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Investing in LIBOR Manipulation

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Written by Geoffrey Pike
Posted December 26, 2014

After the LIBOR scandal, where banks were fined billions of dollars for manipulating currency rates, the British government enacted laws to make it a criminal offense.

Now the British government is expanding the scope of these laws to include manipulation in currency, gold, silver, and oil markets.

This is to take effect on April 1 and will carry a penalty of up to seven years in jail for anyone convicted of manipulation, as interpreted under these laws.

Those of us looking for freer markets, however, should be cautious about cheering on these new laws.

First, it is always going to be open to interpretation as to what constitutes manipulation. It is not hard to imagine that politics will enter the decision making of government bureaucrats who decide who should be prosecuted and who should not.

The second thing we should also wonder is how a government agency is going to enforce laws against manipulation when it is the government in the first place that is either doing the manipulating or supporting the system that allows it to happen.

It is naïve to think that big banks are fully independent of the government and that the government carries no blame from the previous scandal.

This is about the equivalent of the Federal Reserve cracking down on counterfeiters. Why look in the mirror when you can point your finger at others for distraction?

Why would anyone depend on a government agency to crack down on manipulators when the government itself is the biggest manipulator of them all?

Manipulating Markets

While I believe there is certainly manipulation, even with varying definitions, I think some investors get carried away with using manipulation as an excuse for almost any market move.

When gold goes down, many gold investors and speculators will say that the gold price is being manipulated. But we didn’t hear much of this accusation when the price of gold went from $300 per ounce to briefly touch $1,900 per ounce in just over a decade.

Almost the opposite tends to be true for oil. There are a few investors and other special interests that are complaining about oil going down right now and that it is manipulation, particularly by OPEC.

But with oil, it is usually the opposite, and the complaining is by consumers. When oil was rising rapidly before the big recession hit in 2008, many people were complaining about manipulation by the big oil companies. Now that oil prices are falling like a rock, these same people are not accusing anyone of manipulation as the price heads down.

It is possible to have some manipulation in one direction, but the point is that it isn’t usually long term. The marketplace has a way of correcting these things.

If there is major manipulation in any of the commodity markets, we certainly shouldn’t expect the British government to correct these issues with new laws that will supposedly punish those doing the manipulating.

If anything is going to correct the situation, it will be government stepping out of the way and not enabling it, allowing the free market to correct these issues.

Central Bank Manipulators

If you want to look at the biggest manipulators on this planet, look no further than central bankers. You can’t get any more manipulation than from a central bank.

If you look at the United States, the Federal Reserve has a monopoly over the money supply. It can increase or decrease its balance sheet at any time by buying or selling assets, which is primarily government debt.

The Fed has approximately quintupled the adjusted monetary base since 2008, while keeping the overnight bank lending rate (also known as the federal funds rate) near zero. It has also been paying banks 0.25% interest on reserves held with the Fed.

In other words, the Fed is constantly manipulating the money supply and the interest rates, while bailing out banks and funding the federal government’s massive deficit spending.

This isn’t anything comparable to manipulating the price of a consumer good — even something as big as oil. Money is at least half of almost every transaction. To manipulate money is to manipulate the entire economic system.

Gold Manipulation

On top of this, central bankers can also manipulate the price of gold, if you want to call this manipulation. They can buy or sell gold, thus driving prices up or down.

But this is only what we know about. Some people in other countries are beginning to question whether the Federal Reserve is holding the gold it says it is. This is why we are seeing calls from several countries to repatriate their gold that is held in foreign central banks.

Since the gold supposedly held by the Fed is never audited, we don’t know what exists. Perhaps much of it has been sold, or perhaps much of it has been leased out. We really don’t know because there is no full audit of the gold. If this doesn’t count as manipulation, I don’t really know what would.

Gordon Brown sold off over half of England’s gold about 15 years ago when he was Chancellor of the Exchequer. I don’t know whether anyone would consider this manipulation, but it certainly drove the price down.

But this was a major gift for gold buyers at that time, who were able to buy gold for less than $300 per ounce right before a major bull run. For this boneheaded move, Gordon Brown eventually became Prime Minister of the United Kingdom.

Investing Based on Market Forces

With these new British laws that criminalize manipulation, we can be quite certain that they won’t include central bankers. We can also be certain that they won’t put an end to manipulation by central bankers, whether in gold or interest rates.

But we can be certain that, eventually, market forces win out. Now more so than ever, we live in a global economy.

If anyone is manipulating commodity markets, I just look at it as an opportunity to buy more of what I want. When Gordon Brown sold a huge chunk of England’s gold 15 years ago, the question isn’t whether or not he was manipulating markets or trying to drive down the price of gold — it is whether investors were smart enough to take advantage of the opportunity to buy gold at such a low price.

Market forces always win out in the end. If central banks keep creating massive amounts of new money out of thin air, then it won’t matter much what OPEC or bankers or government bureaucrats do. Commodities will eventually go up, if for no other reason than that the dollar and other fiat currencies will go down.

Until next time,

Geoffrey Pike for Wealth Daily

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