Eric Sprott of Sprott Global Resource Investments Ltd. recently published a research report titled “Don’t Miss This Golden Opportunity“. His central thesis in the report is that the price of precious metals has been artificially manipulated downwards over the last 12 months or so, and that that precious metals and mining stocks have just begun their bull run with clear skies ahead.

The manipulation of gold markets in 2013

Sprott makes a strong circumstantial case for how and why the gold markets were manipulated downwards by European bank traders in 2013. He points out that BaFin, the German equivalent of the SEC, stated earlier last year that “precious metals prices were manipulated worse than LIBOR.” What exactly “worse” means is debatable, but Sprott argues it means that “the egregiousness of the pricing dysfunction was materially larger in precious metals.”

He lays out a chronology of events:

  • “November 27, 2013, BaFin announces an inquiry into precious metals manipulation on the London Bullion Market Association (LBMA).3
  • Mid-December 2013, BaFin is reported to have seized documents from Deutsche Bank AG (NYSE:DB) (ETR:DBK).4
  • January 17, 2014, BaFin announces that the manipulation is “worse” than LIBOR.1 On the same day, DB also announces its withdrawal from the LBMA gold and silver price fixings.

Let’s imagine how this played out. Our guess is that BaFin, having reviewed Deutsche Bank AG (NYSE:DB) (ETR:DBK)’s trading practices, reported their findings to DB’s senior management. They are horrified at the findings (cough, cough) and decide a retreat from LBMA is required. This seems logical to us.”

It’s about the bonuses

Taking the argument to its logical conclusion, Sprott argues bank traders manipulated gold prices in the direction of their “bets” on the market so they could make big bonuses. He says it is certainly no coincidence that the two lowest gold prices were on June 27 (mid-year) and December 19 (year end), just at the times bonuses are calculated

Gold Prices

Sprott says precious metals going up

First, the report highlights how demand for gold actually outstripped supply in 2013.

Gold Supply

Then, using historical data, Sprott makes the case that gold prices could reach as high as $2400 an ounce by the end of 2014. “If gold prices are back on their long-term trend, ex-manipulation, a linear progression of the gold chart from 2000 to 2014 would suggest a price of $2,100 now (62% higher than the current $1,300 level) and $2,400 by year-end (Figure 3).”