The Pure Gold Company

For anyone investing in the stock market or other financial instrument, there is an expectation that the process is underpinned by regulation and the collective security of millions of other investors. And it’s true that billions of pounds change hands daily through trades in commodities, shares or financial instruments with no instances of foul play…until another market manipulation scandal hits the headlines and trust is ruptured again.

The Libor scandal, Forex market fixing, silver shorts, gold manipulation and insider dealing –  are private investors just collateral damage in a giant game of manipulation? Is it safe to go into the investment waters? Recent headlines about small traders pushing up the price of shares in US company Gamestop have reignited the debate. While this instance may not have affected most people, manipulation of Libor, Forex or commodities could have a direct or indirect effect on many more people. So what is happening?                                                                             

Stock manipulation – the Gamestop saga

US video-game and console retailer Gamestop was faring badly during the pandemic, with lockdowns compounding the structural trend towards downloads and online purchases. Several Wall Street hedge funds had taken short positions on the stock, betting the price would decline further. If it did they stood to make money, if the shares went up they would lose money.

Into this fairly standard stock market instrument was thrown social media. On discussion board Reddit, in the 2 million-strong Wallstreetbets Group, talk turned to thwarting  hedge funds’ plans to turn a profit when stocks decline. They did this by buying up those stocks and pushing up the prices so that the funds lost money. The group targeted Gamestop, Cinema-chain AMC Entertainment and former phone maker turned device security provider Blackberry, encouraging retail investors to buy the stocks. 

Gamestop price hike

In less than a week, the price of Gamestop rose tenfold after a virtuous (or vicious) circle of media interest, increased publicity and more small investors piling into the stock. At one point, popular day trading platform Robinhood had to suspend share trading in Gamestop because it couldn’t underwrite the huge volume of trades.

A month later the shares have fallen back to previous sluggish levels and the furore is just a conversation piece on corporate Zoom meetings. Lots of people lost and made a lot of money, but was it actually manipulation? Day traders who ‘took up arms’ against short-positioned hedge funds were prepared to put their money where their morals were and should be prepared to make or lose money like everyone else who plays the stock market.

The rise in power of small retail investors

Is the fact that the internet galvanised an army of small retail investors more manipulative than the hedge funds whose short positions play on the misfortune of others? Perhaps more importantly for retail investors, when the popular Robinhood platform froze trading in the stock because it didn’t meet the liquidity requirements to legally manage that volume of trading, this impacted investors’ ability to cash in or out of a stock. Stock markets are a common and for the most part manipulation-free platform, but buyers should always be aware of the risks in any investment. After Gamestop, the Reddit message-board turned their attention to silver, a commodity that has a long history of manipulation complaints.

Gold and silver price manipulation

The commodities markets have been accused of manipulation for years. The prevailing theory is that market forces are conspiring to keep prices low. For gold, in particular, the yellow metal’s inverse relationship with the dollar is used as motivation for the ‘powers that be’ to keep the price low in order to stabilise or strengthen the dollar. Silver theories centre around large banks holding short positions in silver and managing, through dint of sheer size and market power, to depress the price. 

Fact or fiction?

The truth is probably far more prosaic than a global conspiracy. Even if a malign influence was to push the price down, market forces being what they are, low prices would attract more buyers and the price would correct. So it is possible to manipulate the market but not for an extended period. The fluctuations in silver and gold prices seem to bear this out, and gold’s inexorable rise over the last five years would also appear to deflate this theory.

What is market spoofing?

That said, there are many ways to manipulate markets. Spoofing is where bids or offers to buy or sell are placed but then cancelled before they are filled, to move the price in the direction that benefits the trader. The silver market has been at the centre of several lawsuits that allege spoofing, and only last year US bank JP Morgan settled a lawsuit that accused them of manipulating the precious metals market in this way.

But it’s not easy to prove. A 2010 lawsuit against JP Morgan and HSBC wended its way through the courts for several years. HSBC was dropped from the suit, and JP Morgan ultimately won a dismissal in 2013 and an appeal a year later. The court found that the investors who brought the lawsuit failed to prove that JP Morgan had manipulated silver prices at their expense even though the bank’s position would have enabled them to if they had been so minded.

A Reddit revolution?

The same Reddit social media thread that impelled Gamestop to new heights in January turned its attention to silver on the basis that it was a highly shorted commodity and a surge would upend institutional investors with dangerously large short bets. Thousands of small investors piling into the white metal did push the price up 12% to an eight-year high around $30 per ounce, but silver is a very liquid market and the spike was short-lived so silver was quickly back to ‘pre-Reddit’ levels.

Can we trust the markets?

Large banks and institutional investors have substantial power inherent in their market hegemony. They have been accused of influencing foreign exchange prices, commodities and even interest rates, with varying degrees of legal success and redress. For retail investors with long-term assets, the impact should be relatively immaterial if the forces of demand and supply move the value in a rational direction. But it doesn’t garner trust in institutions to know that exchange rates or lending rates can be dishonestly exploited. But does the galvanisation of a group, in this case on social media, actually constitute manipulation? The shares were available to buy and the investors chose to act on the advice of an internet forum and make the trade. The fact that a lot of them did so, and it pushed the prices up, could be seen as a show of force but not necessarily manipulation. Short sharp spikes in silver prices as evidenced in January, shouldn’t ultimately affect a balanced long-term portfolio.

Physical metals can’t decline to zero

Importantly, commodities like gold and silver are tangible assets. Where Gamestop shares may one day slide into near worthlessness, a gold or silver coin or bar will retain at least its inherent ounces of value. Both precious metals have been a store of value for centuries and were used as currency long before the money we know today. Where currency values or stocks may fall to zero, gold and silver will remain a valuable tangible asset that is a safe-haven addition to any balanced portfolio.

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