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LAWRIE WILLIAMS: Gold price manipulation/suppression large-scale, study finds

One of the reasons given for gold underperforming vis-a-vis expectations is often claimed by some to be due to price manipulation.  However, this is hotly denied by many well-respected commentators who put the likelihood of gold price manipulation or suppression as an unfounded conspiracy theory.  Now recent independent academic research by the CryptoMarketRisk team at the UK’s University of Sussex Business School claims to have found strong evidence that market manipulation is indeed taking place in the commodity and cryptocurrency markets.

The academic research has found evidence of huge sell orders for gold futures, massive pump and dump operations on copper futures and large spoofing orders on key crypto exchanges. Some single trades on COMEX have been so large as to move prices, the researchers have shown, in clear contraventions of U.S. laws on market abuse. But widespread market turmoil means regulators such as the CFTC have a lot on their plates right now, meaning that even large-scale manipulation of these markets has remained below the radar of regulators.   Some would argue, thoughg, that the regulators themselves have been colluding in the manipulation, although this does not appear in the University of Sussex findings.

Financial markets have been thrown into turmoil by the COVID-19 virus and the measures taken by many governments to try and control its spread.  This has led to an unprecedented global recession/depression which, arguably, is only just beginning to bite and, the academics suggest, should lead to a huge crash in equities and a corresponding flight to safe haven investments like gold.  Equities have indeed seen major falls, although interspersed with occasional what we see as totally unwarranted recoveries.  In our opinion the economic effects of the virus will see things get much worse before they start to get better, and the economic fall-out will continue to hit markets until well into 2021, and perhaps beyond.

According to the researchers we would have expected safe haven assets like gold to soar in price as equity prices turned down sharply and this has not necessarily been the case.  However, perhaps they are jumping the gun here.  In the last major financial crisis in 2008, both equities and gold also fell in concert – at least initially – put down to liquidity problems with investors sometimes forced to sell good assets along with poorly- performing ones.  But then gold recovered quickly and went on to new all-time highs within the next three to four years, while equities took well over a year to recover their lost ground.

Today’s market action in the U.S. in particular, though, probably supports the academic view of somewhat untoward forces in play.  The gold price fell and equities rose quite strongly despite poor financial confidence data and some household names reporting that they required bankruptcy protection over the past few days.  In our view data and financial news will continue to deteriorate for some months, before it starts to get better.  Some businesses are indeed re-opening as lockdown restrictions are eased, but a full return to anywhere near normality and some form of economic growth up to pre-virus levels will likely take months, if not years, to materialise.

The academic researchers note that the biggest beneficiaries of these market attacks, beyond those placing the trades, are holders of U.S. dollars and U.S. assets. These become the main sources of positive returns for global investors in attempts to curtail the recent trend of some central banks to diversify their reserves away from the U.S. dollar.

The researchers go on to say that in contrast with the last major global financial catastrophe the data they have collated is telling. Following the Lehman Brothers collapse in September 2008, the correlations between the S&P 500 index and gold, or the Swiss Franc, or U.S. Treasuries were all around minus 40%. During March and April 2020 the correlation between the S&P 500 index and gold was plus 20%. 

Carol Alexander, Professor of Finance at the University of Sussex Business School, commented on the findings of the study: “As funds flow out of equities one would expect demand for gold and bitcoin to increase. But this time around, safe havens have behaved completely differently. Gold and bitcoin have fallen at the same time as US equities. As the S&P 500 crashed in March 2020, gold had its worst week in eight years when it should have been its best, because of massive shorts on COMEX gold futures. Bitcoin has also been driven down by some pretty obvious manipulation bots on the unregulated crypto derivatives exchanges, especially BitMEX.”

She goes on to say “We are witnessing financial market manipulations on a scale and frequency that have rarely been seen before. The lack of integrity by a few powerful market players is causing a major financial market meltdown from which the current form of our global economy may never recover.”

As we have noted above, though, the markets may need more time to truly adjust and we suspect the gold price will indeed rise in the weeks and months ahead as the reality of what is facing the economy in the medium to long term becomes apparent.  There will be continuing moves to suppress any precious metals price rises from the massive big money short holders in the gold and silver markets – a continuation of the financial shenanigans highlighted by the University of Sussex report.

Meanwhile the massive bailouts by U.S. and European governments and their central banks are building phenomenal debt levels and attempts to mitigate these in the long term will build up all kinds of global economic problems in the years ahead.  If faith in the dollar is lost it could even lead to a reserve currency rethink and the development of a new world order as similar shake-outs have in the past. 

China is waiting in the wings.  As, apparently, the first to recover from the pandemic spread, and the quickest to return to anywhere near normal, it could be well placed to take advantage and the slow realisation of this may be in part behind President Trump’s increasingly aggressive stance on Chinese trade and global influence.  Maybe this is indeed the precursor for some kind of global reset.

But overall we remain confident that holding gold is the best way of protecting one's wealth. Blue chip gold stocks may also be a relatively risk-free option for benefiting, but bear in mind that mining is, in itself, a risky business which is why we recommend the bigger well-diversified gold miners or perhaps the larger royalty/streaming companies.  Regardless of any attempts to suppress prices we think gold, in particular, will win out in the end.  It has stood the test of time as the premier safe haven in turbulent economic times.

26 May 2020 | Categories: Gold

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