About These Most Recent Price 'Corrections' in the Gold Market

Here is some perspective.

First is a chart below of the three recent major price declines, bear attacks driven by concerted contract dumping by a bullion banks holding heavy short positions.   We know this by the volume of contracts being suddenly put forward on the 'sell side.'

And second is a comparison of the two major gold corrections from this year.

As you may recall the Spring 2019 gold correction resolved into a very brisk rally to the upside, as the shorts were squeezed by determined buying by large speculators.

Let's see how this latest price decline resolves.

And let us remember that eliminating and hobbling regulators does not result in freer markets and fairer price discovery, anymore than eliminating law enforcement would result in a safer and more orderly freeways, human nature being what it is, and what it is not.  Except in the propaganda put forward by the hirelings and mouthpieces of would be market manipuators and bankster serial felons.

Gold Is Running Inverse to the US Dollar For Now And Why This Matters

I read an interesting article yesterday, the point of which was that the price of gold is running as the inverse of the Chinese Yuan.  Bing, bang, boom, end of story.

And there may be some truth to that.  But it is hardly the whole story.

When looking for correlations, one has to consider a number of elements, and try to sort out correlations that are often mixed, and what is coincident moreso than causative.

Below is a chart that compares the price of gold with the inverse of the US Dollar Index (DX).

And it should be noted that this is the price of gold in Dollars.  And so there will always be some effect of the value of the dollar in this, since gold is a world currency and not specifically American.

In my own studies, and multivariate correlation analysis, sometimes gold runs inversely to the dollar, but at other times it runs with it, or somewhat indifferently to it.

So what this shows is the obvious, that there are a number of things that effect its price, and may do so differently at different times.

As I have noted here, many times over the past year or so, the price of gold has been running inverse to the Dollar because it appears that major playrs and hedge funds are trading gold as a currency cross, without regard to its supply and demand as a commodity money, as opposed to a central bank fiat currency. And that at some point this is going to lead to a 'break' in the market.

But I think that a correlation to the Yuan here is probably misplaced. Although it is becoming increasing important on the world stage because of the spectacular growth of its domestic economy, the Chinese Yuan is not driving the value of the US Dollar. And for that matter, it is not even included in the weighting of the Dollar DX Index.

Why quibble though?

The important point is that gold is being traded in the currency crosses. This is not always the case, but sometimes it is. And more importantly, the price of gold is being heavily gamed by speculators, and with increasing leverage if the indications we have are correct.

And because of this, at some point gold, which is somewhat unique because it is a commodity currency, is going to assert its independent nature.  And it may very well blow a hole in the speculative scheming that has been allowed to go on for years, without being checked and moderated by the regulators, even as other paper asset bubbles have been allowed to grow.

It has done so even in the recent past, as it exploded up to $1900, after years of steady price suppression.  And then it fell back to the same old same old, but at a much higher base price than it had been at for almost twenty years.

What changed you might ask?  The disgorgement of gold by the Western Banks encountered a steady and determined accumulation of the physical metal in Asia and the Mideast.  Because of this global central banks went from net sellers to net accumulators.  This trend is well documented and unmistakable.

For those who say that there is no price manipulation of gold, even at this point with all that has been uncovered in the markets, I say have a good day.  Because that debate is surely over, except for the most stubbornly and willfully blind to what is painfully obvious to anyone who carefully watches the trading in the metals as it happens with an open mind to the data.

But again, why quibble?

Let's see how this unfolds, and keep an eye on the 'gold float' which is the physical gold bullion that is available for delivery into the markets of Asia.  Because it is being steadily accumulated there, and is not likely to be reintroduced into the Western markets, except at significantly higher prices.

And in this case, if I and others are correct in our analysis, let the devil take the hindmost when the reversion to the fundamentals occurs, which I believe that it will, and with a vengeance.  It always does, but eventually.  And that is where trading and prudent portfolio management come in to play.

Markets go to extremes because most speculators are clever, but not wise.  They will keep on a trend and a 'winning' trade often until it is utterly exhausted, and then run for the exits, leaving the carnage they leave behind to be taken care of by others.  And all that you will see of them is when they come back for a handout, a bailout, for the very damage that they themselves caused, but will blame on others.

Don't Believe Your Lying Eyes: Gold Does Not Offer a Safe Harbor Against Financial Crises

"Gold has worked down from Alexander's time... When something holds good for two thousand years I do not believe it can be so because of prejudice or mistaken theory."

Bernard Baruch


"After we came out of the church, we stood talking for some time together of Bishop Berkeley's ingenious sophistry to prove the nonexistence of matter, and that every thing in the universe is merely ideal.

