By now, most observers have heard of precious metals price manipulation. As the issue creeps into the mainstream, more and more investors will come to understand it - along with its vast implications.
We've covered the mechanisms used to manipulate the metals extensively, but it is important to point out the differences between gold and silver in terms of how they are managed. This is because it provides excellent insight into the relative character of each metal's unique supply and demand profile.
The Mechanisms of Gold Manipulation
Paper shorting via COMEX is perhaps the most egregious and most visible. Its signature can be tracked via reports issued by the exchanges. While the CME recently disclaimed the accuracy of the data, the blatancy of this interference has gone on so long that the existence of the numbers that prove intervention have very little impact on speculators.
Gold leasing has been the time-tested way that bullion banks are given cheap exposure to gold that they can borrow to sell into the market. This method comes with defacto sanctioning by the Exchange Stabilization Fund.
Direct Central Banks selling had been a common practice until it stopped, with the bigger story of the developing world monetary authorities publicly accumulating gold.
London price fixing may be the oldest and most opaque of all the intervention methodology. It has now re-entered the mainstream vernacular on the heels of the German quest to repatriate its physical gold holdings. Recently, Deuthce Bank removed itself from the "fixing process", which also re-enters the collective awareness via the now generally accepted absurdity around the London Interbank Offered Rate (LIBOR). Essentially, a room full of representatives from the largest financial institutions making a collective decision on the price of assets that form the base of money flow and value is astounding...
India, Pakistan via Trade Balance
In response to supposed trade imbalances, India's central bank has tried unsuccessfully to prevent the import of gold. This attempt is in response to surging demand followed by lower prices. The effect of course, has been to embolden an already robust underground trade mechanism. And now Pakistan has weighed in because of the gold diverted through its borders.
Interest Rates Indirectly
Gibson's Paradox, written by Lawrence Summers, describes the relationship between gold and interest rates. This fuels the central banking quest to lower rates such that the real rate of interest becomes negative, thereby encouraging new loan formation. The problem is that a negative rate of return "naturally" puts upward price pressure on gold and, thus, necessitates forming a policy around keeping gold prices in control as central banks pursue this ill-fated policy.
Next, Gibson’s Paradox offers a gold price forecast for the next 12 months (White, 2011). The rule states that for every percentage point the real interest rate (-3%) is below 2%, gold will increase in value by 8%. As calculated in the last paragraph, the real interest rate is assumed to be -3%. Since -3% is 5% below the 2% threshold, 5 percentage points times 8% provides the gold forecast for the next 12 months: 5 x 8% = 40% . The current gold price is near $1,700 - leading to a gold price forecast of: $1,700 x 1.40 = $2,380. Anecdotally, $2,380 coincides with the 1980 inflation adjusted, peak gold price.
Manipulation of Inflation Data
It should be painfully obvious that the officially reported inflation rate has become a complex abstraction with very little resemblance to reality. Mainly, it governs the amount of government payout in terms of Social Security payments. But also, behaviorally, it quells the emotional effect of rising prices
One of These Things is Not Like the Other
With silver, things are much more blunt and a reflection of the precariousness of the situation. Or more likely it is desperation, given that silver prices are the likely lynch pin waiting for the inevitable accident to happen. Silver is a coiled spring and if it begins its return to fair value, it will go further and faster and take gold along with it.
Stock to Flow and The Float
In terms of available stock, silver is much less available than gold. But is still very much representative of a monetary asset where there exists a large supply relative to a modest increase in supply (flow) over time.
But the float is the precarious issue - especially with regard to silver. At any given moment, there is a relatively small amount of available metal for trade near current prices. Given silver's recent surge in industrial use, vast amounts of previously stock-piled silver have been sequestered in an equally dizzying array of devices, materials, and other uses.
Most of this above ground stock is gone. However, it is effectively sequestered whether in use, residing in landfills, or by the very fact of its long running price suppression.
Managing this float is the absolute key and the only way it can be controlled through paper derivatives via COMEX. The long existing short corner by the big commercial category on this exchange have been able to quell the significant and disorderly rise toward equilibrium. Employing algorithms and high frequency trading has helped to fuel the brazenness of this mechanism.
For silver, there are no more giant stockpiles held by sovereign entities that could be readily leased into the market to control the inevitable disorderly rise in price.
To call forth that much physical in a short period of time would be like parting the ocean at its greatest depth - requiring a miracle of miracles.
Silver managed at the core by means of concentrated short exerting proportional difference on which direction the market will go.
Many cynically identify price suppression of the precious metals in an environment where fiat money creation is beyond reckoning to be a gift - one that should not be complained about. Obviously, the implications are far vaster and the inevitable return and move beyond fair price will be something to be hold. This makes the case for some allocation to physical metal a no-brainer at best.