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VIDEOHow to Profit From the Alleged Manipulation of Gold
Though the debate rages on in the precious metals industry, there's a definite discrepancy in gold prices during the intraday period and the overnight period.
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There's much debate within the precious metals industry regarding the alleged suppression, or at least manipulation to an extent, by either central banks or the proprietary trading divisions of large banks, or a combination of the two.
In April the US Commodity Futures Trading Commission (CFTC) fined hedge fund Moore Capital for manipulation of the New York platinum and palladium futures market, as the firm was found to be “banging the close,” which involves entering orders in a manner designed to inflate the closing price, which other various derivatives contracts could be based on. So that's irrefutable evidence that the precious metals futures market is, at least to some extent, being manipulated. However, a large concentration of this debate is based not on platinum and palladium, but on gold and silver, and particularly gold.
Numerous hypotheses have been put forward as to the motive behind alleged suppression of the gold, including a central bank conspiracy to keep gold prices low, large trading banks simply exploiting their market dominance for easy profits, and even a combination of the two with the central banks and large bullion trading operations working together in some kind of cartel to keep gold prices low.
This article doesn't intend to discuss the merits of these theories, however plausible or implausible various parties believe them to be. Instead I'll focus on finding out if a discrepancy exists and, if it does, can one take advantage of it and use it for profitable trading strategies.
Firstly I'd recommend an excellent article by Adrian Douglas, editor of Market Force Analysis and a GATA board member, entitled "Gold Market Is Not 'Fixed,' It’s Rigged,” which goes into great detail on the statistics behind the difference between how gold trades between the AM and PM fix, and how it trades from the PM to AM fix. The very fact that there appears to be a significant difference sets our alarm bells ringing. Whether gold trades in New York, London, Tokyo, or Timbuktu, gold is still gold and one would expect that it would trade in a similar fashion across these time frames over a long period of time.
If we take the change in the gold price from the AM to PM fix (intraday gold) and compare it to the change in the gold price from the PM to AM fix (overnight gold), we can see the startling difference between the two periods of trading.
I'll demonstrate this by showing what would have happened if one had theoretically invested in the intraday gold market from 2001 to present. Starting in 2001 with an indexed based at 100, the chart below shows what would have happened to that investment of 100 if it had been used to purchase gold at the AM fix and sell gold at the PM fix, replicating the daily percentage performance of gold in the intraday market.
As the chart above shows, the performance is dismal. For example, a hypothetical gold investment fund starting with $100 million in 2001, and using it to buy gold at the AM fix and sell it at the PM fix. would now be left with just $40 million, a 60% loss in just under 10 years. Over the same time period gold prices have risen more than 350%.
From this we can infer that it was in fact possible to make money shorting gold every day for the last decade. If a hedge fund were to have sold gold at the AM fix and covered that short position at the PM fix, for each day of this terrific bull market run in gold, that fund would have doubled its starting capital.
This appears to be a remarkable result, as one would presume that shorting gold every day during a period where the yellow metal has risen 350% would have devastated any portfolio, not caused a 107.5% increase.
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