SP 500 Futures Daily Charts Intraday - Option Expiration Tomorrow

Here is a picture of where the June SP 500 futures stand on a daily chart.

They are obviously at key support.

As a reminder, tomorrow is an option expiration in US stocks.

I think the option market is something best left for professionals because of the mispricing of risk.

And that goes double for options on the Comex, and even the futures contracts there for that matter. 

As a reminder, the 25th will be a Comex option expiration in the precious metals.

There are not too many things of which I am sure.  But one thing I am certain of is that if the SP 500 futures market were subjected to a bear raid in which tens of thousands of contracts were dumped into a quiet, non-event-driven market, the exchange and its traders would be up in arms, and the regulators would be getting phone calls at home about it.

Unless, that is, enough trading houses and traders were in on it. And the regulators were obliged to look the other way out of professional courtesy. This happens more often than you might care to believe these days. It is reminiscent of the markets of the late 1920's.

This strategy of moving markets is well known, and goes by the moniker, the Dr. Evil strategy.  Click on the links and read more about it.

Citi Fined for Euro Bond Trades By British Regulator; Italy Indicts Citi Traders; Citi Haunted by Dr. Evil Trades in Europe; Citi Agrees to Pay 14m in Bond Scandal

It is how some marginally talented but especially well connected people beat the market, go to the best schools, and get piles of unaccountable wealth.   And the career minded go along to get along. The best market operations and control frauds are rarely investigated and always denied because they are inclusive enough, and well executed.

Unless of course a single party gets out of line and hurts some other 'major players' who complain about it.  And then there is a real investigation of sorts, like the London Whale, which is quickly smoothed over.

And this does not even begin to touch on the culture of the elite, the insider trading where favors and secrets are the currency of the well connected.  This has always been the case of course, but at times it becomes so bad that it leads to dysfunction in politics and in markets, and is corrosive to the society at large.  And it may go on until it gets so bad that there is an inescapable problem, and attempts to cover it up so that 'confidence' does not break. 

This becomes a vicious cycle, which is the opposite of the virtuous cycle.  It leads to stagnation and disorder.

Charts can only tell a part of the story.  If charting systems really 'worked' the people who had them would become so rich that you would never hear about them.  I have looked at all of them.  The only techniques that work at a high percentage are the ones that rely on asymmetric information flows, and the ability to act in the market with foreknowledge and the power of size. 

One needs to look at the market structure, the volumes, and who is buying and who is selling as best they can.  The lack of transparency is a great weakness in most market systems, and especially in markets that are also lightly regulated and tainted with insider dealing and technical trading gimmickry. 

Transparency is the disinfectant to fraud.  And that is why it is avoided at all costs.

And I still cannot quite understand why no one is talking about what has happened in silver.  It's the dog that doesn't bark.

Today's Gold Smackdown Portrayed on a June Futures Chart, 5 Minute Intervals

Why would the government turn a blind eye to this?

Well, in addition to allowing your cronies to make boatloads of money by gaming the markets, there is a not so subtle message wrapped within this chart from the financial engineers of the current banking system.  This is all a part of the currency wars.

"One of the central facts about modern America is that everything is political; on the right, in particular, people choose their views about everything, from environmental science to gun safety, to suit their political prejudices. And the remarkable recent rise of “goldbuggism,” in the teeth of all the evidence, shows that this politicization can influence investments as well as voting.

What do I mean by goldbuggism? Not the notion that buying gold sometimes makes sense. Gold has been a very good investment since the early 2000s, and it’s probably not all bubble. One way to think about this is that gold is like a very long-term bond that’s protected from inflation; and actual long-term inflation-protected bonds have also seen big price increases, reflecting a general perception that there aren’t enough alternative good investments.

No, being a goldbug means asserting that gold offers unique security in troubled times; it also means asserting that all would be well if we abolished the Federal Reserve and returned to the good old gold standard, in which the value of the dollar was fixed in terms of gold and that was that. And both forms of goldbuggism soared after 2008."

