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The Bullion Report

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April 27, 2011 in 'The Bullion Report'

Market ManipulatorsMarket Manipulators

Gold and silver have been making fresh highs lately, prompting more than one observer to suggest that there is something foul underlying each market. The idea of price manipulation in precious metals is nothing new. The Hunt Brothers did it in the 1980s. There were accusations of recent manipulations at the beginning of this year. What exactly would manipulation entail, and why does the topic crop up so often for these markets?

Past performance is not indicative of future results.

***chart courtesy of Gecko Software

Past performance is not indicative of future results.

***chart courtesy of Gecko Software

 
The question of price manipulation is not a new one for commodities. Everything from oil to grains to potatoes and onions has been the subject of questioning glances. However, the precious metals markets are no strangers to actual manipulations, a factor which helps fuel current arguments. In the 1970s, the Hunt brothers accumulated extreme amounts of physical silver. At the time, private ownership of gold was still a no-no. The duo was able to corner the silver market by hoarding vast amounts of the physical supply. Depending on what source you read, the Hunt brothers had a pool that owned around a third of the world’s silver supply. They took their cash reserves and bought up futures contracts on silver, triggering a demand-led price rally that brought silver up to $50 an ounce. Federal regulators stepped in and COMEX changed their margin and leverage rules on silver, bringing the game to a halt and resulting in millions of dollars worth of margin calls on the brothers. Shorts moved into the market, precipitating a price collapse. The brothers were able to get short term help to stay afloat, but the damage was already done to the market’s image. Prices fell and eventually the Hunt brothers were accused of market manipulation.


Fast-forward to 2010 and the Commodity Futures Trading Commission (CFTC) has new allegations of silver manipulation to investigate. This past fall brought fresh news headlines that accused JPMorgan Chase and HSBC of silver market wrongdoings. Lawsuits brought against the iconic companies accused them of conspiring to depress silver prices to scoop up profits on short silver positions. The traders levying the charges say that the underhanded activities stretch back to 2008. According to the suit, the two banks would collectively have held over 80 percent of the net short silver position, and the plaintiffs say that this twisting of the markets caused their losses. Their interesting extra evidence: When complaints rolled in about the short positions there was a shift in the performance of silver’s price, which went from lagging behind gold to surpassing it.


What about gold? The players in the alleged gold price manipulation run the gamut from Morgan Stanley to the IMF to a collective label of ‘central banks.’ This is part of why there is a Gold Anti-Trust Action Committee (GATA). They exist on the pretense that there are actions which amount to “illegal collusion to control the price and supply of gold and related financial securities.” The organization was inspired into being via essays by Bill Murphy. These essays, according to the GATA’s website, give evidence that there have been efforts on the part of financial institutions to suppress gold prices. That’s not all banks do. Morgan Stanley’s deception in 2007 was the alleged sale of gold which never really happened, but resulted in people being charged storage fees anyways.


The GATA has also accused the federal government of manipulation. They took out an ad in the Wall Street Journal stating that the US government engages in swaps and other market dealings that are part of a surreptitious uses of gold reserves. It also alleged that the precious holdings have “not been independently audited for half a century.” The Treasury responded with details on regular accountings of gold holdings.


By now you are probably asking yourself why anyone would want to manipulate prices lower. The one argument I have recently heard proposed is that the Fed (or whichever large entity you want to insert in its place) is looking to do much the same thing as the Hunt brothers did with silver in the last century, except the goal here is to corner the cash market, not the metals market. According to a recent post from Richard Russell, the manipulation of prices stems from the issues with financing government debt. He charges that gold “exists outside the system” and when gold rises it is a “red flag over Wall Street, the Fed, and the economy.”
 

Summary 

Whichever argument you read related to keeping down the price of precious metals over time, or manipulation of the markets, there will likely be another story just around the corner. The recent high prices in both silver and gold have prompted new and dire stories about manipulation on the other side of the pit: Forces that are colluding to inspire another price hike in precious metals. Is it sour grapes from the short side of these trades? Maybe. A desperate attempt to be the first to call it a speculative bubble? Probably. Either way, the accusations of manipulation can always give an excuse for longs and shorts alike to take a pause and digest the market fundamentals. In this case, that might mean evaluating the recent upbeat earnings and economic reports. That could cause another so-called “clean out” of these markets, and a pull back in prices. Either way, chances are good that despite possible efforts to pull strings or work behind the scenes to affect prices, gold and silver are not going to drop off the average investor’s radar any time soon. 

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Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.