March 10, 2015

Some commentators who claim that the gold price has been relentlessly and successfully suppressed over many decades cite something they call the “London Bias” to support their claim. For example, a recent article by Ed Steer puts the London Bias forward as evidence of long-term price suppression. However, what the so-called “London Bias” actually proves is that some pundits who want to present evidence of unidirectional price manipulation are not above using data manipulation. As I’ve previously said, by carefully mining the data you can ‘validate’ almost any theory, even the most cockamamie one.

The idea behind the London Bias is that there is a tendency for the London PM gold fix to be lower than the London AM gold fix. The result is that you would have lost money almost every year, through gold bull markets and gold bear markets, by simply buying a position at the London gold AM Fix every day and selling the position at the London PM Fix the same day. More specifically, here’s how it’s described in the above-linked article:

…if you invested $100 at the London a.m. gold fix on January 2, 1970, sold your position at the London p.m. gold fix the same day, then reinvested the proceeds the next day at the London a.m. fix and sold at the p.m. fix once again — and did that every business day for 45 years in a row — you’d have had the magnificent sum of $12.13 in your trading account at the close of business on February 27, 2015.

…from January 2, 1975 going forward and with the exception of only a couple of years between 1975 and 1980, the yearly London price bias in gold has been negative ever since — for more than two generations. In other words, since January 2, 1975 — and with the very odd exception in the interim — the gold price has closed for a loss between the London a.m. and p.m. gold fixes for 40 years in a row regardless of what was happening in the overall gold market.

The blue line on the following chart illustrates how someone would have fared if they had started with $100 and then bought/sold at the daily fixes as described above. The yellow line on the chart is the US$ gold price.

Can anyone spot the problem with the assertion that the “London Bias” proves long-term downward manipulation of the gold price?

There’s more than one problem, but the main one is that exactly the same data could be used to prove long-term UPWARD manipulation of the gold price. Here’s why:

The assumption underlying the claim that the London Bias shows relentless downward manipulation is that the London AM Fix is the right price and that downward manipulation regularly occurs between the two fixes, leading to the London PM Fix consistently being lower than it should be. This assumption is groundless. An equally valid (meaning: equally groundless) assumption would be that the London PM Fix is the right price and that upward manipulation occurs between the two fixes, leading to the London AM Fix consistently being higher than it should be. In this case the logic would be that the manipulators get to work boosting the gold price during the relatively thin trading hours, leading to an artificially high London AM fix, and that the price settles back to its correct level during the higher-volume trading hours.

Based on the second assumption, a chart could be constructed to illustrate the financial extent of the upward manipulation. The chart would assume that $100 was invested at the London PM gold fix on January 2, 1970, and sold at the London AM gold fix the following day, with the proceeds then reinvested later that day at the London PM fix, and so on, for every business day for 45 years in a row. The chart would show a huge return on investment thanks to the positive “London Bias”.

The point is that depending on your starting assumption, the same London gold-price data could be used to illustrate long-term price suppression or long-term price elevation. That is, you could assume that there is a negative bias in the PM Fix or you could just as validly/invalidly assume that there is a positive bias in the AM Fix. Alternatively, you could assume that the data is indicative of a market characteristic that has nothing to do with manipulation in either direction.

Clearly, there are people analysing the gold market who have a very strong belief that a successful, long-term price suppression scheme has been operated in this market. These people are eager to interpret data in a way that supports their belief. This is a bias that YOU should be aware of.

You can obviously choose to believe whatever you want, but if you choose to believe that powerful forces have both the motivation and the ability to suppress the gold price over the long term then it would be irrational of you to be involved in the gold market on the ‘long’ side. So, why are you?

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