Protecting Yourself From Unethical Gold Dealers

NYC – Bowling Green: Bull Market (Photo credit: wallyg)

There are three phases to a bull market:

First, the smart money begins to buy a particular stock, bond or commodity when virtually everyone else rejects that investment vehicle as foolish.  Because virtually no one wants to buy the particular investment vehicle, the price is low, low, low.  But some people with great intelligence or intuition look at the investment, see that that vehicle is hugely mis-priced and is about to begin a significant period of price appreciation.  As the “smart” investors move in, the bull market begins and prices start to rise.

In the second phase of the bull market,  institutional money recognizes the success enjoyed by the smart money and therefore copies their example.  As more institutions buy the particular investment, the price rises more rapidly.

Finally, the third phase begins when the public begins to buy the particular investment.  The public doesn’t generally understand trends or economic considerations.  But they understand prices.  They understand that if a particular investment cost $50 two years ago, and $75 last year, then it’s bound to be $125 this year and probably $200 next year.  They buy investments only because everyone else is buying and they’ve heard predictions that the price must soon reach some astronomical level.

When the public enters into a bull market, prices skyrocket because: 1) the public inject huge resources into the market; and 2) the public are ultimately driven by emotion (greed) rather than smarts.

The public phase resembles a stampede.  It’s both exhilarating and dangerous.  It’s exhilarating because prices defy reality and increase hyperbolically.  It’s dangerous because the public’s emotion (greed) can suddenly change to fear and the investment’s price will plunge.

Eventually, the same smart people who helped start the bull market twenty years earlier, will again realize that that investment is significantly mis-priced.  This time, it’s over-priced.  The smart money (who bought when the price was low because no one wanted it) will sell when the price is high (when everyone wants to buy).  Soon after, the price will fall from an irrational high to something reasonable and that bull market will be dead, the people will be impoverished, and the smart money will be rich.

•  Gold has been in a bull market for at least a decade.  During that decade, the gold market has been dominated by the smart money.

Only recently has gold moved into the second phase where we see institutional investors.  Last year, the University of Texas announced that it was buying $1 billion in gold.  Governments around the world are grabbing all the gold they can afford.  Last July, the Federal Reserve, FDIC and Europe’s Bank of International Settlements (BIS) simultaneously recommended that gold be elevated from a Class III reserve asset for banks to a Class I reserve asset.  By doing so, they essentially opened the door for the world’s private banks to begin buying and holding gold.

As institutions buy, the “conventional wisdom” that formerly recommended against buying gold is changing into an admission that gold is hot and likely to stay hot in the foreseeable future.

Now, we’re waiting for the third stage when the public enters en masse.  That entrance might not take place for another 12 to 48 months.  We know that the public hasn’t yet entered the gold bull market because only about 1% of the American people hold gold as an investment.  We probably won’t really see the public “stampede” until at least 10% of the people are buying gold.

If this gold bull market follows the pattern of previous bull markets, the big price jumps and big profits in gold should be all ahead of us.

•  But long before we reach the big money or the end of the bull market in gold, we’re going to see another problem: an influx of “vultures” from Wall Street seeking to predate on institutional and public buying of gold.

We’re already beginning to see “vultures” circling the gold markets. Got GLD?   Are you trading “long” (or “short”) on paper gold futures?  You’re in vulture land.

Who do I mean my “vultures”?  I mean the salesmen and con-artists that have populated Wall Street (and the stock markets, in general) for years and are now starting to sell gold and gold-related “investments”.

Consider:  The New York Times reports in “New York Stock Exchange Settles Case Over Early Data Access” that,

“In the latest federal action against a major exchange, the New York Stock Exchange settled accusations on Friday that its trading data gave select clients a split-second advantage over retail investors. . . . The improper actions, which began in 2008, ran afoul of safeguards set up to promote fairness in a system known for favoring elite investors.

 “Improper early access to market data, even measured in milliseconds, can in today’s markets be a real and substantial advantage that disproportionately disadvantages retail and long-term investors,” Robert Khuzami, the agency’s enforcement director, said in a statement. “That is why S.E.C. rules mandate that exchanges give the public fair access to basic market data.”

There’s the wiggle-room.  It’s there in the word “basic”.  The stock exchanges must now give everyone equal access to “basic market data” but not to “all,” or “sophisticated,” market data.   How long do you suppose it will take the stock brokers to devise a way to pass along “sophisticated” (rather than “basic”) “market data” to their “select clients”?  How long will it take for the “select clients” to learn to read the “sophisticated market data” in a way that lets them continue to generate unfair profits at the expense of the public?  You can measure the delay in milliseconds.