I observed, that though we are satisfied his doctrine is not true, it is impossible to refute it.

I never shall forget the alacrity with which Johnson answered, striking his foot with mighty force against a large stone, till he rebounded from it--

"I refute it, thus!"

Boswell, Life of Samuel Johnson


"For centuries, gold had a profound impact on history, as a symbol and a storehouse of wealth accepted universally around the world. Gold functions as a medium of exchange, particularly in areas where currencies are distrusted.

Yet gold has not been without controversy. The influential economist, John Maynard Keynes, referred to gold as a 'barbarous relic.' Later in the 20th century, former Chairman of the Federal Reserve’s Board of Governors, William McChesney Martin, praised gold as 'a beautiful and noble metal. What is barbarous,' Martin said, 'is man’s enslavement to gold for monetary purposes.' Clearly, this precious metal has aroused great passion. It undoubtedly will continue to do so long into the future."

New York Federal Reserve


"The commerce and industry of the country, however, it must be acknowledged,though they may be somewhat augmented, cannot be altogether so secure, when they are thus, as it were, suspended upon the Daedalian wings of paper money, as when they travel about upon the solid ground of gold and silver.

Over and above the accidents to which they are exposed from the unskilfulness of the conductors of this paper money, they are liable to several others, from which no prudence or skill of those conductors can guard them."

Adam Smith, Wealth of Nations

Gold has moved in price from $250 in the year 2000 to roughly $1,350 today. In other currencies the move has been much more pronounced.

The period of 1996-2000 is a good time to pick a start for this monetary episode, because this is when the global monetary regime, which had been in place since the end of WW II with a significant change made by fiat in 1971, began to change, substantially in the most proper sense of the word. 

Some like to cherry pick a study of recent gold performance from the prior top of $1,900, but that says more about them and their intentions than it does about gold.  They know that all bull markets climb a wall of worry and can offer significant retracements from new highs while remaining intact.

And given the structure of global supply and demand, and the vast movements in the global economy, it is likely to go much higher, unless it becomes a fixed asset in a global monetary system once again and its price becomes set by fiat.

More likely it will become a floating asset with a more 'official' status than it has today when some central bankers will hardly recognize its existence in public, although they own it, and worry over it in private.

As shown in the second last quote above from the NY Fed, which unfortunately is no longer found on their web site, some central bankers find the attractive, and yet restraining, qualities of gold as a standard to be cloying, because it restrains their degrees of freedom to act as they would like.

And even when it is not a standard it does tend to utter some 'unpleasant truths.' But there is no denying its role as a refuge during periods of monetary instability, especially for those who are not currently holding the financial power.

And gold is certainly not the only hedge, and only safe harbor available.  But that is a far cry from saying it has not served many people very well during serious financial crises, and worked exceptionally to retain its value during a currency crisis and reissue/reflation.  Even a cursory look at historical crises show that.   The value is to study the nature of crises, and to understand the situation one has, not the one you wish you had, or even worse, the one that serves your mistaken point of view.

By the way, I am not advocating a gold standard as a cure for our ills. What our financial system requires is genuine reform from top to bottom. It is capable of corrupting, for at least a protracted period of time, virtually any single solution that one can imagine.  Look what they have done to the civic impulse for genuine change that became that industry-born frankenstein, Dodd-Frank.

They create a desert, and whimsically call it the 'new normal.'

So let us then consider this paper below, titled Gold Has Never Been a Great Hedge Against Bad Economic Times.

Not meaning to be rude, but there are some telling flaws in this paper.  But even then I would not have been moved to respond to it, if they had not had the cheek to use the word 'never' in the title, and to employ such sloppy criteria in their hypothesis as 'bad economic times' and 'major macroeconomic declines,' which they tend to confute with stock market performance.

And that is not to say that any very broad sweep of data over time, without sufficient attention to the particular character and context of the various situations described within, can easily be misleading, or be used to 'prove' something else when using it to draw broad and poorly defined conclusions.

What kind of crisis was it?  Was it a crisis period or not?  What caused it, what policy actions helped to precipitate it, if any, and what were the policy responses?  How are you measuring the asset? Was the change uniform, or different across areas and economies, and what were those differences?

In the Weimar inflation, for example, gold among other assets was a spectacular hedge in a financial crisis, but so were some stocks.   So one can see that using the 'stock market' as your defining variable of a macroeconomic disaster might not be effective.  This is not a quibble.  It is calling out some very fuzzy thinking which characterizes this analysis, that does not support such a sweeping hypothesis.

