Precious Metals Market Manipulation?
Doug Casey
Chairman, Casey
Research
posted May 18, 2012
For many years now, a meme has been floating around that the
prices of gold and silver are being manipulated, which is to
say suppressed, by various powers of darkness. This is not an
unreasonable assertion. After all, the last thing the monetary
powers-that-be want is to see is the price of gold skyrocketing.
That would serve as an alarm bell, possibly panicking people
all over the world, telling them to get out of the dollar. It's
assumed, by those who believe in the theory, that the US Treasury
is behind the suppression scheme, in complicity with a half-dozen
or so large bullion banks that regularly trade in the metals.
The assertion is bolstered by the fact that governments in general,
and the US in particular, are always intervening in all kinds
of markets. They try to control the price of wheat and corn with
various USDA programs. They manifestly manipulate the price of
credit (interest rates), now keeping it as low as possible to
stave off financial collapse. And they may well be active, through
the so-called Plunge Protection Team, in propping up the stock
market. They were largely responsible for the boom in property,
through numerous programs and parastatals like Fannie Mae and
Freddie Mac. Why, therefore, shouldn't they also be involved
in the monetary metals? Central banks regularly intervene in
(i.e., manipulate) each others' currencies. So it's not unreasonable
to imagine they'd try to manipulate gold as well.
In fact, the US and other governments did try to suppress the
gold price from 1961 to 1968 through what was known as the London
Gold Pool. The US alone persisted in trying to do so until Nixon
devalued the dollar and closed the gold window in 1971.
But if it was ever doable, that was the time. Although nobody
knows exactly how much gold there is above ground, a reasonable
guess might be six billion ounces. There was a possibility of
controlling the price, in the days of the London Gold Pool, when
there were only three billion ounces in existence and when all
the gold in the world was worth only $105 billion ($35 x 3 billion
= $105 billion).
Today, however, the value of the world's gold is around $10 trillion
($1,650 x 6 billion = $10 trillion), nearly 100 times as much.
And governments own about a billion ounces, only 16% of it, whereas
the last time they tried to control the price they owned about
1.1 billion ounces, which was about 35% of the world supply.
And the governments, their central banks and almost all large
commercial banks are bankrupt; they have vastly less financial
power than they did in the days of the London Gold Pool. Why
would they try to do something that's so obviously a losing game?
I'm not at all disinclined to believe tales of manipulation of
markets by the state; I expect it, and as a speculator I relish
it. But I like to see evidence for everything. And extraordinary
claims demand extraordinary evidence. I've read the stuff these
guys have written for years and have seen nothing but strident
assertions and accusations. I'm completely willing to believe
central bankers are capable of any kind of nefarious foolishness,
but I'd like to see proof. I'm constantly reading assertions
of how "the boys" come along at "precisely"
1 p.m. or 2 p.m. or perhaps "precisely" 11:37 a.m.
or 12:16 p.m. and, on a purely not-for-profit basis, decide to
"smack down" the market for gold or silver or both.
Meanwhile the market has been hitting new highs for a dozen years.
As you might imagine, I know most of the believers in the precious
metals manipulation theories personally and am only a phone call
or email away from those I don't know. And I'm curious. So I
ask questions of these folks, who are generally intelligent,
well informed and sophisticated. But I don't get answers that
I find make sense. There have been readily identifiable reasons
for other government manipulations in the past. It's obvious
why a government wants low interest rates. It's obvious why they
want high real estate and stock markets. But why - in today's
world - would they really want to spend billions keeping gold
(or especially silver) down? You'd think they might have tried
to control the price of uranium when it ran to $140 a few years
ago. Or perhaps the price of sugar when it ran to 28 cents last
year; everybody uses sugar.
Despite the fact that gold can act as an alarm bell, few Americans
- or anyone, for that matter - among the hoi polloi
care or even know the stuff exists except as an academic matter.
Suppressing the gold price is not only vastly harder but much
less important than it was during the last market.
