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A Few Observations On The Gold Market

September 28, 2014

In my opinion, the gold market is too large to be manipulated to any serious extent. While there are many allegations of manipulation, no one has ever shown that there is manipulation that has made any lasting impact on the price of gold. By “shown”, I mean scientifically according to rigorous standards. One serious paper finds no such gold price manipulation. The same author looks at possible manipulation in the London gold spot price announcements. Even if this price is dirty to some extent or at some dates and gamed so as to place certain options in or out of the money, how dirty can it be for the ongoing prices of gold in view of the many players and their wealth? Not enough to worry about, probably close to normal spreads and volatility.

In making a case for manipulation, it is not enough to point to episodes in which gold falls a few dollars and volume spikes. There are episodes where the opposite occurs. There are episodes where price moves quite a bit higher or lower after the alleged episode, or where it was moving quite a bit higher or lower before the episode. The result is that on a daily price chart, the episode doesn’t even stand out as anything out of the ordinary. Gold can easily fluctuate $15 to $20 an ounce in the ordinary course of trading within a few minutes. There are episodes in all markets where prices move when there is not evident news. This happens all the time. In fact, most price changes are unaccompanied by news. They occur as private information gets impounded into prices.

Those who allege that gold’s price is rigged say that the price is too low, or that it has been driven down by concerted selling by bullion banks in league with central banks. Here, for example, is such a charge made on January 17 of this year: “The $650 decline in the price of gold since it hit $1900 in September 2011 is the result of a manipulative effort designed both to protect the dollar from Quantitative Easing and to free up enough gold to satisfy Asian demands for delivery of gold purchases.”

This quote suggests that gold was very undervalued at the $1250 price of that time (by some 34%) and that it was not overvalued at the $1900 price. There is no evidence to support this claim. I believe that it’s foolhardy to make a gold investment based on the idea that gold prices are too low because the market is rigged. It’s also foolhardy to sell gold on the basis that the price will be manipulated further downwards. I believe it’s sensible to buy or not buy gold or sell gold for any number of reasons, including one’s assessment of its fundamental value; but I do not advise including the idea that the price has been artificially suppressed by such significant amounts in making one’s fundamental assessments.

It’s not enough to prove manipulation that gold fell through a very important price support level on heavy volume back in April of 2013. It was clear to many experienced observers well before that occurred that it stood a more than even chance of doing so. This was, after all, a critical pricing point that the gold price had touched many times in the preceding months. This kind of breakdown is not uncommon in many markets.

It’s not enough to prove manipulation by saying that there was naked short selling in the futures markets. All futures markets involve naked short selling. One can sell a contract for future delivery without owning the physical commodity; settlement will be in cash. There is nothing wrong with this system or with naked short selling. If such selling drives price temporarily too low because not enough buyers are in the market at that time, it will not be long before they enter if the price really has been artificially made too low in their judgment.

It’s not enough to prove manipulation by pointing to certain times of day in which orders cluster. This is a feature of many markets. Trading is often heavier at the open.

I know of no evidence that bullion banks have colluded to favor one side of the gold market. I know of no evidence that the FED has directed their activities. We do not even have evidence that they have engaged in systematic naked short sales, even though if they had it wouldn’t make a particle of difference. There are large traders who are classified as hedgers who also own physical gold.

I cannot prove that gold at $1900 an ounce in September of 2011 was overpriced substantially, although I believe it was. I also believe that gold was underpriced back in 1999 and 2000. I do not say that it is not underpriced at present, or conversely that it’s overpriced. What I say is that considerations of market manipulation should not be factored into one’s assessment of gold’s fundamental worth.

Let not this warning about assessing fundamental value leave the impression that this is the only guide in speculation. I place a great deal of weight on so-called “technical analysis”. There are many possible tools of technical analysis, and one must inevitably choose what to use and what not to use. This is another story entirely.

I have long held off writing about the lack of gold price manipulation because I didn’t want to debate the matter, and I still don’t. I am offering an opinion today simply because it finally got to the point where the supporters of the manipulation hypothesis are stating it again and again as if it were proven fact. It is not at all fact. Furthermore, I don’t want to see people buying or selling gold on the basis of this hypothesis, even if it happens to be on the right side of the trade. I think people who buy or sell gold should have better reasons than manipulation. But then I believe the same thing for any asset purchase or sale.


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