Paul Krugman, Lust for Gold

You see, gold is not an investment decision, it is a 'lust.'  And since it does what Mr. Krugman does not wish it to do, it is irrational, and something from his evil adversaries on the right. 

There is nothing quite so cheaply formed as this type of toss off piece from an establishment economist in defense of the status quo. 

This is the common thread I see amongst financial engineers and theoreticians.  The weakness in their theories and models always seems to turn to the brute force of financial market repression when their schemes get into trouble, based on some inherent weakness or false assumption that makes them unstable.  That certainly is the picture in Europe. 

Here is a piece I wrote some time ago about the 38 Year Cycle in Monetary History

Here is a detailed picture of the gold trading on the Comex today. You can look at it and judge for yourself.

There was no news to provoke this kind of a massive sell off in a quiet market and on heavy volume. 

This is just shock and awe in the currency wars.  And everyday people are collateral damage.  And there are always those who will beat the drums, on cue. 

Dear Mr. Chilton, RE the Gold Market In NY This Morning

"If you follow issues like Too-Big-To-Fail or Wall Street corruption long enough, you realize that the reason things don't get done about them by our government has very little to do with ideology or even politics, in the way most of us understand politics.

Instead, it's a bizarre, almost tribal mentality that rules our capital city – a kind of groupthink that makes extreme myopia and a willingness to ignore the tribe's ostensible connection to the people who elected them a condition for social advancement within."

Matt Taibbi, Neil Barofsky's Adventure in Groupthink

Personally I think this is the corrosive influence of the credibility trap, the amorality of careerism, and of course, an ambivalence towards white collar corruption as the inherent entitlement of privilege.  There seems to have been a shift in perspective amongst the new ruling class from noblesse oblige to droit du seigneur.   This is what Robert Johnson calls 'the audacious oligarchy.'

While it is recovering much of this sudden, five minute loss even now, with spot back to 1680 already, the hit on the gold market in the New York trade this morning was fairly blatant.

Perhaps it was just some innocent who had the desire to drop a boatload of contracts into a quiet market, and knock the price down while maximizing their selling loss.  Or another 'fat finger' mishap, which seem to happen quite a bit around option expiration for example.

Or perhaps it was some wiseguy trader who looked at the market, having some advantageous insight into the order books, and decided to 'run the stops.'

Thank God the US has the CFTC, whose job it is to look at this sort of thing and to tell us whether it was legitimate, or not.

And we should hear back about this, perhaps as early as January, 2017. And maybe even sooner on this one: 24 Tonnes of Paper Gold Dumped at Market

But it is nice to see that the CFTC is doing something. They are asking the court to overturn the $30 million fine on the Amaranth trader who was caught manipulating the natural gas market, because another regulator did their job for them.

And how is that MF Global investigation going by the way?

Comex Open Saw 24 Tonnes of Paper Gold Dumped at Market - Sharks, with Laser Beams

 

I am open to more data and other possibilities, but it certainly looks like the infamous Dr. Evil strategy being employed for the Comex post-option expiration in which a large number of call options are turned into active December futures contracts, and then hit hard with a manipulative price effort the next day. I suggested that this might happen given the way in which the option market closed on Tuesday.  Such phenomena are like old friends now in these markets.

Funny too how roughly the same thing happened in the Silver futures about the same time. Silver is also post option expiration today. 

As you know I used to track the big price drops around key option expiration dates on the precious metal charts.

That is not the only possibility. It could also be some 'tape painting' as the big shorts knock the price down before they close the books on their losing positions for the month. But I am inclined to think it was a special post-expiration event.

And it *could have been* just an unfortunate accident that happened in two different and important global markets simultaneously.  Maybe it just 'vaporized.'

Not to worry, I am sure Bart Chilton and the stalwarts at the CFTC, who are closely watching the gold and silver markets, have already identified the seller(s), and examined their selling motivations, and the size and placement of their 'fat finger.' I am sure they will let us know about it, four or five years from now.

"Gold saw a massive 24 tonne sell order (7,800 contracts) at 08:20 a.m. New York time - bang on the opening of the world's largest gold exchange - which [saw] a fall of 2.25% in the market price.

