As a gold bug, I’ve spent many a year believing that both gold and silver prices are about going to go to da moon. Such a belief is part and parcel of being a gold bug.

But a blind belief in a single market narrative can become the kiss of death for a trader and ruin a potential trading career.

It very nearly did mine.

So in this article, I’m going to discuss a little bit about the gold and silver markets, and bring to your attention the latest story gripping the gold community.

 

Gold is going to da moon real soon

The latest narrative to get the gold community on their collective seat edge revolves around some arcane banking regulations.

This event, (which has actually already happened for European banks) and was due to happen in the UK in January is meant to cause a complete disruption in the gold market.

I will come to the specifics later, but this is just one in a long line of events down the years, supposed to set the gold market on fire.

I’ve always been sceptical that this event (Basel III, NSFR) was going to do anything at all for the price.

While the arguments put forward by the hard money crowd are sound, I have a complete mistrust these days of any story of higher gold and silver prices.

Nevertheless, this topic is worthy of discussion. And for anyone interested in the gold market hopefully, it’s an interesting read.

 

The story of gold price manipulation

When you start following the gold market it won’t be long before you notice some recurring themes.

The first – we’re just about to enter Zimbabwe or Weimar-like hyperinflation. I mean like…tomorrow.

It doesn’t matter who’s in charge of the Fed, who is the president of the USA, or whether inflation is transitory or not.

It doesn’t even matter if money velocity is falling.

To some, no, many…hyperinflation is just around the corner!

Such fear sells plenty of newsletters and bullion services.

The second market theme is that the stock market is just about to fall off the white cliffs of Dover!

I mean like next week.

And a whole host of credible reasons will be given:

  • Warren Buffet’s favourite indicator has screamed a sell signal
  • P/E’s are the highest ever in human history
  • insiders are selling
  • the 50-day moving average has crossed the 200-day moving average forming a bearish cross
  • a Hindenburg Omen (WTF?) signal is flashing!!!

So, it’s time to panic, and buy gold and silver – and while you’re at it, subscribe to the latest en vogue gold analyst’s newsletter to boot.

Such rampant scare tactics are a great marketing gimmick for those with a fearful disposition.

But, the third narrative is there is an evil cabal suppressing the price of gold – in order to maintain faith in the US dollar.

 

A long history of gold price suppression

Ask any gold bug and they’ll give you a long detailed history of the war against gold.

They’ll tell you that governments hate gold; bankers hate gold, Wall Street hates gold, as do Keynesian economists.

These groups of elites hate it because it pays no dividend (that’s why Wall Street hates it) and can’t be printed out of thin air (that’s why bankers and governments hate it).

Sure, a few select banks do make money from storage and leasing but for the most part, to use the words of John Maynard Keynes, gold is a barbarous relic, nothing more.

The story of the war on gold spans decades, if not centuries.

Roosevelt confiscated it with Executive Order 6102.

That creature from Jekyll Island, the Federal Reserve is part of the gold price suppression story. As are the German banking dynasties, such as the Rothschilds.

Even our favorite childhood Xmas movie, The Wizard of Oz is integral to the gold story.

 

There was the London Gold Pool of the 1960s.

In 1971 President Nixon closed to the gold window, stopping the pesky French from claiming it.

And over the years there have been speeches from Fed chairman, Volker, Greenspan, and Bernanke that can be interpreted as a coordinated war on gold.

And there probably is.

Forensic accounting-like work was undertaken by Frank Verneroso in the late 1990s – uncovering questionable practices in the gold market.

There was a CFTC precious metals manipulation hearing under Gary Gensler.

And let’s not forget the musings of Ted Butler and his COT analysis of which I eluded to in my post My Trading Journey

All of this brings us to the present day and the latest part of the story – Basel III.

Basel III is supposedly when gold bugs take their revenge.

If you’re a gold stacker or silver backup da trucker, you know all of this of course.

If you are a normal bod, or just getting into the financial markets you likely have no idea.

 

How is the gold price kept low?

The story goes that via paper gold derivatives on the COMEX and the LBMA market, the price is purposely kept low.

There are reports for every one physical ounce of gold in storage, there are 500 ounces of paper gold derivatives traded.

The vast majority of these paper contracts end in cash settlement – not physical delivery.

A quick detour.

Imagine if there were 500 bushels of paper corn traded for every physical bushel of corn.

Or, for every 40,000 lbs of real pork bellies, there were 20 million lbs of paper pork bellies.

Under such a scenario you can see the paper price may not truly reflect real-world demand?

What if the pig flu wiped out the pig population, but because of paper pork bellies, no one saw a problem…until it was too late.

At which point the price of pork bellies would fly.

