The gold bugs really do themselves a big disservice with their tinfoil hat conspiracy theories. They make their actual legitimate arguments too easy to discredit with all their stupid “gold is manipulated” arguments. It really does get tiring to listen to after a while.

Do they seriously think that the world’s Central Banks are conspiring to keep the price of gold down? In an era where the global economy is teetering on a deflationary abyss, the last thing the world’s Central Banks are worried about is the price of gold rising. It is just sad that the gold bugs spend so much time trying to explain that the low price of gold is the result of manipulation.

Even though I do not think that gold is manipulate by the world’s Central Banks, the current price of gold is stupid. Make no mistake about it.

I am a big believer in Hanlon’s razor which postulates that one should “never attribute to malice that which is adequately explained by stupidity.”

Why do I think it is stupid?

If after the 2008 credit crisis the world’s Central Bankers had decided that the easy money policies of the preceding two decades were to blame for the crisis, and that the solution was to return to a disciplined monetary environment, then I would argue that gold should be lower – a lot lower.

But just the opposite happened. We had a massive credit crisis that was the result of excessively easy monetary policies, and we solved it with even easier monetary policies. In fact, the financial system was so desperate to try to reset the large debt burden that the world’s Central Banks had to engage in mind blowingly large amounts of Quantitative Easing to arrest the credit destruction cycle.

Over the last half a dozen years as the Fed and other Central Banks have engaged in unprecedented balance sheet expansion, investors have gradually become numb to the stupid amounts of quantitative easing. When the Fed was winding down their QE program, I read about how they were “only purchasing $10 billion per month.” Only $10 billion? When $10 billion of QE becomes a rounding error, you know you are dealing with a system that that has change dramatically.

So I don’t buy for one second that everything is normal. The global financial system is an unstable, huge hulking pile of debt kept aloft by ever more desperate Central Bankers. You won’t convince me otherwise. The liquidity that the Fed added in late 1999 was minuscule compared to the recent balance sheet expansion. Yet Greenspan’s flooding of the system with liquidity caused a final 30% rise in the Nasdaq in the space of one quarter.

The 9/11 liquidity injection (and ensuing easy monetary policy) resulted in one of the greatest speculative orgies of house speculation that the world had ever seen. And even that balance sheet expansion was minor compared to the last six years.

Since the 2008 credit crisis, the world has engaged in an unprecedented amount of Central Bank balance sheet expansion. The authorities have tried to fix the problem of too much debt with even more debt. This can only end one way – with a massive inflationary spiral. Just because we have managed to skate through the last half dozen years without inflation doesn’t mean it isn’t coming. And in fact, the very fact that everyone thinks that inflation is not a problem is probably a precursor to the conditions needed to usher in the policies that ultimately cause it.

But then why is gold not going up? If things are as unstable as I contend, shouldn’t gold be a lot higher?

And here comes my explanation of why gold is sucking wind so badly.

In the early 2000s when the GLD ETF was first proposed, they needed to get a special exemption to allow a commodity to be put inside an ETF. At the time, BMO strategist Don Coxe testified before the committee, arguing that the GLD ETF should not be allowed. His reasoning was that if you allowed the GLD ETF, it would turn gold into something that was too easily traded. It would become something that hedge funds and other speculators could buy (and sell) at the drop of a hat. It would turn gold too much into a speculative toy as opposed to its more traditional role.

I think he was bang on correct with this analysis. I distinctly remember in 2011 reading research about the top hedge fund holdings. The GLD ETF was always the 2nd or 3rd most widely held position.

It was a perfect environment for this type of speculation. The Fed had just embarked on a massive balance sheet expansion and investors were fearful that it would run amok. They bought so much gold that the market value of the GLD ETF was almost worth more than the world’s biggest ETF.

Think about that for a second. There was almost as much gold held in the GLD ETF as there were stocks held in the S&P 500 SPY ETF.

This was a ridiculous amount of speculation. There is no other way to describe it. These hedge funds took the price of gold way higher than it should have ever gone. In the process there were way too many mines were funded, and way too much supply was brought into production.

Not only that, but the hedge funds were sitting on this massive pile of gold with very few buyers at the elevated levels.

When the selling came, it was vicious as there were few buyers left. The hedge funds quickly realized that they had overdone it on the long side, and they didn’t want to be the last one holding the bag.

The last couple of years has been nothing more than a liquidation of the massive hedge fund speculation.

Don’t listen to all the gold bugs who tell you that the Central Banks are busy conspiring to keep the gold price low. They can’t be bothered – they have much bigger problems than the price of gold.

And in fact, these Central Banks which are supposedly trying to manipulate the price lower are actually increasingly asking for the gold to be returned to their own shores. I am going to be writing about this more in the days to come, but more and more Central Banks are looking around at the direction of the global financial system and becoming concerned.

We are now in the third year of the hedge fund liquidation of their gold holdings. Just because their reasons for gold’s rise did not pan out immediately, does not mean that the hedge funds weren’t correct in their original analysis. I know it is fashionable to be all beared up on gold. I know all the reasons why it is supposedly going a lot lower. But aren’t these the same guys who told us it was going from $1,900 to $5,000 a few years ago?

The reality is that we are approaching the end game of Central Bank expansion. We are about to have things go parabolic to the upside. They are about to lose control. When everyone tells you that it doesn’t matter how much they print, it isn’t going to cause inflation, you know you should be looking for the exact opposite to happen. The system is extremely unstable. These numbers that the Central Bankers are tossing around are insane. At the end of the day, gold is money, and even though it got way ahead of itself from the speculation of the hedge fund lunatics, it is still probably the safest asset out there when this monetary experiment goes off the rails. Don’t buy gold because it is manipulated lower, buy gold because the reasons that all the hedge funds bought it in 2011 are ultimately going to be correct.