Comparing Apples and
Silver and Gold Price Manipulation
By Dr. Jeffrey Lewis
By now, most observers have heard of precious
metals price manipulation. As the issue creeps into the mainstream, more and
more investors will come to understand it - along with its vast implications.
We've covered the mechanisms used to
manipulate the metals extensively, but it is important to point out the
differences between gold and silver in terms of how they are managed. This is
because it provides excellent insight into the relative character of each
metal's unique supply and demand profile.
The Mechanisms of Gold Manipulation
Paper shorting via COMEX is perhaps the most
egregious and most visible. Its signature can be tracked via reports issued by
the exchanges. While the CME recently disclaimed the accuracy of the data, the
blatancy of this interference has gone on so long that the existence of the
numbers that prove intervention have very little impact on speculators.
Gold leasing has been the time-tested way that
bullion banks are given cheap exposure to gold that they can borrow to sell into
the market. This method comes with defacto sanctioning by the Exchange
Direct Central Banks selling had been a common
practice until it stopped, with the bigger story of the developing world
monetary authorities publicly accumulating gold.
London price fixing may be the oldest and most
opaque of all the intervention methodology. It has now re-entered the mainstream
vernacular on the heels of the German quest to repatriate its physical gold
holdings. Recently, Deuthce Bank removed itself from the "fixing process", which
also re-enters the collective awareness via the now generally accepted absurdity
around the London Interbank Offered Rate (LIBOR). Essentially, a room full of
representatives from the largest financial institutions making a collective
decision on the price of assets that form the base of money flow and value is
India, Pakistan via Trade Balance
In response to supposed trade imbalances,
India's central bank has tried unsuccessfully to prevent the import of gold.
This attempt is in response to surging demand followed by lower prices. The
effect of course, has been to embolden an already robust underground trade
mechanism. And now Pakistan has weighed in because of the gold diverted through
Interest Rates Indirectly
Gibson's Paradox, written by Lawrence Summers,
describes the relationship between gold and interest rates. This fuels the
central banking quest to lower rates such that the real rate of interest becomes
negative, thereby encouraging new loan formation. The problem is that a negative
rate of return "naturally" puts upward price pressure on gold and, thus,
necessitates forming a policy around keeping gold prices in control as central
banks pursue this ill-fated policy.
Next, Gibsonís Paradox offers a gold price
forecast for the next 12 months (White, 2011). The rule states that for every
percentage point the real interest rate (-3%) is below 2%, gold will increase in
value by 8%. As calculated in the last paragraph, the real interest rate is
assumed to be -3%. Since -3% is 5% below the 2% threshold, 5 percentage points
times 8% provides the gold forecast for the next 12 months: 5 x 8% = 40% . The
current gold price is near $1,700 - leading to a gold price forecast of: $1,700
x 1.40 = $2,380. Anecdotally, $2,380 coincides with the 1980 inflation adjusted,
peak gold price.
Manipulation of Inflation Data
It should be painfully obvious that the
officially reported inflation rate has become a complex abstraction with very
little resemblance to reality. Mainly, it governs the amount of government
payout in terms of Social Security payments. But also, behaviorally, it quells
the emotional effect of rising prices
One of These Things is Not Like the Other
With silver, things are much more blunt and a
reflection of the precariousness of the situation. Or more likely it is
desperation, given that silver prices are the likely lynch pin waiting for the
inevitable accident to happen. Silver is a coiled spring and if it begins its
return to fair value, it will go further and faster and take gold along with it.
Stock to Flow and The Float
In terms of available stock, silver is much
less available than gold. But is still very much representative of a monetary
asset where there exists a large supply relative to a modest increase in supply
(flow) over time.
But the float is the precarious issue -
especially with regard to silver. At any given moment, there is a relatively
small amount of available metal for trade near current prices. Given silver's
recent surge in industrial use, vast amounts of previously stock-piled silver
have been sequestered in an equally dizzying array of devices, materials, and
Most of this above ground stock is gone.
However, it is effectively sequestered whether in use, residing in landfills, or
by the very fact of its long running price suppression.
Managing this float is the absolute key and
the only way it can be controlled through paper derivatives via COMEX. The long
existing short corner by the big commercial category on this exchange have been
able to quell the significant and disorderly rise toward equilibrium. Employing
algorithms and high frequency trading has helped to fuel the brazenness of this
For silver, there are no more giant stockpiles
held by sovereign entities that could be readily leased into the market to
control the inevitable disorderly rise in price.
To call forth that much physical in a short
period of time would be like parting the ocean at its greatest depth - requiring
a miracle of miracles.
Silver managed at the core by means of
concentrated short exerting proportional difference on which direction the
market will go.
Many cynically identify price suppression of
the precious metals in an environment where fiat money creation is beyond
reckoning to be a gift - one that should not be complained about. Obviously, the
implications are far vaster and the inevitable return and move beyond fair price
will be something to be hold. This makes the case for some allocation to
physical metal a no-brainer at best.
For more articles like this, including
thoughtful precious metals analysis beyond the mainstream propaganda and
basically everything you need to know about silver, short of outlandish fiat
price predictions, check out