Many analysts say gold is volatile. But they should say that the gold market is volatile. That’s because most of it is paper gold, with only a small amount of physical gold to support it.
Think of the gold market as an inverted pyramid, with a small amount of gold at the bottom, holding up a huge amount of paper gold. The paper market could be 100 times the size of the physical market.
That means there are 100 paper claims upon each ounce of physical gold. Imagine a coat check at a restaurant issuing 100 claims for one actual jacket. Well, there’s only one coat so 99 claimants are out of luck.
It’s the same in the gold market.
It’s the paper market that creates the volatility. Gold itself is remarkably stable. It only appears unstable because its price is quoted in dollars, which fluctuates. When gold goes down, it’s really because the dollar is going up. When gold goes up, it’s really because the dollar is going down.
Right now we have a strong dollar, compared to other currencies at least. In reality, the dollar is simply the cleanest shirt in the laundry pile.
And the paper market is highly vulnerable to price manipulation, and there’s been gold price manipulation over the years. There’s no question about it. That’s not just an opinion. The evidence has been very clear, in fact.
The Smoking Gun
I don’t believe in making strong claims without strong evidence. And the evidence is all there. A few years back, I spoke to a PhD statistician who worked for one of the biggest hedge funds in the world. I can’t mention the fund’s name but it’s a household name.
He looked at COMEX (the primary market for gold) opening prices and COMEX closing prices for a 10-year period. He was dumbfounded.
He said it was the most blatant case of manipulation he’d ever seen. He said if you went into the aftermarket, bought after the close and sold before the opening every day, you would make risk-free profits.
He said statistically that’s impossible unless there’s manipulation occurring.
I also spoke to Professor Rosa Abrantes-Metz at the New York University Stern School of Business. She’s the leading expert on globe price manipulation. She has actually testified in gold manipulation cases.
She wrote a report reaching the same conclusions. The bottom line is, price manipulation isn’t just an opinion or some deep, dark conspiracy theory. It’s real.
Here you have a PhD statistician and a prominent market expert lawyer, expert witness in litigation, qualified by the courts and as straight-laced as they come, who independently reached the same conclusion.
Who carries it out?
Anatomy of a Swindle
Gold manipulation can be done by market players like hedge funds and other major players using ETFs and leasing and unallocated contracts. These manipulations do exist and can influence the price of gold in the short term.
The price of gold is a struggle akin to a tug-of-war between physical and paper transactions.
The price of gold will move, in part, because of manipulators’ actions. There’s very strong mathematical evidence that the gold market is manipulated to suppress prices.
How do they do it?
The easiest way to perform paper manipulation is through rigging the futures market.
It’s a bit complicated, but don’t worry about the details. Just realize that they’re meant to suppress gold prices.
Currently the price of gold is set in two places. One is the London spot market, controlled by six big banks including Goldman Sachs and JPMorgan. The other is the New York gold futures market controlled by COMEX, which is governed by its big clearing members, also including major western banks.
In effect, the big western banks have a monopoly on gold prices even if they do not have a monopoly on physical gold. That’s key.
The easiest way to perform paper manipulation is through COMEX futures. Rigging futures markets is child’s play. You just wait until a little bit before the close and put in a massive sell order. By doing this you scare the other side of the market into lowering their bid price; they back away.
That lower price then gets trumpeted around the world as the “price” of gold, discouraging investors and hurting sentiment. The price decline spooks hedge funds into dumping more gold as they hit “stop-loss” limits on their positions.
The Snowball Effect
A self-fulfilling momentum is established where selling begets more selling and the price spirals down for no particular reason except that someone wanted it that way. Eventually a bottom is established and buyers step in, but by then the damage is done.
Futures have a huge amount of leverage that can easily reach 20 to 1. For $10 million of cash margin, they can sell $200 million of paper gold.
Rigging futures markets is child’s play. You just wait until a little bit before the close of trading and put in a massive sell order.
By doing this you scare the other side of the market into lowering their bid price; they back away. That lower price then gets trumpeted around the world as the “price” of gold, discouraging investors and hurting sentiment.
The price decline spooks hedge funds into dumping more gold as they hit “stop-loss” limits on their positions. A self-fulfilling momentum is established where selling begets more selling and the price spirals down for no particular reason except that someone wanted it that way.
Eventually a bottom is established and buyers step in, but by then the damage is done.
If you want more details on this topic, please see my book The New Case for Gold. Specifically, read Chapter 4, “Gold Is Constant.”
Take the Long View
I’m not arguing that manipulation is a principle component of today’s depressed gold price. But it is something to keep in mind.
Ultimately, the shrewd gold investor takes the long view. That’s how patient investors preserve wealth in the gold market. For those who flit in and out and occasionally buy rallies and sell dips in panic mode, all I can say is good luck. You’re probably going to get crushed.
My advice to investors is that when you have gold, you should think about the quantity of gold by weight, not dollar price. Don’t get too hung up on the dollar price, because the dollar could collapse quickly and then the dollar price wouldn’t matter. What would matter is how much physical gold you have.
The goal is to preserve wealth for the long run.