This topic is so timely and so important, that we publish this special report in lieu of our normal weekly Supply and Demand Report.
After our recent article debunking manipulation, we got a phone call from a man whom we will call Jim Bailey (all names have been changed to protect the innocent and the guilty). Jim worked on the London gold desk at a major financial institution. He told us that a lot of what we said was spot on. However, he said in no uncertain terms that manipulation does occur. Here is Jim’s story, as related to us by phone on Friday.
It was seven years ago, today. Lord Horace Abernathy came into our office. I knew of Abernathy, of course, he was my boss’ boss’ boss. A power broker, his value to the bank was not so much in his managerial skills, but his connections in government. His seat in the House of Lords was invaluable.
He did not ask after the traders’ health, or make any other small talk. He is a Lord and traders are mere peasants. He just said, “Chancellor Osborne needs you to make silver go down.”
There was a long silence, as nearly a score of traders gaped at each other.
“Gold too, of course.”
The head trader, a man known only by his last name McKellar, looked like a hard man such as you might find drinking and fighting heavily in a pub in South London. He had a florid nose, and one ear perhaps resembled cauliflower. He kept a running tally of every gold forward throughout the trading day, and could calculate bid and offer on options spreads in his head in about a second.
He wasn’t having none o’ the Lord’s rubbish. “We haven’t got a Harry Potter wand to wave and just make them go down! Every tosser is buying right now. We could sell our whole prop position and it wouldn’t make a dent.”
Abernathy ignored McKellar and his uncouth language. “Well, what are you waiting for? I should not even need to tell you this, but Osborne personally wants gold and silver to go down. This big rise makes the government’s money look bad.”
McKellar just said, “OK, how do you expect us to do that?”
“How should I know? Press some buttons on those fancy terminals of yours! It’s not my responsibility to know how to trade. That’s why we pay you so much, because you do. Am I in error?”
“Oh, we know how to trade. My. Lord.” The sarcasm would have been obvious even to Abernathy. But he either did not hear it, or chose to ignore it.
“Splendid. You have a month to make your plans for silver, but I want to see it start to fall on May the first.”
“May 1 is a Sunday.”
“Very well. You have bought yourself an extra day. But I better see a big drop on May the second!”
McKellar was not the only one staring holes into Abernathy’s head.
“And gold too. But you have until August to get gold down. Silver first. Definitely silver before gold.”
“Why silver first? If I may be sold bold as to ask, my Lord?” This was from Robert Johnson, the assistant head trader.
“Very well. I should not be having to tell you. But I shall, nevertheless. HM Treasury wants to make this look realistic. Silver leads gold, and it went up more. The end of the bull market, and the start of another decade-long bear, should also start with silver.”
“You have your orders.” He made his exit with a grand flourish.
The price of silver dropped four dollars on May 2, 2011. Here is how Bailey told us that it went down.
“You heard him,” said McKellar. “Make silver go down. I am going to the pub for a drink!” and he stalked out. No one knew if he was buckling under the pressure, or if he suspected that we might be breaking the law and wanted to deny any knowledge of what we were about to do.
We got an intern to tape up large pieces of paper on the wall. And as we brainstormed ideas, he wrote each in a different color crayon. After a few hours, we had a goodly list:
- Publish bearish research reports
- Call all clients and urge them to sell
- Call the other banks and convince them to sell
- Find 10,000 tons of silver metal and sell it
- Sell the metal backing SLV, and buy it back and return it later after price falls
- Sell futures, naked
Just then, McKellar staggered back into the office, looking none too steady on his feet. But he fell into a chair and joined the discussion.
It was clear that we had to find a way to change the sentiment in the market. We were a big bank, but we did not have the power to move the market on our own. The challenge was that the market was a raging bull. We couldn’t stop it head-on. We would have to redirect it, like in judo.
A consensus developed that we could just do this.
McKellar took off his coat. Then he removed his tie. When he popped off his cufflinks, everyone in the room began to stare at him. He then took off his shirt.
Johnson asked, “McKellar, why are you disrobing?”
“Deedn’ w’ juush agree dat we weel sill da foohtures nakkid?”
“McKellar, why don’t you go home and sleep it off. Let’s start tomorrow morning, OK?”
