Manipulation marginal, not major, gold driver: Louis James

Jeff Clark: The London Bullion Market Association (LBMA) decided to do away with the 117-year-old silver fix process after allegations of manipulation and Deutsche Bank’s subsequent withdrawal as one of the constituents. That left only two banks on the panel, an insufficient number if they wanted to continue the tradition. A process is thus underway to determine a new daily benchmark price, which is important since many entities need an agreed-upon price for large transactions.

There are a number of entities jostling to be the provider of this valuable service, which is supposed to be decided this month. However, it shouldn’t impact the silver price itself, and in fact will probably be good for the industry. The process should be more transparent and efficient, and it will probably be electronic instead of by phone.

A potential glitch would be if there was a delay implementing the new program. The final fix in its current form is scheduled for August 14, and the industry will want to see a viable, state-of-the-art system in place well before that date. Some analysts think there will be a scramble to meet that deadline.

One factor in determining the likelihood of gold going this route could depend on the success of the new silver fix program. Gold has two “fixing” prices per day, so it would need to be equipped to handle twice the activity. But a more modern and automated system wouldn’t be a bad thing. It could also remove some of the doubt surrounding manipulation of the price.

Whatever the new system might be for silver, and whether or not gold goes a similar route, has no bearing on the reasons to invest in precious metals or our long-term bullish outlook. Gold and silver are money and a store of value, regardless of the process used to determine a daily benchmark price. So, no, we’re not worried about this.

Q: How does the recent revelation of Chinese loans being backed by nonexistent gold collateral impact the gold market?

Kevin Brekke, Managing Editor, World Money Analyst: Some gold bullion was used as collateral for multiple loans, whereas other bullion collateral has gone missing or never existed. The former will not likely have any impact on gold demand. The latter, however, could lead to gold purchases if the gold is needed to meet fabrication or other obligations.

Yet, as China is the world’s largest gold producer, and domestic production is not exported, any bullion purchases will likely be filled within the country and have no impact on the global stocks of the metal or supply/demand dynamics.

The bigger issue here is that of stewardship and the critical importance of the custodian. All gold-backed ETFs rely on a custodian for the safekeeping of the bullion. As the Casey Metals Team has consistently advised, knowing who acts as custodian, and understanding its history and reputation, is vital before investing in these products. Caveat emptor is the name of the game.

Q: If the stock market crashes, will gold crash too? What about gold stocks?

Jeff Clark: Some gold investors worry that if the stock market falls, so will gold. It’s understandable; in a major market crash, everything gets hit, at least for a time. When the market crashed in October 2008, gold dropped by a third—before rebounding and ending the year up.

We’ve measured every decline of 10% or greater in the S&P since 1975—the year gold again became legal to own in the US—and tracked the performance of both gold and gold stocks during those declines (we used the broader S&P 500 Index rather than the narrow, 30-stock Dow Jones Index). The data might surprise you…

The results show that big declines in the broader stock market do not always see gold drop as well. In fact, gold fell in only five of the S&P’s 16 declines of 10% or more, four of which occurred either during an existing bear market in precious metals or after the blow-off top in 1980. Gold rose in the 11 other episodes.

This outcome makes sense. A big drop in the stock market usually reflects trouble in some part of the economy or the world, which is good for gold, as a “safe haven” asset. This suggests that a decline in the stock market is not necessarily something to fear.

Gold stocks are a different story; they tend to follow steep downtrends in the equity markets. Of the 16 declines in the S&P, gold stocks tagged along in 11 of them. However, in smaller declines or flat markets, gold stocks were more likely to follow gold.

Many metals investors believe that bad economic news going forward will be negative for the stock market. If that turns out to be the case, history says gold should do well. But if the market surprises us and goes higher, that could mean the economy has improved—which would lead to higher inflation. I think you know what gold would do in a rising inflationary environment. And gold stocks would explode higher in that scenario. Could be a win-win for us.

Another factor to keep in mind is the time. Even if Doug Casey is right, and there is a major stock market crash on the way, it may or may not happen this year, or even the next. Meanwhile, there’s plenty of money to be made—money we can’t make sitting on the sidelines.

Fundamentally, though, we don’t base our buy and sell decisions for gold on what we think the stock market might do. Gold is an alternative currency, a hard-money hedge against the massive currency abuse that still continues five years after the financial crisis hit in 2008. And the money that has been printed has yet to filter its way through our economy. That makes gold a must-own asset right now, regardless of your outlook for the stock market.

Q: You guys don’t talk much about manipulation of precious metals. Why?

Louis James, Casey Research Senior Metals Investment Strategist: It’s not because we don’t think it’s an important topic, but, to whatever degree it exists today, it is a marginal, not fundamental, driver in the gold market.

Consider that the most famous gold price manipulation in history was the Roman debasement of its coinage. Yet even with their supreme power over life and death, Roman emperors could not suspend the laws of economics, nor command the market to value what it did not.

Also, smart minds don’t always agree on this topic. We view this as an advantage for the reader: they can listen to different viewpoints and make their own decisions on the subject. That said, I think it’s fair to say that most of us agree gold is manipulated to some degree (the disagreement begins as to whether it’s done at the behest of a government agency). The gold market is small enough that deep-pocketed traders can easily push prices around as they wish, and it seems pretty clear that this does happen often.

Bottom line: When the people finally see that the US dollar has no clothes, neither lies nor laws will save it, and gold will be revealed (again) for what it truly is: the best form of money ever invented. This makes any negative distortions created by manipulators buying opportunities—for those with patience and discipline.

Q: Speculation has surfaced that “secret” Swiss vaults have held down the platinum price. Any truth to this?

