Against the backdrop of fiscal mismanagement, political incompetence, and failed austerity measures, the world’s biggest traders have all bet heavily on gold. Lately, they’ve been pulling out all the stops to get what they want while laughing all the way to bigger bonuses.
Today, I want to talk about who “they” are and share a few tricks you can use to capitalize on their actions without being taken to the poorhouse.
Let’s begin with the concept of manipulation itself.
In order to understand the players, you have to understand their motivations. You’d think it’s all about profit, but that’s not entirely true.
How the Big Players Move the Market
The financial markets are like a football game in that there is a constant flow of energy between participants. Sometimes the game gets very aggressive, leading to smash and bash tactics intended to crush the opposing “team.”
Other times, the game is much more subtle, with all kinds of complicated feints and patterns being run to wear down the other side to the point where they make mistakes.
Neither changes the objective — which is, of course, to win.
Traders, especially the big ones acting on behalf of mega hedge funds, large-scale private funds, institutions, and various central banks, do the same thing. They attack the markets with all the ferocity of a top-tier coach orchestrating the most effective combination of plays and players in an all-out effort to win the game that literally starts each day when the opening bell goes off.
If they want to push prices higher, they can work to build momentum to the point where computerized arbitrage programs kick in with “buys” of their own. If they’ve had enough, they can quietly begin selling into strength, hoping to slip out the back door as the new partygoers are enticed in the front.
If they want prices to move lower, they can simply walk away from the “bid,” a tactic used with amazing success and alarming regularity. Absent consistent buying, sellers have no choice but to lower their “ask”…until the buyers come back.
Or, perhaps they will even try to move the markets with a few well-placed comments in the cyber-ether.
Television host and former hedge fund manager Jim Cramer talked explicitly about how this is done on The Daily Show with Jon Stewart during a stunning March 12, 2009 interview, which referenced earlier footage from a December 22, 2006 interview he did with Daily Ticker host Aaron Task.
During this now-infamous appearance, Cramer noted that he’d encourage anyone who’s in the hedge fund business to do it because it’s “legal and it’s a very quick way to make money. And very satisfying.”
He also told Task that while it’s illegal to create an impression that a stock’s down all by yourself, “you do it anyway because the SEC doesn’t understand it.” And you do it in such a way that you get the story-hungry media to do your dirty work for you, making prices move accordingly.
More commonly though, bigger firms like JPMorgan, Goldman Sachs, PIMCO or any of a dozen other behemoths will simply release a “research report” that is interpreted as gospel by the mainstream media and swallowed hook, line, and sinker by millions of unsuspecting investors as a reason to buy or sell.
Guess Who the Target Is
This allows mega-traders to engage a far wider audience–the retail investor. That, of course, is exactly what traders want to see, because it gives them the ability to buy or sell to the last incremental counterparty for maximum gains…right before they move the asset of choice completely in the other direction.
I think that’s the case with gold right now. Of course, it’s also the case with the S&P 500, which is moving higher despite overwhelming structural and fundamental economic problems — but that’s a related story for another time. “Manipulation” works in both directions, especially when it’s being orchestrated by the Fed and other central banks in the name of political expediency.
Goldman Sachs, for example, recently released a report suggesting that gold’s 12-year bull market run is over and that prices as low as $1,450/oz. are ahead. I’d bet dimes to dollars there’s at least one in-house Goldman trading desk that’s shorted the you-know-what out of gold. Goldman is well known for trading directly against the interests of its clients and has reportedly done so on everything from Greek debt swaps to the Facebook IPO to Chinese companies.
Bigger private traders like George Soros and Louis Bacon Moore are far more subtle, but that doesn’t mean they’re not playing the same game. What makes them different, though, is the scale of their actions.
With billions at their disposal, these guys have no need to engage retail investors directly; instead, they look to capitalize on the disarray created by other trading firms and their prey.
In other words, they’ve learned to “read” the game.
Soros, who famously “broke the Bank of England” in 1992 to the tune of more than a billion dollars in profit, is the ultimate example. He knows exactly what “plays” to call based on a combination of personal knowledge, careful study, and gut feel built up over decades — not to mention billions of dollars’ worth of success.
Here’s What to Do About It
If you’re about to give up hope — don’t.
Believe it or not, as a retail investor you’ve got several advantages the bigger players don’t:
- Big traders have to move money; it’s their job. This means they have to keep things in motion every day whether they want to or not. They can’t afford to sit on the sidelines. On the other hand, I haven’t met a retail investor yet who can’t afford to take a breather every now and then.
- Big traders move size. That means you can see them coming a mile away, especially if you are familiar with volumetric analysis. With billions in their portfolios, they simply can’t pick up a few million shares at a whack; that’s why volume tends to increase just prior to important market turning points. They have to move carefully or their actions will work against them. This is why Bruno “the whale” Iksil of JPMorgan got into such trouble. Once other traders learned that he was in deep kim chee, they circled like sharks sensing blood in the water and turned on him by making it very difficult to unwind his positions without a great deal of financial pain.
- Big traders, for all their sophistication, typically have very limited attention spans. This means they will move from one asset class to another much more frequently than typical individual investors. Individual investors, on the other hand, can be more patient and long-term oriented, especially if they have a disciplined plan like the 50-40-10 Strategy I advocate in our sister publication, The Money Map Report.
And, finally, remember that you’ve got simple, effective tactics at your disposal that can counter seemingly overwhelming odds – manipulation or not:
1) “Go with the flow” by selling into strength and buying during periods of weakness. This is counter-intuitive, so it takes a lot of guts and discipline, but it’s worth it. Doing so not only helps minimize risk, but it aligns you and, more importantly your money,with the biggest traders rather than against them. Under the circumstances with gold prices now 10% off its $1,750 peak, I’d be buying.
2) Buy and sell over time, not all at once. One of the simplest ways to do this is simply to split your capital into chunks and invest on the first day of each month. It’s a little more work than just hitting the buy or sell button one time, but given what dollar cost averaging makes possible, I think it’s worth it, especially when you consider the big boys do the same thing for exactly the same reason.
3) Pay attention to the fundamentals. The most successful traders of our time are finely tuned to the world around us and they don’t get distracted by aberrations, even if they’re the ones creating them. Stick to the facts: Fiat currencies are failing, the world’s central banks are buying more gold than they ever have in history, and the world stands on the brink of a 1930s-style currency war. In the long run all three are incredibly bullish influences for gold prices.
4) Use trailing stops. You never want to be in a position where you are second guessing the markets or the big traders who move them. Instead, use trailing stops to pre-identify both profit targets and loss management – just about every online broker offers them these days so there’s no excuse for not using them. More sophisticated investors can use put options to accomplish the same thing.
And at the end of the day, remember, it doesn’t matter who is manipulating gold (or any other asset class for that matter) as long as you can profit from it.
Related Tickers: SPDR Gold Trust (NYSEARCA:GLD), iShares Gold Trust (NYSEARCA:IAU).