Are Gold and Silver Manipulated?
In response to a recent gold market forecast, a reader says: "It always annoys me intensely when someone with your knowledge of the markets rabbits on about "silver not confirming," etc., when you full well know that it, along with gold, is being manipulated on a daily basis."
The observation that "gold and silver are manipulated" has been around a long time and has been a mantra in gold bug circles for many years. Who can forget how this was an incessant, almost rabid cry within Internet gold investing circles in the late 1990s? I had almost daily e-mails from those who claimed that the Fed and central banking concerns would never allow gold to rally much above the then-mythical $300/oz. level. These naysayers were silenced when the gold market commenced in 2001.
Now it seems they've returned as the gold and silver markets have been mostly range-bound this year. Prolonged, sideways action has a way of making investors frustrated and impatient and it's not uncommon to hear grumbles about manipulation during such times as these. Be that as it may, let's turn our attention to the subject of financial market manipulation; along the way we'll see if we can't glean a better understanding of it from some worthy sources.
From a monetary standpoint, gold is "manipulated" to the extent that it is monitored as an inflation gauge by the Fed as it seeks to keep the rate of inflation to a level it deems acceptable. It's always good to keep in mind the overriding goal of the world's leading monetary powers of having a fully integrated global economy. The Fed acts as the enforcer for the emerging world economy and gold - along with the primary indicator of interest rates - is one of the main barometers of inflation/deflation used to keep monetary policy on an even keel.
Keeping the main engine of global economic growth (namely, the U.S.) on what passes for an even keel is now more important than ever. To use a term coined recently by The Bank Credit Analyst, we've entered a period of "unstable equilibrium," with equilibrium being the operative word since that's what the Fed is trying to achieve. And the gold price is crucial to this objective. That's where manipulation comes in as central banks have been known to sell gold whenever they believe prices have overshot the currently acceptable level in relation to interest rates.
Are the markets for gold and silver under day-to-day manipulation from a micro-trading standpoint as well? Of course they are. But so too are the market for virtually all actively traded stocks and commodities. Manipulation is a daily occurrence in the financial markets and will never cease as long as there is a "free market." Producers, money lenders and other commercial operations have a vested interest in commodity markets, including gold and silver, and that translates into a market that is favorable for these huge, market-moving entities.
Here is what R.W. Schabacker, the father of modern technical analysis, had to say about the operations of manipulators on the securities exchanges for the purpose of misleading the public and making money thereby:
"Insiders and professionals are by no means unaware of the growing public interest and education in chart theories and patterns. In normal trading there are certainly not enough chart traders to make it worthwhile for the professionals to play against them instead of against the general public [note: this may no longer be true today], but we have learned that the professionals must play against someone in order to make money. It is quite conceivable, therefore, that the insiders might take a 'crack' at chart traders now and then by manipulating false patterns in their campaign stocks, with the knowledge that, by arranging certain chart pictures, they could draw in a certain amount of buying or selling, as they chose, with a view to strengthening their own position."
Schabacker wrote that the individual trader/investor's best defense against this is by watching a number of charts in a given group or sector. As he put it, "The [manipulator] can hardly swing more than a handful of his pet individual issues to suit himself, much less the market as a whole, and the misleading action of a few individual charts will often be adequately exposed by the contrary indications of a great many other ones."
* Securities & Exchange Commissioner William H. Donaldson retired from his position on June 30. Donaldson arrived at the SEC in February of 2003, just as the early 2000s recession was ending and the cyclical bull market was about to commence. In fact, he came aboard the SEC as commissioner just a few weeks before the dominant interim trading cycle was due to bottom. How interesting that he leaves just ahead of the latest cycle bottom and just a couple months ahead of the 6-year cycle peak, which could well end the current cyclical bull market. Timing really is everything in Donaldson's case!
* Business Week did a cover story in their July 11 issue entitled "Too Much Money: A global savings glut is good for growth - but risks are mounting." This was a worthwhile article as it goes far in explaining the apparent conundrum (a popular word these days) over the declining U.S. monetary aggregates and rising Fed funds interest rates and how it all relates to the inflation/deflation debate. Even though the U.S. has a huge savings shortfall compared to the rest of the developed world, Business Week suggests that the liquidity that is still "sloshing around" in the emerging global economy may rescue the U.S. from the more severe effects of the Fed's tightening operations of the past year. Business Week correctly points out that with the global economy getting closer to full integration there are a whole new set of variables that concern the U.S. financial and economic outlook. Or as Federal Reserve Governor Donald L. Kohn put it, "Our economy is in unexplored territory in many respects."