Silver price manipulation? If it looks too bad to be true, it probably is

I continue to receive emails asking for my opinion on the now week old report by purported silver fraud whistle blower Andrew Maguire and Adrian Douglas of GATA. Their tale of silver price manipulation involving bankers and regulators told in an interview on the King World News last week has been billed as the “largest financial fraud in history.”

As a long time gold and silver investor, not a trader, I’m probably the wrong guy to ask, because I’ve never been a fan of GATA and price manipulation theories. I think it's a lot of nonsense, and this story strikes me as no more credible than any previous one.

For readers who are not familiar with the organization, GATA is the Gold Anti-Trust Action Committee. I became aware of GATA before the group’s inception, when the idea of forming such a group was batted around gold sites such as Kitco’s old forums that I was reading in the mid 1990s as background research before getting into the gold market in 2001.

GATA’s mission is “to advocate and undertake litigation against illegal collusion to control the price and supply of gold and related financial securities.” The premise of GATA was that one or more trusts exist to control the price of gold. Later GATA extended its mission to include the silver market where manipulation is also believed by some traders and investors to occur.

The gold trust of course aims to suppress gold and silver prices not raise them. If the purpose of the trust was to push gold and silver prices up, then who’d complain and why would GATA exist? GATA’s beef is that a cabal of investment banks, central banks, and other nefarious and well-funded parties in the gold and silver markets act to push prices around in the short-term, taking money from independent traders, and also down in the long-term, taking money from buy-and-hold gold investors like me.

Before I go on, I should point out to new readers that my view of the gold and silver markets is not disinterested. I write from the vantage point of one who got into the gold market in 2001 when gold traded at $265. I also bought silver, but not nearly as much, in the same year at an average price of $4.25.

Since then I’ve checked in on GATA from time to time when stories alleging gold and silver price suppression cropped up. Over nine years, as numerous GATA reports of price manipulation appeared, I watched the price of gold move year after year in one direction: up. In fact, the gold price has not ended one year during that period below its opening price. Silver was more volatile on an annual basis, but nine years later it now also trades for more than four times what I paid for it. The relatively small platinum purchase I made has by comparison risen only 3.7 times, but I never hear about platinum price suppression.

As I watched the price of my gold and silver rise, I found GATA’s claims of gold price suppression increasingly curious. If there is a cabal scheming to hold down the price of gold and silver, it must be an exceedingly stupid and poorly organized cabal. It appears that it goofed and suppressed the stock market instead.

Gold price rises 330% since I bought it in 2001, two years after GATA was formed

Nine years of gold rising faster than most commodities, including platinum, has done nothing to dissuade GATA from searching for evidence of illegal gold and silver price manipulation.

To be fair, GATA’s focus is not on long-term gold and silver investors like me but traders who have to duke it out in the gold and silver spot and futures markets on a daily basis.

I don’t trade because I don’t think I can win more money on short-term bets than it costs me in time and transaction costs compared to other things I can be doing. I don’t blame anyone else for trying, but whether illegal manipulation is occurring in the markets or not, I view markets as battlegrounds where the big players always have an advantage over the little guy.

For example, here are a few animated charts that compare one day gold and silver trading on three different days in 2008.

Gold and silver intraday June 5, 2008. Gold spikes up at noon, silver doesn’t.





Gold and silver intraday June 19, 2008. Both spike up around noon.





Gold and silver intraday June 22, 2008. Both spike down around noon.

When I see gold and silver trade this way, I’m thinking that a lot of big money is stacked against me in short-term trading. Call it manipulation or call it big money beating the little guy, as long as the trades are legal, the situation is no different than in any other market, such as the housing market today where huge pools of money are buying up large numbers of properties in Florida and California at prices that individual buyers will never see.

For evidence of malfeasance, GATA relies primarily on the testimony of individuals in the gold and silver industry.

The KWN interview of London metals futures trader Andrew McGuire is the latest “evidence” of illegal manipulation. As I began to listen to the interview, I was stopped not two minutes in by his assertion that banks had "clearly, clearly, clearly" colluded to bring silver prices down from around $20 to around $9 around the time of the collapse of Bear Stearns in 2008 “over a matter of weeks.”

