Is The Fix On In The Investment Game?

Is the fix on in the investment game?

We have seen the effects of the Federal Reserve low interest rate policy on the bond market.  Despite the fact that the federal government needs to finance annual deficits of $1 trillion, interest rates on treasury notes are at historical lows.  Would this be possible if the Federal Reserve was not buying massive amounts of these debt obligations every month?

We have also seen the effects of the Federal Reserve low interest rate policy on stock prices.  If an investor cannot get any return on fixed income investments what do they do?  For many the answer has been to take money from low yielding fixed income investements and move it into stocks.  This has clearly been one of the objectives of the Fed's low interest rate policy and its quantatative easing program.

We may now see that the Federal Reserve (or another Central Bank) is attempting to manipulate the price of gold.

If you have not been paying attention, the price of gold crashed over the last week.   Here is the chart of the price of gold over the last six months.  In two trading days the price of gold dropped from over $1,550/oz to $1,350/oz.  That is a loss of more than 12% in two days.  How did that occur?

Paul Craig Roberts was the Assistant Secretary of Treaury for Economic Policy in the Reagan Administration.  He knows something about economic policy and he also knows how Washington works. He does not like what he is seeing of late.  He thinks that the Federal Reserve has been rigging the stock and bond markets. He also thinks that the Federal Reserve may now be working behind the scenes to drive down the price of gold.  Consider this recent commentary from Roberts on "The Fed's Assault of Gold".  In my eyes, if even half of this is true, it is very troubling.

I was the first to point out that the Federal Reserve was rigging all markets, not merely bond prices and interest rates, and that the Fed is rigging the bullion market in order to protect the US dollar’s exchange value, which is threatened by the Fed’s quantitative easing.  With the Fed adding to the supply of dollars faster than the demand for dollars is increasing, the price or exchange value of the dollar is set up to fall.

A fall in the dollar’s exchange rate would push up import prices and, thereby, domestic inflation, and the Fed would lose control over interest rates. The bond market would collapse and with it the values of debt-related derivatives on the “banks too big too fail” balance sheets. The financial system would be in turmoil, and panic would reign.

Rapidly rising bullion prices were an indication of loss of confidence in the dollar and were signaling a drop in the dollar’s exchange rate. The Fed used naked shorts in the paper gold market to offset the price effect of a rising demand for bullion possession. Short sales that drive down the price trigger stop-loss orders that automatically lead to individual sales of bullion holdings once their loss limits are reached.

I know this is hard to believe but it has been reported that the big sell-off in gold prices began when someone put in an order to sell 500 tons of paper gold at the opening of the market last Friday morning.  How much is 500 tons?  That is equal to more than 10% of all the gold stored at Fort Knox.  At the opening price on Friday that amount of gold was also worth about $25 billion.  Who has that kind of money to be throwing around? Roberts thinks it could only be the Federal Reserve.

According to Andrew Maguire, on Friday, April 12, the Fed’s agents hit the market with 500 tons of naked shorts. Normally, a short is when an investor thinks the price of a stock or commodity is going to fall. He wants to sell the item in advance of the fall, pocket the money, and then buy the item back after it falls in price, thus making money on the short sale. If he doesn’t have the item, he borrows it from someone who does, putting up cash collateral equal to the current market price. Then he sells the item, waits for it to fall in price, buys it back at the lower price and returns it to the owner who returns his collateral. If enough shorts are sold, the result can be to drive down the market price.

A naked short is when the short seller does not have or borrow the item that he shorts, but sells shorts regardless. In the paper gold market, the participants are betting on gold prices and are content with the monetary payment. Therefore, generally, as participants are not interested in taking delivery of the gold, naked shorts do not need to be covered with the physical metal. 

In other words, with naked shorts, no physical metal is actually sold.

People ask me how I know that the Fed is rigging the bullion price and seem surprised that anyone would think the Fed and its bullion bank agents would do such a thing, despite the public knowledge that the Fed is rigging the bond market and the banks with the Fed’s knowledge rigged the Libor rate. The answer is that the circumstantial evidence is powerful.

That circumstantial evidence gets even stronger when you look at the results of what happend when those 500 million tons of naked short paper gold contracts were put on the market.

What happens when 500 tons of gold sales are dumped on the market at one time or on one day? Correct, it drives the price down. Investors who want to get out of large positions would spread sales out over time so as not to lower their sales proceeds. The sale took gold down by about $73 per ounce. That means the seller or sellers lost up to $73 dollars 16 million times, or $1,168,000,000.

Who can afford to lose that kind of money? Only a central bank that can print it.

That's right, whoever dumped that 500 tons of gold on the market lost $1.1 billion according to Roberts as a result of driving the price down on just the first day.  That position is probably down over double that amount now. Does that make sense for anyone other than somebody who has a larger agenda and an even larger pocketbook?

What could that larger agenda be from the Fed's perspective?

Possibly the Fed fears a dollar crisis or derivative blowup is nearing and is trying to reset the gold/dollar price prior to the outbreak of trouble.  If ill winds are forecast, the Fed might feel it is better positioned to deal with crisis if the price of bullion is lower and  confidence in bullion as a refuge has been shaken.

I see the orchestrated effort to suppress the price of gold and silver as a sign that the authorities are frightened that trouble is brewing that they cannot control unless there is strong confidence in the dollar. Otherwise, what is the point of the heavy short selling and orchestrated announcements of gold sales in advance of the sales?

All I know is that the concept of free and fair markets in the investment world today appears nothing more than a fantasy.  The reality is pretty frightening.  Be careful. Be very careful with your money.  Who knows what the man behind the curtain is doing?

Credit: The Wizard of Oz