Laying to Rest GATA’s CRB Index – Gold Kerfuffle

By Tim Wood –
NEW YORK ( — Ah, how quickly things get nasty when money is involved. Right on cue the Gold Anti-Trust Action Committee has responded to criticism of one of its “evidences” for a gold price conspiracy by playing the man rather than the ball.
Let’s reprise this nonsense: GATA distributed a press release claiming that the ratio of the gold price to the CRB Futures Index in 1980 is a bellwether by which to judge today’s gold prices. Because the ratio of 2005 is dissimilar with that of 1980, GATA asserts that it is “powerful evidence of surreptitious intervention by central banks in the gold market”.

Instead of being persuasive through reason in dealing with our criticism, GATA has resorted to type. In come the vituperative e-mails, personal insults, spurious logic, misrepresented facts, and the usual collectivist belligerence of the insecure. It can all be summed up by George Orwell’s maxim from Animal Farm – Four legs good, two legs bad. Well, let’s bolt the barn again.
We’ll ignore Dan Norcini’s prologue of red herrings and avoidance. So let’s go to what substance there is.
Firstly, he claims that over 35-years the relationship between the London afternoon gold fix and the CRB Index shows “near perfect symmetry”. That is dead wrong, there is not near perfect symmetry. The r-squared value from September 1956 to February 2005 is 0.85, which is well off “near perfect symmetry”. But that is better than the period Mr Norcini chose from January 1970 to today which shows a much weaker value of 0.68, which is hardly a close fit.
Furthermore, it is objectionable to use data before September 1971, the month after the dollar’s link to gold was formally severed by President Richard Nixon.
The relationship between gold and the CRB Index deteriorates to an r-squared value of 0.6 from 1971 to last month. If you take it from 1983, when gold was included in the CRB Index for the first time, the r-squared value is just 0.29.
In other words you would not have much confidence using the CRB Index to predict the gold price and vice versa after 1983. You might speculate about what prices could be based on past ratios, but you cannot cast one year in concrete and then claim deviation therefrom reveals a conspiracy.
Second, if you use Norcini’s 35-year time frame, then there is little anomalous apart from a 14-year adjustment from the gold standard to a managed regime of floating currencies. If you compress the time frame based on GATA’s benchmarking of 1980, then the ratio is close to the mean, as well as being right on the trend line for the period to end February 2005. Again, that is hardly anomalous; reversion to the mean seldom is.
Also, if you price gold and the CRB Index in euros, the current relationship is also within the norm though is has been in favour of gold.
Why would anyone tag 1980 as the reference year for a CRB – U.S. dollar Gold relationship when it is almost two standard deviations below the mean (almost 1 below if you pick Jan 1970 as the starting date)? Probably because the conclusion was always foregone.
Third, Norcini assigns equal weighting to demand and inflation hedging for all commodities: “What GATA has stated is that rising commodity prices are brought on by a combination of physical demand in conjunction with speculative forces arising out of reckless monetary policy.”
This contradicts the history of inflation which shows that gold is invariably the lead hedge, with base metals and even non metallic commodities coming into circulation as money in hyper-inflationary circumstances. Currently we have unprecedented physical demand for hard and soft commodities from Asia based on the economic expansion centred in China and India. It is so unusual that exchange warehouses are depleted to levels unseen in decades.
That blessing has not yet fallen on gold so there is no reason to presume that all CRB components must rise on a single tide as Nr Norcini would like to believe.
Fourth, Mr Norcini simply asserts that the supply-demand clearing price for gold is an illusion. Central Bank gold? Just a myth. That’s the most powerful myth in history because London bullion dealers are such clever fellows that they earn a spread liquidating central Bank fresh air rather than gold.
Fifth, and related, the overhang of central bank gold is amply demonstrated by the ability of sale pronouncements to spook investors. Then there is also the need for an agreement to control the release of taxpayer gold into the market.
What do Mr Norcini et al offer as proof that this is not so? Speculation drawn from statistical inferences over selective periods that can be interpreted six ways to Sunday.
Sixth, I neither divine nor forecast gold prices. However, since Mr Norcini has opened the door, let us not forget that GATA’s many and several gold price forecasts have failed the basic test of coming to pass. Thankfully today we do not stone false prophets, we just dismiss them.
Likewise there were the hysterical, and also failed, predictions of the imminent collapse of bullion banks and hedged gold producers at specific price levels. That was supposed to result in gold catapulting away in a short-covering panic.
Of course, GATA attributes these failings not to its own shortcomings, but the robustness of the meta conspiracy.
Seventh, Mr Norcini claims that the CRB Index is a REASONABLE (sic) standard from which to derive gold price targets. There is nothing reasonable about relying on statistically weak relationships or choosing an outlier ratio.
This is why GATA has delivered such venomous attacks against the likes of Dr Martin Murenbeeld whose public forecasts have been accurate and sober. GATA does not want sober analysis applied to the gold price, only drama and intrigue.
Eighth, Mr Norcini falsely asserts that we have stated that GATA has rested its entire case on the CRB boondoggle. We said no such thing, and reinforced it in responses to reader comments. The CRB is not a “dagger thrust into the soft underbelly of a collusion”; just bare feet plonked into a pile of steaming horse manure.
Ninth, Mr Norcini whinges that nobody is willing to debate GATA “head on”. Well, that was quickly disproved, but Mr Norcini races for cover by concluding that no further debate will be tolerated. Therewith the CRB Index and Gold are grafted onto GATA’s grotesque golden calf.

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