There has been only one period over the past ten years when silver prices fell from over $20 to below $9. That was in 2008.

The price decline did not happen over a “period of weeks” but over a span of seven months.

The focus on silver during this period is illogical. Silver was not the only victim of the 2008 price collapse. All commodity and metals prices plunged then. The chart below shows the relationship between silver, the CRB metals price index, and the CRB commodity spot price index over the period in question.

Silver fell to the same extent as the entire metals complex, around 50%, while all commodities fell 31%. Were all these prices under the control of the cabal through the futures market? That's quite a cabal!

This is the primary reason for my skepticism about GATA since day one. They never attempt to correlate gold and silver price movements to any external event that may at the same time be influencing the prices of many other commodities that they don't care about because they and their constituents don't own them. The fixation on gold and silver leads to repeated errors of inductive reasoning as relevant pricing factors are excluded in the calculation of the theory of price manipulation.

Next McGuire asserts that he accurately predicted silver price movements on February 5, 2010, and that these price movements conclusively proved price manipulation, which proof a market regulator failed to fully appreciate.

My observation is that sometimes the market starts the day up then falls, and other days down, then rises.

Up then down

McGuire claims he correctly forecast a rise followed by a decline on February 5, 2010 before the fact based on his analysis of the futures market. In my view, he had a 50/50 chance of getting it right. If he correctly predicted the pattern of silver trades three or four times in a row, then I’d start to believe that he may be on to something, but this one instance, even if it were independently verified, does not prove McGuire’s ability to forecast silver price is better than random chance.

As a gold and silver investor not a trader, that’s about as far as I can go based on my knowledge of and impressions of the market.

One of our members xPat is a professional global commodities trader believes that in fact evidence of illegal trading activity in the silver market abounds. Unfortunately, according to him, GATA has the case completely wrong, and McGuire’s argument is full of holes. Here’s his take (edited for style):

1. "Illegal naked short selling" is a phenomenon of the stock market, not the futures market. Most contracts sold in the futures market are "naked," that is, the seller doesn't own the underlying, and this is perfectly normal. It is the intended functioning of the market. There is nothing illegal going on. No conspiracy. No fraud.

2. Contrary to GATA's allegations, Jeff Christian's testimony to CFTC was not an admission of anything. He merely stated several obvious, well-known facts about the futures market. There is no fraud, no cover up, and no conspiracy revealed by his 100:1 comment.

3. GATA's assertions about selling contracts without owning the underlying as amounting to fraud or default are ludicrous and exhibit an extraordinary ignorance on the part of GATA principals of how the market operates. Contracts held past first notice date and then not delivered are a form of default, but that's not what's in question here. GATA is working for an entirely legitimate cause—to end the very real downward manipulation of silver and gold markets by JP Morgan—but their leadership has demonstrated categorical incompetence beyond any doubt. GATA leadership should step down now and make room for competent people who actually understand commodities markets to take over and fight this very important cause.

4. Andrew Maguire's motives should be scrutinized closely. The GATA people may just be ignorant, but someone with Maguire's experience in futures trading couldn't possibly be so incompetent as to have supported the statements made in the King World News interview. He says rich Asians are bugging him, waiting for the green light to squeeze the shorts in silver. I have to wonder whether he's actually trying to meet those rich Asians for the first time to attract them as clients. His boy scout whistle blower story is extremely compelling at first glance, but to anyone who actually trades futures for a living they just don't hold up to close scrutiny.

5. The attempted assassination story is also highly suspect. JPM would only be adding credibility to his futures manipulation story by trying something so stupid. I have to wonder if he himself staged it as a way to generate media attention.

