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What Isn’t Manipulated? Brady Willett
1 April 2010 News that London trader, Andrew Maguire, has
exposed manipulation in the precious metals market has been making the rounds
over the last week. This rehashed story of precious metals manipulation, which
is being ignored by the mainstream media, has quickly acquired ultra-conspiracy
status because Mr. Maguire was not permitted to testify at the CFTC hearing,
technical difficulties were encountered as soon as GATA’s Bill Murphy
started to speak, and days after the hearing Mr. Maguire’s car was struck in a
‘bizarre’
hit and run. Yet for all of the excitement an objective take on Maguire’s
revelations proves less than compelling. In other words, we all know the price
of gold is manipulated in the same sense that currency prices, interest rates,
mortgage rates, and even stock prices are indirectly and directly ‘manipulated’
by powerful interests -- and?...
Constantly digging for the elusive evidence of manipulation, some goldbugs have
yelled eureka because Maguire accurately forecasted a sell off in the precious
metals market following last months payrolls report. In the same email Maguire
penned on February 3 foretelling of
the alleged manipulation he also stated the following:
“I am aware that physical buyers in large size
are awaiting this event to scoop up as much "discounted" gold and
silver as possible. These are sophisticated entities, mainly foreign, who know
how to play the short sellers and turn this paper gold into real delivered
physical.”
How is it a manipulated market when sophisticated foreign entities
are expected to stop prices from sliding in the manipulators favor? For that
matter, how can anyone cry manipulation when it took the price of gold less
than a week to recovery from its February 5 selloff? (By this logic so
long as I plan and can temporarily move the price of any financial instrument I
am manipulating prices whether I actually produce a profit or not).
Another problem with Mr. Maguire’s story is that he provides no evidence of
collusion and he names no names (except his own). If Maguire was an authentic
whistleblower his information would incontrovertibly be grounds for an
investigation and arrests. But instead of hard evidence Maguire offered
the following:
“The question I would expect you might ask
is: Who is behind the sudden selling and is it the entity/entities holding a
concentrated position?”
And what is Maguire’s answer to this crucial question?
“I would ask you watch the "market
depth" live as this event occurs and tag who instigates the move. This
would surly [sp] help you to pose questions to the parties involved.”
The answer is that Maguire does not know exactly who is doing the
selling (and more importantly why), so he suggests that GATA’s sworn enemy, the
CFTC, investigate whoever starts selling after the payrolls report. Eureka? I think not...
The reality is that Maguire’s February 3 letter highlighted the catalyst that
would send an extended precious metals market lower. It isn’t
whistleblowing when after researching COT statistics and historical price
tendencies you correctly time a price movement – it is a successful trade!
As a side note, the COT manipulation story (as if it needs to be reiterated), is basically that
as small specs take greater control on the long side of things the always short commercials (two firms in particular) slam
prices in the paper gold market until the small specs (and other parties) start
to dump. This is an old story that was worth covering years ago because
it was statistically predictable and it helped uncover good accumulation points
for precious metals bulls. However, as precious metals prices escalated
the COT data has become a statistically less significant tool.
Strangely enough, Mr. Maguire was (is?) not looking to accumulate silver/gold
but instead profit from the manipulation! Not only does Maguire undermine
his case by noting that he was looking to profit from the Feb 5 ‘manipulation’,
he builds the case that it is traders like him – or those that aim to follow
COT shorting - that are responsible for turning tiny corrections in precious
metals into complete meltdowns. Astonishingly, in a recent interview with King World,
Maguire said he has been profiting from the manipulation since 2008, but he did
not feel the need to contact the CFTC until November 2009:
“I thought it my duty to contact the CFTC…we
were all profiting from it [the manipulation]…there comes a point when your
down (inaudible) on your conscience.”
The utterly ridiculous notion that Mr. Maguire enjoyed profiting
from the manipulation before he grew a conscience begs the question: how much
money was Maguire able to amass with his insider information? If the answer is
he is still not on Forbe’s rich-list can it not be readily deduced that his
manipulation theories are bunk? After all, with leverage it would only
take a trader a few ‘take down’ sessions to make an enormous amount of money,
and Maguire has been following and supposedly profiting from the actions of the
manipulators for more than a year!
Maguire’s debatable prescience notwithstanding, the real shock from the CFTC
hearing was comments made by CPM Group head, Jeffrey Christian (video). Who needs the Maguire
angle when Christian – who is supposed to be against the manipulation
theory – is more than willing to admit that the price of COMEX gold is
determined by massive unbacked paper promises?
“Precious metals are financial assets like
currencies, T-Bills and T-bonds they trade in the multiples of a hundred times
the underlying physical and so people buying them are voting and giving an
economic view of the world or a view of the economic world…”
According to Mr. Christian that paper gold can be traded hundreds of
times (why not thousands of times?) beyond the underlying physical asset is not
cause for concern. Mr. Christian also added that the need for position limits
is not required because those with large concentrated positions are actually
hedged with OTC contracts (side note: the notion that everything in this world
is perfectly hedged in OTC land long ago left the realm of comical and has
become simply absurd). Finally, Mr. Christian noted during his written testimony how important the paper driven U.S. market is in determining global
gold prices. If you adorn your conspiracy hat it is easy to infer from
the following that paper gold really does rule each trading day:
“Companies seeking to execute large trades wait
until New York opens, finding the market more liquid and pricing more
competitive. Conversely, there are times when companies enter the market with
large trades during the New York pre-market, apparently with the intention of
moving prices in their favor by placing a large order or orders before the
liquidity is there to accommodate such trades.”
In short, by blithely assuming that massive short positions are
hedged in the OTC market the potentially complicit CFTC is openly endorsing
dangerous naked trading in markets that their own ‘experts’ believe should have
no position limits. Eureka! – one day the shorts won’t be able to
deliver…
Price Manipulation Does Not Constitute Market
Control
Company ABC is in financial trouble and the rumor is that it has a
huge short position in wheat. Smelling blood, traders start buying wheat solely
on the expectation that ABC will be forced to liquidate its position and
cover. This type of situation happens all the time in the financial and
precious metals markets and is perfectly legal. The issue is not the
short sellers, but the rigged nature of the market…
So, are precious metals prices really ‘manipulated’? Of course they are.
But as the surge in precious metals prices over the last decade will attest to,
there is a big difference between isolated instances of price manipulation and
complete market control. To be sure, while the ‘evil’ COT shorts sometimes
succeed in inundating the market with naked (?) sell orders, they have also
failed to exert their will on the markets during the gold bull.
What can put a stop the manipulation and the conspiracies? Well, given that if
gold goes to $5,000 an ounce there will be voices that say it should really be
at $10,000 an ounce, the only endgame is physical demand triggering a default
to deliver. Astonishingly, Mr. Christian seems to be daring the markets to
provoke such an outcome when he claims, ‘there are any number of mechanisms
allowing for cash settlements’’*. Nevertheless, such a squeeze only
seems possible when/as USD hegemony – or the paper holding gold prices down –
ends. Until then there are traders looking to profit from the next ‘take down’
in gold and there are foreign interests looking to buy on weakness.
Question: Are you concerned that the shorts will
not be able to deliver if called upon?
* Christian: No. I am not at all concerned.
For one thing it has been persistently that way for decades. Another thing is
that there are any number of mechanisms allowing for cash settlements and
problems and a third thing is as many people who are actually knowledgeable
about the silver market and the gold market have testified today that almost
all of those short positions are in fact hedges, the short futures positions
are hedges, offsetting long positions in the OTC market. So I don’t really see
a concern there.
Brady Willett
BWillett@fallstreet.com
www.fallstreet.com
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