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If Gold and Silver Are Manipulated, Why Bother Investing?

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Published : January 25th, 2018
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Over the past six years precious metals investors have seen a barrage of negative news regarding the dollar. Yet despite the almost endless money printing and fundamental reasons why gold and silver should respond with higher prices, the precious metals remain well below their 2011 highs.

As has been written on MilesFranklin.com, as well as by experts like Ted Butler and GATA, there is ample evidence suggesting that the markets are being manipulated lower by the bullion banks. Essentially on a somewhat regular basis, large paper sell orders hammer the bids and drive prices lower. Butler also regularly reports how the banks who do the selling are the same ones who consistently end up buying the contracts back at lower prices.

If this is indeed the case, the natural question that many wonder is why to bother continuing to invest in precious metals if the market is rigged? Or in the very least, why not wait until the manipulation has ended to then invest?

Unfortunately the short answer is simply that sometimes life in the financial markets just doesn’t play out in the way that we might prefer.

There is a degree to which some investors analyze the the commitment of traders report (COT) issued by the CFTC (which if you’re unfamiliar, you can think of the CFTC as the precious metals equivalent of the SEC). Amazingly, these reports have enabled traders and investors to have a general idea of when a move up or down is more likely. Although it’s not a perfect science, and the price doesn’t always follow what the market structure might indicate.

So while the COT report can be an informative guide, what it does not tell us is when we reach the true breakpoint. Which given all of the pressure that has been applied to the gold and silver markets over the years, has created a scenario where a big move caused by a short squeeze could occur without any further warning.

You could wait until we see some sort of spark and purchase metals after the price has already gone up a bit. Assuming that when the breakout occurs, it moves a little, before it moves a lot. Which is hardly a guarantee in such a highly distorted market.

But let’s say you wake up tomorrow and silver is trading at $23. Maybe because another bank reaches a settlement similar to Deutsche Bank, who paid out $100 million regarding their involvement in gold and silver trading. In fact this is actually even incredibly likely, given the transcripts that were released as part of Deutsche Bank’s cooperation agreement, as well as the ongoing lawsuits that have been filed since then.

So let’s imagine a scenario like this does occur. What do you do then? It may sound simple, although this sets up the kind of trading decision that many struggle with. Which often leads to decisions that don’t work out well.

Even if the price was kind enough to stop at $23 (which given the current market dynamics is hardly a guarantee), it’s not always easy to decide whether to just go ahead and buy, or if the market will come back to a lower entry point. Sometimes it does, and sometimes it doesn’t.

Of course if the manipulation assumption is indeed correct, there’s also a chance that the price gaps substantially higher. Some analysts have suggested that we could have some sort of Sunday night announcement with a price reset. Similar to how Richard Nixon popped up in the middle of an episode of Bonanza in 1971 to inform the world that he was taking the U.S. off the gold standard and implementing price controls.

Another school of thought is that we could see what’s known as a “force majeure” on the Comex. Where you get settled in cash at the current price, only to see the actual metal price then trade substantially higher. Which again would mean there would be no “last chance” to get in at the lower price.

This is why you hear so many analysts talk about purchasing and stacking metals on a regular basis. While avoiding trying to outsmart the market. Is it fun waking up so often and seeing the price smashed down just when you were getting your hopes up again? Of course not.

But for those who have seen the movie The Big Short (highly recommended by the way), It serves as a great reminder of the value of patience in investing. The movie details some of the investors who realized the subprime real estate market was a bubble, yet had to endure quite a bit of stress and pressure while they waited for their trade to pay off. And perhaps that’s just part of the game. In that to capture the really big wins in the market, you have to earn them.

Either way, it’s a great metaphor for the situation in precious metals. Where there is an abundance of evidence to suggest that prices almost necessarily have to move higher at some point. Fortunately, as long as you invest within your means and allow the element of time to be on your side, you can remove a lot of the emotion by keeping an eye on the fundamentals and remembering that all manipulations eventually do end.

Just as this one will some day too. And when that does finally happen, I believe you will be well rewarded for all of your patience and perseverance.

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Andrew Hoffman was a buy-side and sell-side analyst in the United States (including six years as an II-ranked oilfield service analyst at Salomon Smith Barney), but since 2002 his focus has been entirely in the metals markets, principally gold and silver. He recently worked as a consultant to junior mining companies, head of Corporate Development, and VP of Investor Relations for different mining ventures, and is now the Director of Marketing for Miles Franklin, a U.S.-based bullion dealer.
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