Kevin Brekke: In the post-UBS tax scandal world, Switzerland has become a convenient scapegoat for “answers.” And a recent report played the Swiss card with its speculation about the price of platinum. The report claimed that “secret Swiss vaults” were the source of platinum being released into the market to suppress the metal’s possible price rise during the recent South Africa mine strikes that dramatically curtailed production.

A specific “vault” was targeted, but it is far from secretive. The facility is a bonded warehouse in the free zone near the Zurich Airport. Goods can be stored as “in-transit” merchandise, meaning they are not considered as imported into Switzerland. And although amounts held in transit and ownership data might be difficult to obtain or be unavailable, this is a legitimate and legal practice used in scores of other countries around the world.

Switzerland is one of the (if not the) world’s top locations for high-value metal storage, and it’s self-evident that platinum would be stored there. As such, it seems more than reasonable and plausible that certain players could be filling the platinum supply gap from private stocks. It should not be a surprise that the metal would be stockpiled ahead of an anticipated strike. And because the locations and/or owners of the metal supposedly being tapped cannot be identified does not translate to clandestine activity. No cloaks, no daggers.

Q: Why do you recommend the Hard Assets Alliance over other accumulation programs like SilverSaver?

Jeff Clark: There really aren’t that many quality accumulation plans for the precious metals sector, and these are definitely the two best. The attraction is that you can buy gold and/or silver automatically every month (or even weekly with SilverSaver), which is very convenient for those paid on a regular schedule. And denominating a portion of your savings in hard assets is a must in the current monetary environment.

I have an account at SilverSaver and so do others at Casey Research, as it has many attractive features. But the MetalStream program at HAA has one distinct advantage: international storage. This allows you to kill two birds with one stone: buy metal within your budget and diversify internationally. SilverSaver stores in Delaware (only), while MetalStream offers facilities in Salt Lake City and Singapore. If you don’t have any assets stored outside the US or Canada, this is an easy and inexpensive way to do it. (Existing subscribers can see our detailed comparison of the two programs here.)

Q: I’m new to precious metals. If gold and silver prices are controlled by the government, then why do I want to buy them?

Bud Conrad, Casey Research Chief Economist: I’ve wondered about the potential for important authorities to affect gold’s price for a while. Unfortunately, this important question does not have a clear, easy answer. I agree with Doug Casey that whatever manipulation there is won’t overcome the fundamentals in the long run. Gold itself can’t be manipulated, as it is just an element of the earth’s crust; what is manipulated is the price, and that is partly from manipulating the dollar and paper gold markets.

We need to separate the different kinds of manipulation, as each of them individually has limits and won’t overcome the eventual destruction of the dollar (not gold). Forward mine sales (hedging) as facilitated by bullion banks are in decline. Futures markets are still dominated by big banks that can deliver gold, but their position is less than it was because JPM and Deutsche Bank involvement has lessened.

Central banks tried to effectively contain the gold price by adding fear as well as adding gold to the market in the late 1990s, but that has stopped. Central bank gold leasing seems to be no longer increasing as they may have leased all they can, and some central banks are buying while others are trying to get their gold back from storage with the Fed.

One speculation is that the GLD ETF doesn’t have its gold and has been used as a vehicle to collect gold for eventual shipment to China. This would be hard to prove, but the reported decline in inventory has stopped. The big gyrations with huge orders at the COMEX seem to continue, but their actions should be more closely scrutinized as high-frequency trading and other scams are being discussed.

The most important incentives for manipulation have to come from the central bankers because they don’t want their paper currencies to look weak—but they aren’t going to tell what they are doing behind the scenes, which may include lax regulation, as in huge trades that exceed limits.

Keeping my eye on the prize of long-term prospects for any fiat currency vs. physical assets like gold keeps me invested, even as the schemes of the paper manipulators are revealed and added together. I am confident of the end point, if not all the steps in between.

Q: Do the companies you recommend pay for the coverage?

Louis James: No. Our recommendations are not for sale at any price. There are a few banner ads and similar advertisements on our website, but these are available regardless of Casey coverage. Conference sponsorship is by invitation only, and invitations are extended only to companies we already cover, usually months or years after we initiate coverage (and many companies we cover have never sponsored one of our conferences). There have even been times when a company sponsoring a table at a conference was sold from our portfolio, regardless of their sponsorship, because selling was the right thing for our readers to do.

Q: How many more junior miners do you think will go bankrupt before the market sees a real revival? And how many will be left at the end?

Louis James: In my view, it’d be a good thing if there were a massive wave of bankruptcies in the junior mining/exploration sector; it would clear the deck of a lot of junk, and make our jobs easier as investors. Alas, despite the drastic reduction of liquidity available to juniors over the last three years, there have been very few actual bankruptcies. How do they keep the lights on? Many don’t; the company becomes a CEP, CFO, COO, and dishwasher all in one person, working from home.

What we’ve seen more of, however, is juniors merging to combine assets and cash, in a hope to keep the ball moving forward. This is not necessarily a bad thing, and it beats bankruptcy for existing shareholders. However, one must watch out for companies with new names and the same old projects and serially unsuccessful management.

In short, despite the grinder we’ve been through the last couple years, due diligence is as important as ever, with People being the first “P” of Doug Casey’s famous 8Ps of Resource Stock Evaluation.

We have more “answers” in the recently released issue of BIG GOLD. Our July issue focuses solely on silver, and includes two discounts on bullion, along with the only silver producer we think qualifies as a current Best Buy. Check out what your silver portfolio could be worth from bullion purchased at today’s prices. This issue alone can pay for your subscription.