Precious metal manipulation is one of the most controversial topics amongst bullion investors of all types and sizes. Some consider it an evil thing done by the bullion banks and other big investor groups to benefit the price variation; some consider it a beneficial phenomenon that is the basis of speculation and keeps the markets alive and going. Considering the significance of this theory in the market, let’s take a look at the definition of manipulation and certain aspects of it in order to gain a better understanding.
What is Manipulation?
Manipulating the price of any precious metal can be simply defined as a properly planned effort to increase or decrease the price and demand of that metal (manipulation is especially used in the silver market). This method is particularly used by big investors and traders to try to influence the market. Note that manipulation is only effective in making short-term variations in the price of the metal and can't be used in the long term.
The SEC (United States security exchange commission) has developed a more effective and explanatory definition of Manipulation. It says the Manipulation is an international effort to deceive small and medium investors by artificially controlling and regulating the price of precious metals using unlawful means and influences for security. Large financial institutions create an environment with a fake increased demand for an asset by rigging quotes and prices. However, most investors in the gold trading community believe that the gold price is suppressed (manipulated downwards). But how can this affect the market? Well, let’s take a look at various factors.
Are the prices really manipulated?
It is a popular belief amongst silver investors specifically that silver prices are manipulated continuously. However, there are varying opinions on who controls them. Some say that some of the major central banks that do this job, while others reckon that silver prices are being manipulated by some big banks with the help of “naked shorts" and “high-frequency trading" (trading with the help of algorithms, computers place hundreds of trades and move in and out of a position in milliseconds).
There are some definite points that support this theory. These include:
- The silver market is much smaller.
- Gold can easily be manipulated.
- Some of the influential banks have already been fined for manipulating the price of silver.
- There are practical examples available of influencing silver prices. For example, in the 1960's the US government froze the price of silver at $1.29 /oz. Another example is the Hunt Brothers (more on this later).
Naked shorts, clear evidence?
Many banks in the past have been accused of naked short selling of silver to benefit from decreasing the price of the metal. What is this? Well, to put it simply short selling is a phenomenon in which a bank sells borrowed silver (which is not physically possessed by the seller) and then buys it quickly to portray a fake balance between supply and demand. This sees the price of silver declining and banks benefit from this decline.
The Fed uses this technique to maintain the price of the US dollar. It uses bullion banks to place naked shorts and decreases the price of silver purposefully. And banks also repurchase that silver in low prices. So, that’s a win-win!
Is there any evidence against it?
There are examples like the Hunt Brothers, JB Morgan Chase and Goldman Sachs who are accused of silver price manipulation. Is there anything to negate this theory? Let’s take a look at the variation of silver prices over the long term.
Long-term analysis:
Manipulation is still a controversial theory. Because while it is easy to blame everyone, when we take a look at the prices variation of silver over a decade, there is no clear evidence of silver price suppression that can justify the theory of manipulation.
Moreover, the price of silver varies in a long-term cyclical pattern, and there is no permanent or even persistent downward trend. However, if there is any influence being imposed in the silver market that would only last for a very short time. And this manipulation can go either way, because a price decrease would trigger high demand and that, in turn, would certainly cause the price to increase.