It may surprise you, but not all crises are the same. And I do not hold gold to be a panacea, not at all. Nor do I consider it to be a outlier or aberration, which is the converse of this, that some others seem to do. 'Gold has never been a hedge against bad economic times.' The use of the word 'never' is a deep tell about their mindset and predisposition.

What variables do tend to have a correlation with gold over periods of crisis?  I have found in my own research that they tend to be risk spreads in bonds, the growth in the broadest money supply, other risk factors, and of course the relative strength of the currency in which you are expressing gold's value.   But even this is not uniform over time, especially in non-crisis or managed price periods, such as when gold is fixed as a 'standard.'

Most assets will smooth out over a long period of time, unless they are artificial constructs,like some stock indices, which are altered by throwing losers out and putting winners in to achieve a semblance of growth.

There is an ebb and flow in everything.

It takes someone with the time and ability and most importantly the open, inquisitive mind not bound by some school of thought or orthodoxy to go into the various situations where something has happened, and happened with a particular cause and effect that was widely acknowledged, in order to really understand the mechanisms and nature of a thing.

When I first began studying money as a practical consequence of my international business dealings, and later with first hand experience to the Russian currency crisis, I could have given two hoots about gold or silver.  They were never even mentioned in any of my business or economic courses.  But later as I continued to study this as an avocation, their role in the history of money and current events could not be ignored.

But never mind what is happening all around you.  Don't buy any gold, and don't like it. Laugh at the rest of the world which is buying it.  Tell them to eat trillion dollar platinum coins because you say so.  It doesn't matter. Keep believing, believe in memes and quaint canards and slogans like the 'efficient market theory' and 'printing money endlessly doesn't matter.' Keep applying top down monetary stimulus and ignoring the results of your serial policy errors and asset bubbles.

So called experts have their noses stuck so deeply into 'what everyone in their profession knows' as an accepted orthodoxy that they can understandably fail to see the forest for the trees. They miss the big changes, the 'sea-changes.'  They are well trained for a world that is changing all around them, using inflexible models too often based on deeply flawed assumptions.

In 2006, the central banks of the world became net buyers of gold bullion for the first time in 30 years, and are continuing to do so in a very big way. Gold has been moving en masse to the emerging economies of Asia, the biggest beneficiaries of 'globalisation.'

And there is a reason for this, that is not based in some quirk or personal idiosyncrasy.

But arguments based on faulty hypotheses such as this paper, or even worse, on almost nonsensical or ad hominem arguments, seem to poke their heads up every so often, either when the banks, or some other major players, get their panties in a bunch because of their exposure to bad bets in the metals markets, or when some central banks start to feel nervous about their ability to manage the markets in their currencies to achieve their financial engineering goals.

Those economic policy goals get in trouble, by the way, because the policy itself is quite possibly running against the markets, and is also misdirected in addition to being ineffective.  We have certainly had enough first hand experience in this for the the past twenty years or so.

But at the end of the day, people may say what they will, but money talks. The real economy has a message to tell for those who will listen to it.   Or not.

There will be those who will continue to say, 'this is not happening' even while a tsunami of change rolls over them.   That is their prerogative.

The time for warnings was then.  This is now.

And events are underway that will have something like the character of a force of nature.

GOLD HAS NEVER BEEN A GREAT HEDGE AGAINST BAD ECONOMIC TIMES: Evidence from decades of US and global data

Gold has not served very well as a hedge against bad macroeconomic and stock market outcomes. That is the central conclusion of research by Professors Robert Barro and Sanjay Misra, published in the August 2016 issue of the Economic Journal. Their study draws on evidence from long-term US data on gold returns, as well as gold returns during some of the worst macroeconomic disasters experienced across the world.

Gold has historically played a prominent role in transactions among financial institutions even in modern systems that rely on paper money. What’s more, many observers think that gold provides a hedge against major macroeconomic declines. But after assessing long-term US data on gold returns, the new research finds that gold has not served consistently as a hedge against large declines in real GDP or real stock prices.

From 1836 to 2011, gold delivered low average real price appreciation and experienced high average volatility. The mean real rate of price change was 1.1% per year, close to the 1% average real rate of return on three-month US Treasury Bills and comparable assets. The standard deviation of annual gold returns was 13.7%, almost as high as the 16.7% on the US stock market...