But at that moment, the drunken man slumped in his chair, fast asleep.
The rest of us the team worked out the details of the bearish story, the trading plan, and put together call lists. It was quite elaborate, but it all hinged on the story. The story was a three-legged stool. Each piece, by itself, would not stand. But all three together, well it proved to be quite powerful.
One, argue that the bull market is endless, the dollar and pound are collapsing, the fundamentals of silver have never been stronger, that industry keeps consuming more of it (and will, no matter how expensive it gets), etc. There were two keys to this bit. First, make the narrative so extreme, so over the top, that it becomes the dominant narrative. We needed both silver bulls and everyone else to latch on to this story. Second, make it so obvious that professional traders could see through it. If the silver story really makes no sense, then that’s a problem wouldn’t you say?
Two, publish data showing how small investors are enamored of silver. Let it be known that every idiot is buying silver, expecting the obvious gains which are coming. Publicly, the story is that everyone is going into silver, the currencies are failing, etc. But circulate to institutional investors and to the other banks, that the rally is now being driven by retail. They would hear the hidden message: dumb money.
Three, find the right channels to begin circulating the old rubbish about manipulation. We need just the right amount of fear under the euphoria. We need the right parties to worry that the first big drop in price is when us banks are reasserting control. Their selling will help drive the market the other way.
It was brilliant, wasn’t it? Take over the story with something so bullish and so obviously bollocks that people have to question it. Let everyone know that the market is in the dumb money phase. And inject some fear of God into those quarters where it would be accepted.
The rest was pretty technical and boring. We needed to sell futures at the right times, to induce as many others to sell as possible. It started to work on April 25 and 26. But then retail bought the bloody dip! We started to plan for how we would report the losses we were starting to incur. There would be our management, accounting of course, and trading audit. We would also have to get it past the outside auditors. McKellar suggested he could take them for a few rounds of ale and darts at the Thirsty Lion, but no one went along with that.
Fortunately for us, Friday the 29th was the turning point. That day, we could feel victory was at hand. On Monday, we tasted it. Silver dropped four bucks. Within a month, the price was down $12.
With gold, we had one advantage and one disadvantage. On the plus side, silver had already crashed. The level of fear going into our gold manipulation was already heightened. On the negative, gold has a lot more liquidity. And our story wouldn’t quite work. Everyone knows that every retail customer in India and China buys gold. So we had to change the story a bit.
So we spiked it with a bit about the gold ETFs, especially GLD. Assets under management had rapidly grown from nothing in 2005 to well over 40 million ounces, or about $80 billion. This was retail with a capital R, dumb money with a capital D. This was the herd rushing in to the slaughterhouse, with a capital H. Imagine all those people buying GLD! What were they going to do with their shares?
Gold proved to be much harder. When silver crashed, we only got a $100 drop in gold. And then gold recovered and went on to higher highs. The price broke on August 23, but by the 26th it was rising again. On September 6, the bears—our wonderful herd of bears with a capital B—were wrestling for control. And winning, clearly, by the end of the month. Victory.
Abernathy graced us with his presence again.
“You men,” he began—we were all men on the gold desk. “You men have served your Queen, and God, and Britain well and Her Majesty is most pleased. You are heroes. Some of you may be criminally charged, and thrown in prison, if you committed any crimes in carrying out your orders. HM government, of course, will deny any involvement in such sordid and sorry stunts. And we will not defend you. However, other than that, you have our profound gratitude. Your excellent work has averted a greater disaster than you may know.”
“Do we get a bonus at least for our great work?” asked McKellar.
“A bonus? What, did you not make enough betting on the crash in your personal accounts!? You had the resources of one of the biggest financial institutions in the world at your disposal to engineer a crash. I would assume, being smart traders, that you would have profited handsomely from the crash that you knew was coming!”
We just stared at the floor. We didn’t know if this scheme could work. We were ordered to put the bank at risk, and besides they could just unlimber the printing press in the basement if they needed a few billion quid to bail themselves out. But risk our own hard-earned money? No thank you, my Lord. No one on the desk had risked his own money.
We have one postscript. Jim left the bank in late 2017, and brought his talents to the bitcoin market. After a brief stint and a spot of success there, he was looking for something bigger and more important. Jim moved to New York, and accepted a position trading stocks.