Get Out the Tin Foil Hats

Matt Taibbi has written some interesting articles about finance in recent years. Here is the beginning of one such article. 

Conspiracy theorists of the world, believers in the hidden hands of the Rothschilds and the Masons and the Illuminati, we skeptics owe you an apology. You were right. The players may be a little different, but your basic premise is correct: The world is a rigged game. We found this out in recent months, when a series of related corruption stories spilled out of the financial sector, suggesting the world's largest banks may be fixing the prices of, well, just about everything. 

This is pretty much what I have been saying—the whole market is rigged. In an earlier article I suggested various pre-investments one could make. If the whole market is rigged, how is any investment possible? You can speculate, but you cannot invest

What in particular does Taibbi suggest has been rigged? Libor (the interest rates paid in London), and interest-rate swaps (a form of derivatives) are easily-proved examples. 

Another example was the recent drop in gold prices. While gold was due for a correction, someone suddenly dropping 400 tons of gold on the market was bound to affect the price. Using money borrowed at near zero interest rate, 95% of the sale was borrowed. This amount is about 1/6 of all yearly production around the world. 

This sale forced others who had borrowed money to buy gold to sell their gold to meet a margin call. If one borrows 95% of a purchase, and the price drops 5%, the investor either has to come up with more money or sell. More gold on the market meant prices had to drop. The fact this gold did not exist did not matter. This cascade continued for some time. 

Minion of the Grand PoobahThere was an unexpected side effect. Gold and silver were in effect on sale. Retail investors all over the world rushed to buy real gold in coins or bullion form. There is now a shortage of physical gold and silver. As I write this blog post, gold is now headed back up. 

Was this a conspiracy? In one sense yes, in another no—but it is definitely market manipulation. 

Adam Smith suggested in 1776 that if businessmen get together, prices will be fixed. So in that sense these market manipulations are a conspiracy. But no, the businessmen do not get at lodge meetings and take orders from the Grand Poobah.

So get out the tin foil hats, the markets are manipulated.