If the selling was year-end profit-taking then it was inept. Dealers try and finesse big sell orders into the market to get the best (highest) price for the biggest volume they can and thereby optimize profit - that requires stealth. If on the other hand it was a "fat finger" episode as has been suggested with a broker said to be looking to roll his December gold futures contract then it was even more inept.

More likely this could be a short play, with the seller looking to trigger stops below the market at $1730 and thus extend the move significantly lower and thus increase his profits. If so, he certainly caught the market on the hop as the move is counter-intuitive with everything else that is going on in the economy.

Rising concerns about whether Democrats and Republicans can find common ground between tax increases and entitlement spend reduction remains to be seen. More importantly, the US reaches its law-enshrined debt ceiling of $16.4 trillion early to mid February 2012. That promises fireworks again as it did in August 2011 when gold hit an all time high of $1922 as the market stares into the abyss of a possible US debt default.

Against the current economic backdrop, a short seller would have to be quite brave. In short, we will not know the identity or the reason for the sale for a while. Longer term gold investors should not however be deterred - the rationale for buying gold is as favorable as ever and a degree of patience required.

Ross Norman, CEO, Sharps Pixley, London, Flash Crash in Gold - Whodunnit?

All Wall Street Knows Is...

Audacious Oligarchy: The Double Flash Crash In Gold - Sept 13, 2012

The 'Dr. Evil' strategy in two pictures.

From Nanex Research:

Trading was so furious in Gold, that the CME circuit breakers triggered and halted the futures contract for 5 seconds. First on the downside, then on the upside. This is the same circuit breaker that triggered only once in the eMini during market hours: that time was at the bottom of the flash crash on May 6, 2010.

The first halt in the December 2012 Gold Futures contract (GC.Z12) was at 12:14:44: you can see the gap in volume in the lower panel of Chart 1. One second before the halt, 2,000 contracts traded the price down $10, from $1,730 to $1,720. The CME halt logic triggers a 5 second market pause whenever orders appear that would remove all available liquidity and move the price by a certain amount.

For this event, this basically means that if this order represented a true intent to sell, then we should expect additional selling (from the balance of the order that triggered the halt) when trading resumes.

However, in this case, the additional selling did not materialize, which leads us to believe the large sell order was meant to disturb any market based on the price of gold. And disturb the markets, it did.

1. December Gold Futures (GC.Z12) ~ 1 second interval trades with depth of book color coded by how much size is at each level.

Note the gap showing the halt after the drop. The depth of book shows orders continue to be added/removed from the book during the halt.

Metals Bear Raid - Sprott Raises $392 Million For Gold for PHYS - Dalio Says 'Shift Assets Into Gold'

"Gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as the best money; as the commodity providing the most stable and desirable monetary medium...I see a great future for gold and silver coins as the currency people may increasingly turn to when paper currencies begin to disintegrate."

Murray N. Rothbard

On the bright side, the Sprott Physical Gold Trust (PHYS) completed its secondary offering and the underwriters allotment, raising $392 million to buy additional gold bullion to be held in the trust.

The report does not indicate if they have secured title to the gold yet. Even after they have secured title, it often takes weeks and even months to achieve actual delivery to their vaults. The recent lag times in their Silver Trust expansion, and the types of bars they received, suggested a tight market for the real thing.

As you may recall, I think that it will be in the high quality bullion bar bulk market where the initial signs of failure to deliver will occur. The peripheral and coin markets will stay relatively healthy until the dawning comes, and then dry up overnight. The retail crowd are always the last to know. So lets keep an eye on this.

The metals were smacked hard today in what *looked like* a secondary reaction to the complications in Europe over their rescue funds. What initially looked like good news for the fans of Draghi was tarnished by a misunderstanding about the role and scope of the German Parliament.  There are also quite a few unanswered questions about how it could be implemented in specific countries.

Stocks recovered quickly but the metals remained a bit subdued.

