People ask me—or challenge me—about the manipulation of gold and silver prices on an almost daily basis. Sadly, this has become an issue that sparks conflict among people who should be fellow travelers. I expect to be barraged with hate-mail for wading in, but I think some dispassionate analysis is called for. That’s what I’m known for, so here we go…
Imagine that you are accused of murder and I’m a juror at your trial. You’re innocent, but the situation is complicated and it makes you look guilty.
Would you want me to be swayed by circumstantial evidence, emotional appeals, and opinions stated as facts? Would you want me to believe everything some know-it-all on Twitter or Facebook has to say about you? And you’re very tall, and I happen to hate tall people. Wouldn’t you want me to set aside my personal feelings and judge by the facts?
The answers to such questions are obvious and not controversial. But for some reason, many investors seem to forget the importance of objective evaluation when it comes to a financial issue they have strong opinions about.
Worse, many of my fellow gold and silver bugs show a disappointing willingness to leap to the conclusion that anyone who disagrees with them is lying—may even be part of the conspiracy.
It’s true that there are many bad actors in the world. The financial world is as dangerous a place as any jungle. But the fact that someone espouses an idea I disagree with—even one I’m 100% sure is wrong—does not prove that the person is a bad actor.
Tt’s Logic 101 that if there are multiple explanations for given facts, we can’t say that one is certainly true just because it’s the one we want to believe. (Even Occam’s Razor does not prove a statement is true; it simply suggests that the odds may favor it being true.)
If one cares about the truth at all, it’s critical to remember that to suspect something is not to know it.
A plausible explanation is only a hypothesis, not a fact. To go around stating unproven opinions as though they were facts is not conducive to the discovery of truth. And, keeping this relevant to the point of this service, the discovery of truth—especially overlooked truth—is vital to successful speculation.
I bring this up because even though I found myself disagreeing with Kitco’s Peter Hug many times over the years, I was saddened to hear of his recent passing. I was saddened yet again to hear that some gold and silver bugs celebrated his passing because they despised him for not agreeing with their views on metals price manipulation.
I often didn’t share his way of seeing things, but I respected the man’s courage to say things that weren’t popular.
Schadenfreude is not an admirable emotion.
I’m setting the stage this way because I’m going to detail my views on gold and silver price manipulation—and I know they won’t be popular with many. I’m doing it anyway because:
- I wouldn’t want my audience to think I’m afraid of facing thorny issues, nor that I have some sort of hidden agenda.
- If anyone is going to hate me—or unsubscribe—because I don’t say exactly what they want to hear, I figure it’s better to rip the Band-Aid off. I’d rather do business with more reasonable people.
- I’m tired of people asking the same questions and making the same assertions about manipulation over and over again. Now I’ll be able to answer with a link to this permanent article.
I do see plenty of evidence of market manipulation in the monetary metals space.
- When some entity dumps a large amount of silver or gold on the market when trading is at its thinnest, it’s hard to see that as anything other than an attempt to push prices down.
- Yes, I know that J.P. Morgan paid an almost $1 billion fine for spoofing the gold market. “Everyone” in this space knows. (Posting links to this news story every time anyone discusses gold price action is obnoxious and unhelpful.)
- I also know the London gold price fix was shown to be “fixed” (as was LIBOR).
- I have seen quotes of some government officials saying things in the past that sound like “smoking gun” admissions of state intervention in the gold and silver markets.
- I do get that governments—especially the US government—have incentives to minimize awareness of the impact of their profligacy on the fiat currencies they issue.
These things do show the presence of bad actors—but they don’t prove a giant conspiracy between these bad actors.
More specifically: circumstantial evidence, hearsay, and even the patterns among separate instances don’t prove that the Fed and its cronies have been suppressing the price of gold and silver for decades.
This might be true.
I have no trouble believing that it is true.
But as a juror or judge, I could not say that it’s proven beyond any reasonable doubt.
Many readers aren’t going to like this, but the truth is that there are popular beliefs on this subject that I do think are unsupported or incorrect.
