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I became worried about the imbalances in the global economy back in 1996, when I was a student of the fundamentals of macroeconomics. Since then, I have observed the global economic imbalances becoming even larger, with the paradoxical result that the forces responsible for creating the... More
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  • Is The Price Of Gold Manipulated?

    It is highly possible. In a paper market where no physical delivery is required, one can simultaneously buy and sell gold. E.g. if I am a large bank or a hedge fund (or the United States government, as certain gold bulls seem believe) and I want to keep the price down, I open two (or more) accounts and I trade between these at times when the market is highly illiquid (e.g. when I can easily sell to myself without interference).

    This type of manipulation is often seen attempted in the stock market, where it has to be done repeatedly to drive the price movement for a stock (for this reason, stock exchanges are monitoring the counter-parties for trades using sophisticated algorithms, so don't try this at home…). In the market for gold, it only needs to be done from time to time, as stop-losses and margin calls on leveraged positions will escalate a downward (or upward) move.

    However, it is key to note that it only works when the market is illiquid (you need fill your buy order simultaneously with your sell order in order to avoid losses). This may explain why the recent sell off in gold was initiated with a large sell order placed in the middle of the night when market liquidity was at its lowest (the worst possible timing if the objective is to maximize the proceeds of your sale), triggering the first leg down in the gold decline to $1321/ oz in April this year.

    Nevertheless, unless the manipulation in the paper market is successful in amending the price expectations players of the physical market, it is doomed to be short-lived. The corresponding dynamic will be that demand for physical gold will explode (and yes, we have certainly seen that happening), eventually creating a gap between those contracts that allow for physical delivery and those that don't.

    I tend to believe that the April price move was not government manipulation, but rather a large hedge fund (most likely Goldman Sachs) who had figured out where most of the stops in the market were, and saw the opportunity to profit from a short-position by pushing the market lower. It has subsequently succeeded in scaring the lights out of retail investors, who are liquidating their ETF holdings, and changing the American and European market sentiment for gold.

    At least for now.

    Jul 15 5:33 AM | Link | 2 Comments
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