Caught Red-Handed: Takeaways For Precious Metals Investors From Latest Silver-Rigging Documents

by: Hebba Investments

- None of this should surprise precious metals investors.

- Precious metals investors should make sure they maintain an investing style that avoids susceptibility to these tactics.

Recent court documents, that represent part of a cache of chat-room transcripts, for the first time provide an inside look at how traders allegedly fixed silver prices as reported by Bloomberg. These documents were provided to silver investors as part of a $38 million settlement in April between them and Deutsche Bank over allegations of market manipulation.
In the documents filed last week in Manhattan federal court, the investors told a judge that the transcripts offer convincing evidence to warrant new claims against other Banks.
We are not going to go into too much detail about the documents, as that is better covered elsewhere. But some juicy chat room transcripts show clearly that manipulation was evident and had a massive impact on the precious metals markets. Here is one of the more obvious transcripts:
"Cant wait for another day when we get the bulldozer out of the garage on gold and sil," the Fortis trader wrote on Feb. 25, 2008. "Haha yeah," responded the Deutsche Bank trader, in a chat-room transcript included in court papers.
Here is another "golden" correspondence:
Many of the chats involve a UBS trader known as "The Hammer," who on April 1, 2011, wrote a message urging coordination in trading, according to the records. 
"We gotta do it the same next time...if we are correct and do it together, we screw other people harder." A few months later, on June 8, "The Hammer" suggested to a Deutsche Bank trader that they recruit new members to join the alleged conspiracy, the records show. "We need to grow our mafia a lil get a third position involved," the UBS trader wrote. The Deutsche Bank trader responded, "Ok calling barx," a reference to Barclays, according to the documents.
We will leave the legal system to work out the consequences for the traders and the banks (or not as is more probable), as we wanted to focus on how these latest revelations affect the individual investor. Regardless of what is right and wrong and how things should be, this is the investment world we live in, so investors need to do the best that they can in how markets work today. So here are our takeaways from this latest scandal.
Lesson #1: Your Emotions Are Probably Wrong
There is nothing new under the sun, and these latest accusations of manipulation is certainly nothing new. In fact, master trader Richard Wyckoff, was incorporating these "big boy manipulative strategies" in his own trading back in the 1920s and 1930s. This strategy, which is discussed a bit by the Financial Post, essentially says that the best way to succeed in the markets is to watch the "big operators" and understand what they do and how they make money. Wyckoff discusses how these big operators will bid down a stock or commodity through different types of strategies, while accumulating. Then once others join in on the slaughter, these big operators will be buying that asset off of the hands of these new entrants. Finally, when they have attained their full position, they will use the same strategy in reverse and bid up the asset and clear out those who jumped on the short selling bandwagon and make a lot of money doing it.
Does that not sound a lot like what these traders were doing? It sure does to us. The key here is to be able to PUSH others into buying or selling their positions.
That is where emotions come in. These manipulators were not creating fake news events or issuing bogus reports on why silver (NYSEARCA:SLV) needed to be bought/shorted. They were simply making massive joint-trades in the silver market to cause other investors to panic and buy (or sell) their own positions - preferably done during illiquid hours to get the most for their money.
That means the first takeaway from this story is that investors need to control their emotions.
Do not get too excited when things drop… and when things rise. After all these traders manipulated silver upwards as well - after all you can make money on both directions.
If you are going to be a short-term investor in the gold and silver market you need to be able to invest unemotionally. These are certainly not the only traders in the market colluding to drive prices - remember it has been going on since the dawn of trading.

Which brings us to lesson number two…
Lesson #2: Avoid Stop-Loss Orders
When you read the transcripts of those chats, one thing that should stand out for investors is the fact that the goal of much of this price action was to either front-run client order OR trigger stop-loss orders. Front-running clients can make some decent cash, but far and away the more profitable action is to be able to trigger cascading stop-loss orders - where hitting one stop-loss triggers others. The money is made buying back after the initial "muscle".
The clear lesson here is to not use stop-loss orders in positions. While stop-loss orders are quite useful to protect profits, based on these transcripts, it is clear that these are targets and when your trading strategy is a target for others to make money it is probably not worth doing.
Which brings us to the next lesson…
Lesson #3: Avoid Leverage in Precious Metals
Stop-loss orders are often used with leveraged positions to avoid margin calls and big losses when these are triggered. But for those investors buying with leverage, know that you have a significant disadvantage when some of these bull/bear raids occur - and in precious metals they have been occurring quite frequently.
Which brings us to the last lesson…
Lesson #4: Manipulation Does Not Last Forever So Invest Long-term
The downside to any manipulative trade is that by definition since manipulation distorts fundamentals, it can never last forever. We have been emphasizing for quite some time now that fundamentals are extremely good for precious metals when using a horizon that spans more than a year as investment in exploration has been cut severely.
One of our favorite charts from Goldcorp probably shows it best.
This is not some "pie-in-the-sky" corporate chart trying to sell gold on behalf of the miner - we are actually seeing it happening already in their reserves.

Click to enlarge
These numbers from a previous piece detailing miner reserves at the end of 2015, shows gold reserves (NYSEARCA:GLD) are not being replaced. Exactly the point shown in the Goldcorp presentation.
Thus, investors should always remember that fundamentals always trump manipulation … eventually.

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