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home | Tea Party Economist | Manipulators in the Precious Metals . . .
 

Manipulators in the Precious Metals Market

Gary North
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Reality Check (Dec. 25, 2012)

Who are these manipulators? Perma-bull website editors.

I begin with a question. When was the last time you were told by a precious metals website editor that manipulators have driven down the palladium market? It is a thinly traded market. It is therefore more vulnerable to price manipulation.

You say you never recall reading about manipulators in this market. Well, then, what about the platinum market? They must be having a field day. What's that? You have not heard about this?

Why not?

I'll tell you why not. Because investors in these thin markets are professionals. They are not going to fall for stories about hidden manipulators who secretly control these markets and who always go short, but who never go long.

A FRUITLESS QUEST

In gold and silver markets, there is an endless, hopeless, utterly fruitless quest to find manipulators of the gold market who always go short. The reason for this quest is this: the individual doing the search has experienced recent losses in his gold portfolio. He was not warned by the people who persuaded him to buy gold that gold fluctuates in price, and sometimes falls a great deal. These persuaders spin stories about the inevitable expansion of the money supply leading to inevitably higher prices for consumer goods, which in turn will raise gold at a far higher rate than other consumer goods.

Monetary inflation is likely. So is price inflation. But the consumer price index fell in November. The Median CPI went up a mere .2%, as it had in previous months.

Then the spin-masters tell us that manipulators in the federal government have rigged the official price indexes.

The world is apparently controlled by manipulators.

The markets are powerless to bring these manipulators under control. Oh, woe! The pathetic free market! So helpless to convey accurate information about prices!

I grow weary of all this.

These experts do not know what they are talking about. They or their predecessors got investors in 1980 to buy silver, because of the supposed shortage of silver, and then watched the price fall from $50 to $4 over the next 21 years. At no time did any of them tell their readers that silver was falling and gold was falling, although less, and would continue to fall, because inflation was slowing, interest rates were falling, and there were far better investments in the stock market. They clung to their bullish predictions for 21 years, losing their investors fortunes, never admitting during the entire period that they did not know what they were talking about.

It was depressing for those of us who still held some gold and maybe a little silver, because we still believed that the federal government would eventually expand the money supply even faster. But, we had to wait for the recession of 2001 to get Greenspan into inflationary mode once again. We also had to have the idiot Gordon Brown run out of gold to sell from the Bank of England. When Brown finally ran out of gold in 2001, the price of gold quadrupled. Then it went up by another 80%. Gordon Brown made me rich, but I never had any illusions about the fact that gold fluctuates.

Then came a new wave of bullish, self-appointed experts in gold, about the time that gold went over $500 an ounce. These people screamed that gold had to go up, and most of them said that silver would go up even faster.

Then, in 2008, they got their heads handed to them. I predicted that gold and silver would fall, and I predicted this within about three days after the peak in March. I saw that the recession would smash commodities, and that gold and silver would fall. They did, and silver fell much further than gold did, as I predicted.

Oil's price also fell dramatically. But nobody blamed manipulators for the fall in the price of oil.

So, whenever gold falls, and especially when silver falls, the perma-bulls start screaming about manipulators in the futures market who are selling off gold and silver. They do not admit to their readers that the futures market is a highly risky market in which nobody in his right mind sells a commodity that he does not own, and that he cannot get a hold of unless he enters the futures market to cover his position, unless he thinks the market is close to a top.

Manipulators would have to have access to enormous quantities of money, supplied by somebody else, which enables them to short a position against the movement of the price of the commodity in the physical markets. It is possible to have manipulation for very brief periods of time, but only because individuals shorting the market believe that the market has peaked temporarily, and that by shorting it they will terrify newcomers, who are not strong holders in their positions, and who will then sell their positions. That will drive down the price of the commodity. But this lasts only for as long as there are no buyers coming into the futures market, who, sensing that the bottom is here, begin to buy futures. This reverses the market, and the price goes back up.

