If Gold and Silver Are Manipulated, Why Bother Investing?

We’ve answered the question “Why buy gold and silver if they are manipulated?” before. But only in brief where we said:

“if this manipulation is ongoing how can we trust them to retain or increase in value compared to fiat currency? We only have history as a guide for this. Assuming manipulation has been going on for the past decade, gold and silver have steadily increased in value nonetheless during this time (or rather paper currencies have continued to fall). So it could argue that all things being equal they will continue to gain in purchasing power in the future.”

See: If precious metals markets are manipulated why should I buy gold and silver?

But here is a great answer from Miles Franklin in the USA we thought it worth sharing. Particularly in light of the all the recent news on gold and silver manipulation. Back in September 2020, JPMorgan Chase & Co agreed to pay more than $920 million and admitted to wrongdoing to settle federal U.S. market manipulation probes into its trading of metals futures and Treasury securities.

JPMorgan will pay $436.4 million in fines, $311.7 million in restitution and more than $172 million in disgorgement, the Commodity Futures Trading Commission (CFTC) said on Tuesday, the biggest-ever settlement imposed by the derivatives regulator.

Between 2008 and 2016, JPMorgan engaged in a pattern of manipulation in the precious metals futures and U.S. Treasury futures market, the CFTC said. Traders would place orders on one side of the market which they never intended to execute, to create a false impression of buy or sell interest that would raise or depress prices, according to the settlement.

This manipulative practice, which is designed to create the illusion of demand, or lack thereof, is known as “spoofing.”

Some of the trades were made on JPMorgan’s own account, while on occasions traders manipulated the market to facilitate trades by hedge fund clients, the CFTC said. The bank failed to identify, investigate, and stop the behavior, even after a new surveillance system flagged issues in 2014, the agency said.

Source.

While just last month two former precious-metals traders for Bank of America Corp.’s Merrill Lynch unit are on trial for “spoofing” precious metals lower.

Chat logs produced as evidence show one of the accused, Edward Bases, bragging about how easy it was to manipulate gold prices::

“On Jan. 28, 2009, when Bases was working at Deutsche Bank AG, he put out bids to buy 2,740 gold futures contracts valued around $244 million over the course of four and a half minutes, according to Maria Garibotti, a vice president at Analysis Group who studied exchange and trading data for prosecutors. More than 98% were canceled without being filled, she said.

As prices rose, a fellow Deutsche Bank trader Bases coordinated with sold his 170 contracts valued at $15,172,500, Garibotti told jurors…”

Source.

These charges and other fines previously paid by banks are proof that there is definitely manipulation in the gold and silver markets.

But here’s a well reasoned argument as to why you should still invest in gold and silver even if they are manipulated…  

If Gold and Silver Are Manipulated, Why Bother Investing?

First published at Milesfranklin.com in 2018:

Over the past six years precious metals investors have seen a barrage of negative news regarding the dollar. Yet despite the almost endless money printing and fundamental reasons why gold and silver should respond with higher prices, the precious metals remain well below their 2011 highs.

As has been written on MilesFranklin.com, as well as by experts like Ted Butler and GATA, there is ample evidence suggesting that the markets are being manipulated lower by the bullion banks. Essentially on a somewhat regular basis, large paper sell orders hammer the bids and drive prices lower. Butler also regularly reports how the banks who do the selling are the same ones who consistently end up buying the contracts back at lower prices.

If this is indeed the case, the natural question that many wonder is why to bother continuing to invest in precious metals if the market is rigged? Or in the very least, why not wait until the manipulation has ended to then invest?

Unfortunately the short answer is simply that sometimes life in the financial markets just doesn’t play out in the way that we might prefer.

There is a degree to which some investors analyze the the commitment of traders report (COT) issued by the CFTC (which if you’re unfamiliar, you can think of the CFTC as the precious metals equivalent of the SEC). Amazingly, these reports have enabled traders and investors to have a general idea of when a move up or down is more likely. Although it’s not a perfect science, and the price doesn’t always follow what the market structure might indicate.

So while the COT report can be an informative guide, what it does not tell us is when we reach the true breakpoint. Which given all of the pressure that has been applied to the gold and silver markets over the years, has created a scenario where a big move caused by a short squeeze could occur without any further warning.

You could wait until we see some sort of spark and purchase metals after the price has already gone up a bit. Assuming that when the breakout occurs, it moves a little, before it moves a lot. Which is hardly a guarantee in such a highly distorted market.

But let’s say you wake up tomorrow and silver is trading at $23. Maybe because another bank reaches a settlement similar to Deutsche Bank, who paid out $100 million regarding their involvement in gold and silver trading. In fact this is actually even incredibly likely, given the transcripts that were released as part of Deutsche Bank’s cooperation agreement, as well as the ongoing lawsuits that have been filed since then.

So let’s imagine a scenario like this does occur. What do you do then? It may sound simple, although this sets up the kind of trading decision that many struggle with. Which often leads to decisions that don’t work out well.

Even if the price was kind enough to stop at $23 (which given the current market dynamics is hardly a guarantee), it’s not always easy to decide whether to just go ahead and buy, or if the market will come back to a lower entry point. Sometimes it does, and sometimes it doesn’t.

Of course if the manipulation assumption is indeed correct, there’s also a chance that the price gaps substantially higher. Some analysts have suggested that we could have some sort of Sunday night announcement with a price reset. Similar to how Richard Nixon popped up in the middle of an episode of Bonanza in 1971 to inform the world that he was taking the U.S. off the gold standard and implementing price controls.

Another school of thought is that we could see what’s known as a “force majeure” on the Comex. Where you get settled in cash at the current price, only to see the actual metal price then trade substantially higher. Which again would mean there would be no “last chance” to get in at the lower price.

This is why you hear so many analysts talk about purchasing and stacking metals on a regular basis. While avoiding trying to outsmart the market. Is it fun waking up so often and seeing the price smashed down just when you were getting your hopes up again? Of course not.

But for those who have seen the movie The Big Short (highly recommended by the way), It serves as a great reminder of the value of patience in investing. The movie details some of the investors who realized the subprime real estate market was a bubble, yet had to endure quite a bit of stress and pressure while they waited for their trade to pay off. And perhaps that’s just part of the game. In that to capture the really big wins in the market, you have to earn them.

Either way, it’s a great metaphor for the situation in precious metals. Where there is an abundance of evidence to suggest that prices almost necessarily have to move higher at some point. Fortunately, as long as you invest within your means and allow the element of time to be on your side, you can remove a lot of the emotion by keeping an eye on the fundamentals and remembering that all manipulations eventually do end.

Just as this one will some day too. And when that does finally happen, I believe you will be well rewarded for all of your patience and perseverance.

Related: See –  “Why Bother With Technical Analysis if Gold & Silver are Manipulated?”

Or to learn more about when to buy gold or silver check out this article: When to Buy Gold or Silver: The Ultimate Guide

Editors Note: Originally published 31 January 2018. Last updated 17 August 2021.