What Isn't Manipulated?
by Brady Willett, FallStreet.com | April 1, 2010
News that London trader, Andrew Maguire, has exposed manipulation in the precious metals market has been making the rounds over the last week. This rehashed story of precious metals manipulation, which is being ignored by the mainstream media, has quickly acquired ultra-conspiracy status because Mr. Maguire was not permitted to testify at the CFTC hearing, technical difficulties were encountered as soon as GATA's (Gold Anti-Trust Action Committee) Bill Murphy started to speak, and days after the hearing Mr. Maguire's car was struck in a "'bizarre'" hit and run. Yet for all of the excitement, an objective take on Maguire's revelations proves less than compelling. In other words, we all know the price of gold is manipulated in the same sense that currency prices, interest rates, mortgage rates, and even stock prices are indirectly and directly 'manipulated' by powerful interests—and?...
Constantly digging for the elusive evidence of manipulation, some goldbugs have yelled "Eureka!" because Maguire accurately forecasted a sell-off in the precious metals market following last month's payrolls report. In the same email Maguire penned on February 3 foretelling of the alleged manipulation, he also stated the following:
"I am aware that physical buyers in large size are awaiting this event to scoop up as much "discounted" gold and silver as possible. These are sophisticated entities, mainly foreign, who know how to play the short-sellers and turn this paper gold into real delivered physical."
How is it a manipulated market when sophisticated foreign entities are expected to stop prices from sliding in the manipulators' favor? For that matter, how can anyone cry manipulation when it took the price of gold less than a week to recovery from its February 5 selloff? (By this logic so long as I plan and can temporarily move the price of any financial instrument I am manipulating prices whether I actually produce a profit or not).
Another problem with Mr. Maguire's story is that he provides no evidence of collusion and he names no names (except his own). If Maguire was an authentic whistleblower his information would incontrovertibly be grounds for an investigation and arrests. But instead of hard evidence Maguire offered the following:
"The question I would expect you might ask is: Who is behind the sudden selling and is it the entity/entities holding a concentrated position?"
And what is Maguire's answer to this crucial question?
"I would ask you watch the "market depth" live as this event occurs and tag who instigates the move. This would surly [sp] help you to pose questions to the parties involved."
The answer is that Maguire does not know exactly who is doing the selling (and more importantly why), so he suggests that 'the CFTC investigate whoever starts selling after the payrolls report. Eureka? I think not...
The reality is that Maguire's February 3 letter highlighted the catalyst that would send an extended precious metals market lower. It isn't whistleblowing when after researching COT (Commitments of Traders) statistics and historical price tendencies you correctly time a price movement—it is a successful trade!
As a side note, the COT manipulation story (as if it needs to be reiterated), is basically that as small speculators take greater control on the long side of things the always-short commercials (two firms in particular) slam prices in the paper gold market until the small specs (and other parties) start to dump. This is an old story that was worth covering years ago because it was statistically predictable and it helped uncover good accumulation points for precious metals bulls. However, as precious metals prices escalated the COT data has become a statistically less significant tool.
Strangely enough, Mr. Maguire was (is?) not looking to accumulate silver/gold but instead profit from the "manipulation"! Not only does Maguire undermine his case by noting that he was looking to profit from the Feb 5 "'manipulation,"' he builds the case that it is traders like him—or those that aim to follow COT shorting—that are responsible for turning tiny corrections in precious metals into complete meltdowns. Astonishingly, in a recent interview with King World News, Maguire said he has been profiting from the manipulation since 2008, but he did not feel the need to contact the CFTC until November 2009:
“I thought it my duty to contact the CFTC…we were all profiting from it [the manipulation]…there comes a point when your down (inaudible) on your conscious.”
The utterly ridiculous notion that Mr. Maguire enjoyed profiting from the manipulation before he grew a conscience begs the question: how much money was Maguire able to amass with his insider information? If the answer is he is still not on Forbe's rich list can it not be readily deduced that his manipulation theories are not fully supported by facts? After all, with leverage it would only take a trader a few "'take down"' sessions to make an enormous amount of money and Maguire has been following and supposedly profiting from the actions of the manipulators for more than a year!
Maguire's debatable prescience notwithstanding, the real shock from the CFTC hearing was comments made by CPM Group head, Jeffrey Christian (video). Who needs the Maguire angle when Christian—who is supposed to be against the manipulation theory—is more than willing to admit that the price of COMEX gold is determined by massive unbacked paper promises?
"Precious metals are financial assets; like currencies, T-Bills and T-bonds they trade in the multiples of a hundred times the underlying physical and so people buying them are voting and giving an economic view of the world or a view of the economic world and so when you start saying to a bank I have a number of people…"
According to Mr. Christian, the fact that paper gold can be traded hundreds of times (why not thousands of times?) beyond the underlying physical asset is not cause for concern. Mr. Christian also added that the need for position limits is not required because those with large concentrated positions are actually hedged with OTC contracts (side note: the notion that everything in this world is perfectly hedged in OTC-land long ago left the realm of comical and has become simply absurd). Finally, Mr. Christian noted during his written testimony how important the paper-driven U.S. market is in determining global gold prices. If you adorn your conspiracy hat it is easy to infer from the following that paper gold really does rule each trading day:
"Companies seeking to execute large trades wait until New York opens, finding the market more liquid and pricing more competitive. Conversely, there are times when companies enter the market with large trades during the New York pre-market, apparently with the intention of moving prices in their favor by placing a large order or orders before the liquidity is there to accommodate such trades."
In short, by blithely assuming that massive short positions are hedged in the OTC market the potentially complicit CFTC is openly endorsing dangerous naked trading in markets that their own "'experts'" believe should have no position limits. Eureka!—one day the shorts won't be able to deliver...
Price Manipulation Does Not Constitute Market Control
Company ABC is in financial trouble and the rumor is that it has a huge short position in wheat. Smelling blood, traders start buying wheat solely on the expectation that ABC will be forced to liquidate its position and cover. This type of situation happens all the time in the financial and precious metals markets and is perfectly legal. The issue is not the short sellers, but the rigged nature of the market…
So, are precious metals prices really "'manipulated"'? Of course they are. But as the surge in precious metals prices over the last decade will attest to, there is a big difference between isolated instances of price manipulation and complete market control. To be sure, while the "'evil"' COT shorts sometimes succeed in inundating the market with naked (?) sell orders, they have also failed to exert their will on the markets during the gold bull.
What can put a stop the manipulation and the conspiracies? Well, given that if gold goes to $5,000 an ounce there will be voices that say it should really be at $10,000 an ounce, the only endgame is physical demand triggering a default to deliver. Astonishingly, Mr. Christian seems to be daring the markets to provoke such an outcome when he claims, "'there are any number of mechanisms allowing for cash settlements.''* Nevertheless, such a squeeze only seems possible when/as USD hegemony—or the paper holding gold prices down—ends. Until then there are traders looking to profit from the next '"take down"' in gold and there are foreign interests looking to buy on weakness.
*Question Are you concerned that the shorts will not be able to deliver if called upon?
*Christian: No. I am not at all concerned. For one thing it has been persistently that way for decades. Another thing is that there are any number of mechanisms allowing for cash settlements and problems and a third thing is as many people who are actually knowledgeable about the silver market and the gold market have testified today that almost all of those short positions are in fact hedges, the short futures positions are hedges, offsetting long positions in the OTC market. So I don’t really see a concern there.
© 2010 Brady Willett
The opinions of FSO contributors do not necessarily reflect those of Financial Sense.