Retail investors beware: Manipulation is happening all around you; commodities can offset your risk

In the wake of the GameStop/Reddit saga, North American market manipulation is once again the topic du jour; that the rules of the game vary by player— institutional versus retail investor, hedge fund versus little guy — is clear, highlighted by the fact that once again, big finance has won. Deemed too important to fail, the latest bail out of Wall Street, this time, ironically, thanks to brokerage firm Robinhood Markets Inc., which continues to hold itself out as an ally to day traders, was unapologetically at the expense of those same lowly traders.

The so-called ‘Reddit Army,’ in an unprecedented and spectacular move, exploited the short positions taken by the major hedge funds (these shorts being greater than 100% of the float of the company), who, by assuming these positions, had voluntarily taken on huge convexity risk. When Wallstreetbets (the Reddit group of investors) started to buy GameStop, Blackberry and other stocks deemed on their way to die by Wall Street, they drove the price in the wrong direction— up — and the hedgies’ risk was realized. The broker dealers, Robinhood in particular, were forced to expose their true allegiance. On the side of big finance, are they.

Is this fair? Of course not. But in the game of market manipulation, there are always winners and losers, and everyone knows — or should know—who they’re supposed to be. Fair or not.

The giant market makers, with their predatory algorithms created solely to front run retail clients, are meant to win. Their electronic trading systems, further aided by the absence of the uptick rule (repealed in the U.S. in 2007 and in Canada in 2012 and which prohibited a short sale unless the price was at or above the last sale price for that security) almost guarantee success. That is until someone else — in this case Reddit day traders — games the game.

But when things don’t go according to plan, big finance gets saved, either by the feds or by each other (in this case, Citadel LLC bailed out Melvin Capital, a fund which sank 30% after shorting GameStop). It’s virtually impossible for Wall Street to lose.

This reality comes as no surprise to anyone who has observed the commodities markets—specifically the gold market — over the last few decades. Since 1972, when U.S. President Richard Nixon eliminated the gold standard and Saudi Arabia agreed that all oil would be settled in U.S. dollars, the price of gold has been manipulated.

Because the U.S. dollar has been the reserve currency the world over, the U.S. has been able to grow its debt to astronomical new highs. Throughout the Covid-19 pandemic, the printing of money has gone unchecked, while inflation, curiously, has remained low. While currently forecasted to be around 2% for 2021, true inflation — calculated using the mathematical formula from before it was changed in 1990 — is really at seven or eight per cent.

Inflation is the erosion of purchasing power and as it rises, the U.S. dollar drops. By keeping inflation artificially low, the reverse is achieved: the greenback retains its value. Conversely, the price of gold, influenced by the bullion banks with their infinite leverage, is crushed. To wit: last fall JPMorgan settled a US$920 million fine with U.S. authorities on charges of previous metals price manipulation.

The gold price is further suppressed by one of Wall Street’s favorite things: the derivatives market. With a gold futures market 100 times bigger than the actual physical market, the bullion banks can make massive trades by the second at static (non-rolling) prices. Physical delivery almost never occurs; if it had to, the price would fly off the charts.

Currently at roughly US$1,850 per ounce, some estimates put the price of gold upwards of US$5,000 to US$7,000 if true inflation is factored in.

Who is buying physical gold? If your first guess is China and Russia, you are correct. Both countries are currently engaged in continued buying of physical gold and other commodities. In a rebuke of the U.S. dollar, the countries are settling commodities in gold or Yuan with the Petro-yuan (a form of the official Chinese currency, created in 2017 for the purpose of oil trading) and selling off their U.S. treasuries. This is literally a dagger in the heart of the U.S.’s monopoly on the settlement of commodities.

And gold is not the only commodity to watch (and buy). Copper (the single largest commodity that goes into an electric car), silver, nickel (the number one commodity in a lithium ion battery) and zinc are all up 30%, 40%, 50%, 100% over the last few years, another indication that inflation is indeed on the rise. These commodity prices will continue to rise vis-a-vis fiat currencies.

North American governments are all too happy to continue to issue debt at never-before-seen levels, the consequences of which the little people will one day feel. There are severe repercussions coming our way soon, either in the form of substantial tax hikes, major inflation or, more likely, both. Few people are focused on gold or other commodities, choosing instead to continue to pour money into the equities markets at their peril. When the proverbial shit hits the fan, which it will, you will wish you were long on gold.

—Russell Starr is president and CEO of Trillium Gold and a director on the board of Canada Nickel. Starr is also a co-founder and part owner of Canadian investment dealer Echelon Wealth Partners. After leaving Bay Street, he also held executive positions at Cayden Resources and Auryn Resources. As senior vice president at Cayden Resources, Starr played a role in the marketing, financing, development and ultimate sale of Cayden for $205 million to Agnico Eagle Mines.