Royal Economic Society, Gold Has Never Been a Great Hedge Against Bad Economic Times

Chinese Gold and Silver Exchange Has 'Almost Run Out of Available Gold Bullion' Awaits Imports

Hong Kong's century old Chinese Gold and Silver Exchange has reportedly almost run out of gold bullion at these price levels and is waiting for imports to come on Wednesday of next week from Switzerland and London. This information is from an April 19th interview.

Apparently they are not able to source from within their region which is a bit of a surprise since China is a major gold and silver producer.  Gold seems to be moving from West to East.

Why aren't they also going to New York for available bullion supply at the Comex?  

The Hong Kong Gold and Silver market seems to be more of what is called a 'bullion market' rather than a paper speculative market dealing in highly leveraged position trading with only small amounts of actual metal changing hands.

"The Chinese Gold and Silver Exchange Society operates in Hong Kong as a registered society. At present, we have 171 member firms which are sole proprietorships, partnerships or limited companies. Among these 171 firms, 30 are bullion group members. Bullion group members who want to manufacture good delivery bars may apply for the qualification of accredited refineries. Upon accreditation, these member firms may produce 99% fineness 5-tael gold bullions and 999.9% 1-kg gold bullions for delivery on the Exchange. The bullions they produce also circulate widely in the open market."

Please see the attached interview from Bloomberg Asia with the President of the exchange.

I do not want to make too much of this as it may be temporary. And since this is a metals exchange rather than a derivatives market a shortage of metal is not a default. A default is a paper promise to deliver that fails.

But it seems to call into question, if not shoot all to hell, the theory that the precipitous decline in the price of gold marked by the dumping of huge numbers of contracts into quiet markets was based on market fundamentals rather than brazen naked short selling and highly leveraged speculation in the London and especially New York markets, which both deliver only a fraction of the metals volumes which are traded on their exchanges.

And still hardly anyone is talking about the dog that didn't bark, and that is silver.



h/t to Delray and Liberty Mike

Sorry but I do not have any way to turn off the autoplay feature with the Bloomberg player. You will have to pause it yourself.

Gold Intraday

Hard to miss the deliberate price smackdown.

As I said yesterday, "I will not be surprised to see a final big move to run the stops to the downside in the precious metals, and take additional shares and units of paper claims before the markets break free."

So is this 'the final big move?' Of course I do not know, no one does. But gold is now deeply oversold, and we are nearing the rinse phase of the wash-rinse cycle, at least according to the technical indicators.

Things like this are a pity, because they make a sham of the markets. But what else is new.

Three day weekend ahead. And the currency war is on.

The Anglo-American Precious Metals Derivatives Duopoly: Quarterly OCC Report

The US Office of the Currency Comptroller (OCC) issues a Quarterly Report on the Derivatives exposure of US Banks and Trust. The report, including historical archives, can be found here.

The report includes "all insured U.S. commercial banks and trust companies as well as other published financial data." So obviously it is not comprehensive of private funds, and banks without a US subsidiary presence.

The archives go back to 1998, but it is quite clear that the report is not so interesting prior to the repeal of Glass-Steagall and the Gramm-Leach-Bliley Act, also known as the Commodity Futures Modernization Act of 2000.

The report shows that JPM has about 80 percent of the gold derivatives in the world on its book, with HSBC holding the other 20 percent.    And in other commodities, JPM holds a similar position as well as part of their overall $78 trillion derivatives book which is heavily dominated by interest rate and credit derivatives.  But hey, that's without netting, right?  Oh yeah, counter-party risk.

JPM is not just Too Big to Fail.  It IS the market.  And 95% of their transactions are still OTC.

Just for the sake of perspective I did include a chart from the 2Q 2000 report here which shows both the total derivatives exposure, leverage and concentrations, and the gold market in particular. 

Notice that some of the players are no longer with us, and of course there is the big combination of CMB and JPM, when the houses of Morgan and Rockefeller combined after this report was issued to become the leviathan of international banking. 

At that time Chase Manhattan Bank was the biggest player with about $14 Trillion in nominal derivatives with a leverage to total assets of about 43.  The gold market was a three way split amongst Chase, Morgan and Citi, with Fleet grabbing some scraps.

This is for the derivatives gold market among commercial banks.  At that time the silver market was dominated by a non-bank, the now almost infamous AIG. 

As Ted Butler relates in December, 2003:

"Here's how AIG got to be the biggest trader in the silver market. When Drexel Burnham Lambert went bankrupt in 1989, the DBL Trading Group was purchased by AIG, and became the AIG Trading subsidiary, which currently operates out of offices in Greenwich, Conn. You may recall DBL Trading was the subsidiary involved in the temporary gold loan default with the central bank of Portugal at that time.

