A few weeks ago, I might have argued that gold price suppression is a myth. The more I learn about it, though, the scarier I find the concept.

Gold price suppression refers to coordinated efforts to lower the price of gold. On the face of it, that sounds like a meaningless goal. Dig deeper, though, and you’ll see there’s a whole lot at stake; namely, the future of the U.S. economy.

If governments, institutions and individuals lose faith in the dollar as a reserve currency, the Greenback’s value will plummet. It will be much harder for the U.S. to borrow money, and government services will have to be slashed. With 48.5% of the U.S. living in a household that receives some form of government benefits (per the Wall Street Journal), slashing benefits could collapse the U.S. economy.

Here’s what really changed my mind about gold price suppression: a single diplomatic cable released by WikiLeaks (click here to see the gold price suppression cable from Wikileaks). In it, the U.S. Embassy in Beijing wrote to the U.S. State Department, warning that the Chinese government was proactively dumping dollars in favor of gold reserves in an attempt to undermine the dollar and raise the clout of the Chinese Yuan.

The cable highlighted an article titled “China increases its gold reserves in order to kill two birds with one stone” from a State-sponsored newspaper in China. It was apparently alarming enough for the U.S. Embassy to send it straight to the State Department. Here’s an excerpt from the story:

“The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold’s function as an international reserve currency. They don’t want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar’s role as the international reserve currency.

China’s increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB.

Of course, right now, the yuan is tightly controlled by the Chinese government. It’s difficult for retail investors to even invest in the yuan (see our post How to buy Chinese Yuan for more), but China’s showing signs of loosening that control.

It’s not in their interest to de-couple the yuan and dollar yet, since tying it to the Greenback keeps Chinese exports cheap. It is interesting, though, that China’s could be building up enormous leverage over the U.S.

“When they [China] want the dollar to fall, they will let it,” Mark Weisbrot, the co-director of Washington’s Centre for Economic and Policy Research, told Al Jazeera recently.

In the meantime, China’s accumulating gold, even while they realize that the U.S. could be working to suppress gold prices. Should the U.S. economy continue to stagnate, suppressing gold prices looks like a losing battle.

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