Wednesday, July 2, 2014

How to Prevent the Manipulation in Gold and Silver

There is a practical way to eliminate the manipulation of gold and silver prices. It is to require that anyone selling short any derivatives contract that provides for the delivery of physical metal must meet margin requirements by having physical silver in a vault, and further that the margin requirement be reasonably high to control the fractional-reserve leveraging.

This step would prevent price manipulations like the one where Barclays Bank was caught and fined. Traders, whether acting for their bank’s account or as agents for government central planners, would no longer be able to conjure up out of thin air London good delivery bars in an attempt to force gold and silver prices lower by making believe that they have physical gold available for sale when in fact they don’t. A reasonably high margin requirement in terms of physical metal imposed on short sellers of physical metal would move price discovery in gold and silver back to where it should be based, which is the market for physical metal and not the derivatives market.

My recommendation is that a 50-percent margin requirement be imposed on short sellers of contracts of physical metal. So if someone sells short a contract obligating the delivery of physical metal, the short-seller needs to prove that he has at least 1 ounce of silver in a vault for every 2 ounces sold short.

This measure will reduce the fractional-reserve aspect of precious metal trading to a reasonable level from the 100-to-1 level, which some market participants have stated is the present ratio of paper commitments to actual physical metal available. Not only will reasonable margin requirements reduce the opportunity to manipulate gold and silver prices with derivatives, it will also offer the added benefit of lowering the possibility of systemic risk like what occurred in 2008.

Now here’s the important point. Fractional-reserve systems are not only fraudulent because of the inability to deliver all commitments; they are also inherently unstable and come with incalculable risks. For this reason I therefore always recommend avoiding paper products, and owning only physical gold and physical silver. When you own physical metal, you are going to be safe when the next 2008-like systemic collapse arrives.”

- James Turk via King World News


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