Is the gold price manipulated?
Many die-hard gold bugs say it’s obvious. The gold bugs argue that precious metals prices have been manipulated downwards for years.
It’s true banks have been caught manipulating nearly every market under the sun — LIBOR, global currencies, and sub-prime mortgages, to name a few.
But precious metals prices aren’t kept artificially low. I recommend ignoring the manipulation rumours, and focusing on trading the trade.
Think about it…
Why would the banks manipulate prices down?
It’s impossible to manipulate a market against its trend for any length of time. For example, have a look at the monthly chart for gold below:
Source: Resource Speculator; Trading.view.com
Click to enlarge
Gold’s monthly trend — shown by the blue lines — has pushed lower since 2011.
Despite a significant rise earlier this year, gold prices have remained within the broader downtrend. The global forces driving this broader downtrend are far too powerful to be simply manipulated. Any efforts by banks to drive gold below this trend would attract capital back to the ‘real’ trend. That’s due to international arbitrage (investors buying gold in cheaper markets and selling it in more expensive markets) and common sense investing.
There also isn’t a huge incentive for the banks to manipulate prices to the downside. The reward, similar to short selling, is limited. The most you can gain is 100% — assuming that prices go to zero.
And the gold price, of course, will never get anywhere close to zero.
The big money is made to the upside — that’s when banks love to manipulate prices. The reward is unlimited to the upside. Most punters love buying into an exciting story — and only buy when prices go up.
It’s about the fear of missing out. The idea is to bring everyone into the story and trap the herd at the top. The banks create liquidity by fuelling plenty of investors into the story. When the price rockets, more people want to buy. That’s when the banks offload most of their position — at the top — and ‘trap’ everyday investors into the move.
Let’s be realistic
This doesn’t mean the banks don’t trade against their clients. Veteran trader Martin Armstrong argues,
‘The [investment banks] banks keep track of people’s positions and routinely trade against them. For years floor brokers gunned for stops and shared that info with the big players. It was common to talk to the floor brokers and they would say where the stops were laid in above and below. That does not amount to the perpetual suppression of a market when there are no profits to be made.’
Scalping clients, which is routine, doesn’t amount to manipulation. The broader trend doesn’t change. Plus, if that’s called manipulation, then why do the banks get bailed out during a crisis? They should be indefinitely profitable, and survive the hard times. It’s impossible to manipulate the trend.
My colleague, and our resident options expert, Matt Hibbard knows the trading business better than anyone. He has decades of experience trading options and futures. He sent through an article from The Australian last Friday (my emphasis added):
‘An Australian academic’s discovery of global gold price collusion has sparked a looming US trial in which four of the world’s major banks are being sued for up to $1 billion over claims they rigged the price of the precious metal at the expense of investors over a decade.
‘“I never thought it would get to this,” Professor Caminschi said. “I didn’t go out cartel-busting or bank-bashing — it was more like the data was just yelling at me.”
‘During his research, the academic discovered apparent manipulation during the twice-daily meetings held by banks in London that determined the benchmark price of gold, which was then used by dealers, central banks and mining companies to trade the precious metal.
‘The analysis of 14 years of raw data found that during these meetings, and before the benchmark price became known, trading volumes in gold derivatives would rise substantially. This suggested the banks were trading on, and potentially profiting from, information that was not available to the wider market — a theory that had been rumoured for years but never proven.’
‘In a key development, a US judge ruled last week that the four banks — Barclays, Bank of Nova Scotia, HSBC and Societe Generale — had a case to answer and that a lawsuit filed by investors would proceed to trial.’
Professor Caminschi initially published his research back in 2013. It’s still gaining plenty of attention, with the lawsuit now going forward. This shows you the glacial pace of the judicial process at work.
The research also shows the banks were rigging the precious metals prices when they were going up — not when they were going down. Remember, that’s when the big bucks are made.
At the moment gold remains in a downtrend, though I expect that to change sometime next year. But even if banks look to manipulate the gold market when it does return to an uptrend, they can’t manipulate the gold in the ground. The gold will be there…or it won’t.
That’s why I like speculative stocks so much. No matter who is trying to influence the prices, you can expect speculative stocks’ share prices to fly if they find the mother lode.
So ignore the manipulation rumours. Instead, look to trade the best stocks, the ones that can make many hundreds of percent in gains if their story plays out.
This is what I spend most of my waking hours doing…when I’m not writing to you. And over the weekend I found perhaps the best all-rounder speculative stock on the ASX. I’ll send all the details to readers of Resource Speculator later this week. To find out how to get your no obligation trial, and get all the details on my latest stock, click here.
Resources Analyst, Money Morning