Here's a quote from a floor trader on the Chicago Mercantile Exchange, expressing the growing irritation of himself and his colleagues at the "market action". The comment was made on June 16.
"The entire S&P price action in the futures is being controlled by one counter party. All the guys hate them. Their CME clearing number is 990N and they clear through Gelbel trading. That one account is solely responsible for the current level of the S&P. They are the ones that are throwing the S&P up overnight."
"Then they are the ones that are sitting on the bid all day long, supporting the market action. The S&P pits have been decimated, absolutely ruined. There is no volatility, so all the traders have left. Now the hot pit is the Eurodollar pit. Go figure, that used to be like watching paint dry. All the traders I have talked to view the market as being rigged."
"Intervention at its finest, your tax dollars at work, providing the ultimate tax to us all."
Now, here's a quote from the British Bank Barclays - a new addition to the group of banks which establish the London AM and PM Gold "Fixes":
" ...it is time to play gold from the short side at least until the market view of inflation threat is raised. Gold won't benefit from its perceived role as an inflation hedge until the US consumer price index rises above 4.0%."
Piquant, isn't it? The traders of stock futures are getting all hot under the collar about their markets being "rigged" while the boys who "fix" the Gold price are calling Gold a "short" until the US CPI rises above 4.0%. Someone should have told the gentleman from Barclays that the latest official figures show US consumer prices rising at a 4.4% annualised rate in the four months to April 2004. It is a safe bet that the level over the six weeks since the end of April will show still bigger US consumer price increases.
When was the last time you heard any floor trader on the Chicago Mercantile exchange (or for that matter on the NYSE) complain about the Fed "rigging" interest rates or about the Treasury "rigging" official government deficit figures or about government statisticians "rigging" almost every economic number that comes out of Washington? Nope, we haven't heard any such complaints either.
What we have, and what we have had for decades all over the world, is interventionist governments running fiat currencies while priding themselves on their stewardship of "market" economies. MARKET economies? It is to laugh. With the partial exception of Hong Kong, the world has not seen even a pale imitation of a TRULY market economy since the early 1930s and the takeover of Keynesian economics. Look at the supposed "raison d'etre" of all modern Central Banks - the maintenance of "price stability". Prices are RATIOS between money and goods and are set, in a MARKET economy, by a countless number of INDIVIDUAL valuations. These valuations fluctuate constantly. Different individuals "value" differently, if they didn't, then no exchanges would take place and there would be no prices. The same individual also "values" differently from one day to the next and sometimes from one hour to the next. "Price stability" is simply impossible in ANY economy, market, mixed, or command.
Of course, Central Banks know this. Their dutiful bending of the knee to the concept of "price stability" is merely a buzz phrase which is supposed to give the impression that they are straining every sinew to maintain the purchasing power of the (fiat) currency of which they are the steward. Examine the record of the purchasing power of any of these currencies. It is not in the least surprising, given Central Bank and government economic policy, that it has been falling for decades. The truly astonishing thing is that, in the face of the record in this regard by ALL Central Banks, they still get away with their claim that they are coming ever closer to their holy grail of "price stability".
Come to think of it, it is not all that astonishing. Mr Ashcroft has been getting away with claiming that the US Patriot Act is vital to preserve the "freedom" of Americans. Now THAT'S truly astonishing.
The point is that if interventionist governments want to at least give the impression that they are going about the business of "running" the economy successfully, they have no choice but to attempt to manipulate prices. What they do have a choice about is how subtle or blatant that manipulation is.
In "good" times, like the second half of the 1990s, for example, they don't have to do anything overt. With everyone "getting rich" on paper, they don't have to mess much with interest rates, or add liquidity to the system, or play around with statistics. And they certainly don't have to intervene in markets, not in paper markets anyway. In bull markets in paper assets, Wall Street and the investing public don't need any help.
It is when times are not so "good" that the arsenal of interventionist weapons is dipped into, and the worse times get, the bigger the calibre of the weapon employed. The first step is to drag down interest rates (a la 2001). If that doesn't work, then the government starts to ramp up their deficits (a la 2002). If that doesn't work then the Central Bank starts tinkering with the banks' reserve requirements and adding "liquidity" to the system. When that doesn't work an excuse for a war is found to take people's minds off the economy and get them all excited, and ready to invest, when the war is "won". When that doesn't work, then an excuse for redoubling all interventionist efforts is found (like a "deflation scare", for example). And when that doesn't work, the interventionists throw all caution to the winds and start to manipulate EVERYTHING - up to and including the markets for stocks, bonds, futures, commodities, and of course, precious metals.
As an aside, interventionist governments are ALWAYS intervening in any class of asset which allows people to step OUTSIDE the managed economy. The premier class of asset which allows people to do this has always been Gold, with Silver a junior partner. Interventionist governments MUST do this. To have a "market" to manipulate, people must be constrained within that market, after all.
The history of the US markets and the US economy over the past decade or so can be divided roughly in half. In the first half, and especially after the end of 1994, the government and the Central Bank was happily riding in the "back seat". Overt manipulation was not necessary. In the second half, and especially after the first bubble of the late 1990s, the stock market, topped out in early 2000, the government and Central Bank slowly but surely moved from the back seat to the front seat. Now, as economic reality is looming large and the Central Bank is left with no choice but to start to RAISE interest rates, the interventionists are planted firmly behind the wheel and are "fixing" all the branches of the economy and all the markets.
They are also re-writing the rules of the road as they go, ignoring all warning or caution signs, and doing their best to ram any obstuctions they come up against into the nearest ditch. This is dangerous driving, political economy style, at an extreme.
The signs are all around us. No matter how thoroughly the books are being cooked, little signs of economic reality keep escaping into the light of day. Even official "inflation measures" (like the CPI and PPI) are now starting to veer out of control. Treasury yields are rising inexorably, stock indexes are comatose in spite of the best efforts of "990N" - see the quote which begins this analysis. And now Gold has had the temerity to rise $US 10.50 over the last two trading days of the week.
Make no mistake about it. The economic interventionists in the government and the Central Bank will hang onto the wheel no matter what, even if they pile the economy into the proverbial brick wall. In "white knuckle" circumstances such as these, any REAL breakout of the $US Gold price (don't forget, it is still more than $US 30 below its 2004 highs set on April 1) would be not so much the action of the "markets" as it would be a sign of the LOSS of control by the interventionists.
That loss of control is inevitable. As a knee-jerk reaction, the US Dollar may even go up temporarily when the Fed raises rates. That won't last. It will quickly become clear that the Fed is not raising rates to "damp down" an "overheating economy", it is doing so to prevent or at least postpone a wholesale abandonment of the currency. The symptoms of a loss of control will be the faltering of the paper markets. But as long as an alternative is not seen, that will merely result in an ever more frantic shuffling of paper amongst those paper markets.
The PROOF of a loss of control will be a Gold breakout. THAT will show the beginning of the abandonment of the paper markets - any interventionist government's worst nightmare.