After the bombings in London on the morning of July 7th, the spot gold price shot up $5, as one would expect in an atmosphere of fear and uncertainty. Yet, an hour later with no substantial new information, the market began to drop like a rock, and the New York close was identical to the day before.

Writers like Bill Murphy and Peter Grandich assert this price action is another example of gold market manipulation. We've seen similar aberrant behavior in the silver market, where the price remains low despite a fifteen year supply deficit. The bullion banks frequently have a net short position over 450 million ounces of silver, almost equal to global production for a year. In April of 2004, the COMEX suddenly increased the margin required when silver hit the $8.40 mark. This forced longs to liquidate their positions, and sparked a waterfall decline despite bullish fundamentals. Even with a silver shortage, the dealers always find enough ounces to supply the physical market, allegedly provided by China. (For more discussion of manipulation, see www.discountsilverclub.com/news_8-31-04.html).

Recently, a friend asked me how the price of silver could make any headway with the powerful forces of banks and governments aligned against the small investor. He was frustrated by the stagnation in the markets this year. Fortunately, I was able to cheer him up. I explained that the fundamentals of the market can't be denied forever; the tide will eventually wash over the sandbar. As Tim W. Wood (of www.cyclesman.com) states, "all throughout history we know that the natural forces eventually overcome the unnatural."

Ralph Elliott would agree if he were alive today. His Wave Principle divides price trends into two types of waves, impulsive and corrective. The impulsive waves flow in five subwaves in the same direction as the market, either bullish or bearish. The corrective waves move in three subwaves against the dominant price trend. In fact, Elliott discovered that markets form fractal patterns, like trees and shells. A large pattern, like a yearly chart of the Nasdaq, looks remarkably similar in shape to a smaller Nasdaq pattern, such as a weekly or daily chart.

Elliott's Wave Principle states that markets are composed of groups of people that don't act rationally or even randomly, but are ruled by emotions. Humans tend to behave as a herd, and their moods swing predictably from optimism to pessimism and back again. Robert Prechter expanded this principle further, and named the science of studying social mood socionomics. He asserts that mass psychology drives the markets, not events as the news media claims. Prechter believes that negative social mood leads to bear markets, which beget terrorism and other violence.

You can't fight this herd negativity with Prozac, but you can profit from it. Market manipulation can only work when the masses wish to believe it. Asset bubbles pop when greed is supplanted by fear, and the change can occur swiftly. The Crash of 1987 saw the Dow lose 22.6% in a single day. When the housing and stock markets finally turn down, investors will panic. They will run to perceived safe assets, including the precious metals. When the public moves as a herd to silver, the price will rise sharply. The short positions of the bullion banks will be swamped by the waves of investors buying physical silver. If you stock up at these bargain basement prices, you can surf this coming wave to excellent profits. If you wait until CNBC is promoting silver, you may be swamped by the onrushing tide.

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