Is China manipulating the gold market?

31 May 2017 (Gold Seek)

 

• Hedge fund, PhD statistician claims gold market is “the most blatant case of manipulation”
• PhD: “Statistically impossible unless there’s manipulation occurring”
• Gold serves as political chips on the world’s financial stage.
• Price is being suppressed until China gets the gold that they need
• Gold will go higher when all central banks ‘confront the next global liquidity crisis’
• ‘When that happens, physical gold may not be available at all.’

Jim Rickards: The Golden Conspiracy

Is there gold price manipulation going on? Absolutely. There’s no question about it. That’s not just an opinion.

There is statistical evidence piling up to make the case, in addition to anecdotal evidence and forensic evidence. The evidence is very clear, in fact.

These are the opening lines of Jim Rickards’ piece ‘The Golden Conspiracy’, an op-ed that may surprise even the most seasoned followers of gold markets.

Gold and silver price manipulation is not a new topic to regular readers. For years the idea that precious metals markets are subject to more than just free market forces has been dismissed by the mainstream. Many have referred to gold and silver manipulation as topic fodder for the conspiracy and deep web forums. This is despite evidence to the contrary.

In the last eighteen months or so what was dismissed as anecdotal tales of manipulation has finally been recognised by the regulators and lawmakers as something very real and serious. Fines have been doled out and regulators have been slowly implementing new rules.

But what if the manipulation goes above institutions that can be called to account? Can they be fined? Can it be somewhat controlled by the authorities? What if it is a country doing the manipulation? Rickards believes it is.

‘…where is the manipulation coming from? There are a number of suspects but you need look no further than China.’

Role of China

Previously we have been excited about China’s role in the gold market. In April last year they launched yuan denominated gold bullion trading. We not only expected this to further boost its power in the global gold and forex markets but to also lead to increased transparency and reduce price manipulation.

However the country is not only keen to increase transparency in the market for their own long-term gain, they have short-term goals as well – to increase their gold reserves.

Rickards explains:

China wants to do what the U.S. has done, which is to remain on a paper currency standard but make that currency important enough in world finance and trade to give China leverage over the behavior of other countries.

The best way to do that is to increase its voting power at the IMF and have the yuan included in the IMF basket for determining the value of the special drawing right (SDR).

China accomplished that last September when the IMF added the yuan to its basket of currencies.

The rules of the game also say you need a lot of gold to play, but you don’t recognize the gold or discuss it publicly. Above all, you do not treat gold as money, even though gold has always been money.

The members of the club keep their gold handy just in case, but otherwise, they publicly disparage it and pretend it has no role in the international monetary system. China is expected to do the same.

Right now, China officially does not have enough gold to have a “seat at the table” with other world leaders. Think of global politics as a game of Texas Hold’em.

What do want in a poker game? You want a big pile of chips.

Gold serves as political chips on the world’s financial stage. It doesn’t mean that you automatically have a gold standard, but that the gold you have will give you a voice among major national players sitting at the table.

For example, Russia has one-eighth the gold of the United States. It sounds like they’re a small gold power — but their economy’s only one-eighth as big. So, they have about the right amount of gold for the size of their economy. And Russia has ramped up its gold purchases recently.

The U.S. gold reserve at the market rate is under 3% of GDP. That number varies because the price of gold varies. For Russia, it’s about the same. For Europe, it’s even higher — over 4%.

In China, that number has been about 0.7% officially. Unofficially, if you give them credit for having, let’s say, 4,000 tons, it raises them up to the U.S. and Russian level. But they want to actually get higher than that because their economy is still growing, even if it’s at a much lower rate than before.

 

Where is the evidence for this?

As we have explained previously, manipulation is often dismissed as a conspiracy and anecdote driven theory. But Rickards has academic evidence:

I spoke to a PhD statistician who works for one of the biggest hedge funds in the world. I can’t mention the fund’s name but it’s a household name. You’ve probably heard of it. He looked at COMEX (the primary market for gold) opening prices and COMEX closing prices for a 10-year period. He was dumbfounded.

He said it was is the most blatant case of manipulation he’d ever seen. He said if you went into the aftermarket, bought after the close and sold before the opening every day, you would make risk-free profits.

He said statistically that’s impossible unless there’s manipulation occurring.

I also spoke to Professor Rosa Abrantes-Metz at the New York University Stern School of Business. She is the leading expert on globe price manipulation. She actually testifies in gold manipulation cases that are going on.

She wrote a report reaching the same conclusions. It’s not just an opinion, it’s not just a deep, dark conspiracy theory. Here’s a PhD statistician and a prominent market expert lawyer, expert witness in litigation qualified by the courts, who independently reached the same conclusion.

 

Surely they can be honest about it?

