Since the beginning of 2013, gold’s price action has been irrational. The fundamentals are getting better for gold in respect to demand and supply, but we see sudden, wild swings, often to the downside, on no news and for no apparent reason.
Those who closely follow precious metal prices will agree with me on this: many times in 2014, it was common to wake up in the morning to new gold prices that are sharply down. When you look into the price action, you find a mysterious seller. He sells a significant amount of gold contracts on the paper market at times when not many participants are around to buy…so prices plunge.
This phenomenon begs the question: is gold’s price being manipulated?
Before jumping to any conclusion, it must be noted that other markets have been rigged and manipulated as well.
Rigged: Currency Market
Look at the currency market as an example. On November 12, news came hot off the press that five global banks—The Royal Bank of Scotland Group plc (NYSE/RBS), JPMorgan Chase & Co. (NYSE/JPM), Citigroup Inc. (NYSE/C), HSBC Holdings plc (NYSE/HSBC), and UBS AG (NYSE/UBS)—were being fined $4.3 billion for their participation in manipulating certain currency markets.
More fines are likely to come against the banks as civil and anti-trust cases follow them.
Concerning this, Britain’s Treasury Minister said, “It’s completely disgusting…,” adding, “I think taxpayers will be horrified…I don’t know if corruption is a strong enough word for it.” (Source: “Six banks fined $4.3-billion for ‘disgusting’ currency manipulation,” The Globe and Mail, November 12, 2014.)
To put some perspective on how big the currency market really is, according to the Bank of International Settlements, in April of 2013, trading in the foreign exchange market averaged $5.3 trillion per day. This amount has increased over years. In 2007, it was only $3.3 trillion. (Source: Bank of International Settlements, September 2013.)
Manipulated: Key Interest Rate Benchmarks
This isn’t all.
A while back, a number of major banks were alleged to have manipulated interest rates for a very long time. Traders at these banks were accused of rigging the London Interbank Offered Rate (LIBOR)—an interest rate at which major banks lend money to each other short-term.
While investigation into the LIBOR manipulation is ongoing, regulators from the U.S. and U.K. have fined seven banks and brokerage firms so far. (Source: The Telegraph, October 7, 2014.)
The LIBOR affects many different financial products that the average consumer uses, including, but not limited to, credit cards, mortgages, and student loans. According to the Federal Reserve Bank of St. Louis, 45% of prime adjustable rate mortgages are benchmarked to the LIBOR.
Can Gold Be Manipulated?
The answer is very simple: yes.
Understand this: the gold market is much smaller than that of the currency or interest rate markets. While average volume in the currency market is $5.3 trillion a day, according to the London Bullion Market Association (LBMA), average daily trading volume on the over-the-counter gold market is just $224 billion. (Source: World Gold Council web site, last accessed December 5, 2014.) In other words, the gold market is just 1/25 the size of the currency market.
The smaller the market, the easier it is to manipulate it.
Regardless of whether or not there’s manipulation in the gold pits, I remain bullish on the yellow metal. Its fundamentals continue to impress me. And I believe world central banks will have to do a lot of new money printing to stimulate their economies. Manipulation and irrationality can only last for so long, though.
As I have been saying throughout all of 2014, the current low prices of senior gold producers are a bargain.