6. Ron Kirby is the "analyst" who broke the tungsten-salted gold story with what I consider to be some very sensationalist and factually inaccurate writing. He is the man who wrote about "naked short selling, an illegal act where a someone sells a commodity contract in the futures market even though they don't own the underlying commodity." (Disclaimer: quoted statement is from memory - I'm sure it's substantially accurate but really don't have time to go check Kirby's article for exact wording).Anyone who understands the futures market would immediately recognize this nonsense for what it is. "Illegal Naked Short Selling" is a real issue, but the phrase relates to the stock market, not the futures market. Futures are a derivative market, and the seller isn't expected to own the underlying. There is nothing illegal about that whatsoever, and it is most often the case in most commodities. So Kirby either has no clue what the futures market actually is or how it operates, or else he's engaged in an intentional disinformation campaign designed to put fear, uncertainty and doubt into the metals markets. I can't decide which, but either way I have zero respect for this character.In his original piece breaking the "tungsten story," he claimed to have personally seen shipping receipts proving that tungsten slugs manufactured in the Midwest USA were shipped to Fort Knox as part of a clandestine secret military operation aimed at defrauding the world by replacing all the gold in Ft. Knox with Tungsten-filled bars. Or somesuch hogwash. Go read his story if you want to know the exact plot line... But now in the latest version of this spy novel (posted by Kirby on ZeroHedge just the other day), he claims the 400-oz tungsten blanks were manufactured in eastern Europe and shipped to Ft. Knox. In the first article he claimed he had seen shipping receipts proving the tungsten blanks were made in the US. Minor inconsistency there...

Of course Kirby never bothers to mention that although gold and tungsten have nearly identical density, they have completely different ultrasonic response frequencies, and that a tungsten fake would be spotted instantly if assayed by any sophisticated buyer using ultrasonic verification. That's a rather odd detail to leave out. Unless you're writing conspiracy drivel for the intentional purpose of scaring people.

His recent piece on Zerohedge was an embarrassment to ZH, and is full of factual inaccuracies. This guy just plain doesn't understand how futures markets function and prefers to flaunt his ignorance publicly rather than educate himself. It's shameful that he's getting so much coverage.

7. There is a strong body of evidence assembled by Ted Butler alleging that Bear Sterns was engaged in a massive concentrated short position that was taken over by JP Morgan and was still being used to manipulate the market right up to just before the CFTC hearing. I find Butler's analysis of the COT reports revealing this highly concentrated short to be highly credible. Whether that very large short is truly being used to manipulate the market to the downside is something I can neither prove nor disprove, but I think the evidence Butler has assembled certainly warrants a closer look by regulators. GATA has very real evidence of a large concentrated short and a plausible allegation that it exists purely for downside market manipulation. Those claims certainly warrant thorough investigation. This evidence contrasts with this business of a JPM short and the utter nonsense being thrown around by GATA relative to the 100:1 "leverage" (sic) business.

I predict their numerous inaccurate statements in the KWN interview will be used to discredit them in a future public hearing.

I'm not an expert in the commodities futures market so I cannot evaluate xPat's counter arguments to McGuire's, but I know that many of our members are as a group exceedingly sharp and well versed on the subject, and I have no reason to doubt xPat. He offers further clarifications of his opinions here. I will leave it to the iTulip community to decide.

The remaining assertion that banks are manipulating gold and silver to manipulate the dollar makes no sense. The exchange rate value of the dollar can be manipulated by setting gold prices and was back when the dollar was backed by gold. This was the primary mechanism of dollar devaluation by FDR in 1933. But the US is not on a gold standard. If it's on any commodity-based standard, the dollar is on an oil standard. Oil prices have a profound impact on the US economy because the US imports hundreds of billions of dollars of oil. The impact of rising prices in dollars is inflationary. Deflating the dollar against oil was the primary mechanism of reflation in early 2009. Gold and silver prices reflect the dollar exchange rate, not the other way around.

Gold price manipulation is the GATA's raison d'être. No gold trust, no GATA. Take GATA stories about gold and silver price manipulation with a grain of salt.

You can also expect stories about gold and silver price manipulation to appear frequently during periods when prices are either stagnant or falling.

Here’s my forecast. When gold and silver prices resume the long rise that began in 2001, the latest gold cabal price suppression story will fade away again as they have each time these temporary slow periods ended.

See also:
Lessons of the American Lost Decade – Part 1: The gold bugs were right - Eric Janszen

iTulip Select: The Investment Thesis for the Next Cycle™
__________________________________________________

To receive the iTulip Newsletter or iTulip Alerts, Join our FREE Email Mailing List

Copyright © iTulip, Inc. 1998 - 2010 All Rights Reserved