Make Kitco Your Homepage
Contributed Commentaries
  1. Kitco Metals Inc.
  2. Commentary Archive
  3. Bio

Confessions of A Gold Analyst: Debunking The Manipulation Theory

In the past, I have asked market participants what has been manipulated more, the price of gold, or market participants following gold analysts?

I know my perspective is not in the majority, but, as you may know from my first feature article on KITCO, my perspective is that market participants have been manipulated by analysts more than the price of gold has been manipulated.  These analysts have needed something to which they can point as to why the market crashed when they did not expect it, rather than admit they were wrong, or that there methods are faulty.  Again, I know that mine is not the popular perspective, but I hope you can maintain an open mind to at least consider an alternative that has actually predicted the market moves, which others only blame upon manipulation.

I know many of you will cite what has been sold to you as “clear” and “incontrovertible” proof of market price manipulation.  But, if one were to truly dig deeply into those “proofs,” you would recognize that the arguments are quite specious, at best.

So, before you close your mind to what I am about to present, I want to simply note that tracking market sentiment patterns allowed me to call the top to the gold market within $6 of the top actually struck, and also call for a correction target between $700-$1,000 even before the market topped.  Maybe there is more profit to gain in tracking market sentiment than in complaining about manipulation?

What type of manipulation are we dealing with?

First, there are two types of potential price manipulation in a market.  There is the manipulation that may move a market by a percentage point or two, and there is manipulation that can move a market 70%.  My personal perspective is that there “could” be attempts at manipulation which may cause very small percentage momentary movements in markets, but which will not change the general direction or trend of the market.

I had a commenter to one of my articles on metals provide the following example, which I believe is what “may” occur in the metals market:

“Compare the market to a stream of ants marching by in, generally, a single direction. Run a stick across their path and there will be some momentary confusion and reaction to the direct stimuli but very soon afterwards the original parade of ants continues and the stimulus is forgotten.”

But, as far as larger degree “manipulation,” I do not believe it to exist as to be able to move a market by 70%.  So, if you see “proofs” of manipulation, one must consider whether they are that which would cause a small move that will ultimately be meaningless (as the case of the ants), or, for the larger degree moves, if the market is simply moving in the direction for which it was set up to move based upon overall market sentiment.

What about all the strong evidence of manipulation?

There are many market participants that point to all the “evidence” of manipulation cited by GATA and many others.  But, if one were to actually dig more deeply into such “evidence,” one would find that there is more smoke and mirrors than actual evidence.

Let me take an example which has been posted more times than I have hair on my head.  The manipulation theorists are known to point to the testimony by Alan Greenspan before the Committee on Banking and Financial Services in 1998 as the smoking gun regarding “clear manipulation” by the Fed in the gold market.  Specifically, they point to where Greenspan stated that “central banks stand ready to lease gold in increasing quantities should the price rise.”

Just like much of the supposed evidence cited by the manipulation theorists, if one takes a closer look at the context of this statement within the entire testimony by Mr. Greenspan, you would recognize that this statement was taken completely out of context by those that cite it as evidence of manipulation.

You see, the manipulation theorists take bits and pieces they feel support their position without regard to the context in which the entire quote was meant, and they ignore everything else said by the person they quote which evidences the appropriate context.  If one were to actually read the entire paragraph around the sentence cited by the manipulation theorists, you would note that Mr. Greenspan was bringing up a methodology which may combat an attempt at market manipulation in the gold market. But, Mr. Greenspan never even opined as to how successful such an attempt would be, nor did he even state that there was manipulation which had to be combatted.

While I am sure the manipulation theorists will still discount what he really said and view it as evidence that the Fed is manipulating gold, a few paragraphs later, Mr. Greenspan went so far as stating that manipulation did not likely exist:

"Even with centralized execution or clearing, the most relevant attributes of these markets would not resemble those of the agricultural futures markets and hence would not be susceptible to manipulation."

Of course, I now fully expect to be bombarded by the manipulation theorists with the point that Greenspan is not to be trusted.  My question to them is then why do they attempt to use his testimony as evidence for their perspective that the Fed manipulates gold?  It’s about time for a little intellectual honesty and consistency, don’t you think?

As far as another perspective on debunking the market manipulation theories, I highly suggest one read an article written by one of my colleagues, James Kostohryz, in which he analyzed the extent of price manipulation by Barclays (and others in the industry). Ultimately, he showed that if there is any manipulation at all, it has no effect on the larger price direction of the general trend.

The gold market price has been directed by sentiment, not manipulation

The main reason I have a hard time believing that this market has been manipulated in a meaningful way is that, if it were, I would not have been able to track it as accurately as I have these last 4 years based upon my sentiment analysis.  You see, sentiment is what has been moving the metals and price has adhered to the sentiment patterns quite well. 

If the market was truly being moved by “un-natural” forces (such as manipulation), then we would not have been able to track it and trade it profitably based upon our analysis methodology.    Yet, I know many of you will claim the after-hours “dumping” of large positions is “manipulation.”  But, how is it that we were short (and publically noted as such) before those “dumps” occurred, with the expectation that the market was about to drop strongly?  In fact, the markets have turned almost to the penny so many times based upon our analysis that it would be impossible for manipulation to be the cause of those turns, unless the manipulators were following our analysis.  Moreover, there have been times I even called for those big drops within 24 hours of the actual large price drops that have occurred over the last few years.

Ultimately, a market participant must come to a decision as to which truth is more feasible:  Either the market is moved by sentiment, which is generally predictable, and has allowed us to profit therefrom, or the market is being manipulated to the downside by 70% or more in silver and the mining industry, and we are just part of the cartel, and know in advance when these “dumps” will occur, and publically call for them.

And, if you are being led to believe the latter, then those that have sold you a bill of goods to buy the market at the all-time highs are still selling you a bill of goods. My question to you is if you are interested in buying a bridge I would be willing to sell you at a discount?

The real questions you must ask yourself is if you want to continue to buy those faulty goods, or are you willing to accept a better way?  Do you want to continue to be on the wrong side of the market, but be able to blame it on some “theory” being sold to you by those who did not foresee the market drop?  Or, would you rather take the time to learn how markets really move so that you may have advance warning of the potential market “dumps” being blamed upon manipulation? 

Personally, when I was told years ago that “the market is just not trading on fundamentals,” while it certainly made me feel better for the moment that I was not stupid, it did not take me long to figure out those who make such a statement really have no clue as to what is moving the market.  That is when I turned the corner into becoming profitable with metals trading and investing.

Next week, I will address the recent Chinese sell off we saw a few weeks ago.

By Avi Gilburt



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
kitco news