times before. In 1914, at the outbreak of World War I, most of the combatant nations suspended redemptions of paper money for gold. The UK did not technically suspend redemptions, but it did convert most private gold from coins to 400-ounce bars so that it would be taken out of general circulation, and forced into bank vaults. Over time, people forgot about gold as a medium of exchange and became accustomed to reliance on paper money.

In 1931, a run on the banking system forced the UK to devalue pounds sterling relative to gold in order to stop the conversion of sterling held abroad into gold. In 1933, the U.S. ordered the confiscation of all private gold. It then ordered price hikes in the value of gold, with the government keeping the dollar profits from those price hikes. In 1939, at the start of World War II, nations again suspended the redemption of paper currencies into gold or the export of gold abroad. In 1971, the U.S. suspended the redemption of dollars for gold by U.S. trading partners.

All of these suspensions and devaluations – in 1931, 1933, 1939, and 1971 – were the direct result of failed price suppression schemes. Everyday citizens and trading partners of the gold powers demanded the conversion of paper money into gold because they could see that low official gold prices were going higher.

In every case, the gold powers reneged on their promises to redeem paper for gold. Throughout this chronology, from 1914 to 2016, the price of gold surged higher from $20.67 per ounce to $1,260 per ounce as of this writing. That’s a 6,000% increase in the dollar price of gold.

Other price suppression schemes have failed also. In the late 1960s, the major gold powers of the time organized the notorious London Gold Pool in which they combined their gold hoards in a price fixing cartel. At the time, there was an “official” price for gold ($35 per ounce), but there was also a private market for gold that often traded at $40 per ounce or higher. The idea was that if market forces created upward pressure on the market price, the Gold Pool would dump official gold on the market to bring the market price back in line with the official price.

The London Gold Pool fell apart when members refused to do their part by selling gold. They could see the price was going higher and decided to hold on to the gold they had. In fact, some members such as France joined the speculators by cashing in dollars for gold at $35 per ounce, and them immediately selling the gold to the private market at $42 per ounce, thereby pocketing a nearly risk-free profit of $7 per ounce. President Nixon closed the U.S. “gold window” in 1971 mainly in response to such arbitrage tactics by France and others.

Another gold selling cartel was organized in the late 1970s. By then, the dollar was no longer pegged to gold and the gold price was set by the open market. The open market price was surging. This surge in the gold price was feeding expectations of increased inflation.

The U.S. wanted to damp down inflation expectations, and therefore decided to suppress the market price of gold after 1974. The U.S. did this by dumping about 1,000 tons on the market, and by persuading the International Monetary Fund to dump another 700 tons from its reserves. This gold dumping also failed as the gold price rose relentlessly from $42 per ounce in 1974 to $800 per ounce in 1980, a 1,900% increase in just six years.

More recently another price suppression cartel was organized. This was called the Central Bank Gold Agreement (also known as the Washington Agreement on Gold). It was signed on September 26, 1999 among the European Central Bank and the central banks of the 11 members of the euro at the time, plus Sweden, Switzerland and the UK. (The U.S. orchestrated the agreement, but did not sign it because official U.S. sales had all but halted in 1980. The reason the U.S. has not sold any significant amount of gold in over 35 years is explained in Chapter 1 of this book). The Central Bank Gold Agreement was extended in 2004, and extended again in 2009.

The agreement was designed to facilitate the dumping of gold by its members. The fear was that if every member tried to dump its gold at once, the price would drop too far too fast. The agreement put limits on what each member could sell per year, while still allowing significant sales totaling

over 4,000 tons. The largest single seller of gold under this arrangement was Switzerland, although France sold significant amounts also. Despite this organized dumping, the price of gold also surged from $200 in 1999 to $1,900 by 2011, an increase of over 850% in twelve years.

The exact timing and catalyst for this historic short squeeze in gold is impossible to forecast. But the magnitude of the price impact will be enormous, and the likelihood of the squeeze happening sooner than later is high.

The Central Bank Gold Agreement fell apart in 2010 when members simply stopped selling gold altogether. As was the case in 1968, and 1980, governments saw that dumping gold into a rising market was a losing game; they were giving away their national wealth for no good reason.

Since 2010, organized efforts to dump gold have been more sporadic and ad hoc. In 2010, the IMF dumped 400 tons of gold. Of this amount, 200 tons went to India, Sri Lanka and Mauritius. The buyer of the remaining 200 tons has never been publicly disclosed, but is likely to have been China, (thus accounting for the non-disclosure since China proceeds in stealth).

Over the course of 2015 and early 2016, Canada sold 2.5 tons of gold, about 75% of its gold hoard. Canada may now proceed to sell the remainder, just under one ton, leaving it the only major economy in the world with no official gold at all. The price of gold rose steadily during both the IMF and Canadian dumping episodes.

As this century-long history shows, gold dumping is an exercise in futility and price suppression schemes always fail in the end. These schemes may keep the market price of gold below where it would otherwise be for brief periods. But, eventually the coiled spring explodes, and gold re-sumes its steady upward march measured in units of pa-per currency per ounce.