Transpose that to the gold market and that’s what the bugs and stackers think is going to happen.

One day, all of a sudden shit..there’s no gold and silver left. Then gold, and silver prices will do a Richard Branson into hyper space.

Okay, that’s a simplistic way of explaining things, but you get the idea.

 

The cabal of “They”

If you go down the rabbit hole of gold and silver manipulation you’ll hear the same things again and again.

They slammed the metals lower overnight in Japan.

Or

They won’t let gold rise when a Fed chairman speaks.

With a dose of

They collectively pulled bids on the COMEX  which is why the price collapsed.

You’ll hear the third person pronoun they rather alot.

They, over the years, have meant JP Morgan, the late Bear Stearns, HSBC, the Bank of Nova Scotia, any other bullion bank, the LBMA, the COMEX, Barrick Gold, Kodak, Dupont, and many more.

I don’t know who they are specifically, but they control the price.

 

The silver supply deficit

The silver supply shortage is chronic compared to gold.

While the only people using gold are dentists and rap stars, a huge amount of silver is used in industry and lost forever.

When I started trading silver in 2005 there were approximately 400 million ounces of available supply. It was a no-brainer the price would be at $100 in a minute.

And yet here we are, nearly two decades later and by some accounts, there are one billion ounces of physical silver supply.

Recently some Reddit traders tried to force a short squeeze in silver – they failed – as was to be totally expected.

They still hold out hope of succeeding.

Note the article I just linked to was written in 2021 – but these same stories have been around way before that.

Market stories are sexy but can end up being total garbage. There is no room for them if you want to be a successful trader – only hard facts, please.

 

Silver’s dual role

Why the hell would Kodak or Dupont be part of a price suppression scheme?

Well, silver is both a precious metal and an industrial metal.

Silver is one of the best conductors of electricity. By some accounts, more new uses of silver are found each year than all other metals combined.

And with an ever-increasing demand from the alternative energy complex, there really is a bullish thesis for a slowly grinding higher silver price.

But besides the evil JP Morgan manipulating prices lower to maintain faith in an evil US dollar regime, theories also focus on a group of industrial users too.

Kodak was part of that particular cabal.

The age of digital cameras has put a huge dent in the use of silver in photography.

But, these days, the likes of Apple and Samsung have taken over from Kodak as large silver industrial users.

And both tech giants like to keep stum on the amounts of silver used – most likely in fear of a price spike.

Keeping the price of silver low as a silver user is a no-brainer.

So between the banksters (a term most surely coined by stackers and back-up da truckers) and industrial users, a pincer-like move price manipulation downwards is constantly being perpetrated on the price of silver.

 

Slam the silver price and gold will follow

Silver and gold are highly correlated.

On occasion, they wander off in different directions (usually when silver investors can’t decide whether it’s an industrial or monetary metal).

The silver market is a much smaller market than gold. Less liquidity and less market cap.

Not to mention it’s supposed to lead gold.

So if you were they, it would be easier to slam silver (in Japan) and watch a spillover effect as gold traders in the west started to panic.

The late Bart Chilton, whilst at the CFTC spent a lot of time analysing these dodgy price moves and was suspicious of shenanigans going on.

But the CFTC never (at that time) brought any cases forward, due to lack of solid evidence.

There have since then been a number of traders caught and fined for spoofing and manipulating the precious metals markets.

But there’s a difference between a few lone traders trying to put in a profitable month and a cabal of master criminals trying to maintain faith in the fiat money system.

No doubt to some, these lone traders are simply the fall guys for evil masters of the universe.

 

The Basel III Accord

The event that has the gold community buzzing is something called the Basel III accord.

The Basel III accord is a continuation of, you guessed it; Basel I and Basel II

The Basel III accord was written in the aftermath of the 2008 financial crisis by the Bank of International Settlements.

There’s no doubt the financial crisis was a scary time for anyone who can remember it. You couldn’t help but noticed how scared governments and bankers were the whole system would implode.

To some Barack Obama and Hank Paulson were heroes who saved the world.

Yet, to others (and many in the stacker crowd) they were Bond-like villains handing out piles of cash to their mates.

 

Allocated gold – tier-one asset.

Okay, things get slightly more technical now.

There’s only a certain part of Basel III the bugs, stacker, backup da truckers care for.

That’s the part concerning the reclassification of physical gold as a tier-one asset.

A tier-one asset is deemed to be as safe as cash, or US government bonds.

You could make a strong case that physical gold is even safer because it’s free of government debasement (the whole reason there is a war on gold in the first place).

So, allocated gold (physical gold) is kept in a secure vault with a bar number, with only one owner.

Now that physical gold has become a tier-one asset it will naturally result in stronger demand from the likes of pension funds.