One would perhaps think that given China’s resources and their growing power in the physical gold market, the country would be able to just buy all that they need. Without the need for cloak and dagger activities.

Rickards argues this isn’t possible:

Here’s the problem: If you took the lid off of gold, ended the price manipulation and let gold find its level, China would be left in the dust. It wouldn’t have enough gold relative to the other countries, and because the price of gold would be skyrocketing, they could never acquire it fast enough. They could never catch up. All the other countries would be on the bus while the Chinese would be off.

When you have this reset, and when everyone sits down around the table, China’s the second largest economy in the world. They have to be on the bus. That’s why the global effort has been to keep the lid on the price of gold through manipulation. I tell people, if I were running the manipulation, I’d be embarrassed because it’s so obvious at this point.

The price is being suppressed until China gets the gold that they need. Once China gets the right amount of gold, then the cap on gold’s price can come off. At that point, it doesn’t matter where gold goes because all the major countries will be in the same boat. As of right now, however, they’re not, so China has though to catch-up.

I’ve described some catastrophic scenarios where the world switches to SDRs or goes to a gold scenario, but at least for the time being, the U.S. would like to maintain a dollar standard. Meanwhile, China feels extremely vulnerable to the dollar. If we devalue the dollar, that’s an enormous loss to them.

China has recently sold a portion of its dollar reserves to prop up its own currency, which has come under tremendous pressure. But it still holds a large store of dollar reserves.

If China has all paper and no gold, and we inflate the paper, they lose. But if they have a mix of paper and gold, and we inflate the paper, they’ll make it up on the gold. So they have to get to that hedged position.

China has been saying, in effect, “We’re not comfortable holding all these dollars unless we can have gold. But if we are transparent about the gold acquisition, the price will go up too quickly. So we need the western powers to keep the lid on the price and help us get the gold, until we reach a hedged position. At that point, maybe we’ll still have a stable dollar.”

China isn’t the only one

We know that the banks like to play with the gold market, but China isn’t the only country involved. Rickards says Russia has the same goals as the PRC. Together they are not only critical to the physical gold market but also for the overall structure:

Currently the price of gold is set in two places. One is the London spot market, controlled by six big banks including Goldman Sachs and JPMorgan. The other is the New York gold futures market controlled by COMEX, which is governed by its big clearing members, also including major western banks.

In effect, the big western banks have a monopoly on gold prices even if they do not have a monopoly on physical gold. But that could be about to change.

Russia and China are not only building up physical reserves and exploring for more, they are building trading systems that allow for price discovery and leveraged trading in gold.

It may take a year or so to attract liquidity, but once these new exchanges are fully functional, the physical gold market will regain the upper hand as a price maker.

Then gold will commence its march to monetary status, and its implied non-deflationary price of $10,000 per ounce.

How to turn a problem into an opportunity

Manipulation goes on across many markets, whether precious metals, interest rates or forex. At no point is it victimless. Individuals and companies alike have experienced losses on their investments, both as a direct and indirect result of manipulation.

To hear this can be depressing, many investors might just ask what the point is in investing in assets such as gold and silver when they might be as manipulated as paper markets. Sure they might go to $10,000, but what stops it being manipulated even then?

Those who are concerned should take a step back and look at the bigger picture which is actually an opportunity rather than a problem. A suppressed price means great opportunity for investors to accumulate more bullion. Ironically for those looking to manipulate the price, this is good news for those who are keen to stock up on both gold and silver.

In the long-term Rickards is convinced that we will see big changes in the gold price ‘when China reaches its gold reserve target of 10,000 tons — surpassing the United States. At that point, it will be in China’s interest to become more transparent and let the price of gold soar, which is another way of saying the value of the dollar is in free-fall.’

In the short-term, gold investors and those considering diversifying their portfolio with the yellow metal would be wise to consider the following, according to Rickards:

• Private gold holders continue to hold their gold
• There is persistent excess of demand over supply
• Situations in North Korea, Syria, Iran, the South China Sea, and Venezuela (to name a few) show no signs of improving, in fact the opposite.
• Fed policy tightening is normally a headwind for gold. But, the last two times the Fed raised rates — December 14, 2016 and March 15, 2017 — gold rallied as if on cue. Look for another Fed rate hike on June 14, and another gold spike to go along with it.

Gold manipulation aside, we are currently in a period of major market complacency. Mainstream investors have seemingly been lured into thinking that years of risky and unprecedented policy making will be without consequence. They believe that elevated prices of stocks and bonds and reduced price volatility in stock markets are completely normal. This cannot be.

At some point the marketplace will realise all is not really as it seems. When this happens, expect a serious backlash and ensure you are holding onto something that is real and has shown its true value despite years of manipulation on all fronts.