Warry investors at all levels wonder if the price of gold can be manipulated and if so to what degree? Certainly, there are other stocks and industries where price manipulation occurs from time to time. Some might even be accused of doing it frequently. So, is there a real threat that gold prices can be manipulated?
From a technical standpoint “Gold Market Manipulation,” which might also be referred to as “Gold Price Manipulation” is generally defined as a person or entity that makes a purposeful effort to control gold prices. Indeed, manipulations like this do exist in certain conditions where traders will attempt to influence a market. This could be any market, which means it could hypothetically occur in the gold market.
While small scale manipulations might occur in certain segments of the gold market, they are likely only capable of causing a few short-term aberrations in the price of an asset-based stock like gold. Yet the United States Securities and Exchange Commission actively looks for intentional misconduct or manipulation in any market. This includes investigating entities that are attempting to control investors or by artificially affecting the market for a given security.
Protection Against Securities Fraud
The SEC takes a proactive approach to finding things like rigged quotes, as well as prices and trades that intentionally create a false or deceptive perception of the demand for a security. Still, within the gold investing community, there is a pervasive feeling that gold prices can and are being gradually manipulated to a downwards. This is what the SEC would consider price suppression.
There are different theories afoot to imagine how gold prices could be manipulated or are being manipulated. Indeed, there are those who believe that all precious metals investments are essentially under the influence of central banks. Yet there are still others blame large scale corporate banks for using derivatives, or so-called “Naked Shorts and high-frequency trading to create a gradual decline in gold prices.
In a certain light, these theories make a little sense and can’t just be written off as conspiracy theories pumped up from time to time to fill voids in the 24-hour news cycle. Its especially disconcerting when you also keep in mind that for decades the price of gold was either fixed by governments or it was essentially suppressed by the London Gold Pool. Then we have to also consider that a few entities have been fined in the past for attempting gold price manipulation.
A Closer Look At Long-Term Gold Market Cycles
While all these concepts seem ominous, it’s also worth pointing out that a considerable amount of academic research failed to find any clear evidence of gold price suppression. Then when we look at the long-term behavior of gold prices a clear cyclical pattern starts to emerge that supersedes a flatline or even a downward trend.
When we look at this long-term pattern starting with the 2000’s it’s hard to understand how things like gold market manipulation and price suppression could be occurring. Especially when we consider that many of these accusations have been very selective in nature.
Essentially, when the price of gold is declining it generates a pervading sentiment that there is some sort of conspiracy afoot. Yet when the gold price starts to rise, suddenly investors give up accusing entities of manipulation, because profits are good, and it must be the true market forces taking over!
Ultimately, the gold market is simply too vast and too filled with liquidity to be controlled by any single entity, person, bank or corporation. In the end, any serious attempts to systematically suppress the price of gold would likely be counterproductive as it would simply trigger a market reaction with increased demand as well as upward pressure on the price of gold.
Understanding The Concept Of Naked Gold Short Selling
The gold price manipulation theory that the central banks are controlling the price of gold is based on a concept that is sometimes referred to as naked gold short selling in order to drive the price of gold down. This would involve selling gold bullion that isn’t currently owned by the seller, meaning it would most likely be borrowed. Then there would be a subsequent repurchasing of the gold with the idea being that they could take advantage of the short-term price decline.
Of course, the impact of naked shorts is hugely controversial. It’s based on the belief that the Federal Reserve uses bullion banks to serve as their agents when putting naked gold shorts on Comex. This is supposed to protect the value of the U.S. dollar while enabling those same banks to theoretically repurchase gold at lower prices.
If this theory was value, there would be a “Short Squeeze” and the price of gold would rise. This means any naked short manipulation would only be short-lived. The short-term impact of selling the futures contract associated with it would eventually be reversed as banks would have to unwind their positions. The financial mechanics of a scenario like this, just don’t prove out.
There are some negative sentiments out there targeted at large scale firms and investment banks. Some of it is linked to the “Too Big To Fail” problems that complicated the Recession in 2008. Goldman Sachs and JP Morgan Chase are often cast as villainous characters in these theories. Yet they still would have to rely on the same mechanics as the other big banks. If they did, they might be able to affect a short-term advantage, but they still wouldn’t have the leverage to maintain the price suppression for long.
When we look at the temptation woven into the concept of gold price manipulation, it looks like there is a dry tinderbox of opportunity just waiting to be ignited. Yet, when we chase out the fine points and look at little closer at the details, we see that the mechanics simply aren’t there for any one entity to affect the price of gold for very long.
Ultimately, large scale bull or bear market conditions, as well as the general state of the global economy seem to set too large of a stage to be manipulated. This makes them, and things like interest rates and inflation more likely to influence the price of gold today and into the future.