Before moving over to AIG, the DBL Trading Group worked at Goldman Sachs (J. Aron) in the early 1980's, and before that began at ACLI (A.C. Leon Israel). For the sake of full disclosure, and in an interesting coincidence, I worked at Drexel Burnham Lambert in Miami, for 10 years until 1986, but had no involvement, whatsoever, with DBL Trading."

I include this not only for historical interest, but also to remind you that the derivatives market is only one facet of the markets overall, albeit a growing one that is still about 95% Over The Counter and unregulated. It also still does not include the futures markets in this data.

Here is an overall chart from the June 2011 Report. One thing that immediately jumps out is that JPM now has a total nominal derivatives position of about $78 Trillion. That's a lot of nuts.

The other unmistakable point is that besides the increased concentration, the nominal leverage of Goldman Sachs at 537:1 is that of a hedge fund and not a commercial bank or trust. Even Morgan Stanley is running at a modest 26:1.

By the way,  in a bit of non-metals related gossip, I hear that Mackie Messer is strolling the downtown area, and might be looking to put a blade between the ribs of Meier Schmul with the objective of having one less investment bank in the market, in addition to the fine pickings from the collateral corpses.

Who can really know such things? Not so many as think they do perhaps. But it is good to know who and where your friends are, and with whom they are associating. Just ask Herr Fuld.  Oops, Mistah Kurtz, he dead. John Paulson?

The leviathan JPM, uber bank of Rockefeller and Morgan, holds 80% of the gold derivatives in the world, with HSBC having the rest. HSBC was founded in the British colony of Hong Kong and is now headquartered at Canary Wharf London.

At this sort of concentration you do not have a size advantage, you ARE the market, with all that it implies in terms of knowledge of positions et cetera, at least concerning derivatives. In the non-gold precious metals JPM's derivatives are a more modest 69%.

How important are derivatives to gold and the metals? Not so much, unless you consider it important to know who is hedging what positions and future supply. And it also helps to manage some of the largest non-derivatives positions such as large ETFs for example.

But some might conclude that between them the Anglo-Americans have the gold market in hand.

JPM holds quite a derivatives position in 'other commodities' as well, presumably non-precious metal. Inconsequential thinkgs like food and energy. That makes the commodities boss at JPM, Blythe Masters, Der große Macher in anyone's book.

As general rule of thumb, if you are the House in any game, you should not be able to also sit at the table as a player, internal confidentiality agreements notwithstanding. It really is just that simple.

You should be taking money on a transactional service basis and net zero exposed. And if you can't do that and make enough money, then you need a new business model.

And the notion of commingling this sort of business with insured bank deposits and Federal Reserve subsidies is insane.

Any major commodities player needs to be compact enough to wrap up in a carpet and get rolled out the door, sans bailouts, should conditions require. Even a big player like Enron or Refco.

One cannot help but wonder if some of these mega banks have not become so interwined with government as to be in a virtual partnership in their implementers of fiscal and financial policy, which is a dangerous development indeed.

"Oh the shark has pretty teeth dear,
And he bears them dripping red,
A sharp knife has Macheath dear
And when he flicks it you are dead."

Gold, and Platinum, and Money, Oh My!

Traders have recently been remarking about a highly unusual event in the metals markets.

For the first time in quite a while, the price of gold per ounce has exceed the price of platinum per ounce. This is shown in the first chart.

There is even a paired trade being touted, short gold and long platinum. The caveat is that this is said to be a profitable trade IF there is a global recovery. Personally I think one must also assume that the recovery is not due to money printing.

Platinum is largely an industrial and consumer metal, even moreso than silver. Platinum has wide industrial uses in jewelry, catalytic converters, fuel cells, and hard drives among other things. similar to copper, platinum is an indicator of industrial manufacturing activity.

The use of platinum as money a store of value has relatively little traction except among collectors. The big price drive is its very useful properties for industrial use. I am not aware that it has ever been used as a national currency except for a brief period of time in 19th century Russia.

There is some secular effect on platinum, with substitution in some applications being achieved by palladium. But the two metals are tracking one another in price, as show in the chart below. So that seems to be a minor influence.

Some are confused because of the relative rarity of platinum, which is produced in fairly small quantities each year. But to look only at supply without considering demand is a basic fallacy of pricing. There is a definite shortage of honest politicians in Washington, but the ones that are there do not seem to be commanding very high prices amongst lobbyists, for example, as demand for honesty is also relatively low.

It does serve to look at a few more items as we see in the chart comparing price performance, rather than price, in the mix of gold, the SP500, the Commodity Index, and platinum. The Commodity Index is used as a broad reference and includes much more than metals.