Now there is a new, even unprecedented, element in the mix. Gold has been sucked out of the weak hands of western debtor nations, hedge funds, speculators and scared retail investors. It has moved into the strong hands of Asian creditors, and sophisticated high-net worth individuals who understand the dynamics at play. The weak hands are willing to make gold available for price suppression through leasing. The strong hands are not. This means that more and more paper gold trading is resting on less and less physical gold. The gold market is technically positioned for the greatest short squeeze in history.

The exact timing and catalyst for this historic short squeeze in gold is impossible to forecast. But the magnitude of the price impact will be enormous, and the likelihood of the

squeeze happening sooner than later is high.

What is certain is that when this short squeeze hits, you will not be able to get gold at any price. You might be able to watch the gold price skyrocket on television. Central banks and sovereign wealth funds may be able to get some because of their dominant positions. But retail investors will not be able to get any. Mints will be backordered and dealers will be out of inventory. The only way to avoid being shut out of the greatest price spike in the history of gold is to buy your physical gold now.

This review of reasons for owning physical gold would be incomplete without mentioning the attractions of holding physical gold in an IRA. Many Americans today fund their retirement with 401(k) plans and IRAs. The times when Americans could count on defined benefit plans from large corporations are over, and many believe Social Security may be undependable or insufficient.

This leaves many Americans in the position of being their own wealth advisors, a role for which they are often not well prepared. (People have money because they work hard, and are creative and prudent. That’s not the same as being expert about money. Earning money and managing wealth require different skills).

Investors assume they are safely “diversified” if they own, say, 100 different stocks, ETFs, and mutual funds. But this diversification only exists in calm markets when it is not needed. The power of diversification is needed in volatile markets. When markets are extremely volatile, diverse equity positions act as a single asset class and move in lockstep. Diversification disappears just when it is needed most.

In fact, most investors are not diversified at all, because in panics and liquidity crises, equities, ETFs, and mutual funds may exhibit highly correlated behavior. This is called “conditional correlation” and it can quickly wipe out much of your wealth in a panic. Physical gold is not correlated to equities even in panic situations. It offers true diversification.

Another benefit of holding physical gold in an IRA is that the gold is physical. The overwhelming majority of all IRA assets

are in stocks, bonds, ETFs, and mutual funds, represented in digital form. When was the last time you received a paper stock certificate from a public company? Less than 1% or IRA assets are in tangible form such as physical gold, silver, fine art or real estate. Digital securities can easily be wiped out by cyber-attacks, which can be political or criminal in nature.

These attacks have already started and more are coming every day. Mysterious “outages” at major stock exchanges are occurring with alarming frequency. Some may be genuine computer glitches, but some are no doubt due to malicious attacks that exchange officials don’t want you to know about. Physical gold is not vulnerable to such cyber attacks.

An IRA with some physical gold offers significant advantages compared to other forms of gold ownership, and significant advantages compared to IRAs without gold. The first advantage is that IRA depositories holding physical gold are not banks, and are independent of banking regulation. Major secure logistics providers such as the Delaware Depository are the preferred depositories for IRA gold. Insurance is provided by Lloyds of London. Such depositories are private facilities and have nothing to do with the federal government. When the banking system is in distress, such private gold vaults holding physical IRA gold will not be affected.

Gold held in an IRA must meet strict specifications on purity to comply with U.S. law. Gold in an IRA must be 99.9% pure gold or finer, or may consist of American Gold Eagle coins from the U.S. Mint. Depositories inspect all the metals that arrive at their facilities to insure they fit the IRS requirements for IRA possession. This minimizes the risk of receiving counterfeit low grade gold.

Physical gold held in IRAs is the property of the client. Client statements list each individual coin or bar held on account, including the serial number of any gold bars and the date that each coin was minted. IRA customer account statements include a complete physical gold inventory priced at the spot market valuation for gold and updated with each statement.Storage costs for physical gold held in IRA form are quite low, and include insurance. Storage costs as a percentage of the value of the gold decline as the quantity of gold in the IRA increases. All gold in the IRA account is fully allocated to the client; there is no “fractional reserve” when it comes to gold in an IRA. Other costs for holding gold in an IRA are inexpensive compared to alternative forms of asset man-agement. There are no management fees, and no profit sharing in a gold IRA. The account charge for holding gold in an IRA is a low flat fee based on the value of the account.

Finally, gold in an IRA offers the added advantage of being available for an in-kind distribution. This means that the gold can be stored at the depository, and later taken out in physical form as a distribution. When an in-kind distribution takes place, the gold is physically shipped from the depository to the account holder’s home. The client can select the exact items that they wish to receive from their account.

Finally, gold in an IRA not only serves you well during your years of saving and investment, it serves you well in your retirement also by offering the chance for lower tax rates if you do finally sell it.

Gold is the oldest and best form of wealth preservation. Physical gold offers protection against inflation, deflation, and cyber threats. No other asset stands up to all three threats as well as gold. I hope you enjoy learning more about physical gold as an attractive twenty-first century asset in The New Case for Gold.

Gold is the oldest and best form of wealth preservation.