The primary reason for the drop seems to be the traditional pre-FOMC metals smackdown. As you know the FOMC is in a two day meeting with their announcement coming tomorrow. Why does these attempts to dampen any enthusiasm for gold and silver seem happen around key central banking events?

"The modern mind dislikes gold because it blurts out unpleasant truths."

Joseph Schumpeter

The violence of the selling was concentrated and hard as you can see from the intraday silver chart below. It looks like the infamous "Dr. Evil" strategy in which a big player comes in to a thin market and runs the stops with a mass of concentrated sell orders in order to manipulate the price lower.  They make their money and then move along.  

It is illegal to do this, but in some cases and markets the regulators turn a blind eye to these shenanigans.  Professional courtesy, indirect policy action, perception manipulation, call it what you like.  It may be why futures volume on the CME is down 40%.

Bad behaviour drives out the good, in exchanges as well as companies and other organizations.  Corruption is a steep tax on expected profits, unless you are one of the profiteers, and a member of the audacious oligarchy.

"Ok guys, you're mad.  Now how are you going to stop me?" 

JPM must be quaking in their shoes over the rumoured exposé from the CFTC.  

I will say it again. This will end, eventually. And badly.

But in the meanwhile, investments with less counterparty risk that offer a stable store of value will command increasing interest among first the smart money, and then more widely by the public after it has appreciated even more significantly.

"Gold is primarily an alternative to fiat currency and a storehold of wealth. The main advantage that gold has over other currencies is that it can’t be printed. While we have just gone through a period in which the degree of monetary stimulation has ebbed, the ongoing deleveraging means that developed economic will remain highly reliably on continued stimulation for years.

By the end of the quarter, central banks were starting to shift back toward renewed stimulation. In addition, one of the primary disadvantages of gold relative to fiat currencies, that it doesn’t pay interest, is mitigated by low rates in the current environment. Real interest rates are likely to remain very low and below real growth rates as a means of combating deleveraging and improving debt sustainability (as described in our “beautiful deleveraging” work). As such, deleveragings strongly favor shifts from financial assets into gold and other tangible assets."

Ray Dalio, from his most recent hedge fund letter

As a side note, a virus of some sort has kept me struggling and a little shaky this week, and so I am especially grateful for the help and support I am getting from 'the invisible community of the mind and of the spirit.' They are helping me to stay abreast of the news. You know who you are, and you make a difference in so many ways, some of which you may not even realize, from passing along news items to helpful feedback and even highly welcome encouragement. Special thanks to 'Delray Beach.'

Sprott Physical Gold Trust Announces Completion of Its Follow-on Offering of Trust Units
Sep 12, 2012

TORONTO, Sept. 12, 2012 /CNW/ - Sprott Physical Gold Trust (the "Trust") (NYSE: PHYS / TSX: PHY.U), a trust created to invest and hold substantially all of its assets in physical gold bullion and managed by Sprott Asset Management LP, today announced that it has completed its follow-on offering of 26,450,000 transferable, redeemable units of the Trust (the "Units") at US$14.84 per Unit for gross proceeds of US$392,518,000 (the "Offering"). This includes the exercise in full by the underwriters of their over-allotment option.

The Trust will use the net proceeds of the Offering to acquire physical gold bullion in accordance with the Trust's objective and subject to the Trust's investment and operating restrictions described in the prospectus related to the Offering. The net proceeds of the Offering per Unit are greater than 100% of the most recently calculated net asset value per Unit of the Trust prior to, or upon determination of, pricing of the Offering, as required under the trust agreement governing the Trust...

Gold Daily and Silver Weekly Charts - Gold Chart Shows About 10,000 Contracts Dumped in Quiet Market

I felt this bear raid coming on the tape, from the action I was seeing. I cannot express it better than that.

So I had sold my silver bullion trading position and trimmed back gold, adding a hedge in the first hour of trade.

The hit came around mid-day after the European close as you can see on the 5 minute June futures chart.

One does not drop 11,000 contracts in a ten minute period in what might be called a reasonable trade.

The Dr. Evil Strategy and Some Targets

Will the CFTC investigate, asking the seller why perchance they did this? No, and that in itself speaks volumes.

