Were Gold and Silver Manipulated Alongside LIBOR?

The sensationalism surrounding the LIBOR scandal has spurred the masses to raise their metaphorical  pitchforks once again, calling for judicial action, stricter regulations, and more aggressive reforms. As everyday traders and investors fall victim to the unscrupulous acts of LIBOR’s manipulators, many are left wondering how this seemingly abstract issue will effect their very real-life, coveted investments. But now analysts are suspecting that the scandal runs even deeper, and falls onto two of the most popular commodities in the world, gold and silver [for more commodity news subscribe to our free newsletter].

The LIBOR Scandal

The manipulation of arguably one of the most important figures in finance actually started several years ago. Although no one knows exactly when it began, a vast array of revealing evidence have periodically surfaced over the years, pointing to the British powerhouse bank Barclays as one of the biggest culprits. Traders were well-documented in their attempts to rig LIBOR; one trader had even offered coffee in exchange for a fixed number, while another exclaimed “Dude. I owe you big time!” and celebrated his success with a pricey bottle of Bollinger champagne (eerily reminiscent of Enron). And as the damning evidence continues to pile up, investors are now beginning to realize the global significance of this issue.

But investigators now feel that the prices of gold and silver were manipulated alongside this scandal that has been developing for a number of years. In fact, a formal investigation of silver manipulation has been in progress over the last two years in the U.S. but despite evidence of such actions, there have been no outcomes. Chris Powell, Secretary and Treasurer of the Gold Anti-Trust Action Committee told CNBC in June that “as central banks are interested in supporting government bonds and the dollar and keeping interest rates low, they continue to manipulate the gold market” [see also How to Play Schiff’s $5,000 Gold Prediction].

Ned Naylor-Leyland commented that “It is effectively an intervention in two ways; one would be the fact that for central banks, gold and silver going up doesn’t make their currency look any good, and secondly a number of the big commercial banks have very large short positions which they like to manage and make easy money from.”

What it Means for Commodities

There have been conspiracy theorists about gold/silver manipulation since the dawn of time, but they were often written off for being overly paranoid. Silver has been especially at the forefront as there have been very blatant shreds of evidence throughout U.S. history to prove that some sort of market manipulation was occurring. So what happens to the value of these two precious metals if it is discovered that they truly were manipulated? Prices would likely take a nosedive until finding what the market feels is a more reasonable level to sustain, but where that bottom lies is nearly impossible to predict. A dip in prices would destroy the savings, positions, and even retirement funds for a number of individuals around the world [see also Why Buffett is Dead Wrong on Gold].

The scariest part of all of this is what it could mean for the entire commodity industry. What about crude oil, which has far more ties to the economy and is arguably a much more important commodity? At what point does the manipulation stop and when should investors actually trust what they hear from big banks and institutions? After witnessing the subprime mortgage crisis and a number of other issues at these large financial institutions (like rogue traders or overly-large and impractical bets from men like Jamie Diamon whose losses are still being tallied and seem to grow by the day) the answer that many investors would give is never.

How to Play Manipulation

Now comes the question of how to make safe allocations to these precious metals while minimizing exposure to manipulation. There are two camps that investors can get behind. The first is trading. Those who are active traders can simply keep a keen eye out on developing trends and ride the waves as they come. At that point, manipulation may not matter at all, as a savvy trader will be able to profit in any kind of environment. The SPDR Gold Trust (GLD) is probably your best bet for gold as it is one of the largest funds in the world and also has an extremely liquid options market. As for silver, the iShares Silver Trust (SLV) will be your go-to move [see also Three Reasons Why Gold Is Overvalued].

The second camp that investors may fall under is simply waiting out the storm. This will apply to the “buy-and-hold” investors who plan on holding funds like GLD and SLV for multiple decades. The hope here is that the manipulation will come to light and that the issues will eventually smooth over. After all, it would appear that the manipulation of these metals has been to keep their prices down rather than up which would mean that long term investment still has a strong attraction.

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Disclosure: No positions at time of writing.

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  • http://twitter.com/BizBragEngineer Hunter Sherman

    “So what happens to the value of these two precious metals if it is discovered that they truly were manipulated? Prices would likely take a nosedive until finding what the market feels is a more reasonable level to sustain, but where that bottom lies is nearly impossible to predict.”

    “After all, it would appear that the manipulation of these metals has been to keep their prices down rather than up which would mean that long term investment still has a strong attraction.”

    If the manipulation is to push the prices down, and silver and gold are in fact undervalued, then why would prices nosedive if the manipulation were discovered?

    • Docvinney

      Hunter, that’s exactly what I wondered too.