Precious metals investment terms A to Z

Gold Manipulation

Gold market manipulation, called also gold price manipulation, can be defined broadly as a purposeful effort to control gold prices. This sort of manipulation exists in financial markets as traders try to influence the markets (in this case, the gold market). It may be responsible for some short-term aberrations in asset prices, including the price of gold. However, there is another, more specific definition. According to the Security and Exchange Commission, manipulation is intentional conduct designed to deceive investors by controlling or artificially affecting the market for a security… [this includes] rigging quotes, prices or trades to create a false or deceptive picture of the demand for a security. A popular belief within the gold investing community is that gold prices are manipulated, generally downwards, in what is described as price suppression.

Gold Price Manipulation

Many gold investors believe that the market for gold is systematically manipulated. There are many variations of this theory: some say that precious metals are under the thumb of central bankers, while others blame big banks and their use of derivatives (‘naked’ shorts) and high-frequency trading for the declines in the price of gold. There are also worries about the discrepancy between paper gold and physical gold, the fairness of London trading, declining inventories at Comex and leasing of gold by central banks. At first glance, this theory makes sense, especially that the price of gold was fixed for decades by governments or suppressed under the London Gold Pool, while a few financial institutions have already been fined for influencing or manipulating gold prices.

However, academic research did not find any clear evidence of gold price suppression. Moreover, when we look at the long-term behavior of gold prices (see the chart below), we see clear cyclical patterns, not a permanent downward trend (or even a flat line).

Chart 1: Gold bull and bear markets (from April 1968 to January 2016, London PM Fix).

gold price manipulation

Therefore, from the long-term perspective, and especially looking at the 2000s, it is hard to understand the accusation of manipulation in the gold market. The cries of “suppression” are extremely selective. When the price of gold is decreasing, then this is the obvious effect of evil conspirators, but when the price of gold is rising, then there is no manipulation and the true market forces are at work. The influence on price may be only short-lived, as low prices cure low prices. The gold market is simply too big and too liquid for any person, central bank or corporation to control. Therefore, any attempts to systematically suppress gold prices would be counterproductive, since the reduction in the price of gold would trigger a market reaction in the form of higher demand and upward pressure on the price.

The bottom line is that despite many variations of the theory of manipulation in the gold market, their supporters hardly offer any proof. Just as with other asset classes, there are both bull markets, when the gold price goes up, as well as bear markets, when the price goes down. Bear markets do not imply that there is a deliberate suppression of the gold price. They are normal market behavior resulting from changes in the gold market’s fundamentals. Indeed, the fundamental factors, such as the U.S. dollarreal interest rates or risk-aversion, do a very good job of explaining the behavior of gold prices in the long term.

We encourage you to learn more about gold – not only whether it is manipulated, but also how to successfully use gold as an investment and how to profitably trade it. A great way to start is to sign up for our gold newsletter today. It's free and if you don't like it, you can easily unsubscribe.

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