 

Unallocated gold – tier-three asset

This is a whole different kettle of fish.

One way to own gold is to open a gold account with a bullion bank.

You can choose to own unallocated gold. There are no storage fees this way.

At no time do you take physical possession of the gold. You are trusting the bank that the gold you bought is stored in a secure facility.

But unallocated gold is like fractional reserve banking.

In FRB, banks hope customers don’t want their cash at the same time. If they did it can lead to a banking collapse.

And with unallocated gold, the same thing occurs.

Customers all wanting their gold at the same time can lead to a mad scramble to source the physical.

There are many questions hanging over unallocated gold accounts.

  • was the gold there, to begin with?
  • are there multiple claims on the same gold?
  • has the bank leased out your gold?

These legitimate fears have bugged the gold bugs for some time. And it’s the reason they’re also suspicious of gold and silver ETFs.

Many rightly see unallocated gold as a disaster waiting to happen.

Gold is supposed to offer safety from counter-party risk, yet the very idea of fractional gold runs contrary to that.

Which is I guess why the BIS proposed new rules.

 

Net Stable Funding Ratio

All banks in Europe, and the US will have to adopt new standards because of Basel III. (UK banks have just got a pass!).

Here is more info on NSFR by Risk.net

And this is their definition

The net stable funding ratio is a liquidity standard requiring banks to hold enough stable funding to cover the duration of their long-term assets. For both funding and assets, long-term is mainly defined as more than one year, with lower requirements applying to anything between six months and a year to avoid a cliff-edge effect. Banks must maintain a ratio of 100% to satisfy the requirement.

Introduced as part of the post-crisis banking reforms known as Basel III, the ratio ensures banks do not undertake excessive maturity transformation, which is the practice of using short-term funding to meet long-term liabilities. It was finalised by the Basel Committee in October 2014.

As far as gold goes, or more specifically unallocated gold, much more money is now needed to trade unallocated gold.

The London Bullion Market Association

This is where a huge amount of OTC gold trading takes place.

Few of these contracts ever end in the delivery of physical gold and silver.

The NSFR rule changes mean trading paper gold is going to become a lot more expensive to the participating evil banks.

It is this that has got the bugs & stackers excited.

Some of them are even claiming it will be the end of the paper gold market altogether.

But not so fast, the LBMA has lobbied hard with the Bank of England, and it appears that UK banks will be allowed to apply for a special exemption from this rule.

We will have to see the specifics of what this exemption means – but I can almost guarantee the bugs will say the evil cabal of banksters is at it again.

 

To be a precious metals investor is to be constantly disappointed

Ever since I read my first Ted Butler article, I’ve read that one day the physical silver market will trump the paper market.

And over the years small cracks have from time to time appeared.

  • backwardation for weeks or months at a time
  • the inability of fabricators to get metal
  • spiking lease rates
  • months on end for Germany to get its gold back from New York
  • silver and gold eagle coins running out at local dealer shops

All symptoms of an impending gold shortage – and yet the price remains as boring as ever.

Basel III is labelled as a game-changer but to be honest, is more likely to turn out to be another damp squib in a long line of damp squibs.

Is there a gold price conspiracy or not?

I believe there is.

But one of the takeaways of this article is you have to be pretty damn dumb to be hopelessly long in a market suppressed by superior market forces.

There are a number of stackers I know personally who have suffered endless disappointment because of conspiracy theories.

Their fault is in believing that one day they’ll wake up and they’ll suddenly be rich overnight.

With that mentality, you’re setting yourself up for any number of poor trading decisions.

I love gold, I love silver but being a trader means being agnostic and not falling for sexy market narratives and conspiracy theories (no matter how true they end up becoming).

Gold Bugs

As a trader, there is no room for opinions

I’ve talked a lot about the gold market in this article – but the point is not even about gold.

Crypto is the latest market to have such a sexy market narrative.

In fact, crypto is labelled digital gold…yeah whatever.

We are led to believe that soon, bitcoin will be a million dollars.

That the whole world and his mother will be transacting in bitcoin or satoshis.

And that if you are not on the bitcoin, dogecoin or baby dogecoin train you’re a sucker going to be left behind.

That may or may not be true.

What I know to be true though is that if you let FOMO direct your investment decisions you’re going to lose in the end. Period.

Don’t ever let any market story get the better of you, be it about gold, crypto or the next market fad that arrives!

 

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John Scott
John Scott has been trading CFDs and FX since 2003. His favourite markets are the Dow 30, Gold and the GBP/USD. John believes short-term price action trading is the best approach for beginners to trade. Tradeneophytes is his humble attempt at helping new traders reduce the learning curve to trading success.
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