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Gold Bugs Digging for Illusive Evidence of Market Manipulation, What Isn’t Manipulated?

Commodities / Gold and Silver 2010 Apr 01, 2010 - 10:15 AM GMT

By: Brady_Willett

Commodities

Best Financial Markets Analysis ArticleNews 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 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 months 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 GATA’s sworn enemy, 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 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 specs 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, 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 conscious 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 bunk?  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 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.

By Brady Willett
FallStreet.com

FallStreet.com was launched in January of 2000 with the mandate of providing an alternative opinion on the U.S. equity markets.  In the context of an uncritical herd euphoria that characterizes the mainstream media, Fallstreet strives to provide investors with the information they need to make informed investment decisions. To that end, we provide a clearinghouse for bearish and value-oriented investment information, independent research, and an investment newsletter containing specific company selections.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Mike
02 Apr 10, 08:12
GATA Rebuttle

Commentary posted today by Brady Willett, editor of FallStreet.com, headlined "What Isn't Manipulated?," suggests that GATA's work has gone from outrageously radical to old hat overnight without ever having touched revelation in between.

"We all know," Willett writes, "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."

We all do?

Does Willett really presume to speak for, say, Kitco's Jon Nadler, Martin Wolf of the Financial Times, International Monetary Fund Managing Director Dominque Strauss-Kahn, British Prime Minister and former Chancellor Gordon Brown, and most of the members and staff of the U.S. Commodity Futures Trading Commission?

Maybe Nadler, Wolf, Strauss-Kahn, Brown, and the CFTC do know and it's just not their business to tell. But those who have been part of GATA for any substantial part of its 11 years have been disparaged enough in that time to imagine that preaching to the choir feels very different.

To mock the market manipulation witness about whom GATA informed the CFTC and the world at last week's CFTC hearing, Andrew Maguire, Willett makes a serious factual error. Maguire, Willett writes, "provides no evidence of collusion and he names no names (except his own)."

Wrong. In his e-mails to a CFTC investigator, which Maguire provided to GATA and which GATA in turn presented at last week's CFTC hearing, Maguire specifically and repeatedly accused traders for JP Morgan Chase:

http://www.gata.org/node/8466

Thus Willett could not have been paying very close attention, but he dishonestly mocks Maguire twice. He writes: "How can anyone cry manipulation when it took the price of gold less than a week to recover from its February 5 selloff?"

Well, Maguire can cry manipulation because its purpose and effect were, as he wrote to the CFTC investigator, to "trip stops" around "key support levels," flushing out weak long position holders, something fully within the power of any trading entity that has access to huge amounts of money, amounts far greater than competing traders have access to, amounts capable of being generated by, say, JPMorgan Chase's business partners, the Federal Reserve System and the U.S. Treasury Department, for which the investment house is a registered agent.

Willett himself used to recognize as manipulative and objectionable the practice of which Maguire complains, as Willett did in his Fall Street commentaries on the silver market in April and May 2004:

http://www.fallstreet.com/apr704.php

http://www.fallstreet.com/may1204.php

While Willett acknowledges that this manipulative practice continues, he seems not be be bothered by it as much now as he is by Maguire's and GATA's complaining about it.

But Willett concedes perhaps the bigger point to GATA when he joins us in marveling at the admission made at the CFTC hearing by establishment gold market analyst Jeffrey Christian of CPM Group. "Who needs the Maguire angle," Willett asks, "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? ... According to Mr. Christian, 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 position limits are not required because those with large concentrated positions are actually hedged with OTC contracts. (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.)"

Returning to minimizing mode, Willett concludes, "Price manipulation does not constitute market control."

Maybe not, but as Silver Stock Report editor Jason Hommel, who attended last week's CFTC hearing, notes in his commentary tonight, headlined "CFTC: Obey Your Plaque" --

http://silverstockreport.com/2010/CFTC-plaque.html

-- even a little manipulation is against the law, quaint as the law may seem to Willett these days. It says so right on the plaque on the wall of the CFTC's hearing room, of which Hommel took a picture.

You can find Willett's commentary, "What Isn't Manipulated?," at Fall Street here:

http://www.fallstreet.com/april110.php

And at GoldSeek's companion site, SilverSeek, here:

http://news.silverseek.com/GoldIsMoney/1270170340.php

CHRIS POWELL, Secretary/Treasurer

Gold Anti-Trust Action Committee Inc.


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