There is much talk of price management/manipulation
in almost all markets. These charges are met with denial, silence and scorn.
There are several aspects of markets that can give the opportunity to
manage/manipulate prices. Often we think of market manipulation solely in
terms of heavy buyers and/or sellers overwhelming the markets.
The following is a
thorough explanation of the ways in which management/manipulation of markets
can be achieved.
Ø Cornering the Market: In the 1970’s, the famous Hunt
Brothers, huge oil barons from Texas,
decided to corner the market in
silver. They bought all the silver they could, driving the price of silver to
new peaks. When scrap sellers
offered their silver, they bought that as well. At that point, the Hunt
Brothers had taken the price of silver to its all time peak of +
$50/oz, a price never before seen. The problem: The Hunt Brothers were the
only buyers, and after having cornered the market, buying all the silver,
they inevitably became the only sellers.
Ø Dumping: The reverse of cornering the market is dumping. This occurs when a seller with
huge quantities of almost any type of commodity enters the market to swamp
the buyers to the point where the sellers have all they want and the selling
continues unabated so that the price just keeps on falling.
The gold price from the
early 1980’s was subject to something similar called, accelerated
supply. This had the same effect as dumping but in a slightly
different way. Companies found that they could mine profitably to the point
where the price reached the area of upper $200. Now with the gold price
starting at its peak of $850 there was a good deal of profit to be made on
the way down. Add to that the money market facility of selling forward
[earning interest until the due delivery date] and one could make far better
prices than the ruling gold price. With the clear intent of discrediting gold
as money, the gold bullion banks [having themselves borrowed gold bullion
from the Central Banks] loaned gold to many gold mining companies. The mining
companies then sold this gold as far forward as it would take to build the
mine, extract their gold and bring it to market, repaying in gold, the gold borrowed. In this
way they earned what is known as the “Contango”
[the interest earned on the sale proceeds until delivery], which ensured that
they could achieve over $400 an ounce when the market gold price was below
This ensured that the
mine was profitable and they could produce gold in time to repay the bullion
banks. It was a neat, prudent way of mining for gold and ensured that the
mines were profitable even while the price of gold was dropping. Accelerated Supply also made sure that
the gold supply far exceeded the demand for gold, ensuring a declining gold
price. In effect the market had newly mined gold ‘dumped’ on
Ø The Power of “Marginal”
Demand/Supply: Wise buyers of anything try to secure their supply to the extent they
can gauge their future needs. They can usually secure approximately 80%
– 95% of their requirements.
But the remaining 5% - 20% is the amount they must acquire directly in
the open market. This forces them to accept the prevailing market conditions
and, consequently, prices. Noteworthy suppliers, (not to be denied the full
benefit of market prices), always ensure the price for which they are paid is
the market and covers the full 100% of their sales at the time of delivery. It is this ‘marginal’ demand
of 5% – 20% which controls the price of all production.
Controlling the price becomes easier than
expected in the short-term. (Over
the longer term, as new prices flow through the system the demand supply
formula will adjust, in the light of market prices). Speculators, for
instance, can buy heavily to reduce that supply, driving prices up. With the
wisdom of hindsight, other buyers can wait until prices adjust, or they can
buy forward or future delivery if they can postpone their needs. Then they
will turn to the futures market and pay an extra interest rate to secure a
better price in the future at which point they take physical delivery. Doing
this also removes uncertainty of supply and cost. This can undermine
speculators attempts to manage/manipulate prices.
There are times, however,
when the demand is so strong and immediate. Prices for this immediate
delivery [‘spot’ prices] rise higher than future prices. The
result: backwardation. This is when it is most likely that we
will see spikes in the price. The reverse is also true: A spike in the gold
price would be in the interests of either a large buyer or one finalizing the
price on the bulk of his requirements, to go into the market and sell, taking
prices down for the short-term. Once these prices are fixed, they then close
their open market positions. Any loss incurred will be far less than the
benefits of the lower cost on the bulk of their needs. This type of action can and must be a source of price manipulation.
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Manipulation / Management of market prices is an integral part of the structure of all markets all
institutions and all nations.
The system demands it.
But eventually market forces will and do overcome all but the most
stringent of actions by government and when they impose such stringency,
eventually they do pay a heavy price. The path of the gold price over
the last three years and more are proof positive of this.
Julian D. W. Phillips
– Global Watch