But the solution is not to try and trade these scandalously under-regulated markets, but instead to hold long term investment positions, preferably as far away from Wall Street as is possible.

I had suggested last week that calls that the 'bottom was in' might be premature. It is in the established playbook to hit the futures hard at least once after an options expiration which we had last week.

The shorts are trapped, especially in silver, and they have powerful friends in the government and the media. There are some very worried people out there. Big things may be coming.

Swiss National Bank Considers Capital Controls

Gold Daily and Silver Weekly Charts - The Dr. Evil Strategy and Some Targets

"The exact methodology being deployed that enables the dominant commercial traders to pull this scam off repetitively, aside from outright collusion, is High Frequency Trading (HFT). HFT is the collusive bundling of advanced computer hardware and software that is so advanced and powerful that it has achieved the power to move prices sharply with little actual trading required in setting prices. The way HFT works is that the collusive trading programs suddenly flash great numbers of contracts for sale. But before much actual selling occurs, all the other traders in the market see the great volumes of contracts apparently offered for sale and these other traders withdraw buy orders and start entering their own sell orders to get ahead of the great wave of HFT sell orders offered. Then a not so funny thing happens. Most of the time, very few of the HFT orders originally offered for sale get filled or executed. Instead, they are quickly cancelled. There's even an operative term for this practice that's perfect – spoofing.

Most of the HFT orders are never filled, nor are they ever intended to be filled. These spoof orders are intended to scare others into selling so that the dominant commercial traders can buy gold and silver contracts. And make no mistake, this phony HFT activity has been successful, to the great shame of the regulators at the CFTC, who know that this manipulative trading is against commodity law. The proof that it is manipulative trading lies in the data published by the CFTC. That data shows the big dominant commercial traders are always the big net buyers on the big down days. It is not possible for that to be coincidence; it as close to cause and effect as is possible."

Ted Butler, Butler Research


“The tactic is always the same. The gold banks enter the COMEX and offer more gold for sale at the market than has been mined in the last five years. Immediately, the locals (pit traders) try to run in front and hit any bids they happen to have on their book or are out there in order to get the price down.

Gold tanks down to the $1,640 level and now the brokers for the gold banks begin to enter the market to cover shorts to reduce the short position taken, and most likely to completely flatten it on the day. This has been going on from 1968 to 1980 and it’s also been going on from 2001 to today. The net effect is absolutely nothing."

Jim Sinclair, KWN


“Gold has to get through $1,800. $1,600 has to hold in the short-term. $1,550 to $1,600 is okay, but I wouldn’t like to see a move to the lower end of that range because your uptrend and support are coming in right now around $1,600.

Gold has a horizontal consolidation in place. I was disappointed gold couldn’t break $1,800 previously, but again, sideways is okay. This sideways action is healthy, this consolidation, but gold now has to prove itself.”

Louise Yamada, KWN


"These big plunges in price look to be driven by short selling, with weak hands being driven out, and then short covering or determined buyers stepping back in to maintain the overall number of contracts at a relatively steady level, but with some good profits from covering their short positions at cheaper prices. There is also a lucrative cross trade to be had in other markets like the mining stocks. An operation in bullion is often preceded by some noticeable movements in the miners.

Recall the case in the Euro bond market, wherein Citi came in and sold an enormous volume precipitously, running the stops and driving the price down sharply. The Citi trader came back in and covered his shorts, pocketing the difference in his market disruption based on size. This trading strategy was known as 'the Dr. Evil' trade at Citi, but has deep roots in speculative market manipulation, with the counterpart to a bear raid being the longer term bull pool.

I recall reading at the time [that it was fined for disrupting the eurobond markets] how the Citi traders were incredulous at being outed by the regulators, because that is how they would do things in the States, running the stops and using outsized positions to perform short term price manipulation. In the states 'price management' has become quite notorious around key market events, such as option expiration.

It is so prevalent that it has its own momentum among traders. The only time that it is remarked by the exchanges in the states, however, is when other prop trading desks are caught by it unawares and complain. The public is fair game."

