This Inanimate Object Performs Better than the ASX200

This Inanimate Object Performs Better than the ASX200

Nine years ago, I began writing about it. And the derision was intense.

Being called a ‘conspiracy theorist’ was a typical email. There were far more dramatic ones.

The story? Precious metals were being manipulated. Heavily.

Here’s some of what I wrote in the Daily Reckoning Australia at the time:

Precious metals trader Andrew Maguire informed the commodities trading regulator, the Commodities Futures Trading Commission (CFTC), that there was substantial manipulation of the metals market occurring on a regular basis. For example, he alleges that by purchasing Bear Stearns, JP Morgan had gained control of the precious metals market and was using this control to make significant profits. Other savvy metals traders caught on and simply hung on for the ride.

The CFTC didn’t seem particularly interested in his claims, so Maguire gave them several predictions, based on the manipulations that metals traders expected. Those predictions were completely accurate, but the CFTC simply stated that it was investigating, as it had previously done.

Imagine the police had an informer telling them that a rape would occur, when it would occur and who was going to be the perpetrator and the victim, but they merely watch it happen and then “investigate”. That is what the CFTC did.

Andrew Maguire was thoroughly annoyed at this point and went to GATA, the Gold Anti-Trust Action Committee. GATA has campaigned to expose such market manipulation for many years. The organisation is frequently ridiculed by the mainstream press. But with Maguire’s claims it is now apparently armed with the credible witness it needs.

Representatives from GATA appeared at a CFTC hearing, armed with their new whistle blower’s information, and promptly blew the commodity regulator’s committee out of the water. Unfortunately, the camera filming the testimony happened to break shortly before the GATA chairman began speaking. It began working again shortly after he had finished.

Andrew Maguire, the whistleblower, was recently subject to a hit and run traffic accident. All major media organisations have cancelled their scheduled interviews with GATA. The press is not covering the developments.

It has since emerged that the London Bullion Market trades on 100 to 1 leverage, meaning that for every ounce of real gold, there are 100 ounces of paper gold being traded. If, or when, people try to take delivery, there could be a dramatic shortage, leading to a huge spike in the gold price.

Over the years, examples of manipulation in just about every financial market asset price have hit the news. But not gold or silver…

‘Puking the gold market’

Lately, the conspiracy theory turned into criminal court cases. Now CNBC reports that:

Three J.P. Morgan precious metals traders charged as criminal probe continues.’

The few specifics that whistleblowers and conspiracy theorists pointed to nine years ago all feature in the case. JPMorgan, Bear Stearns, spoofing and plenty more.

If you read the Bloomberg story from last week, it’s remarkable how closely the case resembles Andrew Maguire’s allegations as I described them above nine years ago:

When JPMorgan Chase & Co. took over Bear Stearns more than a decade ago, it got two traders with a new trick.

Their strategy: Use multiple fake orders to manipulate the prices of precious metals futures. The maneuver, adopted by the traders’ new colleagues at JPMorgan, became part of a spoofing and rigging campaign so expansive that federal authorities have now likened it to a criminal enterprise operating inside the U.S.’s biggest bank.

In a criminal indictment unsealed on Monday, U.S. prosecutors accused three JPMorgan traders of rigging futures trades in precious metals for nearly a decade, making millions of dollars for the bank at the expense of counterparties that included the bank’s own clients.

The case resembles the type brought against criminal syndicates and the Mafia — federal racketeering. And it’s far from the first of its kind: ‘In the past five years, federal prosecutors have brought a total of 13 spoofing cases against 19 defendants.’ Investigators expect plenty more.

It took nine years for the conspiracy to be confirmed. But the real issue is what the gold market will look like after the dust settles.

It’s clear the manipulation is designed to keep the gold price low. They call it ‘puking the gold market’ — the opposite of spiking it. And trading paper gold contracts that are devoid of the physical market adds fake supply. If this sort of thing stops, what’ll happen to the gold price?

It could spike. Dramatically.

Useless rock outperforms

What’s amusing is how much gold prices rose, despite the manipulation.

In fact, it completely trounced the stock market.

Investopedia has the figures:

Over the past 15 years, the price of gold has increased by 315%, roughly the same as the 30-year return. Over the same period, the DJIA increased by 58% and the FBNDX [Fidelity Investment Grade Bond Fund] returned 127%,

Using the set gold price of $35 and the price of $1,390 per ounce on July 1, 2019, a price appreciation of approximately 3,500% can be deduced. Since August, 1971, the DJIA has appreciated in value by over 1,800% and the FBNDX returned over 2,100%.

This chart from Forbes shows the last 19 years, but before the recent spike:

Source: Forbes

In euro, it’s even funnier, with gold outpacing the European stock market index too:

Source: Eduardo Vinante, Twitter

For Aussies, it’s much the same. The ASX more than doubled so far this millennium. Gold more than quadrupled.

To be clear, an inanimate object — a lump of metal — has outperformed the almighty stock market…

How embarrassing for the financial intelligentsia.

Few ‘get’ it

But I doubt one in a thousand people are aware of all this. How many of us put money into precious metals? How many financial advisors recommend it? What’s the typical allocation of super funds to the best performing asset class?

In fact, most people simply don’t believe me when I tell them about gold’s performance.

When customs officials accosted me at Melbourne airport a few years ago, they certainly didn’t. The idea that a lump of metal was doing better than their super account simply wasn’t plausible.

They confiscated my gold and claimed I was going to sell it for ‘commercial purposes’. Which requires a whopping customs declaration, which costs hundreds of dollars to get done.

They kept asking me, ‘What are you going to do with it?

Erm, own it…

But what are you going to dooo with it?

Keep it as an investment…

Are you going to sell it?

Perhaps, in a few years…

And, bam, that was good enough for them. I was designated some sort of commercial gold dealer who hadn’t registered his wares.

As proof of their right to take my gold, they gave me a one-page guide. Their printer must’ve run out of paper though, because page two specified the exemptions, which applied to me, as I was holding the gold for personal use as an investment.

I got a written apology and spent a few hours of my time driving back and forth to the airport to sort it all out…

In other words, gold as a personal investment option may have left stocks for dead.

But it’s still not exactly well known or popular. In fact, people will do their very best to stop you.

And that means opportunities. My friend Shae Russell has dug out a few of them, and she’ll tell you more about that in the next few weeks.

Until next time,

Nick Hubble Signature

Nick Hubble,
For The Daily Reckoning Australia