Of Course Precious Metals Prices Are Manipulated
Of Course Precious Metals Prices Are Manipulated by Mark Nestmann
A question I’m asked a lot by clients is, “Are markets manipulated?” My answer is always the same: “Of course they are.”
Given the nature of capitalism, it could hardly be otherwise. Investors with exceptionally good access to market knowledge generally make more successful investments than those who don’t.
The most obvious example of this phenomenon is insider trading. I’ve never understood why anyone thinks this is a crime. I consider the individuals involved to be providing a useful service, because more information makes markets more efficient and accurate – no matter how the information was acquired. It’s the natural result of participation in the markets by individuals with superior knowledge.
Individuals involved in insider trading move market prices up or down, depending on the nature of the information they possess. If they acquire negative information about a company or commodity, they can sell their holdings, short them, buy “put” options on them, etc. If they acquire positive information, they simply do the opposite. Everyone benefits from more transparent pricing.
It’s also possible for insiders to profit by manipulating the price mechanism itself. This is a more destructive type of manipulation, because it makes pricing less transparent.
Investors in precious metals, especially silver, have long claimed this type of manipulation is pervasive. That’s partially a consequence of how precious metals prices are set.
Until 2015, gold and silver prices were set or “fixed” twice daily in London by a group of dealers from the city’s largest “bullion banks,” financial institutions that clear transactions in gold. This pricing model, which originated in 1919, lasted nearly a century. It ended in 2015, after a series of scandals involving conflict of interest and outright manipulation of precious metals prices by the bullion banks were brought to light. In its place, the London Bullion Market Association (LBMA) set up an electronic auction mechanism to set prices.
Even with the new system in place, some analysts following the precious metals markets continue to believe that the prices are being manipulated. One notorious example occurred earlier this year. On January 28, the LBMA silver price was set 84¢ below the prevailing spot and futures prices. So much for the “transparent pricing mechanism” the LBMA claimed to be overseeing!
Even with these shortcomings, it’s now obvious that the old pricing system was worse. In July 2014, a silver investor sued bullion banks Deutsche Bank, Bank of Nova Scotia, and HSBC for conspiring to manipulate silver prices. The lawsuit later achieved class action status. This meant that other investors could benefit if the banks were found responsible for price manipulation.
Other lawsuits followed, some alleging the manipulation began as early as 1999. These three banks are accused of suppressing prices on up to $30 billion of silver and silver contracts annually. This price manipulation allegedly allowed the participating banks to generate huge profits. One way they supposedly did so was to short the price of silver futures contracts.
Most analysts – me included – thought the litigation would be dismissed out of hand by the courts. Surprisingly, that didn’t happen.
The first inkling these banks took the lawsuit seriously came in April 2016, when Deutsche Bank agreed to an out-of-court settlement. In October, it announced a $38 million payout. The settlement terms also require Deutsche Bank to cooperate in pursuing the case against the other defendant banks.
In the meantime, a US district judge ruled that investors may pursue antitrust and manipulation claims against Bank of Nova Scotia and HSBC. With Deutsche Bank turning on its co-defendants, it seems likely that investors alleging a silver price suppression conspiracy will find their claims vindicated.
What I fail to understand, though, is why anyone is surprised. The banks saw a market opportunity and exploited it to the fullest. What they did may or may not have been illegal, but it was certainly profitable.
I also don’t understand why gold and silver investors think they’re powerless to fight back against this manipulation. They can, and the remedy is very simple: Insist on full, unencumbered ownership of physical gold and silver.
If you have precious metals in your physical possession or a safe deposit box or in a fully-allocated holding in a private vault, neither bullion banks nor anyone else will be able to sell your metals short. This is also the safest way to own precious metals.
That’s not to say it’s wrong to speculate on gold and silver prices by purchasing futures contracts, exchange traded funds (ETFs), or similar investments. Just keep in mind that the custodians of these investments can – and often do – loan out the metals to speculators so they can sell short. This activity is pervasive, and it directly contradicts your interest in rising precious metals prices.
If you hold your allocated metals outside the country you live in, in a private vault, not a bank, you’ll be much better prepared for the next round of financial chaos than most other people. And unlike your money in a bank account, your metals can’t be “bailed in.”
Protecting your assets (and yourself) against any threat – from the government, the IRS or a frivolous lawsuit – is something The Nestmann Group has helped more than 15,000 Americans do over the last 30 years.
Feel free to get in touch at [email protected] or call +1 (602) 688-7552 to learn how we can help you.
Original Source – Nestmann.com