The breakdown in gold prices over the last few years has confounded many a goldbug, primarily in the face of massive monetary stimulus programs from central banks around the world. While some economists argue that the deflationary forces stemming from the 2007-08 financial collapse has kept runaway inflation in check, there could be additional factors in play that are distorting the realities of the market and the investors that operate within it. Bud Conrad, Chief Economist for Casey Research, has been monitoring this disconnect within the gold market for quite some time. His research has brought him to make a compelling case that may scare—and perhaps anger—many investors. However, that same conclusion could mean the tide may be finally turning for those bullish on gold in the near future. Equities.com had the opportunity to speak with Bud to get his perspective on what gold investors really need to be focusing on right now. He’ll also be discussing this issue in further detail in his keynote address at the upcoming San Francisco Metals & Minerals Investment Conference. EQ: You’ve long been a recommender of gold and related resource investments. Could you discuss some of the long-term reasons why it’s still a good idea to invest in gold now? Conrad:It’s really a commitment to the belief that the world governments are now in a position to destroy all their currencies by printing too much of them, and they are actually doing it. I’ve actually written a book on this, Profiting from the World’s Economic Crisis (2010). So that’s given me a mission to look for investment opportunities as the governments gave us a one way ticket to destruction of currencies that we as individuals need to protect ourselves from. I’ve been recommending gold for years, back into the early 2000s. Actually, I traded gold in the late ‘70s as well, which puts a little aging gray hair on my perspective. I can quote phrase and verse of projections of government debt deficits and all that stories are in the news, but I’ll pick one thing to point out. If you take the current debt of the federal government, which is at $17 trillion, and add $800 billion per year for four years–that’s $20 trillion. Now if interest rates move from the current close-to-zero for short term and about 1 or 2 percent for long term, to the natural expected interest rate of 5 percent, what does that come out to? Well, 5 percent of $20 trillion is $1 trillion! That’s about half of the tax income of the government, which is around $2.5 trillion right now. In other words, interests can overwhelm and make clear that the government is bankrupt. That’s why the rates are forced down to unreasonably low levels by the Fed. And it basically says that the Fed is never going to stop printing. They’re going to try and keep driving us over the cliff rather than to just the edge. This will blow up sometime in my lifetime. EQ: Who are the important buyers of gold that you’re watching right now? Conrad:The big shift has been Asia. China imports from Hong Kong. This year, it’s projected to import 1,000 tons. Now, a lot of people don’t know what 1,000 tons actually means. It’s about half of the world, excluding China’s production, of gold. That’s a huge amount. But that’s not all they import. They import through other sources into Shanghai where they have a gold exchange that delivers gold. And if you put all that together, it’s possible that China is actually importing almost as much as the rest of the world’s total production of gold. If you look at the resources available in the COMEX Warehouses, which is where gold is traded in futures markets, they’re in big decline. They’re falling from 11 million ounces to 7 million ounces of all kinds. The actual amount that is deliverable is now under 1 million ounces, identified as registered. That amount is trivial considering the size of the market. Many of the warehouses around the world publish how much they’re holding, and the biggest is the SPDR Gold Shares ($GLD). It’s dropped to around 20 to 15 million ounces in the last year. And this is during a time that our governments’ deficits should be driving people into gold for investment purposes, and the warehouse stocks are disappearing. The net of all that is that the price should be going up by all the measures that are obvious to us. EQ: From a long-term perspective, over the past decade or so gold is still looking fine, but it kind of broke down about two years ago after it hit its peak. What happened? Conrad: The most interesting piece that I have done in the last couple of months is to look at the details of the futures market’s operations. I’ve been a commodities trader for a number of years, so I can interpret these detailed, insider things. The price you see every day, all-day long when you see gold moving is actually the quote from the COMEX futures exchange trading floor. So we use the futures market to define the price of gold throughout the world. When you go in to buy your gold coin at the bullion dealer, they say, “Well, gold closed at this on the futures market, this is what the price is with the mark up.” That’s what people kind of believed was an honest price. They think it’s a large market with a lot of traders, but a very small portion of it is actually delivered at the end of a contract’s expiration. And that delivery process, it turns out, is managed by the biggest bullion bank: JP Morgan (JPM) . I have the data and stats and plan on presenting it in the current article I’m producing for Casey Research through The Casey Report. I’ll also be presenting it at the San Francisco Metals and Minerals Investment Conference. But my point is that JP Morgan has delivered 69 percent of the gold so far this year in the delivery process. That is clear dominance of the market with a direction that says that they have been pushing the market down. EQ: What would be the motivations of banks like JP Morgan to keep rates down and gold prices down? Conrad:Well, from JP Morgan’s standpoint, they are a big bank that makes money when interest rates are low. The Federal Reserve has been printing up new money to go out and buy up what I call a combination of toxic waste and government debt—it’s hard to tell the difference sometimes, but that’s my bias—to drive the price up, and therefore, the interest rate down. They can do this to a limit, and that limit is when the dollar starts collapsing because people recognize that the central bank is putting up too much money. One of the leading indicators for that is whether gold is rising dramatically in price, keeping stable, or going down. So there’s an incentive for the big banks to manufacture these low interest rates and they do this through different kinds of interest rate products. This allows them to