Clearly industrial activity would seem to be lagging, while the money components of things like gold are increasing for some reason unrelated to commodity demand. That ought not to surprise anyone following the markets. The supply of paper money is increasing beyond demand of organic growth in the real economy, while demand for commodities used in production is slumping.

I would therefore not think the gold platinum pair to be particularly useful. I would consider something else if I believed that there would be an imminent industrial recovery.

Notice that I did not include copper or silver in these charts. That is because their performance tends to crush the meaning out of the others. Silver is responding to a massive break in a long term price suppression caused by artificial shorting activity. And copper is a more speculative market than most commodities.

I also did not include crude oil because, as nine out of ten Americans will remember, it is not a metal. And it sometimes has a speculative life of its own, especially as a reaction to certain regional conflicts. However being the indulgent sort I have included it in a final chart. It is a commodity.

Why the Official Antipathy to Gold and Silver? The Second Oldest Profession

Every so often someone asks, 'Why do the government and the banks manipulate the price of gold and silver?'

There is a great deal of circumstantial evidence to support this, even some blatant quotes pertinent to the topic from the likes of Volcker, Greenspan, and Bank of England governor Eddie George. Of course it can all be denied. People can deny anything, even well known historical events with many witnesses, if it suits their bias and purposes.

But putting aside the operational aspects, what is the motive?

Most recently a correspondent from India asked the question 'why do the banks wish to control silver from the short side? Why would they not blow it into a bubble like they do with stocks and make their profit there? Why do the banks wish to hold these prices down and make people think badly of silver and gold which we here value so much?'

When asked this, I will usually attempt some explanation that begins with the fact that the banks involved are the Primary Dealers for the most part, and very involved with the Federal Reserve and the government on a variety of levels in the issuance and arbitrage of official US debt.

The motive therefore involves aspects from an 'official' monetary perspective. It will often include a reference to Gibson's Paradox, a paper by Larry Summers involving the price of gold and its perceptual relationship with the long end of the curve. It might include Volcker's and Greenspan's comments about the price of gold casting a negative light on the stability of the currency if it rises too high or too quickly. I may even get into the Second Bank of the United States, and Andrew Jackson's populist role in exposing its frauds, and refusing to renew its Charter in favor of constitutional money.

But if I am ever asked about this in the future, I can think of no better, no more concise statement of a possible motive for the manipulation of gold and silver than this:

“The central economic problem plaguing this country since 1913 has been the presence of the Federal Reserve System. Without the Federal Reserve System’s debt-currency scheme having effectively supplanted the constitutional monetary system based upon silver and gold, it would have been impossible - not simply improbable, or difficult, but impossible - for politicians in the public sector and speculators in the private sector to have amassed the staggering level of unpayable, unconstitutional, and unconscionable debt that now bears down upon this country.”

Dr. Edwin Vieira, Jr., Going to the Roots of the Problem

It's enabling the fraud, always and everywhere, and the power obtained in controlling the supply and issuance of money.  There are those who are involved in productive labor, and those who wish to unproductively tax it. It is an old story with deep roots in history.

And once again, the government and the financiers seem to have formed an unholy alliance to harness the real economy with excessive, unjust, and unproductive taxes for the private benefit of a privileged few, protecting and promoting their schemes when they win, and covering and subsidizing their losses when they do not. In either case the money is coming out of the real economy, and like a paraiste is starving it of its vitality.

So there is your motive, from what might be called the second oldest profession. Find out what people need to have, and then seek to control it to obtain your wealth by exacting a tax on it, but without having to deliver anything for it, a mere exploitation of informational and procedural advantage.

There is a difference between amassing capital, building a business, and assuming the risks for its success and failure, and this modern form of banking which is nothing more than an enormous tax on the productive economy granted by a corrupted government that turns a blind eye to fraud and abuses. And when its schemes go wrong, it obtains subsidies and relief from its partners in government.

As Andrew Jackson noted of the Second Bank of the United States, the predecessor to the Fed which came back into being 80 years after:

"Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the grace of the Eternal God, will rout you out."

Butler: JP Morgan "Covering Its Silver Shorts Like Crazy"

JP Morgan holds a massive short position in silver, some of which it is said to have inherited as a concentrated speculative position from Bear Stearns. Retreats from such overextended positions are never easy, and therefore never straightforward. Having such a position can be very profitable in the short term since it gives one remarkable control over the paper price of a commodity, paricularly if the regulators are willing to turn a blind eye to certain trading practices.