Jesse, Bear Raid In Gold - Memories of Citi's Eurobond Price Manipulation, December 2009

I had a little chuckle a few weeks ago.  Someone wrote in and asked that I stop referring to precipitous decline in the price of the metals as 'bear raids.'  Well, not all declines are bear raids, but the hallmark of such a market operation is fairly obvious to someone watching the tape all day.  And they are not exactly subtle at times.  If you want to be in the markets, you need to know these things, and if they upset you, well then you should probably be reading the funny papers, or watching your favorite financial news station, which is equally diverting.  They will make you mindlessly content, at least for the time being.

In a somewhat unusual circumstance, the BLS has decided to release the Non-Farm Payrolls number tomorrow even though US markets will be closed.

Since gold, and to a lesser extent silver, typically get hit around NFP days, we might attribute the action that was tied to the FOMC minutes release and the PM fix to that.

Chart-wise I am very comfortable with a short term decline in gold to the 1580 level, although I would be a little concerned if it should break support at 1550 and stick a few daily closes down there.

This all looks like a long sideways consolidation within a broad symmetrical triangle. But we have to let the market instruct us, and that will only come over the next few weeks, and maybe months.

This notion that the Fed will not be stimulating the economy and subsidizing the debt through a rolling monetization is a fairy tale.

The words may change, but the song remains the same.

Ben Bernanke Was a Money Printin' Man.

A Single Large Seller Smashed the Gold Market Yesterday: Dr. Evil Strategy?

There are a variety of reasons to liquidate a large position.

But whatever the reason, no experienced trader would take a very large position into a thin market and then just dump it at the market, if they wanted to achieve some sort of reasonable economic benefit from selling that position.  One does not do this unless they were under significant duress, or have some motive other than profit. Such a trade is called 'selling against yourself.'

Usually one diversifies their positions slowly and carefully, selling some and buying others without roiling the markets. At some point their trading objective becomes known, but by then it is fait accompli.

Unless of course they may have a strategy to lose some in one market while making huge profits and buys in others at cheap prices, as in the case of buys in the mining sector while slamming bullion for example. Here is one old hand explaining how funds rig the markets.

A trader who was being paid to obtain the best value for the seller would be fired if they simply dumped a large position in the market, driving the prices realized down almost 10 percent in less than an hour.

The same situation occurred at roughly the same time in the silver market, as hundreds of millions of paper ounces of silver were just dumped in the market in less than an hour, breaking the price down dramatically.

Such unbridled selling triggers other selling, as the complex web of trades and relationships drive other parties to liquidate their positions and trigger stop loss orders.

I have described in the past how the big trading desks use the Dr. Evil tragedy to artificially disrupt markets. Regulators are in place to prevent such things from happening.

And this is the story of the economy and the governance of the US markets today. There is little rule of law, only the power of size. And it will get worse as the paper game comes closer and closer to default.

Personally I think there were multiple reasons and beneficiaries from yesterday's market action in the metals. When the word goes out from some powerful party, others in the market find out and craft their own strategies and trades to benefit from this insider information. This is how outsized profits are made.

I believe that some parties who were heavily short silver were staring into the abyss, seeing a first delivery notice going out into a paper market that is many multiples larger than their ability to deliver silver bullion into it. And a default of a major commodity exchange would have disastrous results for the confidence in the markets, already stretched thin by fraud and scandal.  So the interests of the big short, the government and the exchange might be aligned.

Let's see what happens. Because when these artificial market operations occur in a long term trend, they often are short lived, and tend to reinforce the primary trend, in this case the shortage of real bullion caused by many years of price manipulation and the resulting underinvestment to meet demand.

Still, there should be no need for speculation about what happened. The CFTC have the direct responsibility to question the seller's motives and trades, and to reassure the public about what happened. I am sure they will be doing that shortly, if they are actually doing their jobs.

When this tide of corruption goes out, 'we will see who was swimming naked,' as someone who some years ago owned a huge amount of silver, and then capitulated under duress and sold it, once said. And he remains bitter about it to this day.

