In general, we try to remain unbiased when it comes to money, metals and markets. We have learned over the years to look at charts and fundamentals with an open mind. Bias and emotions are distractions which avoid people to pick up market signals and interpret them correctly.
However, even with our best intention to remain unbiased and neutral, we cannot resist to the idea that precious metals prices have truly been manipulated, and continue to be.
Up until now, the manipulation topic remained somehow “obscure” and highly associated with conspiracy. That is definitely changing now. This week could prove to be a hallmark in the gold and silver manipulation saga. The Swiss financial regulator, FINMA, has confirmed “a clear attempt to manipulate precious metals benchmarks by traders from UBS, with a particular focus on silver price manipulation.
Bloomberg wrote earlier this week that “electronic chats played a key role in the improper conduct in foreign exchange and precious metals trading, the Swiss Financial Market Supervisory Authority, or Finma, said in a statement today. It found front running, when traders profit from advance knowledge about a transaction expected to influence prices, over client orders for silver. It is believed that traders manipulated the gold and silver bullion fixes. The benchmarks known as the gold and silver fix”were used to ascertain gold prices twice daily and silver prices once a day for the precious metals industry and market participants including investors.”
Along the same lines, the other media giant Reuters confirmed the same news, adding to it that UBS said in its annual report in May that it had widened an internal probe of its foreign exchange operations to include precious metals trading.
The “problem” with this, in our opinion, is that there is no sanction for those infringements. Yes, FINMA said that a variable pay for UBS forex and precious metals employees globally would be limited to 200% of their basic salary for two years. Similarly, earlier this year, the UK fined five major banks 1.1 billion pounds ($1.75 billion) for failings in currency trading in a landmark settlement after a scandal that has roiled the world’s largest market. But given the amounts of profits these banks are making, those fines are truly ridiculous.
The other “problem” with this is that the dynamic of the price manipulation is occuring in the COMEX futures market. The key issue is the concentration of positions by a limited number of participants. It results in the ability to set the direction of the price. Already long ago, silver analyst Ted Butler explained the issue and pointed out how JP Morgan has taken over that dominant position from Bear Stearns:
“Let me speak in simple terms. JPMorgan is stuck in silver, in my opinion. They bought a pig in a poke when they bought Bear Stearns in 2008 and took over the manipulation of the silver price. Armed with US Government financial assistance that probably included a promise of immunity against being charged with manipulating the price of silver, JPMorgan plunged headlong and willingly into that manipulation. Armed with virtually unlimited capital and regulatory carte blanch from the government, JPMorgan set out to dominate the paper silver market, just as Drexel Burnham, AIG and Bear Stearns did before that. Because the counter party technical funds could be bamboozled into and out of the market by the rigging of prices, JPMorgan came to own the silver market. But they became too clever for their own good. JPMorgan became such a dominant force in silver that the tables became reversed and it is unclear if whether silver now owns JPM.”
What does this mean for precious metals investors? We believe there has no short term impact on prices and that the manipulation scheme will not be resolved. However, it seems that momentum is building up around the manipulation story. With this week’s evolution, the story is becoming more mainstream and accepted. We do not believe there is a possibility that manipulation would end out of the blue; however, there is a possibility that a slowmotion change is taking place. These trends simply take a long time to play out.
The real resolution could probably come from a silver shortage. As Ted Butler noted, “the guarantee is that if the price is set artificially low, there will be enough of an increase in demand and decrease in supply to eventually cause the price to explode.” Indeed, a supply shortage could act as an arbitrator. Then again, that is not an event but rather a process. The market would start sending significantly important signals particularly in the wholesale market.
The main driver of the gold and silver prices currently remain market sentiment, and, as we all know, it is outright bearish. It is a “too bearish” situation which could prove to be a tipping point rather than the end of the manipulation scheme.