Does Gold Price Manipulation Exist?
A question we’re asked a lot by clients is, “Are markets manipulated?” Our 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 Controversy of Insider Trading
The most obvious example of market manipulation is insider trading. 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, and so on. 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.
How Gold and Silver Prices Are Set Has Changed
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.” These are financial institutions that clear transactions in gold. This pricing model, which originated in 1919, lasted almost a century. It ended in 2015. 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 on January 28, 2016. On that day, 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.
Price Manipulation, Lawsuits and Settlements
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 – us 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. That’s when Deutsche Bank agreed to an out-of-court settlement. In October 2016, 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 we 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.
We also don’t understand why precious metals investors think they’re powerless to fight back against this silver and gold price manipulation. They can, and the remedy is very simple: Insist on full, unencumbered ownership of physical gold and silver.
Here’s What You Can Do
If you have precious metals in your physical possession or a safe deposit box or in 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.
Allocated vs Unallocated Gold Storage
Banks or private vaults that take responsibility for storing your metals use two storage options: allocated and unallocated storage.
- Allocated storage means a bank or private vault has set aside specific coins or bars that you own.
- There’s also semi-allocated storage, in which you have a fractional ownership interest in a specific bar of precious metal.
- Unallocated storage means that rather than owning specific coins or bars. You have a fractional ownership interest in a pool of precious metals.
Unallocated storage is much cheaper than allocated or semi-allocated storage. But, it’s also riskier. Since you don’t own specific bars or coins, you have no way to inspect your actual holdings.
Some companies that offer unallocated storage don’t even permit redemption in metal – you must accept a cash settlement.
Also, if a vault goes bankrupt, unallocated metals may become part of its balance sheet. This could expose your holdings to the vault’s creditors. You would then become an unsecured creditor and apply to the bankruptcy trustee for relief.
You can find more information here on how to convert unallocated to allocated gold.
That’s not to say it’s wrong to speculate on gold and silver prices. You can do so by purchasing futures contracts, exchange traded funds (ETFs), or similar investments. But 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 assigned metals outside your home country, in a private vault not a bank, you’ll be better prepared for the next financial chaos than most. And unlike your money in a bank account, your metals can’t be “bailed in.”
All About Gold Storage
What’s the best way to store gold – within the US and offshore. Please see our primer on how to store precious metals.
How to Ship Gold Internationally
Shipping gold overseas from the US might sound straightforward. But it can be quite a process. If you’re thinking about it, here’s what you need to know: how to ship gold internationally.
Gold IRA vs Physical Gold
Both a Gold IRA and physical gold involve owning physical metals. But there are notable differences between the two: Each option has specific advantages and limitations. Here’s what you need to know before you decide: Gold IRA vs Physical Gold.
Need Help?
Since 1984, we’ve helped more than 15,000 customers and clients protect their wealth. For its proven record as a wealth preservation tool, gold has often been a part of that planning.
If you’re looking to use gold for the same purpose, and aren’t quite sure where to start, please book a free, no-obligation call with one of our Associates to see if a wealth protection plan is right for you.