“Large Seller in the Market” as COMEX Gold Hits $1,708
By GoldAlert Staff
February 29, 2012, 11:39am EST

...Commenting on the sell-off, CIBC World Markets wrote in a note to clients that “Gold – looks like a large seller of gold in the market. a 10k contract traded, down ticked the price by $40/oz. roughly 200k contracts trade per day, but unusual to see such a large single trade. not likely due to contract expiry either. That transaction represents 1mln oz of gold.

Postscript: Apparently I am not the only trader who saw this in the market. Caesar Bryan of Gabelli raises exactly the same concerns.

“What we saw yesterday in the gold market was very large volume just pounding the market lower and it raises the question, is this a seller who is trying to maximize his revenues? The answer is, maybe not because it was very sudden and the volume appeared to be very large.

This is actually similar to other experiences that we’ve seen in the last year where there has been a very sharp, sudden pullback in the gold market. But what I can tell you is the seller was not looking to maximize his revenue from the sales and to market participants like myself and others this is strange. The design of the selling raises serious red flags and leaves some questions unanswered.

I can only say the action was very odd and that’s as far as I want to go because I don’t know what the seller’s or sellers’ motivations were. We have seen this on a number of occasions over the last year where indiscriminate large selling will come in and the gold price falls like a stone. Sometimes gold falls $50 to $80, literally, within a few minutes..."

Read the rest here at King World News.

The LIBOR-Gold Forwards Pain Index - Gold Lease Rates Plunged - More Than Meets the Eye

This is the reason for the ferocity of this sell off in my judgement, coupled of course with a general liquidation in stocks and other 'risk assets.'  I cannot help but notice that despite the message of panic, the SP futures remain in a fairly well defined trading range that goes back to late October.  The lower bound of its triangle is around 1180.

Maybe things will fall out of bed, and Europe will topple, but right now I smell a skunk.  And it is likely the offspring of BB and TG.

Central Banks were leasing gold for record low rates to the bullion banks like JP Morgan and HSBC. Silver lease rates also fell in sympathy.

As you may recall, LIBOR - GOFO (Gold Forward Offered Rates) = Lease Rate.

As can be seen from the last two charts showing the LIBOR GOFO spread, the lease rates reported in the press are a derived rate and actually represent the amount that can be earned from the gold carry trade.

I do not like to look at just the Lease Rate which is really just a calculated derivative like the 'spot price' based on the present value of the futures front month,  but at the two major components that constitute it.  Which one is driving the change in the spread, and why? 

As an aside, I do not think that the major bullion banks finance their gold leases through LIBOR anymore in these days of excess reserves and quantitative easing, but it is a useful reference for most others.  This tends to put a little more emphasis on the nominal level of the Gold Forwards Offered Rate.  But this is just my opinion and I could be wrong.

There is an obvious 'chicken and egg' argument embedded in this phenomenon.  For example, some might say that the high spread between GOFO and LIBOR makes it difficult for those who wish to short gold to obtain it since the price one pays to finance the deal is quite high.  I think this is Tom McClellan's hypothesis as well as some others. 

This is an interesting theory, because it seems to suggest that without the ability to borrow gold from central bank holdings and perhaps those others who can lease in large numbers like ETFs and not the spot market, shorting gold is not possible at these prices and the natural tendency of the clearing price is to stay the same or to increase.  This suggests more manipulation than market demand and supply.

I tend to think that the spreads widen as the bullion banks must borrow more heavily to support their short positions with some sort of physical backing.  When the pain of the spread becomes too great, they have the incentive to throw contracts at the paper price in a desperate effort to break the price and relieve the short term pressures. 

The 'informational campaign' by the bankers demimonde that surround these bear raids seems to support this hypothesis of a 'market operation.' The central banks are notorious for rescuing Primary Dealers who are in trouble.

I would tend to categorize this latter theory of mine as the LIBOR-Gold Forwards Pain Index.

