By Kishori Krishnan Exclusive To Gold Investing Newswidth=300

Every gold bug would cringe at this. Fraudulent games have expanded in the gold market. There are toxic bonds and phony gold bars. What does one rely on?

Several conspiracy theories abound about the massive gold-fraud orchestrated by central banks, and the fact that the US Federal Reserve allowed gold to trade higher and the dollar to fall lower.

Then there was news of the peddling of tungsten gold bars. The caper was finally exposed, but who created the bars and sold them? And to what purpose?

It is a scandal that is really an afterthought to the massive physical buying in the marketplace, but that is by far the last of the frauds.

Speculators are postulating that members of The London Bullion Market Association (LBMA) have oversold their inventory to investors. Other’s claim that financial instruments called ETF’s, of gold and silver, do not have the metals in inventory to cover what has been bought by investors.

As the world’s second-largest exchange-traded fund, and sixth-largest holder of gold bullion, the GLD gold ETF is considered the most powerful force in the global gold market.

With reports that the GLD “was created and run by untrustworthy instititions”, Michael Pennington explains: “The gold and silver ETFs were created by such financial giants as JP Morgan and Barclay’s Bank that also serve as custodians and sub-custodians. These are the very firms that have been involved in the process of short selling gold and silver in huge quantities. That they would be involved in creating the ETFs had to be considered as most unlikely unless they had nefarious purposes.”

Reports later exposed how the Comex could legally use GLD shares from their exchange traded fund to satisfy short futures contracts in need of a buyer.

It is not just organizations, but even bullion companies are involved in the gold scandal. Remember the Canadian company Bre-X Minerals Ltd gold mountain? One fine day, it was there, and suddenly, it wasn’t.

Also, check out the news that JP Morgan has been “manipulating the gold market”.

As if that was not bad enough, there is fresh news that the the UN intends to mint gold and silver coins with their logo. That raises a moot point: Where did the gold come from for the UN to start minting its own coins? For sure, the UN doesn’t have an official budget to buy tonnes of gold on the open market.

And to sum it all, the Gold Anti-Trust Action Committee (GATA) is reported to have filed a suit against the US Federal Reserve Board on alleged gold price manipulation.

Hey, what is happening here? Are these just plain ol’ conspiracy theories or could any of them have a grain of truth?

One thing though is certain - it has happened before. No new phenomenon this, for investors have lost gold before.

Gold price

Some analysts maintain that the flight into gold, that was seen in the last quarter of 2009, has not been sparked by anticipation of inflation, but by a flight caused by a lack of confidence and trust in central banks.

If the US can strengthen its dollar, gold buyers will flee the market. And if other major governments have monetary problems they cannot be buyers of US Treasuries. They will have to be sellers of dollars.

That will drive the dollar lower, further reduce the demand for US funding, force the Fed to further monetize and create more inflation. That in turn might give gold a life of its own, and speculators fresh gist for their mills.

There are also other economic trends set to unfold in 2010. What about the complete collapse of the stock market, a possibility that always lingers in the shadows.

Stock prices trade far above their book value levels and at massive multipliers to cash and assets. One day, investors could realize that it is only their perception holding this investment structure up. If they quit believing, it may cease to exist. And it would all come crashing down like a pack of cards.

Besides, the fact of the matter is the gold industry is “not in good shape”. To make matters worse, some bankers are encouraging dubious gold listings, under the guise of entrepreneurship.

The entry of many fly-by-night operators into other metals along with gold is also confusing investors, who could be turning to exchange-traded funds (ETFs) for the gold exposure pure gold companies have traditionally provided.

Also, the industry is bereft of the big dividend payouts of the base-metals industry. This, despite the high gold price. Many mines are still marginal even at the higher gold price, causing one leading fund manager to lament that some gold-miners are paying more in fees than in dividends.

On top of that, there has been a decrease in gold supply. There just exists no logic to support the significant growth in market capitalisation of the gold industry on world stock exchanges.

Artificial high?

Over the course of 2009, speculators have pumped the price of gold to a historic high of $1,227 per ounce. Its the classic short squeeze which moves prices up higher than they would ordinarily go without speculator’s actions. Multiply this by the entire world wide market and the net result is froth in the market.

What will be interesting to note is exactly how much real demand is out there for gold.

S&P has said that most global banks are still unsafe. That includes every bank in Japan, the US, Germany, Spain and Italy. FDIC said the number of banks on the problem list rose to 552 from 416. These same banks recently borrowed $11.7 trillion. Where did all the money go?

Another factor boosting the value of gold has been attributed to the rising interest in commodities from individual investors and investment funds alike. The recent decade has provide market speculators an increasingly easy way to trade gold, silver, oil, and even coffee and other commodities through chart trading platforms in their own home.

As the spot price of gold continues to rise, this creates a self-generating buzz of excitement which in turn leads to higher prices yet again. These are clearly artificial highs.

Don’t believe us? Think again.

Successful investment and even speculation in bullion requires total emotional neutrality. If one can’t suppress and ignore one’s own greed, fear, and every other emotion, one will never grow wealthy in the financial markets. Not only does this create enormous problems for conspiracy theorists, as their theories are so emotionally-charged, most investors tend to surrender their ability to think rationally.

Logic and common sense is thrown out the window. How far has yours travelled?