If it is indeed reducing its oversized short positions, JP Morgan will undoubtedly attempt to 'smack the price' on occasion even as it covers, to prevent the specs and hedge funds from taking too much leash to the long side. This will help to prevent them from provoking a disorderly rout and, God forbid, a 'short squeeze.' In these managed markets, the major players tend to respect each other's turf, so one has to wonder who might take them on.

The 'deadline' if any that they might face is prospective position limits to be imposed and more transparent reporting required by the CFTC. Given the past history, it is most likely that JPM will not be overly inconvenienced by them in the short term. Ted has always been the optimist with regard to regulatory reform and willingness to 'do the right thing.' I also believe this will happen, but slowly. Still, it does seem as though the darkest hour is always before the dawn, and the last few weeks have been disheartening for the metals bulls, as demonstrated in the sentiment indicators.

Let's see what happens in the market and take our cues from that.

"JP Morgan Chase, the big short in the silver market, is "covering like crazy," silver market analyst Ted Butler remarks in his weekly interview with Eric King of King World News.

Butler thinks that both silver and gold turned around this week and he wonders whether, in light of the new financial regulation law, MorganChase will ever come back to shorting silver so much.

Butler also is very encouraged by the comments of Commissioner Bart Chilton of the U.S. Commodity Futures Trading Commission and the promise of position limits in the precious metals markets." Chris Powell, GATA

You can listen to the interview with metals analyst Ted Butler at the King World News Internet site here.

SP 500 September Futures Daily Chart and Gold Chart at the Close: Option Expiry Bear Raid

I had thought that the SP 500 would fail at a slightly higher level, the blue resistance trendline, but apparently that is not the case, at least for now.

Earnings misses in the banks and key tech bellwethers is driving the selling, and not coincidentally on the option expiration Friday for July. Michigan sentiment came in at a very low 66.5 which was well below expectations. At least for now belief in the recovery is off the table.

I beefed up my short positions in the financials as part of the short stocks / long gold & silver paired trade the other day, and this appears to be working reasonably well, giving me some room to play behind the shorts to add selectively at throwaway prices in the better miners and in bullion.

I am looking for a move down to the 1050-1060 area before the SP tries to back and fill itself on support. If it breaks down from there then the 1000 level looks possible. Keep in mind that this is a trader's market, and fundamentally it isn't telling us much of anything, except that a lack of financial reform has made the US a nation dominated by frivolous speculators who add no value and tax real GDP through price distortion.



Gold and silver were hit very hard with yet another bear raid, with the paper crowd trying to trigger selling by smashing prices with program selling at key moments and price points, running the stops and scaring the weak hands out. This is how the game is played, and particularly so in this environment of big players and lax regulations.

I don't think this precious metals selling will last much longer, but we have to keep one eye on stocks to see if there is a great move to a general sell off and act accordingly. That means little or no leverage, conservative positions, and hedging against loss. Or better yet, don't bother with the market at all except in long time frames.



Despite the rumours and rationales spread by hedge funds and trading desks like this commentary here, this was obviously a bear raid tied to today's stock options expiration. No profit motivated professional trader dumps positions like this and sells against themselves unless the motive is to drive down the price and run the stops, clearing out the weak hands and taking profits from short positions in related trades. Now that 'sales by the IMF' has gotten tired through repetition it looks like 'liquidation by John Paulson' (JP) is the new bear trade precious metals boogeyman. More likely "JP" is in reality "JPM."

A Modest Proposal

CNBC Europe: Is Gold a Bubble, Or an Outstanding Value, or Both?

My friend Horst from Germany sent this to me.

I think you will find it to be of interest.

The subject discussion revolves around the currencies, paper gold, and bullion.

Ben Davies, CEO of Hinde Capital



I cannot help but note that the level of discussion in CNBC Europe and Bloomberg Asia is much more serious than that of Bloomberg and CNBC USA. I wonder why this is, given the global character of the financial markets.

And then there is Fox Business where T/A does not necessarily have anything to do with technical analysis or charting.

BIS and the Gold Swaps: Curiouser and Curiouser

Here is an update on the BIS Gold swap story from The Wall Street Journal via GATA's Chris Powell.

Gold swap mystery deepens as BIS gets correction from Wall Street Journal
Submitted by cpowell on 07:41PM ET Wednesday, July 7, 2010.
Section: Daily Dispatches

10:47p ET Wednesday, July 7, 2010

Dear Friend of GATA and Gold:

The Wall Street Journal this evening updated and corrected its report about the gold swaps undertaken by the Bank for International Settlements, disclosing an e-mailed statement from the BIS stating that the swaps were with commercial banks, not central banks as the newspaper first reported.