- The fact that the CFTC hasn’t caught any bad actors who have dumped ridiculous amounts of metals on the market when the fewest buyers are present does not prove that it’s a government conspiracy. Government incompetence is a perfectly reasonable explanation as well. The government didn’t catch Madoff. It didn’t stop Enron on time either. Government incompetence is the norm, not the exception, and it explains a lot.
- The fact that J.P. Morgan was caught spoofing is proof… proof that J.P. Morgan was spoofing. Are other bad actors spoofing? I don’t doubt it. Are other bad actors cheating in other ways? I don’t doubt that either. I’ve stipulated that manipulation does happen. But this is not proof of a vast, international, public and private sector conspiracy to suppress the price of gold or silver.
- The existence of pool accounts—and problems taking delivery from them—are not proof of any giant conspiracy. I’ve never bought into a pool account and do not recommend them. But it is neither surprising nor suspicious for operators of pool accounts to experience delays converting non-allocated metals to allocated. It’s even more to be expected for them to face delays fabricating bullion coins and bars for delivery at a time of extraordinary demand. This shows the dangers associated with non-allocated accounts—which, by definition, add counterparty risk to the idea of owning metals. This is why I stack physical bullion.
- Taking “delivery” on the COMEX does not mean removing physical metals from designated COMEX “good for delivery” warehouses. The metals themselves are not traded in the futures market. What’s traded—what traders may “stand for delivery” of—are warehouse receipts for metals. It’s incorrect to think that “record numbers of traders standing for delivery” means that investors are emptying COMEX warehouses. It just means that record numbers of traders took possession of the underlying warehouse receipts—not the physical metal—rather than rolling the futures contracts over into new contracts. If record numbers of those who stand for delivery of these receipts were to actually redeem them, that would indeed remove metal from the COMEX. I’ve seen no evidence of this happening in large quantities yet. People who point this out are often shouted at and accused of being liars. But if you look at the COMEX’s disclosures on this, it’s all spelled out. Some then shout that the COMEX is lying. That makes no sense. Sure, I’d like to see price discovery through the actual exchange of physical metal. But what I’d like isn’t relevant here. The COMEX is what it is, and it’s not a lie to point out the facts regarding the contracts traders agree to.
- The fact that the notional amount of silver or gold traded on a daily basis in the futures market is far more than the amount of silver and gold held in COMEX warehouses is not evidence of fraud. The COMEX is like a poker game. The players buy chips, putting cash in the pot. The cash stays in the pot until the end of the game or until someone cashes out. Until then, the chips trade hands many times. If you add up the transactions in each round, the total is far greater than the amount of money in the pot. That’s not fraud. No one thinks the pot is getting bigger just because chips are flying back and forth. It would only be fraud if upon winning the game or deciding to retire from the field, one cashed in one’s chips and found the pot was empty. The notional amount of gold and silver traded on paper is completely separate from the question of whether or not the metals backing the system are actually there.
- For exchange-traded products to add more silver or gold to their books in a day than seems physically possible to move is not by itself evidence of fraud. It could be evidence of something fishy if such a product guarantees that all the silver or gold added to its account must be physical, allocated, and segregated—and the additions are larger than its custodians can manage. Otherwise, it’s like the poker chips mentioned above. The gold and silver stay where it is, but the name on the pile changes. But most of these products make no such claim on physical possession. The fine print allows them to back their products with more notional ownership, making it even easier to lay claim to some form of the metals, somewhere. In my view, this is a good reason not to invest in these products, but it’s not fraud. (If investors don’t read the prospectus, it’s on them.) Notional ownership makes it very easy for exchange-traded products to acquire and dispose of very large amounts of metals—without fraud—all day long.
- It makes no sense for silver enthusiasts to imagine that governments are more active in suppressing the price of silver than gold. If governments were going to suppress either, it would make sense for them to concentrate on gold. Gold is still more widely regarded as a financial asset, and not just another industrial metal. Central banks still hoard gold, not silver. To the degree that manipulation seems more evident in silver than in gold, it would suggest that it’s not governments doing the manipulation.
- It makes no sense for silver enthusiasts to imagine that industry is more active in suppressing the price of silver than other industrial metals. The prices of copper and nickel are far more important to companies like Tesla than the price of silver. To the degree that manipulation seems more evident in silver and gold than in industrial metals, it suggests that it’s not industrial consumers doing the manipulation.
