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Are Gold and Silver Prices Manipulated?

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There is a popular claim amongst gold and silver enthusiasts that large banks like JP Morgan and Goldman Sachs are capable of manipulating the price of gold and silver and suppressing its "real value". I find this to be a dubious claim.

There are two ways that the megabanks could control prices, the first being to change supply the second being to change demand. Of course, they have no real control over public demand, so they would have to focus on supply.


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While there is no way for JP Morgan to instantly create actual gold or silver, what they have managed to create is a great deal of paper gold and silver in the form of exchange traded funds (think of a stock that tracks the price of gold that you can sell online). This absolutely does affect the price of gold and silver, but not by means of force or subterfuge. I don't have the means available to prove that paper gold and silver are truly fraudulent (and neither does anyone else claiming to), but I think it is extremely reasonable to think that they don't have all the gold they say they do and they are running the same kind of fractional reserve scheme that they run with depositors money and everything else. If everyone holding paper gold decided to redeem their shares, I'm sure the wheels would come off, but I can't prove that.

So, by creating a product that enough people believe is equivalent to gold or silver, and appreciates like gold or silver, the megabanks and their friends have satisfied a great deal of demand for gold and silver with a paper substitute that meets those investor's needs. Is this manipulation, or is addressing a market? Is it fraudulent in the sense that the deposits are not fully backed with real gold? Almost certainly, but this is also true of every bank deposit.

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Ultimately, everything is "worth" whatever another person is willing to pay. To say otherwise is to speculate as to what a future buyer or a buyer that hasn't been found yet might pay. So, in the absence of what may be a large, fraudulent scheme in paper gold and silver, would physical gold and silver prices be higher? Maybe. I can't say with authority what billions of people would suddenly think about a product in a different world.

If physical gold and silver were really grossly undervalued, it should be simple to find a buyer that will pay more than market rate. However, as sellers of actual gold and silver online will prove, market rate isn't a fake number.

Another tool that big banks have at hand is the naked short. If JP Morgan takes a huge short position, they essentially "sell" a whole bunch of gold or silver they don't have in return for promising to buy later. This has a short term effect of apparently increasing supply and dropping the price, but when the short has to be covered and the gold or silver  bought, this has the reverse effect. Aggressively shorting a market is a dynamic thing looking to benefit from larger moves in price, and doesn't have a net effect on supply. Every ounce virtually sold must eventually be bought back.

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For better or worse, the megabanks have satisified a large number of people with their paper products that may or may not have bought physical gold or silver. Paper gold and silver may not survive a long-term downturn in prices, but during the precious metals bull market of the past ten years the market has done very well. While paper gold offends my sensibilities for the same reasons that paper food might, it doesn't have this effect on everyone. Institutional investors like paper, and with their billions of dollars, they like the low maintenance fees (vaulting is expensive), and that they don't have to physically cart around tons of precious metals.

In fact, the enhanced liquidity of paper gold and silver has no doubt brought new investors and additional money into the market. While I would venture that the banks made enough paper to cover the new demand, paper gold and silver did expand the market. The physical-only crowd can still buy physical metal, and a new horde of speculators can now buy paper.

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I don't trust the paper, but enough people prefer it to the physical metal that they buy the paper instead. Is this a manipulation? Only if the paper doesn't meet customer expectations. So long as the price tracks with the physical product, the institutional investors will be happy. If the market was satisfied via fraud, and the paper markets fall apart, then a fraudulent manipulation did occur. Time will tell.

What do you think? Leave a comment below.

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Richard is an engineer by day, and a political activist by night, fighting would-be totalitarians and government busybodies everywhere.

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