borrow at zero percent from the Fed and lend it out at the higher mortgage rate or corporate rate, and make money on that spread. But if gold were to take off, that would be a big problem for the Fed and the confidence in the dollar, limiting the Fed’s ability to sustain the low rate, and therefore, it’s advantageous to have gold not take off. And if you’re 70 percent of the market, you almost don’t care whether you’re going long or short. If you’re manipulating it, you can make money out of it anyhow. There’s no regard for people that are thinking about long-term investments and looking at the current price as if it were a meaningful market definition of the value of the dollar. It’s defined by the supply and demand, and JP Morgan is a huge portion of what is now a distorted futures market. EQ: Assuming JP Morgan has the motive, won’t they eventually have to cover their short positions, and in turn, eliminate the effects of the original attempt to manipulate those prices? Conrad:Theoretically, the futures market is a zero-sum game where for every person long, there’s somebody short, and by the time of expiration it’s all supposed to be sorted out. But most people don’t realize that if you have a short position, you can deliver against it with physical gold. That’s exactly what JP Morgan has been doing. You never have to remove your short position if you have the gold to deliver. So in the rather rarified and much smaller portion of the market where physical gold is delivered, these big banks hold an edge on how they trade. The reason is each unit is 100 ounces, which translates to about $135,000 per unit. So it’s not for small mom and pops to play in. The big banks can actually take positions and never have to cover them until they actually deliver the metal, which is exactly what they’ve been doing. EQ: So where are the regulators here? How is this all legal? Conrad: Where are the regulators? Just recently, the U.S. Commodity Futures Trading Commission announced that they were going to vote on imposing some position limits. Well, they’ve been working on that since 2008. Bart Chilton, one of the CFTC Commissioners, is removing his name for re-nomination, which meant that he wasn’t going to be re-nominated. So they don’t actually do anything, and as a result, JP Morgan gets away with it. But let’s go a little step further; remember LIBOR? Oh no, big banks will never mess up the setting of a world market rate. Then there’s JP Morgan paying $13 billion–not million, billion–for fraud with its mortgage systems. It has $23 billion on its books for potential payouts for various different kinds of frauds from energy markets to foreign currency. And just recently, we saw several banks remove foreign currency traders from their positions in London. It goes on and on. If you just read the news and think about it, gold is a prime target for a manipulated situation since it’s much smaller than these other markets, and therefore, capable of being manipulated. And JP Morgan admits to having $70 billion of gold futures on its derivative books, according to the Office of the Comptroller of the Currency. Why would you think they wouldn’t be manipulating the market? And in this case, it appears everything they’re doing is legal. They can drive the price where they want. They know what they’re doing. They are the market. EQ: So if you’re a gold investor what do you do here? Conrad:Well, if you look very closely, something important has changed. For years, JP Morgan has been short the gold market and driving it down. They did it very actively as gold supply started to disappear, particularly from their own warehouse. But, and here’s the key, they’re no longer short. They just went long this last year. So their net advantage to themselves would no longer be to drive the gold market down for their trading purposes. They are much less likely to be a source of driving prices down. In fact, they are much more likely to be driving it the other way. We’ll see if that plays out, but I think it’s a good reason for a trader to feel less scared about the fact that we’ve had a period of time where gold was driven down. As foreigners demand and get delivery of gold, the shortages that we saw over the last two years ago will become more common. So gold prices will rise as a result, especially as people realize they need to protect themselves from the government’s spendthrift ways, which is obvious to all of us following the news. EQ: So it sounds like there’s going to be some major shifts here and maybe some opportunities for investors in this space. And as you stated, you’re going to detail this in your presentation at the upcoming Metals and Minerals event in San Francisco. What are some other discussions or themes that you enjoy when you attend events like these? Conrad:Well, I gave a talk in Tucson, Arizona a little over a month ago to an audience who had just heard about the decline and fall of the Roman Empire. So I decided to take a little different approach and started with blowing up a balloon that I had written “Bonds” on. You get the point. Someone ran up and hit it with a big pointed thing to make it burst. There are many things to say about the world market, but I don’t think we should be trusting that these interest rates–which were at a bottom about a year or so ago—will ever return to that low as people lose confidence in these paper money systems. How to trade that is also very complicated, but it’s rather simple to understand. People want to get at least the purchasing power of their money back or they won’t lend it out. So that general trend back toward higher rates will happen despite what the Fed does to try and stop it from happening. EQ: Any closing comments for the investment community? Conrad: We don’t operate in an ivory tower vacuum of economics nerdism, which is what I would certainly label myself. We operate in a changing society and in a world I see that is heading into difficulties. I don’t like that the wars we’re in were taken on as a matter of choice, which seems like the worst way to go to war. I don’t like the lack of confidence in financial systems almost everywhere. We have a government that is bought and paid for by the largest bidder. There are so many things that will affect our future beyond just counting how many gold bars there are in a given warehouse. All that is part of the fabric that we need to be aware of when we are making our investments. What’s really going on in the gold market, and why does Bud think the gold price is much lower than it would be in an honest and transparent market? Read his in-depth analysis in the current issue of The Casey Report. You don’t risk anything trying it for 3 months—love it or your money back. Click here to get started.