If the S.E.C. ever decides to stop the corruption, they’ll mandate that the stock exchanges make all data available to everyone at exactly the same time.   The fact that the S.E.C. has mandated that only “basic” data be accessible to all indicates that the S.E.C. is complicit in the stock market corruption.  They know it’s taking place.  They don’t intend to stop it.  They only intend to create the impression that the corruption is being stopped.

The corruption on Wall Street is systemic. Even the regulators are in on the “fix”.

Insofar as the corruption is systemic, who can work in the stock market industry who is not corrupt or at least indifferent to corruption?   Can we expect moral and ethical behavior from stock brokers who are either corrupt or at least indifferent to corruption?

• Business Insider reports (“Cliff Asness Wants Everyone To Read This Paper On How Investors Are Getting Swindled”) that

“A new paper charges that America is getting swindled by the investment management industry.  The paper, titled Murder on the Orient Express and authored by Charles Ellis, claims that ”a ‘crime’ of extensive underperformance has been committed in mutual funds, pension funds, and endowments” – that is, among the institutions where “Main Street” has its money invested.

“One insidious reason for the terrible underperformance by the funds investing your pensions, 401-Ks, and endowments, is, according to Ellis: the fees. . . .  Seen correctly, active management [of investments] may be the only service ever offered that costs more than the value delivered. . . . true fees—incremental fees as a percentage of incremental added value—are more than 50% of the value delivered by the more successful active managers and are far higher, even infinitely higher, for the many less successful active managers.

“Ellis says across the industry, everyone from investment managers and investment consultants to fund executives and investment committees are complicit in the “crime” of institutional underperformance.”

That’s more evidence that the entire financial industry is beset by corrupt brokers, regulators, salesmen and gurus.  The problem is systemic.

•  Business Insider also reports that,

 “Nassim Taleb–the man behind the term “black swan” . . . explains how it has basically become impossible to be successful in the industry by putting in the work.

“You just have to get lucky.

“The reason for this is that the track records of successful managers are increasingly characterized by huge wins resulting from “spurious performance,” according to Taleb, which has allowed them to “rise to the top for no reasons other than mere luck, with subsequent rationalizations, analyses, explanations, and attributions.”

In other words, the financial industry is increasingly led by CEO’s who didn’t achieve power because they were hard-working, intelligent and insightful—but instead because they were lucky.

Taleb’s allegations of luck overcoming hard work and intelligence imply that the markets have become irrational, unpredictable and are therefore unsusceptible to hard work and intellect.

Is that possible?  Sure.

Why?  Market manipulation.

In the past, the two fundamental forces of supply and demand determined prices in a way that could be generally understood and predicted.

But today, there’s a third force: government and/or Wall Street manipulation of markets.  That force is unpredictable and can therefore cause the markets to behave “irrationally” by suddenly going up—or down—for no reason that economics can identify or anticipate.

What are those reasons?  Wall Street financiers and/or government have conspired to rig the markets to either 1) generate fat, unearned profits for themselves; or 2) to deceive the public into thinking the economy is stronger than it really is.

The markets themselves are being manipulated in ways that clearly defy classical economic theory.  That manipulation is evidence of systemic corruption.

•Here’s one from Forbes with the provocative headline, “Which is More Corrupt?  Wall Street or Congress?”:

“It’s an interesting question: which of the two is more corrupt, Wall Street or Congress?  We can certainly see that there is corruption on Wall Street as we can see people being sentenced for being corrupt. We do sometimes see people from Congress being hauled off to jail for corruption, but it’s much rarer.

“That should in fact settle the issue.  More finance types get jailed for corruption than political types, therefore finance is more corrupt than politics. . . . Which means that we can finally answer our original question, which is more corrupt, Congress or Wall Street? Why, it’s Wall Street, of course. For Congress has decided that when Congress does it, it isn’t corrupt. Which makes everything just fine, doesn’t it?”

OK—maybe it’s a tossup.  Maybe Wall Street isn’t actually as corrupt as Congress, but it’s a close call.

And, again, we see evidence that the extent of corruption, breach of fiduciary obligations, unethical and even criminal acts within the financial industry is widespread.

•  But are the previous articles really evidence?  Or are they just the hyperbolic opinions of journalists trying to attract an audience?

