HardAssetsInvestor

Written by Brad Zigler  |

May 19, 2009

Has Gold Been Manipulated?

Details

HardAssetsInvestor.com's managing editor looks for a smoking gun amid rumors of conspiracy theories.

• Is a banking cabal suppressing gold's price?
• Focusing on facts
• Bank lopsided positions not limited to one commodity sector

 

Writing articles on precious metals can be an unending job. The time spent researching and composing the piece often seems short compared with the investment required to field questions and defend one's reasoning.

Gold, for example, seems to excite everyone's passions. Everybody's got an opinion about why the metal's where it is today or why it ought to be higher, or lower, in the future. And why not? After all, if it weren't for differences in opinions, there'd be no trading.

But let's be clear: An opinion is just a personal view; it's not a fact. When it comes to the responses to gold articles published by Hard Assets Investor (www.HardAssetsInvestor.com), there seems to be plenty more opinions than facts offered.

One of the most common beliefs held by responders is that the price of gold is being artificially suppressed. Gold, according to subscribers of the manipulation theory, would be higher-priced today if not for the efforts of a banking cabal that cuts short rallies.

But what are the facts, if any, that support this contention?

Articles written by Ted Butler are most often cited as the backup for the manipulation argument. Butler, a newsletter publisher and one-time commodity broker, posits a criminal conspiracy among large commercial interests in the silver - and by extension, the gold - market. The smoking gun Butler offers is the short interest held by a handful of banks.

According to data compiled by the Commodity Futures Trading Commission (CFTC), banks are indeed on the short side of the metals futures markets and have been for quite some time. At present, the market looks like this:

 

COMEX Gold - Futures Only

Source: CFTC- May 5, 2009

 

 

So, bank-held long positions, in the aggregate, amount to a quarter of the size of the financial institutions' short sales. That's supposed to be a smoking gun?

Butler attributes the 2008 gold sell-off to some sort of manipulative action by these banks. In one newsletter, he writes: "Every criminal act must have a motive and an opportunity to commit the crime. By the simple process of elimination, those responsible for this crime are the concentrated commercial shorts on the COMEX. No one else fits the profile. They had the means (through their dominant and monopolistic position), the profit motive and the skill to cause the sell-off."

Okay. Time for a lesson in capitalism. Banks are in the business of making money. There's no crime in that. And while banks strive to earn a yield spread between borrowed and lent funds, they also have proprietary trading desks in which they deal as principals in debt securities, foreign exchange and, to one degree or another (more so for non-U.S. institutions), precious metals. Banks also execute trades as agents for their large customers.