LEVERAGE

The commodity futures market, like any other futures market, is highly leveraged. It is always dominated by the market in the physical commodity. Individuals believe that they have a better understanding of what the future of that market will be, and they enter the futures market, either to buy or sell. For every contract to buy, there has to be a contract to sell. For every person who thinks the price is going down, there is somebody else who thinks the price is going up. Always, the markets are equal. For every futures contract, there is a long and a short.

Never do the gold bugs and silver bugs go into the details of exactly how these markets work. Never do they tell the buyers what I am telling you now, namely, that for every long there is a short. For every person who thinks a commodity's price is going up, there is a person who thinks it is going down. For every person who promises to make delivery of the commodity in the future, there is a person who promises to take delivery in the future.

If the person who is either long or short in a commodity in a futures contract is incorrect, he will suffer losses. The losses are imposed by the real world of physical commodities. There are vastly more contracts out there than there are physical commodities to deliver. This is why only about 3% of commodity contracts are ever executed in terms of physical delivery. The entrepreneurs are interested in price changes; they are not interested in physical delivery.

PURVEYORS OF BULL

When silver bulls and gold bulls tell you that prices have to go up, because of underlying conditions, they misinform their readers. Nothing has to go up. Lots of things fall that are supposed to go up. All kinds of interventions can take place that are outside the ability of people to forecast. So, anybody who is a perma-bull is full of bull if he tells you, or even implies, that there will not be wild fluctuations in the price of the commodity between the day you buy it and the day you sell it (probably for digital money). The suckers are anybody who believes these purveyors of bull.

When the purveyors of bull see the price of the commodity going in the opposite direction, they frantically tell their deluded victims, who believed these silly people, that manipulators have entered the market to push down the price of the commodity. This is conceivable over very brief periods of time, but it is a highly risky transaction. At 10-to-1 leverage or greater, anyone who bets wrong is going to have his head handed to him. If these short-sellers get caught by high demand for the physical commodity, the price reverses, and they will lose lots of money.

The bull purveyors never tell you that the people who go long can be manipulators, too. Why should shorts have more power in the market than longs? Why should shorts be more favored than longs when it comes to manipulation? Why cannot people who want to make money from a market go long in a market? Why is manipulation always on the short side?

For example, why cannot central bankers who plan to sell gold to other central banks start spreading rumors about an imminent move on the part of other central bankers to buy gold? Then the suckers will buy gold, and the central bank that wants to sell gold will pocket the difference when it sells. Why don't we ever hear this kind of manipulation? If it doesn't happen, why doesn't it happen? If you can make money shorting a commodity, you can make money by going long. If someone can manipulate a market down, then someone else can manipulate a market up. This is obvious, but it is not obvious to the gold bug manipulators who manipulate their victims.

THE VICTIMS

The victims are naïve investors who do not understand economics. They do not understand how the commodities markets work. They do not understand that the physical market dominates the futures market. They do not understand that supply and demand for a real commodity in a real market are what ultimately triumph over speculators who bet wrong in commodity futures markets.

Maybe they understand this with respect to oil, which is actually consumed, but they do not understand with respect to gold and silver.

The real manipulators are the gold bugs and silver bugs who invoke the myth of hidden manipulators in the futures markets. They impose losses on their naïve victims, who believe the nonsense about the inevitable rise of the price of silver and gold. The rise of prices is not inevitable, although it is probably likely. But a straight-line increase is unlikely to the point of impossibility. So, the bull purveyors in the gold and silver markets frantically send out their newsletters and e-mails telling their people not to panic. The readers would not be in panic mode if they had been well-informed. But the bull purveyors have gotten them into the market on the assumption that gold and silver are going to go straight up, and that there will not be substantial losses along the way, not because of manipulators of the precious metals futures markets, but because of underlying realities in the physical goods markets.

The victims of these bull purveyors cannot get it into their heads they have been suckered by real manipulators, namely, the purveyors of bullish predictions regarding gold and silver. In no other commodity markets do you have these constant e-mails telling you "manipulators, manipulators, manipulators." Investors in all the other commodities markets know that none of this is likely. They know that the physicals market goes up and down irrespective of supposed manipulators in the futures market.