But unfortunately I can see both sides of these theories.  I would just like to know who is motivated by leasing their gold in order to knock the price for some reason.  I know of only two groups like that:  the fiat central banks in order to help the bullion banks, and perhaps unallocated ETFs that do not particularly care what the price of gold may be as long as they can collect their fees.

"Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise."

Alan Greenspan, Congressional Testimony on Regulation of OTC Derivatives, 24 July 1998

The bullion banks use this leased gold as collateral for more fractional paper short sales, breaking the price trend and forcing liquidation. Their sales are done in the so-called Dr. Evil manner, of dumping large numbers of contracts on light markets.

There is also the liquidation factor from the collapse of MF Global, and the reluctance of small specs to engage in the futures markets at all because of capital risk and lack of confidence.

This allows the bullion banks to arrange for a big price swing that allows them to cover their short positions and also obtain other assets on the cheap such as mining companies.

Since the leased gold must be returned after a short term period, this is almost always a trading gambit, as opposed to outright net gold sales by the central banks which have virtually stopped in the past couple of years.

This at least is my take on what is happening. If this is correct we could see a repeat of the big market bottom and deep lows with a spring back as we have seen several times before.  And the magnitude of these swings may continue to increase as the sorcerer's apprentices continue to meddle with the real economy.

If the CFTC were to do their jobs, as the Europeans had done with banks like Citigroup who employed their 'Dr. Evil' trading strategy there, we would not have this type of harmful volatility in key commodity markets.

On these dips one would imagine that long term buyers are taking advantage of the low prices to acquire bullion and store it as a future hedge. As the bullion banks seek to return the borrowed gold, their demand attracts the momentum trading hedge funds that are now selling, so we see a big rally in the metals.  The big rally in the metals causes the LIBOR - Gold Forwards pain to increase, and so the banks cry to be rescued.  And so on it goes on, until something breaks.

The obvious artificiality of these price swings obscures the efficient allocation of capital, and the orderly operation of markets, not only in metals but in key commodities significant to the real economy. The CFTC and SEC apparently have the tools to correct this, but they choose not to do anything constructive for whatever reasons.   Cronyism and Congressional opposition are two possible motives.

This is not dissimilar from the gaming of the energy markets that Enron made infamous before its collapse. Financial structures based on this sort of artificial con game always collapse, given time and the latitude for their greed made possible by regulatory capture.

That is why the public should have no patience with the commodity market makers like MF Global, a TBTF bank, and even an exchange when they fail because of reckless gambling and market manipulation.

As for any complicit central bankers, regulators, and politicians, justice must be restored and prosecutions made in order to halt the growth of the moral hazard of complicity in fraud and insider trading that is now endemic, if not epidemic.

Bloomberg
Gold Lease Rate Slides to Lowest on Record as European Banks Seek Dollars
By Nicholas Larkin
Dec 8, 2011 10:55 AM ET

The interest rate for lending gold in exchange for dollars plunged to the lowest on record this week as European banks sought ways to secure the U.S. currency amid the region’s debt crisis.

The one-month lease rate on gold fell to minus 0.57 percent on Dec. 6, the lowest according to Bloomberg data going back to January 1998. The rate, derived by subtracting the gold forward offered rate from the London Interbank Offered Rate, was at minus 0.56 percent today and compares with minus 0.23 percent at the start of this year. A negative reading means banks have to pay to have their gold deposits lent.

The rate at which London-based banks say they can borrow for three months in dollars rose to the highest level in almost 2 1/2 years yesterday, even after the Federal Reserve and five other central banks agreed on Nov. 30 to cut the cost of providing dollar funding. Gold has climbed 21 percent in London this year and reached a record $1,921.15 an ounce on Sept. 6 as investors and central banks boosted holdings to protect wealth.

“European banks especially are having liquidity funding problems, which does see a lot of lending of gold and that’s putting downward pressure on lease rates,” Walter de Wet, head of commodities research at Standard Bank Plc in London, said today by phone. “Funding problems will continue for a while.”

All figures in these charts are priced in US dollars and are from the LBMA. The cumulative gold price is the daily change between London PM fixes.