Manipulating the gold price

[rickb]

Imagine I wanted to make money by manipulating the gold price.  Also imagine I'm an authorized participant of one or more of the gold ETFs.  Would the following work?

1) borrow, say, $1B.

2) with 80% of the amount borrowed ($800M), borrow shares of ETFs for which I'm an AP (I'll need to put up $800M cash to do this)

3) exchange the borrowed ETF shares for actual gold

4) with 20% of the borrowed $1B, establish a short position on COMEX (by itself this likely creates negative pressure on the price of gold)

5) at the least liquid time possible (say, the week between Christmas and New Year's, or at a time only some obscure Asian metals market is open), dump the gold I've effectively borrowed from the ETF on the spot market - causing the price to crash and, because it's crashing, folks with stops will sell causing the price to decline even further

6) cash out the short position

7) over, say, a month buy back either enough gold to exchange back to the borrowed ETF shares, or shares of the ETF

8 ) return the borrowed ETF shares

9) return the borrowed $1B

If I cause a 10% crash in the spot market:  my short position goes up (if it's 5x leveraged, my $200M short is now worth $300M).  I sold what was $800M worth of gold - even if I sell it all for 10% less then its original value, I take in $720M from the sale.  Let's say when I buy it back I pay an average price 5% less than the original $800M, so I pay $760M.  I exchange this gold for shares, which I return to whoever I borrowed them from, who returns my $800M collateral.  I now have the $800M collateral plus $300M ($100M profit) from the cashed out short position less the $40M difference between what I sold the gold for and what I subsequently bought it back for, making a $60M (6%) profit in roughly a month (on $1B). 

A.  Is there any particular reason this would be illegal?

B.  Aren't there pretty regular price smash downs in the gold and silver markets that would fit this exact scenario?

C.  If the gold and silver ETFs did not exist, or were not so big, wouldn't this be impossible (i.e. it depends on having a ready supply of "borrowable" gold/silver, which these ETFs make possible because their shares can be borrowed and subsequently exchanged for actual metal)?

[bronsuchecki]

If your original sale causes a 10% drop then wouldn't you buying back cause the same sort of increase? On what basis do you assume the price only rises to 95% of the original market price?

BTW, authorised participants, who are bullion banks, wouldn't bother with borrowing share of ETFs, they'd just borrow the gold directly.

[stone]

I don't think selling at illiquid times to crash the price then rebuying when there is more liquidity and so the price stays low despite your buying is a strategy specific for gold let alone gold etfs. There has been recent controversy about doing just that with bonds:
http://hereisthecity.com/2005/02/04/dr_ ... ding_stra/

I thought that options were a key device for the large players in the gold market. The periodic crashes in gold nicely follow the option expiry dates (see jesse cafe americain ). If you dump lots of gold at an illiquid time, then the losses from selling gold at a bad price can be more than made up for with options that see disproportionate gains for a given price swing.
Personally I don't  really care about gold price manipulation. Gold is sort of just a saving vehicle for eccentrics such as ourselves. I do think that options for agricultural commodities are a genuine danger though. Food price manipulation done using the same methods of hoarding and dumping and using options to gather profits does actually kill a lot of people. The 2009 grain price spike is "money manager capitalism's" answer to Chairman Mao's famines or the colonial 1943 Bengal famine.