The price of gold and silver can be manipulated through derivatives contracts by fractionalizing the physical metal held at the COMEX (CME Group’s futures exchange) and the LBMA (London Bullion Market Association). This is done primarily through the issuance of paper gold and silver, which represents claims on physical metal but is often backed by only a small fraction of actual bullion.

Derivatives Market vs. Physical Market

Gold and silver trade in two distinct markets: the physical market and the paper market. The physical market involves the actual buying and selling of bullion, where individuals, institutions, and central banks take possession of gold and silver bars or coins. In contrast, the paper market consists of derivatives such as futures, options, and unallocated accounts that represent claims on gold or silver but do not necessarily require physical delivery.

The issue arises because the paper market is vastly larger than the physical market, with many more contracts traded than there is actual metal available for delivery. This allows large institutions, such as bullion banks and hedge funds, to exert significant influence over the price of gold and silver without ever having to move or own physical metal. Since the benchmark price for these metals is often determined by derivative contracts rather than real supply and demand dynamics in the physical market, the price can be artificially suppressed or inflated based on trading strategies rather than true scarcity.

Fractional Reserve System in Precious Metals

The COMEX and LBMA operate on a fractional reserve system, much like modern banking. In a fractional reserve banking system, banks only hold a fraction of the total deposits available for withdrawal at any given time, relying on the assumption that not all customers will demand their money simultaneously. Similarly, in the precious metals market, the number of paper contracts representing claims on gold and silver far exceeds the actual physical supply of bullion stored in vaults.

For every ounce of gold or silver physically stored in these vaults, multiple claims exist, meaning that many investors who believe they own metal are actually holding only a promise to deliver metal, which may never be fulfilled. This system works as long as most traders settle in cash rather than demanding physical delivery. However, if a significant number of contract holders insist on delivery at the same time, the system could break down, exposing the lack of sufficient bullion to meet obligations.

Suppression Through Excessive Short Selling

One of the most effective methods of price suppression is through naked short selling in the futures market. Large banks and institutional traders can sell massive amounts of gold and silver futures contracts without actually owning the physical metal. By flooding the market with these paper contracts, they artificially increase the supply of gold or silver on paper, which exerts downward pressure on prices.

This strategy becomes even more effective when price drops trigger automated sell orders from other traders, including hedge funds and retail investors, leading to cascading liquidations. As more contracts are dumped into the market, prices fall further, reinforcing the downward trend. Since these large players often have deep pockets and access to privileged market data, they can profit by buying back these contracts at a lower price after triggering a sell-off. This cyclical manipulation distorts the true price of gold and silver, keeping them artificially low.

The Role of COMEX and LBMA in Price Setting

The COMEX and LBMA play a central role in setting global gold and silver prices. The COMEX is the primary futures exchange where contracts are traded, and its price serves as a benchmark for the entire industry. Meanwhile, the LBMA operates the world’s largest over-the-counter (OTC) gold and silver trading system, where most transactions involve unallocated accounts that do not require full physical backing.

Since the majority of transactions in these markets are settled in cash rather than metal, traders can manipulate prices without needing to own or move actual bullion. By issuing large numbers of unbacked paper contracts, these institutions create an illusion of excess supply, driving down prices. This means that even if physical demand for gold and silver is strong, prices may not reflect that reality due to the overwhelming influence of the paper market.

Leveraging ETFs and Central Bank Leasing

Exchange-traded funds (ETFs) such as GLD (for gold) and SLV (for silver) are widely used by investors as a way to gain exposure to precious metals without holding physical bullion. However, many of these ETFs are backed by “paper” metal rather than actual bullion that investors can redeem. This allows financial institutions to create additional claims on metal without increasing physical supply.

Another major mechanism for price suppression is the leasing of gold by central banks. Many central banks lend their gold reserves to commercial banks, which then sell this metal into the market. This temporarily increases supply and suppresses prices, even though the central banks still count the leased metal as part of their reserves. Since there is no guarantee that this leased gold will ever be returned, this practice further inflates the perceived supply of gold while keeping prices artificially low.

The Risk of a Short Squeeze

The entire system relies on the assumption that most traders will not demand physical delivery. However, if a large number of contract holders suddenly request physical gold or silver instead of settling in cash, it could trigger a short squeeze. A short squeeze occurs when those who have sold paper contracts must scramble to buy actual metal to fulfill their obligations, driving prices sharply higher.

In such a scenario, the COMEX or LBMA may be forced to settle contracts in cash rather than metal, exposing the fractional nature of the system. If this happens on a large enough scale, trust in the paper market could collapse, causing a flight into physical bullion. This could lead to a major revaluation of gold and silver prices as investors recognize that the true supply of metal is far smaller than the number of outstanding paper claims.

The Breaking Point

Through the use of paper derivatives, naked short selling, unallocated accounts, and leased metal, major financial players have been able to artificially suppress gold and silver prices for decades. By creating an excess supply of paper metal without corresponding physical backing, they manipulate market sentiment, keeping prices lower than they would be in a truly free market driven by supply and demand. However, this manipulation is not foolproof and comes with inherent risks that increase over time.

At the core of this system is the fractional reserve model, which allows a much greater number of claims on gold and silver than actual metal available for delivery. As long as traders, institutions, and investors continue to accept paper settlements instead of demanding physical bullion, the system can persist. However, if confidence in these paper markets erodes—whether due to systemic failures, a financial crisis, or a major market event—investors may rush to convert their contracts into real metal. If enough market participants demand physical delivery, the illusion of excess supply will be shattered, exposing the reality that there simply isn’t enough gold and silver to fulfill all outstanding claims.

This situation cannot go on forever. Every system built on leverage and deception eventually reaches a breaking point. The cracks in the system are already visible: COMEX and LBMA have had to introduce measures such as cash settlements, delivery delays, and increased margin requirements to prevent widespread redemption of physical bullion. Furthermore, the shift of gold and silver from Western vaults to Eastern nations—where physical ownership is prioritized—indicates that more investors and governments recognize the risks of relying on paper claims.

When the tipping point is reached, and confidence in paper gold and silver collapses, the true scarcity of physical metal will be revealed. This will trigger a massive price revaluation as buyers scramble to acquire actual bullion, and institutions caught short will be forced to cover their positions at much higher prices—potentially triggering a short squeeze of unprecedented scale. In this scenario, prices would surge violently, and the paper gold and silver markets could collapse under their own weight, marking the end of an era of artificial price suppression.

While the fractional reserve system has allowed financial institutions to maintain control over gold and silver prices in the short term, it is ultimately unsustainable. The long-term dynamics of supply and demand, combined with the growing awareness of manipulation, will eventually force a reckoning. When that moment arrives, those holding physical bullion—not paper claims—will be the ones who truly benefit.