Peter Schiff

We can't ignore it anymore - the markets are rigged. The LIBOR scandal broke almost two years ago, and the banks found responsible for manipulating that key index are still dealing with lawsuits. Meanwhile, allegations of gold market manipulation have been simmering for over a decade and grew into an inferno after the spot price dropped dramatically last spring.

Yet I'm left wondering what the conspiracy theorists hope to accomplish. Yes, I believe in exposing truth for its own sake and that the individual investor should have the same opportunities in the marketplace as the big institutions. But with these conspiracists, there is often a subtext of, "Because the price is suppressed, buying gold is for suckers." I think this conclusion is precisely wrong.

Even if banks and governments are manipulating the day-to-day price of gold, the metal's long-term fundamentals are stronger than ever. In fact, the reasons for them to suppress the gold price are the same reasons for us to buy gold in the first place.

Let's examine what large institutions may be doing to the gold price and how that affects the long-term gold investor.

Flash Crashes

There are two prominent suspected methods of gold price manipulation. The first is through massive short-selling of COMEX gold futures in the United States. Paul Craig Roberts, former Assistant Secretary of the Treasury under Reagan, is perhaps the best-respected voice calling attention to this controversy.

Roberts argues that large banks, like JP Morgan and Goldman Sachs, wait for periods of low activity in the gold futures market to sell large quantities of futures contracts. This selling drives down the actual spot price of gold, which in turn scares away weak longs and encourages other short-sellers to join in on the action.

These "mini-flash crashes," as they've come to be known, allegedly knock gold down a peg or two right when it is primed for a rally - thereby stealing its momentum. More importantly, Roberts claims, these flash crashes provide support for the US dollar when it looks weak.

The most recent example is a series of mini-flash crashes in March, when the US Dollar Index dropped below the key level of 80. Gold was steadily rising towards $1,400, but after the attack, began falling again. Sure enough, the Dollar Index recovered above 80.

The Foggy London Fix


Peter Schiff

An expert on money, economic theory, and international investing, Peter is a highly recommended broker by many leading financial newsletters and investment advisory services. He is also a contributing commentator for Newsweek International and served as an economic advisor to the 2008 Ron Paul presidential campaign.