The Great Manipulator

Chapter 2

June 1, 2001

Andrew Harriman had just received his orders from his superiors at Goldman Sachs. He was instructed to keep the price of gold on the U.S. futures market below $500 an ounce at all costs.

Harriman was the Fed's back-pocket gold trading wizard. He knew everything about his game and could be counted on to follow orders strictly and to the tee. Most importantly, he could be counted on to get the job done.

The great-grandson of the famed railroad mogul and stock trader E.H. Harriman, he hailed from a distinguished Northeastern family, highly respected in various "money" circles and among the well-to-do of Wall Street financial district. But his claim to fame was not strictly heritage alone.

E.H. Harriman, known to many as "The Great Manipulator," cemented the family's fortune in 1989, when the syndicate he headed to acquire the Union Pacific line, which was then in the hands of a receiver. Having brought the Union Pacific out of bankruptcy into prosperity, he utilized his position to draw other lines within his control, notably the Southern Pacific in 1910.

His great-grandfather was equally famous for his forays in the stock market as he was for his Union Pacific railroad empire. His abortive contest with James J. Hill for the control of the Northern Pacific led to one of the most serious financial crises ever known on Wall Street, for which he received the censure of President Theodore Roosevelt.

Back in his day around the turn of the last century, Harriman was many times able to control the entire tone of the market through his manipulation campaigns in Union Pacific stock, as well as the stock of other railroads he hoped to acquire. He could boast as his investment partners and chief associates such names as William Rockefeller, H.H. Rogers, National City Bank, and Kuhn, Loeb & Co.

Old man Harriman's method in such campaigns were to first poke a stock down to as low levels as he thought advisable; then gather in everything he could find within a certain buying zone. There would be drives for the purpose of shaking out weak holders who had placed stop orders or who could be scared off by signs of weakness. After this, Harriman would keep his stock dead within a range of a few points, for weeks at a time, so that nobody could make any money trading in it and those who held it would be discouraged, throw it out and get into more active issues. In other words, he first shook them out, then he tired them out. This was a strategy that his great-grandson, Andrew Harriman, would later learn to perfect in his dealings in the gold market.

Characteristic of an E.H. Harriman manipulation it was to see Charlie MacDonald, or some other important Harriman broker, come into the Union Pacific crowd with orders to "put her up." This was readily done under the rules of that period by bidding for round lots of stock such as 10,000 to 25,000 shares without having to accept offers of less. The bid made, he would gather in whatever was offered, then immediately he would bid again, an eighth or quarter higher, for a big lot. Other smaller buyers and shorts were thus forced to raise their bids to the same price, or above; if there was no stock offered he would bid still higher. An atmosphere of urgency filled the crowd; sellers withheld their offerings even though they had orders in hand. This continuous artificial effect of an excess of demand over supply was a vital part of what has been in financial jargon as the "marking-up period."

These manipulative bull campaigns of the elder statesman Harriman were based on one of Harriman's fundamental marketing principles. Once when asked whether he could unload a line of the old Southern Pacific railroad stock at $80/share, he replied that he did not think so, but he could put it at $120/share and then sell it back to par. The reason for this was that with the stock selling at, say, 70, a ten-point rise would not attract much of a following, while a fifty-point rise would attract an enormous following. Such a broad market would be created that almost any amount of stock could then be sold to people who thought themselves shrewd because at 110 or par the stock looked cheap in comparison with the 120 where it had lately been.

It had often been remarked that after the death of E.H. Harriman in 1909, such methods would not operate with the same degree success owing to the fact that those who succeeded him to leadership in important stock market operations employed different tactics, lacking his boldness of execution. But great-grandson Andrew Harriman knew from experience that this wasn't true. With the proper method, the right connections, and easy access to sufficient funds, such rank manipulation campaigns as those employed by his great-grandfather in his day were very much possible in this day and age-even in the market for gold futures.

After receiving his orders from Goldman Sachs, Andrew Harriman set upon the task that lay before him. He was to manipulate the price of gold on the futures market down to $400, and under no circumstances was he to let the price go above $500.

Sitting at his desk in his office overlooking the Hudson River, Harriman pondered the task before him. He knew what he would have to do in order to make the campaign seem credible; it was simply a matter of execution. How, he wondered, should he go about this? He took out a copy of the chart he kept on gold prices. On the paper before him the priceline etched and meandered its way higher and higher, and it looked like it had no intention of turning back. His job was to make it turn back.

His job would not be performed in total isolation-he knew he would have to coordinate his actions with his trading correspondents in London and Tokyo as well as New York. After gazing intently at the chart for half an hour, he finally decided the tack he would take. He reached for the telephone and immediately began working out the details of his plan with the foreign members of his team. It would be no simple, short-term operation, but rather a prolonged campaign that would likely take several months to successfully complete. Having fomented his idea into what he considered to be a workable plan, his next step was to put it into execution. For him, this is where the fun really began.

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including “2014: America’s Date With Destiny.” You can view all of Clif's books here. For more information visit www.clifdroke.com.

China is poised to become world's biggest gold consumer.