- It makes no sense to claim that gold and silver are “totally” manipulated and “completely controlled.” If this were so, their prices would be set much lower. If the US government could truly control the price of gold, I’d expect it to still be $35 per ounce. That would make a great case that all of Uncle Sam’s money-printing really doesn’t matter.
- Sudden drops in gold or silver prices are not proof of manipulation. Just about every day that gold and silver make a sudden retreat, I see cries of “Manipulation!” This would make more sense if, say, real rates or the dollar dropped at the same time. That would make it a time when (other things being equal) monetary metals should rise. Such price action wouldn’t prove manipulation, but it would at least make manipulation a more sensible explanation. But to conclude that it must be manipulation when there are other clear and measurable explanations is not reasonable. One would need to have good evidence for dismissing the other explanations before being able to put more weight on the manipulation idea. Asserting that all big drops in gold and silver are because of manipulation implies that gold and silver can never correct or retreat on the open market—and we all know that nothing goes up forever.
- Some assert that when real rates, the dollar, inflation, or other variables associated with gold and silver move suddenly—and the metals prices react accordingly—this just shows how big the conspiracy is. I’m a hardcore libertarian who finds it easy to see all governments as bad actors, but this scale of conspiracy is too vast for me to believe. It would have to include many participants in commodities markets, participants in bond markets, foreigners trading currencies, vast armies of bureaucrats around the world, and corruption of many officials in regulatory and law enforcement agencies. I can only guess, but it would seem like hundreds of thousands of people—maybe millions, globally—would have to be keeping this secret. And no one has blown the whistle for decades. This is not consistent with human nature.
I’m willing to change my views on any of the above—based on new evidence, not angry Tweets.
Feel free to share any evidence you think I’ve missed, by the way. But let’s not waste time on anger.
That said, here are the few conclusions I have been able to draw:
- Again, I do see evidence of market manipulation in gold and silver.
- It is possible that all of this manipulation is the result of greed and/or dishonesty among some deep-pocketed private sector players. There may be more to it, but this is sufficient to explain the visible evidence. Occam’s Razor favors it.
- It’s also possible that governments turn a blind eye to private sector banditry because it’s convenient for them. Possible, but not proven. And even this passive involvement would require corruption of regulators and law enforcement agencies, which is a big claim.
- Whoever is manipulating gold and silver markets, they do not control them entirely. If so, gold would not have risen above $1,900 in 2011, nor above $2,000 in 2020.
- If one does believe that gold and silver prices are totally artificial and set by bad actors, then the only logical choice is to exit these markets entirely. To invest or speculate in markets totally controlled by such powerful adversaries is to court financial suicide. Anyone who believes this should stop following gold and silver markets. Pick up your marbles and go home.
- My core conclusion is that rather than agonizing over whatever the prices of gold and silver “should” be, it’s much more productive to think about the future direction of monetary metals and speculate on related stocks.
Acting on this conclusion has made me a lot of money over the last two decades. That’s true despite all the evidence of manipulation I’ve seen over these years.
There is, however, something else gold and silver bugs can do…
If we don’t like the way the gold and silver futures markets work, we can stop quoting them.
We could, for example quote the Shanghai Gold Exchange (a physical market) instead.
Or we could quote the latest prices we see on eBay. That’s $1,966 to $1,986 for US 1-oz. bullion coins as I type, vs. $1,768 on the front COMEX contract. I rather like this borderless approach. It’s arguably the most real price discovery on the market today.
And, of course, we can keep stacking as we’re able.
That’s not to speculate, but to have the metals in case we should ever need them.
I’m especially keen to stack as much as I can before the world’s disastrous century-long experiment with fiat money ends—badly.
One more thing…
If anyone disagrees with any of the above, that’s fine. I’m putting my current views down for the record. To each his or her own. I like independent thinking.
But if anyone finds that my views make them angry, they should do some serious introspection on whether or not speculation is for them. Securities analysis requires dispassionate objectivity. Falling in love with an investment thesis can be fatal to our finances. Refusing to consider ideas or evidence that contradicts our beliefs is just as dangerous.
Hate, like love, can blind us.
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