Smoking-Gun Evidence for Manupulation of the Gold and Silver Markets

Market Force Analysis

More Forensic Evidence of Gold & Silver Price Manipulation

By Adrian Douglas

In two recent articles "The Gold Market is not "Fixed", it's Rigged" and “The Failure of the Second London Gold Pool”. I showed how the gold trading between the London AM Fix and the PM Fix was unnaturally related in an inverse way to the trading between the PM Fix and the following AM Fix. I calculated that the probability of such a counter-intuitive correlation existing by happenstance was one in 2.6 times ten raised to the power 31. This is almost irrefutable evidence that some one is continually and deliberately dumping gold into the PM Fix to suppress the price of gold.

In this article I have unearthed even more forensic evidence in the form of a correlation between the gold and the silver price which again could not happen by random chance. It is necessarily a result of deliberate market intervention and what’s more it occurs on a continuous basis.

The fundamentals that drive the supply and demand of any commodity are so different from one commodity to a next that we would not expect there to be any mathematical relationship between their prices. For example let’s consider gold and copper. 

Figure 1 Cross-plot of Copper versus Gold 2001-2010

 They are both metals but that is where the similarity ends. Copper is used in many industrial applications for its superb electrical conductivity properties but also it is used for water piping because it is non-toxic, durable and corrosion resistant. Gold on the other hand has almost no industrial uses and is used for storing wealth as an investment and in jewelry fabrication. One would expect that there would be no long term correlation between the price of copper and the price of gold.
Figure 1 shows a cross-plot of gold and copper prices from 2001 to 2010. It can be seen that there is no discernible mathematical relationship between the prices of these two metals. The cross-plot of prices looks like someone randomly fired a machine gun at the chart.

Gold and silver are also two metals that have very different supply and demand fundamentals. Only about 10% of mine supply of silver is used for investment purposes while 90% is used in industrial processes from photography, electrical soldering and wiring to batteries and medical applications. One would expect that like copper there would be no particular relationship between gold and silver. 

Figure 2 Cross-plot of Silver versus Gold 2003-2008

Figure 2 shows a cross-plot of silver versus gold from June 2003 to September 2008. This chart is absolutely shocking. It shows that gold and silver prices are almost perfectly correlated with an R squared value of 0.96 (1.0 is a perfect correlation). The best fit line to the data gives the relationship that

POS= 2.23*POG – 253…….…eq(1)

This means that silver prices in this five year period did not move with respect to the very different fundamentals of silver; they were entirely determined by the price of gold! If I had been on a desert island between 2003 and 2008 you could have called me on the phone and told me the price of gold and I could have told you what the price of silver would have been on that day. Let’s demonstrate it.

Let’s take today (September 21) back in 2006. The price of gold was $582.2. From the equation the silver price should be 1045 cents/oz. It was actually 1083 cents/oz so the synthetic price calculation based only on the gold price agrees within 3.5%. 

Figure 3 Cross-plot of Silver versus Gold 2008-2010

Figure 3 shows a similar cross-plot but this time the data is from September 2008 to September 2010. It can be seen that yet again there is almost a perfect correlation between the price of gold and the price of silver. In this case the relationship is given by

POS= 1.92*POG – 431…………..eq (2)

Figure 4 shows the data set from June 2003 to September 2010 on the same chart. The two distinct correlations are shown with the black and green lines. 

Figure 4 Cross-plot of Silver versus Gold 2003-2010

 I have already demonstrated in previous articles that the price of gold is suppressed. What this chart demonstrates is that not only is the price of silver manipulated and suppressed but it is done so almost perfectly algorithmically. What can also be deduced is that the price of silver was creating a problem to the manipulators in 2008 so they hammered it down and subsequently instigated a much more aggressive suppression on the price of silver. This can be seen from the fact that since 2008 the correlating line (green line) is below the pre-2008 relationship (black line) and also sports a lower slope. Had the same pre-2008 algorithm been maintained until today the low for silver in 2008 would have been $14/oz and the price today (9/21/2010) with gold at $1288/oz would be $26.19/oz when it is only $20.90/oz.

In figure 5 the two equations eq(1) and eq(2) have been used to generate a synthetic price of silver from June 2003 to September 2010. This is the red curve on the chart. This curve is only derived from the price of gold and the correlation equation. There is no input of the price of silver. The real price of silver is charted for comparison and is shown in blue. What is really astounding is that one can generate almost a perfect reproduction of the price of silver by only knowing the price of gold. This is again “smoking gun” forensic evidence that the price of silver is not only manipulated but is done so algorithmically.

Such a perfect relationship with gold could not happen over a seven year period by pure happenstance. The silver price is completely false and has absolutely nothing to do with the fundamentals of silver. 

Figure 5 Real & Synthetic Price of Silver 2003-2010

In figure 6 the price of gold and the correlation equations have been used to generate a synthetic gold to silver ratio from June 2003 to September 2010 which is shown in red. The actual gold/silver ratio is also shown. It can be seen that the two data sets match very well. This shows that the ratio only depends on the gold price because this is the only information that was used to generate the red curve. 

Figure 6 Real & Synthetic Gold/Silver Ratio 2003-2010

This is simply an outrage. The bad news is that for the last seven years those who have been expecting silver to outperform gold or to march to its own drum have been sorely disappointed and it was hard wired into the trading that they were not going to see a freely traded silver market. The good news is that from the way silver has traded in recent days it is decoupling from gold. It is breaking the algorithmic shackles placed on it by the manipulators. There is not enough data to see this definitively in the cross-plots yet but it should be evident very soon. The artificially low price that has resulted from the creation of false supply through the sale of paper silver via unallocated accounts as a substitute for real bullion has led to a growing shortage. This monumental scam is in the process of becoming unraveled as investors insist on taking delivery of real silver.

Forward sales of silver through the LBMA OTC London market are approximately 8.5 Billion ozs. This is almost all the entire global reserves of silver that are yet to be mined! But the silver miners who own the remaining reserves are unhedged, so who ever has sold 8.5 billion ozs of silver forward by inference does not own 8.5 billion ozs of silver. It is a naked short position of 11 years of global production.

The interesting question is what will the free market price of silver be? Gold itself is suppressed by many multiples of the current price and the false silver price is just a derivative of a false gold price. I have previously estimated that there is only one ounce of gold for every 45 ozs that have been sold. If a similar relationship exists in silver than the eventual long term free market price target could be more than $900/oz. This is just a wild estimate but I think it is safe to say it will be many multiples of the current outrageously suppressed price of $20.9/oz.

Adrian Douglas
Editor of Market Force Analysis
Board Member of GATA

September 21, 2010
www.marketforceanalysis.com
Market Force Analysis is a unique analysis method which provides reliable indications of market turning points and when is a good time to enter, take some profits or exit a market. Subscribers receive bi-weekly bulletins on the markets to which they subscribe.