Gold / Silver
Forecaster - Global Watch -
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
The following is a thorough explanation of the ways in which
management/manipulation of markets can be achieved.
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
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 $300.
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 it.
Ø The Power of “Marginal”
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.
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.
D. W. Phillips
Gold/Silver Forecaster – Global Watch
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