The reason why the purveyors of bull in the gold and silver markets are able to get away with it is that they are dealing with naïve investors who do not know anything about commodity futures. They are suckers, and the manipulators who manipulate them make money from them. I have watched this for over 40 years.

The endless quest for the hidden manipulators who inflicted losses on the suckers who believe the bull purveyors is endless. It is endless because they will not admit to themselves that they have been sucked in by people who have no particular insights into the markets.

I realize that it is never going to end. There is always somebody on my mailing list who has been sucked in by these purveyors of bull, and who really believes it. They do not understand that these people are the real manipulators. They manipulate people's opinions, and the people they manipulate are uninformed, naïve, and trusting. The victims are buying because some guru tells them to buy, and if the market moves against them in the interim, because they hesitated to buy when they should have bought, they get frantic because they think, maybe, that they have bet on the wrong guru. They do not blame themselves for being hesitant to get in when they should have gotten in, so they go looking for reasons why they were really, truly smart for getting in late, and they want to find out why their investment has turned sour. The reason why they have lost money on paper is because they did not have enough sense to get in when they should have gotten in. Then they got manipulated to get in by some guru who is the real manipulator, not the hidden manipulators of the commodity futures markets.

EXCHANGE TRADED FUNDS

I was asked by a subscriber: What about ETFs (exchange traded funds)? Nobody in an ETF managerial position is going to short the market against the desires of buyers if the ETF buyers are going long. There is nothing to motivate a manager of an ETF to go against the movement that he is experiencing in his ETF. If people are buying the ETF, because they want to own promises to pay digital money based on the movement of prices in the physicals market of a particular commodity, the manager of the ETF buys the promises. If, on the other hand, people are mostly selling the ETF, the manager is going to sell the promises.

The ETF makes money on the difference between the cost of investing and the cost of issuing promises. It makes it on the spread between buy and sell. It does not make it on market investments that are opposed to the demands made by investors to buy or sell his ETF. The manager of an ETF is not a speculator. He is selling an asset for which he makes a commission.

CONCLUSION

Markets go up or down long-term based on supply and demand in the physicals market, not based on supply and demand in the futures market. The futures market is a temporary phenomenon, because leverage is high, and because anyone who stays in a market in which he has gone on the wrong side of the contract is going to lose all his money.

It is possible for a manipulator like Gordon Brown to force down the price of gold, but it only lasts for as long as he can get his hands on gold to sell. When Brown ran out of gold to sell, it was time to buy gold. But hardly anybody did. That was because their confidence in gold had been broken, because Brown kept selling gold, and the price kept falling.

Do not look for manipulators in the futures market. Instead, look for manipulators in the gold and silver newsletter market. These are the people who are the real manipulators, because they manipulate people's opinion. I think they are right about the long-term implications of gold, but they are utterly wrong in not telling their subscribers from the beginning that the physicals market for gold and silver is dominant, and will persevere over whatever happens in the futures market. Meanwhile, conditions change in the physicals market, due to the business cycle and lots of other reasons, and these changes are going to produce paper losses for people who have bought gold and silver on the basis of long-term movements, but who suffer losses on paper because of changes in supply and demand in the physicals market.

Do not forget this. If you are leveraged ten to one in the futures market, and you are on the wrong side of the trade, you are going to lose your shirt if you do not cover your position. This is why there cannot be long-term manipulation of the metals market, or any other market, unless somebody has access to enormous amounts of money that he is willing to lose, irrespective of the movement of prices in the physicals market.

Here is reality: if a market can be manipulated on the short side, it can be manipulated on the long side. Never believe anybody who tells you that the price has moved because of manipulators on the short side, but who never, ever tells you that the prices have gone up because of manipulators on the long side. Anybody who plays this game should not be believed if he tells you that the sun is going to rise in the east tomorrow. If he says his mother loves him, check it out.


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