Gold Market Manipulation

Back in the late 1990s when I first began learning about gold, I found some conspiracy theorists who argued that the "true" price of gold should be much higher, and would be so if not for the actions of central bankers around the world. Some of these people were simply wackjobs; others dressed up in suits and testified before Congress about their theories. Since I believe that a conspiracy of any more than three people is doomed to failure, I assumed these nuts were just part of the package that comes with believing anything out of fashion. See also: libertarianism.

I also know that manipulating any liquid market is near impossible, and poses significant risks to the would be manipulator. If I tried to keep the DJIA low by selling, I would be the one that lost money when prices went up. Even if I had a billion dollars, there's simply no way I could control the DJIA. Heck, even a trillion wouldn't be enough. Trying to manipulate the market is a set up for severe long term losses.

Since then, I've seen more and more respectable people claiming that there is indeed manipulation in the gold market. It seems to be a given among people familiar with the market. The theoretical reasons why this is even possible have to do with the fact that the gold market is not transparent. Only in 1997 did the world find out the size of the gold market:

Deals involving about 30 million troy ounces, or 930 tonnes, of gold valued at more than $10 billion are cleared every working day in London, the international settlement centre for gold bullion.

This is the first authoritative indication of the size of the global gold market, and was revealed yesterday by the London Bullion Market Association.

With the blessing of the Bank of England, the association overturned years of tradition and secrecy to provide statistics illustrating the size and depth of the London market.

The volume of gold cleared every day in London represented nearly twice the production from South African mines in a year, Mr. Alan Baker, chairman of the association, pointed out.

That much gold was trading hands without the exchange rates being made public. That certainly suggests that the overt market could indeed be massaged a bit by the opaque market players.

Recently, an article was published on Zero Hedge detailing evidence of attempts at price manipulation. Essentially, there is a massive difference in the behavior of the price of gold between day and night. A liquid, free market should ideally trade the same general way at all times. But according to the data, one of the best performing investment strategies over the last decade would have been to short the intraday market and go long overnight. It would have returned a 20-bagger over the last decade, more than the just a shade under 4-bagger earned by being long gold all the time. That certainly sounds fishy to me. I could hypothesize various explanations for this phenomenon, but none of them would hold a candle to the most obvious: someone is trying to manipulate the market and keep the price of gold down.

If this indeed is the case, then the manipulation is simply gunpowder for an eventual future explosion in price.

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Losses

Jonathan,

Trying to manipulate the market is a set up for severe long term losses.

The gold in a central bank does not belong to the central bankers, so they do not personally suffer the losses, which in fact have often occurred. Their incentives are largely political. Gold hidden in a vault has no economic effect unless and until it starts to run out. If selling gold helps to keep printing new money it's a free lunch for the bankers.

Regards, Don

Conspiracy

Since I believe that a conspiracy of any more than three people is doomed to failure,...

When world leaders go to Copenhagen and outline plans to take control over enormous swaths of commerce - saying this is to save the world from global warming but knowing that their proposed programs accomplish little or nothing relevant to their doomsday models - how is that not a conspiracy?

Aquiring

is it better to hold physical gold or ETF's like GLD? I do not envision an apocalypse that would mean using gold as money. I do foresee a melt down in general that would make ETF stocks shoot way up. What is the correct play to capture some of the run up in gold price that I expect. $1500/ounce at a minimum and probably closer to 2k per ounce is not out of the question. Physical gold or ETF's?

I wouldn't touch paper gold, i.e.,, ETFs, futures, etc with a...

...10 foot pole. Eventually, I believe GLD and the like will blow up. If there is manipulation in the market, then GLD et al are being used to suppress the price.

GLD is akin to a gold standard. You get a paper receipt and a promise that it represents a chunk of gold. The people behind GLD could easily print more receipts than there is gold, especially if they're trying to keep the price down. One day, as demand peaks, this "gold standard" will undergo a bank run, and the holders of the receipts will be left with a bunch of worthless paper.

I also think you're being way to conservative in your estimates. In addition, keep in mind that even if you're correct in your conservative estimates, then the DJIA will probably fall to 2000-4000 and everything else--bonds, real estate, foreign currencies and stock markets--will crash as well. The lower the price of gold stays, the lower the DJIA goes. So even if you're correct in your conservative predictions for the price of gold, nowhere else is safe.

Peter Schiff argues that gold

Peter Schiff argues that gold mining stocks are higher leverage and thus will do better than gold itself.

All options have their dangers , physical gold can be taken from you by force and may even make you a target. Wilde writes:

Aside: I found this "How to hide anything" pdf very helpful. I also heard a relatively ingenious way to hide gold: geocaching. The most powerful lock is the mind.

Um, maybe, but it's also one of the things I can least afford to have broken. If a reader holds a gun to his head and says "Take me to your gold", ETFs might suddenly look a lot more attractive,

Hedge all bets.

I have nowhere argued that

I have nowhere argued that gold is the perfect investment vehicle nor that geocaching is the perfect way to hide gold. The risk of someone someone holding a gun to my head demanding I lead him to my geocached gold is...small. The risk of gold ETFs blowing up are pretty high. Just my opinion. If someone does go the ETF route, I'd go with Eric Sprott's PHYS.

Re: Schiff. I have also argued on this very blog that gold miners have more leverage that gold itself. However, I changed my strategy to physical gold when I realized that something more than a typical bear market is probably afoot, namely a reset of the monetary system that occurs every 40-50 years pretty much everywhere in all eras. So my physical gold buying's goal is simple: to preserve wealth in the midst of financial destruction. It is not to grow my money, simply to preserve it. Even if I am dead wrong and the gold price peaks at today's price, and we have a 20 year bear market in gold, its price will eventually come back to today's price. I can't say that about any other financial instrument with confidence. My physical gold holdings are insurance an insurance policy; something to pass on to my kids someday.

The risk of someone someone

The risk of someone someone holding a gun to my head demanding I lead him to my geocached gold is...small.

Because during a monetary reset bad guys don't look for piles of gold.

Plus they don't know about search engines.

As I said, I'm making a

As I said, I'm making a judgment of the relative risks of strategies in the absence of a perfect strategy. I'll take my chances with the gunpoint geocache thief; you can take yours with paper gold.

I'm not against gold or

I'm not against gold or geocaching, I'm for diversification and scrupulous paranoia.