Gold price manipulation – The how and the why

Manipulation is a somewhat contentious word in financial markets, yet in truth virtually everything is manipulated by those who have the political need and/or the financial clout to do so.  The whole capitalist system is set up for this to take place – and arguably a socialist system even more so.  Governments manipulate statistics and financiers manipulate prices – all usually to their advantage, and sometimes the two work in concert with one another.  The manipulations don’t always work (think the Hunt Brothers attempt to corner the silver market several decades ago).  Occasional stock market crashes and counter moves in commodity prices can show the flaws in financial manipulations and in a democracy the defeat of a ruling political party demonstrates that their often deceptive data, supposedly indicating why one should continue voting for them, does not always work to their advantage either – usually through their successful opponents better putting across their own misleading data and policies which seldom in reality see the light of day once the hustings are behind them.  Virtually all political and financial spin and statistical manipulation is designed to influence public perception – and a gullible public invariably falls for it in going with whoever puts their dubious arguments forward in the most plausible manner, or perhaps promises to put the most money in their pockets.  We live in a world where advertising and spin are continually employed to try and influence people’s minds, not just for consumer goods and services but for financial and political gain.

Gold certainly is no stranger to the manipulation.  I would commend you to an article on this by Canadian lawyer/commentator Robert Appel published on the website titled Gold Prices: Here’s What the Federal Reserve Doesn’t Want You to Know which sets out both the reasons for, and the process of, gold price manipulation as he sees it and why gold is so important to many of the world’s central banks despite denials that this is the case.  As another commentator, Jim Rickards, points out, if gold is of no consequence why do nations (perhaps apart from Canada which has just liquidated virtually all of its gold holdings), continue to hold so much of it and why are mega powers Russia and China continuing to buy gold month in month out.

But back to the Appel article, he details some past admitted manipulations of the gold price and why central bankers hate gold so much.  “the central bankers and their crony politicians hate gold for the same reason tanning salons hate the sun. Because gold cannot be printed or destroyed, it exists in limited and quantifiable amounts, and therefore, unlike paper money, there is a limit, a tether, on the amount of incompetence and financial mismanagement our elected governments can get away with without being called to account” – that is from the days of the gold standard when the currency of the world’s leading economy, the USA, was tied to gold and thus it could not print unlimited amounts of money (the fiat currency world) in attempts to manage the economy.  If one studies economic history, all fiat currency systems have ended in financial disaster and tears – why should this time be any different?

Some will see government/central bank sponsored gold price manipulation as justified if that it may help even out potentially disastrous economic fluctuations, but the accompanying benefits to the financial sector which may play the system purely for financial gain, not so.

Appel sets out the whole manipulation process and why the financial sector colludes in this.  Firstly, the political and economic establishment, helped by a compliant media which often doesn’t understand the implications of the propaganda being fed to it, constantly puts out seemingly well-researched data all the time intended to suggest to the public just how useless gold and silver are.   This is backed by a price fixing component which he sees as especially ironic since the theoretical purpose of a price fix is, ostensibly, to avoid collusion!

But there’s much more – which Appel describes as ‘blunt-force movement of price whenever key technical inflection points are in proximity.’  He reckons that those wishing to do so will potentially be able to fully control any market providing a number of conditions are in place – namely:

  1. The market has a paper or derivative component in place so, in the case of gold vast paper trades, without any physical backing, can drive prices in a desired direction.
  2. Access to massive amounts of cash or credit.  He sees this as not a problem for government agencies and the financial institutions he describes as their ‘cronies’ given central banks can create endless amounts of money at will which can be filtered through to benefit the financial sector.
  3. Legal immunity from prosecution – not a problem for governments and their agencies – much of which comes under blanket legislation to protect national interest against economic meltdown and any form of ‘terrorism’ as they themselves define it.
  4. What he describes as ‘the implicit encouragement of third parties to join the party and play whack-a-mole with the precious metals’. This brings traders into the equation who will trade as desired as an easy way to make money – again ‘a trade that seems at first glance to be risky and irrational but is actually safe and protected because, no worries mate, we have your back!’