Consider a recent survey of 500 financial services professionals, conducted by market researcher Populus at the behest of law firm Labaton Sucharow.  It turned up some surprisingly candid results. For example:

1.  39% of financial industry insiders surveyed “reported that their competitors are likely to have engaged in illegal or unethical activity in order to be successful.”

2.  ”26% of respondents indicated that they had observed or had firsthand knowledge of wrongdoing in the workplace.”

3.  Nearly one in four “believed that financial services professionals may need to engage in unethical or illegal conduct in order to be successful.

4.  Nearly one in three said they felt “pressured by bonus or compensation plans to violate the law or engage in unethical conduct.”

5.  16% of respondents admitted that they—personally—would break the law by trading on insider information ”if they could get away with it.”

That’s evidence that the Wall Street financial “culture” is corrupt from top to bottom.

Wall Street admits its corruption.

Its candor implicitly celebrates that corruption.

Are there some honest men on Wall Street?  Probably.  But if they’re both “honest” and successful, they know of other crooks in the business but are unwilling or too cowardly to report them.  How “honest” is a man who truly won’t commit a murder, but also won’t report the murders he’s seen committed by his neighbors?

However many honest men may work on Wall Street, they’re a minority.

•  When asked why he robbed banks, Willey Sutton answered, “‘Cuz that’s where the money is.”  Similarly, wherever you find big money, you’ll also lots of crooks looking to make a fast buck.  Big money attracts big crooks.  That principle explains the fundamental motivation behind a lot individuals working on Wall Street.

They’ve knowingly sold shoddy products, churned the markets to make multiple commissions, and routinely lied to hustle their clients into spending more money.

These “investment advisors” have routinely advised against the single best investment over the past decade (physical gold and silver).  Why?  Because once someone buys physical gold, he holds it.  Stock brokers dislike gold because once someone buys gold, they won’t quickly sell it to buy something else and then, sell again, to buy a third investment.

See, stockbrokers are paid by commission.  The more sales they make, the more commissions they make.  Therefore, if a customer bought gold and essentially dropped out of the market, there’d be no more commissions to be made of that customer.  On the other hand, if a customer could be persuaded to buy GM stock today, sell it tomorrow, move his money into IBM, sell that on the following day to speculate in Microsoft, the broker could make multiple commissions off the same customer.

The investment advisors’ and stock brokers’ refusal to recommend buying gold for the past decade is evidence of the obvious:  Wall Street and the people it employs are not interested in seeing their customers prosper—they are primarily interested in their own prosperity.  The principle means of generating profits for Wall Street and its brokers is by extracting money from their customers.  Thus, there’s no serious inhibition to screwing customers if brokers can profit.

And some of those hustlers are starting to emigrate from Wall Street’s stocks and bonds to the sale of gold.

When the third stage (public participation) of the gold bull market arrives, the hustlers from Wall Street will arrive in droves.  Because the public is gullible, greedy, and ignorant, they’ll be easily exploited by the Wall Street hustlers.

•  How can gold buyers protect themselves from the influx of unethical Wall Street types?

1.  Recognize that paper is a lie.  Any paper debt instrument is not an asset but merely a promise to pay.  Yes, there’s a lot of leverage in paper and big opportunity for huge profits.  But that same leverage creates an equal or greater risk of enormous losses.  We live in a world that’s so overrun by “promises to pay” (debts) that 80% to 90% of those promises must ultimately be repudiated.  The vast majority of those who hold their wealth in the form of paper promises will lose their assets.

2.  Recognize that physical gold in your possession is not a promise to pay, but a payment.  Those who hold their gold won’t lose their assets.  Having real assets in a world about to go broke could save your life and might even provide unprecedented opportunities to acquire land and businesses at fire-sale (depression level) prices.

3.  Recognize that any gold coin dealer that employs ten or more salesmen will be susceptible to the same competitive forces that helped make Wall Street systemically corrupt.  The big dealers have big overhead that must be paid.   I guarantee those salesmen will be fighting to win commissions by hook or by crook.   If you do business with the biggest dealers, they’ll be working entirely for their own interests and not at all for yours.

4.  Remember that the first phase of the bull market is dominated entirely by the “smart money”.  Those investors aren’t merely “smart enough” to see early on that gold was a great investment, they were also smart enough to discover the gold dealers who were ethical and fair.  Any gold dealer who’s been in business for at least the past ten years (the “smart money” phase of the bull market), has been tested by the “smart money” and found to be generally honest, competent and fair.

If you’re looking for a physical gold dealer, stay away from the Wall Street types.  Look for a dealer who has a small staff and has been in business under the same owner for at least a decade.

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