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Not Your Grandfather's Bank Holiday

This comes amid an internal inquiry at the Commodity Futures Trading Commission about whether the daily setting of gold and silver prices in London is subject to manipulation, thus raising the question of whether anything is safe.

The short answer from Rickards is, "There is almost certainly manipulation in the gold market." He notes the CFTC, if it launches an investigation, is likely to find little at fault with the price-setting process in London. "It's very much like the old specialist system on the NYSE, and it's very old-school, with a lot of discretion being applied based on the buy and sell orders in the books of dealers. I think it is extremely unlikely that there is manipulation going on in that ring."

Manipulation, he says, can and does occur in futures markets and Comex gold futures markets, where arbitragers can "paint the tape" -- issuing sell orders at the end of the day that are below the prevailing market price, which has the effect of taking the entire market down.

When that happens, Rickards says, there is a an arbitrage between the futures market and the physical market. "So if I see futures going down a couple of bucks and I'm an arbitrager -- I'm not a manipulator, I'm just a hedge fund trying to make a living -- I might buy the futures and sell the physical [gold assets] because I think the futures are cheap and the physical is at a premium and I have an almost risk-free trade."

Who would do this kind of thing? Some point to the Fed or the Treasury, but Rickards thinks China is a far more likely candidate. "We know that China is out to buy thousands of tons of gold, and we know that the market is thinly traded," he said. "It has been going on for years and will continue to go on for years until China acquires the gold they need."

None of this affects individual investors per se who typically do not, or perhaps should not, trade in the gold futures markets.

"The little guy has to be careful," says Rickards. "If you are going to buy gold I would say just buy your gold and put it away as I think it's going to do extremely well. There is very little doubt that with inflation coming and the money printing that is going on around the world, that gold is going higher. I just tell people buy their gold, put it in a safe place and don't read the papers or worry about daily volatility."

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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