Anyone who studies the markets can easily see all the above factors in place.  Massive trades come in with paper gold, often at hours when markets are at their thinnest, whenever the precious metals look as though they might be breaking out sufficiently to threaten the big short positions built up by the bullion banks and commercial sector - see note 4 above.  I quote from Ed Steer’s daily newsletter of yesterday as an example of what appears to be happening on an almost day to day basis: ‘It was yet another day when the powers-that-be were quietly at battle stations—and it began the moment that the dollar index topped out in London during their lunch hour—and ended with the crushing of the price rallies in all four precious metals that began around 11:30 a.m. EDT—as the 84 basis point decline in the U.S. dollar index got halted by ‘gentle hands’ in New York at noon.’

Some (the manipulation deniers) just consider this standard financial practice as it is undertaken by the big money today - but that is why the rich, who can afford to employ vast financial resources to move markets in the way that benefits them, get richer, and the person in the street just doesn’t get a look-in.  If that’s not a form of market manipulation by the haves at the expense of the have-not’s then I don’t know what to call it.

Much of the mainstream media also seem to try to play down gold in particular at almost every opportunity, often with attention-grabbing headlines which emphasise the negative (even when there isn’t one), and interpretations of events and data which may not reflect the true position at all.

How long this can continue is anyone’s guess but it will go on until the manipulators find it impossible to counter market forces.  Gold (and silver) may then see a strong price surge, but at some stage the manipulators will return again when they feel the timing is right to do so.

But things could be changing.  This month should see the opening of a Shanghai Gold Exchange benchmarking (fixing) process relying totally on physical gold.  But the SGE is an integral unit of the Chinese Central Bank, the Peoples Bank of China – and if the SGE fix (in yuan) gains traction might we just be exchanging one set of manipulators for another?  Although admittedly with one which may have a totally different agenda!

Indeed, in his article, Appel sees the current month as something of a crunch one.  Gold shorts are at the strongest level ever, he says, and that would indicate there could be a major price crash ahead as the manipulators take the lead.  But that just does not seem to be happening at the moment.  Gold looks to be increasingly resilient at current levels.  Indeed yesterday, at the time of writing, gold was  moving up strongly and looked even test the key $1,250 level (although some put the upwards resistance at a slightly lower $1,244).  By the time you get to read this we may well know the answer to that!  (Yes, in the event gold was brought back down into the low $1,230s again.  It will be interesting to see where the next moves come in.  There certainly do seem to be specific moves in place to keep the gold chimera under some kind of  control.  (Some would say not a bad thing given that a rampaging gold price would raise all kinds of questions over the state of the global economy and a forerunner of financial collapse - gold bugs be careful what you wish for.)

If the manipulators lose this particular battle, no doubt the gold price war will continue and they will look for other levels to protect, but in this era of negative interest rates – which makes gold more attractive than bonds and overnight government deposits – the momentum could well be shifting in favour of precious metals.  Now maybe this is wishful thinking by someone who is basically a believer that gold is destined to move at least decently higher in the medium to long term, but the indicators are there.

Appel does see both sides of this picture and feels one should sit tight to see how things pan out – he puts a breach below $1,180 as the target for the bears – which could see gold move sharply lower still – and an upside of $1,400 (which still seems a long way off) as the very bullish target after which gold could move substantially higher.  But he also feels that, given the huge gold short positions in place at the beginning of this month, if gold can simply hold at its current levels that would be a major bull signal for the rest of the summer.

We say watch the gold ETFs and GLD in particular.  It has seen a resumption of inflows over the past couple of days and this is a good indicator of what the smart money is thinking.  If strong inflows continue then gold is probably headed upwards.  If increases begin to become the norm, rather than the exception as we have seen over the past few years, gold could well have a good northern summer – and summer is not a time of year which usually works out to be positive for the yellow metal – apart from the heady days of 2011 when gold rose strongly through the season before being brought down, starting immediately after Labor Day when the big money players returned from holidaying in the Hamptons and points further afield.  History does tend to repeat itself - be warned.

This article is a slightly edited version of one I posted yesterday on the Sharps Pixley website

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