Price Manipulation Awareness May Keep the Mainstream Away

Price Manipulation

If the new-found mainstream awareness of price manipulation of precious metals is embraced with anything close to the impact of LIBOR and similar scandals, the news may ultimately be a sweet sorrow.

The Financial Times is a long time staunch defender of the status quo and therefore, by default, negative and misguided toward precious metals. Recently, for the first time, the publication broke a story about price manipulation in the gold market.

To long time observers, the issue is simple to see, whether by direct documentation or as evidenced by the price action.

As if suddenly fashionable, the Financial Times report alluded to the sacrosanct physical versus paper divide. The ultimate indicator of price normalization will be the day when the physical market is no longer valued by the monstrosity of paper derivatives. The paper derivative market, fueled by the ultimate in faith based currency, still drives the day to day value of the actual metal.

A loss of faith in paper precious metals could very well likely be the trigger that pushes the dollar over the edge toward which it is inevitable headed.

That this story won approval from managing editors must be the ultimate indication of the low point in sentiment. Indeed, there was no determinable reaction from the very tightly controlled markets.

While the new awareness of the emerging market crisis has made some waves in the financial system, paper price discovery remains firmly held by the HFT and bullion bank dominated trading system.

Media Alchemy

Current price management enables institutional money to always benefit from price volatility - however it is induced.

In much the same way, the mainstream financial media celebrates the success of investment banks despite the obvious fraud. It is quite amazing that as the lawsuits mount, the institutions that committed the (in many cases obvious) fraud are still hailed as all-powerful and omniscient.

In fact, when popular media defends the indefensible, it is a testament to how far beyond repair the system has become.

On one hand, the media marvels at the 'undefeated' trading record of the largest bank in the world. Meanwhile, billionaire Warren Buffett, arguably the most visible and perfectly crafted holograms of the financial system road show, praises its CEO.

On the other hand, legal fees and the reserves required to be set aside to manage future arbitrage have morphed into a significant wedge to the bottom line.

LIBOR and the London Fix

The London Interbank Offered Rate, which serves as the basis for interest rates on trillions of dollars, was recently the center of a mass scandal. It was discovered that the long-suspected "fixing mechanism" was indeed fraudulent. The LIBOR issue dovetails with the London-based precious metals "fixing" that occurs twice per day in gold and once per day in silver.

Essentially, the price or rate for each of these markets is determined by a small room of representatives from major banking establishments. These individuals arbitrarily determine the cost of capital and directly derive profit for their subsidiaries.

The LIBOR scandal was dramatic when it finally broke into the mainstream. But the shock and market impact was ultimately muted, perhaps because it had been already generally known but politically unfashionable to admit.

The same could be said for other markets, including the precious metals, where direct participants have generally known and come to expect that prices are artificially derived. Therefore, it would not be a stretch to assume that the manipulation of gold and silver could go on, even in parallel with legal proceedings if any serious ones come to pass.

The Accident Waiting in the Wings

Faith has kept the dollar system together. Fear will ultimately lead to a false hope, symbolic legislation, and then shock.

Faith is a powerful wind, but one very susceptible to change.

The paper precious metals market and physical market will dramatically split and detach at some point. There already exists a trivial split in the form of premium. The trigger point will likely coincide with a series of unforeseen crises intertwined with a monetary event leading to more intervention.

It is very possible that the return to physical market price discovery would go unnoticed by the bulk of investors. Awareness and perception are nearly fully overlooked.

Even as it becomes more obvious to all, the suppression may indeed go on untouched by regulators and, perhaps, even celebrated by the financial system hierarchy.

The sad reality is an echo from history. Think about how complex the issues are for the semi-aware. The masses will understand only in the aftermath. And as an afterthought, it will all be perfectly understood. Most will miss the move and only become aware in retrospect. But the damage caused by the return to reality will be very difficult to undo.

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