The Covid-19 pandemic has been distressful for almost everyone on the planet. The outbreak from Wuhan in 2019 has affected people worldwide in many ways. While many brick-and-mortar outlets have seen a drastic slowdown in business, other sectors like online services and home delivery saw a boost in demand.
Many brick-and-mortar chains and outlets have launched online stores in order to continue trading in this new business climate.
In times of uncertainty like this, investors behave differently and switch their investments to hedging in precious metals like gold and silver. Gold, in particular, has passed the test of time as a store of value for millennia.
Gold is inversely related to the industrial and financial sectors. Investors and market forces often exploit this inverse relation to earn quick money in uncertain times.
Career investors know the market well, and they are aware of how prices of precious metals react to socio-political and natural events. Covid-19 provided an opportunity to manipulate the market after the worldwide lockdown increased market volatility.
How the prices of metals are manipulated:
To understand the core of the problem, we need to understand how the price of gold works.
The prices we are discussing here are the spot gold and silver prices. The spot prices for both these metals are determined by the London Bullion Market Association of LBMA and are derived from central banks and large commercial banks.
The prices are set through a process of electronic auctioning that is also referred to as London Fix. For gold, the prices are defined two times in a day, while for silver, it is done once daily.
In parallel to determining and announcing the Spot Price of metals, gold and silver contracts are also traded by both commercial and non-commercial market forces within the gold and silver futures market. The biggest such market is COMEX in New York City.
The tricky part of the futures market is that the actual amount of physical gold and silver being traded is shown by ‘open interest’ held within precious metals warehouses (COMEX approved). The contracts which ‘stand for delivery’ are needed to deliver the required COMEX gold and silver bars. Those parties that do not have the ability to ‘stand for delivery’, have contracts that are rolled over to next month, or are settled in US dollars.
This means that not all future contracts are fulfilled, and some may end up getting their dollars back along with some return.
What is disturbingly interesting here to notice here is the COMEX, which handles a majority of futures of gold and silver and also operates the London Over-the-Counter spot market. COMEX uses the data of high demand in futures of gold and silver to determine the spot prices.
Many experts think that the core of metals price manipulation is the COMEX itself.
Another proof of manipulation of metal futures between 2009-to-2016 is the settlement of JP Morgan Chase with US authorities. In one of the biggest deals in financial investigation settlement, JP Morgan admitted their involvement in spoofing of metal futures and treasury securities.
The settlement details uncovered that during the period mentioned earlier, JP Morgan’s traders placed false orders which they didn’t plan to execute at all on one side of the market. This created a false impression of high demand by the investors in gold and silver. This is known as spoofing and is done to lure the investors towards the desired commodity of stock.
JP Morgan threw the traders who were involved under the bus, but the truth is that the damage has been done, and it has proven that the financial system isn’t well equipped to stop market manipulation in spite of big regulatory and enforcement organizations. The book “Rigged: Exposing the Largest Financial Fraud in History,” by Stuart Englert, is a good read to understand why price manipulation happens, what its implications are, and how to stop this. As he points it out;
“Manipulation continues today. We saw it last Friday (January 8) with the short selling on the COMEX and the periodic price smashing — gold was down US$50 at one time last Friday, I think, and silver down US$1.70. We’ve seen these smashes the time and time again in the last decade, and that to me is in-your-face proof of price-suppression and manipulation” — Stuart Englert.