Here are some questions I'd like answered:-
Q: Why do these banks (JPMorgan, etc.) even give a damn,
in the first place, what the price of the metals might be?
The only reason that makes any sense is that they are acting
as proxies for the US Treasury; the Treasury doesn't go into
the markets itself. But does it direct a commercial bank to act
for it to buy or sell gold? It might. But there's zero proof
of any sort it's doing that.
These banks have no dog in the fight; they couldn't care less
what the metals prices are and have no reason to try manipulating
the market.
Q: Why has there been zero word from their traders about
how stupid their bosses are for fighting a gigantic 10-year bull
market? These guys all know each other, and they gossip with
the same delight as teenage girls.
It's hard to keep a long-term illegal collusion a secret. Two
parties might possibly be able to keep a secret. But six or eight
commercial banks acting in broad daylight? It's said that three
individuals can keep a secret, but only if two of them are dead.
But for a half-dozen trading operations to do so? Wall Street
is the world's greatest rumor mill. But there's never been a
rumor (outside of those created in conspiracy circles, who offer
no sources) that the bullion banks are acting, in concert or
individually, as agents of Timmy Geithner.
Q: If, as alleged, these banks have been short gold from
the bottom of the gold bear market at $255 in 2001 and the silver
bear market at $4.25, also in 2001, how can they possibly absorb
tens or hundreds of billions of losses? Did they expect to take
the metals to a fraction of their 1971 lows?
Trading desks make mistakes. But they don't stay short in one
of history's great bull markets - it's not the way traders earn
bonuses. How stupid are the supposed "not for profit"
sellers of gold supposed to be?
Q: Exactly where and how do they supposedly get the capital
to cover these losses? Haven't they ever heard the old saw, "He
who sells what isn't his'n must give it back or go to prison"?
No bank can tie up billions in capital fighting the market for
a decade.
Q: Exactly who originated this idea of trying to suppress
prices using the futures markets?
Here a well-known writer on this subject suggested the following
to me, via an email, when I asked:-
"The big commercials, starting some 25 years ago, discovered
they could dominate the market and force technical traders in
and out of the market when they wished at great profits to the
commercials. But they miscalculated and stayed in too long, and
now they are trapped."
I don't buy that explanation for several reasons. Of course
the big guys, like commercials, are always bullying small speculators.
The small guys use technical trading systems, which make it easy
to figure out where they're buying and selling. Small traders
are always minutes behind the market. And small traders usually
use way too much margin, so they're prone to being squeezed and
panicked. This has always been true, not just for the last 25
years. It's part of why small traders are notorious for losing.
The commercials are typically on the other side of the trade.
But one thing is for certain: nobody (certainly not commercials)
allows himself to get in so deep he's trapped for 12 years in
one of history's greatest bull markets.
Q: Why fight the market, and get trapped, in just gold
and silver? Why aren't they trying to suppress copper, platinum
and palladium as well? For that matter, every commodity?
I don't credit the people who run central banks or national treasuries
with a great deal of financial acumen; they're basically just
political hacks, flunkies that went to "good" schools,
dress well and like feeling important in a safe niche in the
bureaucracy. But they don't want to lose their jobs by being
that wrong for that long.
Q: Why would the US Treasury (if it's behind a gold suppression
scheme) make things easier for the Chinese, the Russians, the
Indians and numerous other developing countries by suppressing
the gold price? They simply take advantage of the lower price
to buy more.
The arguments for suppression of gold make very little sense
when you examine them. The arguments for silver make absolutely
no sense at all; it's a tiny market that nobody cares about except
for silver fanatics, who treat it like a religious icon. That
said, I'm at least as bullish on silver as gold - but a discussion
of that will have to wait.
If anyone could answer these questions, I'd appreciate it. I
advise readers to buy gold - even at current levels - but I'd
like to see them do it for the right reasons. And it seems to
me the arguments about gold manipulation are more redolent of
religious belief than economic reasoning.
[For much more economic straight talk, from Doug Casey and 30
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###
Doug Casey
May 17, 2012
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