18 May 2012

Chris Powell Answers Doug Casey's Questions About Gold Manipulation

I had read Casey's piece, but quickly lost interest in it at the argument that the gold market is so big it cannot be manipulated by the poor weak central banks and their surrounding commercial banks who are practically bankrupt.

If someone is a value sophisticate in a segment of the market, but does not understand and have concern for the power of the Federal Reserve and its associated banks being able to print money at will, then it is probably good advice to stick what you do know, and leave the economics for someone else. The saying that control of the money supply is a powerful tool has been around so long that it has become proverbial.

As for the size of the gold market, it is tiny relative to the financial markets. Consider the enormous size of the international currency markets. Or the bond markets. Do the central banks manipulate them? Did Citi not get caught blatantly shoving Euro bond prices around a few year ago? Of course they did. And as the sanctioned trader protested, it was nothing out of the ordinary. They just don't get caught at it unless they get clumsy.

Prices in a market are set at the margin or 'on the float' in the day to day trade. All a large trader or group of traders has to do is manage that marginal trade and the market will follow. If one looks at the amount of daily trading done on the LBMA in daily volume relative to the amount of physical gold changing hands, the answer is fairly glaring.

Market operators may not be able to resist the primary trend, but given deep enough pockets and high enough leverage, and cooperation from like minded manipulators, and they can make a good game of it for quite a long time. That is an old and familiar story for those who know the history of the markets.

As for the why of the manipulation there are many reasons. But as just one example, if I and a group of associates could knowingly push the bullion price around in the short term, we could make enough money skinning speculators in the ancillary markets, derivatives such as options and in mining stocks for example, to make it a very lucrative trade. This is Markets 201.

All that is required is that the regulators turn a blind eye to the manipulation in the markets. And if anyone close to the markets still doubts that they do that today after all that has happened, you will excuse me if I don't take them very seriously. The big trading desks have been using the markets like their personal ATMs, and every time they do get caught in some slip up it is a slap on the wrist and a nominal fine, and a promise not to do it again.

Has this fellow ever read anything from Ted Butler or Harvey Organ or Bart Chilton?

Forget gold for a moment, what about silver?  Is that market too big to manipulate? How about the energy markets in the US? Remember Enron?

Academics like Paul Krugman might not readily understand this, because this is not what they do, and they tend to approach the world through simplified, abstract models that are without the dark alleys and rough edges of the real world. 

The notion that markets cannot be manipulated are a corollary to the efficient market hypothesis, and idealized markets that naturally tend to stable clearing prices.

But I would expect someone who considers themselves a seasoned speculator and market savvy to know that markets do not behave in this manner, and that as long as there are markets, there will be those who will bend the rules and cheat whenever and wherever they can.

The Wall Street demimonde does not care if the markets are corrupt because if you get enough information to see the 'bezzle you can make money on the swings, or if not by trading then by serving the interests of the trading desks of the large funds.  But market distortions can play hell with investors, and is destructive of the real economy because of the malinvestment that long term market distortion cultivates.

I don't like to dwell on the manipulation when investing as opposed to speculating.  As I have repeatedly said here, take your investment positions based on logic and the fundamentals, and a long term financial portfolio plan, and ignore the short term noise and wiggles.  Thinking back I have always made the most, if not all the profits on balance,  when I took a solid position and then just rode it, sometimes for years.   So if I were in the game of mining stocks I would not want to see people distracted from them IF they were in it for the long term and they were properly fit in a portfolio. And so I understand why some people get frustrated by talk of market manipulation.

Chris Powell makes a good show of answering these sorts of things, but I do not think that the effort here will be worthwhile. Anyone who can trot out the canard that a 'market is too big to be manipulated' does not engage my interest for very long.   All will be revealed in time whether we argue about it or not. 

But the real economy is in dire need of serious and meaningful financial reform, which includes cleaning up the markets and taking the pampered princes off the malinvestment feedbag.  And that is something that matters greatly.

"In an essay posted Thursday at GoldSeek, financial writer Doug Casey of Casey Research asks for evidence of gold market manipulation and some explanation of its purpose. Casey's essay is headlined "Precious Metals Market Manipulation?" and it's posted here.

The evidence and explanation have long been posted in the "Documentation" file at GATA's Internet site here.

Maybe the most comprehensive treatment of the subject is the latest version of your secretary/treasurer's "stump speech" here.

But we're always adding to the "Documentation" file, like the acknowledgment by the late Dutch central banker and Bank for International Settlements President Jelle Zijlstra that Western central banks rig the gold market show here, so if he's at all curious Casey might want to drop by occasionally for updates."