Manipulation /Management : Controlling the Gold Price

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From the Archives : Originally published January 03rd, 2008
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Category : Gold University

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 $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” 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.

24hGold - Manipulation /Manage...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

Gold/Silver Forecaster – Global Watch

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Julian Philips' history in the financial world goes back to 1970, after leaving the British Army having been an Officer in the Light Infantry, serving in Malaya, Mauritius, and Belfast. After a brief period in Timber Management, Julian joined the London Stock Exchange, qualifying as a member. He specialised from the beginning in currencies, gold and the "Dollar Premium". At the time, the gold / currency world exploded into action after the floating of the $ and the Pound Sterling. He wrote on gold and the $ premium in magazines, Accountancy and The International Currency Review. Julian moved to South Africa, where he was appointed a Macro economist for the Electricity Supply Commission, guiding currency decisions on the multi-Billion foreign Loan Portfolio, before joining Chase Manhattan the the U.K. Merchant Bank, Hill Samuel, in Johannesburg, specialising in gold. He moved to Capetown, where establishing the Fund Management department of the Board of Executors. Julian returned to the 'Gold World' over two years ago and established "Gold - Authentic Money" and now contributing to "Global Watch - The Gold Forecaster".
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