The updated story suggests that some puzzlement continues about the swaps:

"The enormous amount of gold involved, nearly tripling what the BIS itself owns, left many market participants wondering about the nature of the deals. The BIS declined to identify the commercial banks involved. ... It isn't clear what prompted the banks to borrow from the BIS instead of their central banks."

Further, without citing authority the paper says "the gold hasn't entered the open market," but "if the banks that loaned the gold are for some reason unable to make good on the loan, the BIS could opt to sell the gold in order to get its money back, which could amount to flooding the market with an unexpected boost to the global supply."

But gold being money that for years has been appreciating against nearly all currencies, as noted for you a few minutes ago here --

http://www.gata.org/node/8798

-- why would any institution want to sell gold "to get its money back?" -- unless, of course, "flooding the market" and suppressing the gold price wasn't the real objective?

Another unanswered question is where the European commercial banks got all that gold, "349 metric tons ... nearly tripling what the BIS itself owns." The European commercial banks aren't known for holding that much metal on their own account. (If you rent a safe-deposit box at a European commercial bank, you might want to check its contents in the morning.)

While the story has changed in an important way, the first principle of journalism hasn't, and journalists here haven't yet demanded information from the primary sources, the BIS and the commercial banks themselves. Nor has there been any change in the conclusion that must be drawn from the story so far. That is, the secrecy and the involvement of the BIS, an admitted gold market rigger, impugn the transaction as part of another gold market rigging scheme.

Official Gold Reserves As of June 10, 2010, and Truths Yet to be Told

It is important to remember that these are the 'official' numbers. And it does not show how the reserves are 'encumbered' by leases and loans.

For example, there is circumstantial evidence that the Reserve Bank of Australia loans up to 100% of its gold reserves to the bullion banks who subsequently sell it, and then 'owe' it to the Bank and the people of Australia. The trick of course is the significant counterparty risk in the event of a serious short squeeze.

And they are not the only ones. Since this is an asset owned by the people, a timely and transparent accounting by the Treasuries and the Banks is something that the people of every nation obviously deserve. Whether the financial engineers, who enjoy experimenting with Other People's Money and doing favors for their private sector cronies, will ever willingly provide that information is another story altogether. It will almost certainly be under force of law, or an independent audit.

World Gold Council
Official sector gold reserves as at June 2010

European central banks sold virtually no gold over the past quarter, save a small amount for minting gold coins. Total sales by European central banks have amounted to just 1.8 tonnes since the third central bank gold agreement began in September of last year. The only sales of note made via CGBA3 have been by the IMF, which has sold 38.7 tonnes since mid-February. We expect the IMF to sell at a similar pace this quarter.

Outside of the agreement, the main purchases reported over the last quarter have been by Russia and the Philippines, both of which have long-standing gold buying programmes. The Central Bank of Russia bought another 26.6 tonnes of gold over the past quarter, taking its total gold holdings to 668.6 tonnes or 5.5% of its total reserves, and remains the 9th largest official sector gold holder. The Philippines central bank bought 9.5 tonnes of gold in March, taking its gold holdings to 164.7 tonnes or 13.7% of total reserves.

The Saudi Arabian Monetary Authority reported last quarter that “gold data have been modified from First Quarter 2008 as a result of the adjustment of the SAMA’s gold accounts”, meaning SAMA’s gold reserves are now reported to be 322.9 tonnes or 2.8% of reserves, from 143 tonnes or 1.2% previously....

What Have They Been Doing Since the Financial Crisis Began?

"China is considered a stealth buyer of gold, said Boris Schlossberg, director of currency research at Global Forex Trading. As the world's largest producer of the metal, China often buys gold from its own mines and doesn't report those sales publicly. But in April 2009, China did admit to having added 454 tonnes, or a 76% increase, to its reserves since 2003.

Analysts suspect the country is continuing to buy gold and could in fact, be the world's largest buyer consistently. It simply doesn't reveal it's pro-gold stance proudly, however, because China is also the world's largest holder of U.S. Treasurys.

Announcing an aggressive gold buying spree is not in China's best interest because, for one, it might push gold prices higher. Secondly, it could devalue the U.S. dollar, which would subsequently lessen the worth of the country's portfolio of U.S. government bonds, Schlossberg said."

Central Banks Join Gold Rush - CNN

Just as there are stealthy buyers, how can one refuse to acknowledge the body of evidence that there are also stealthy sellers, hiding behind official secrecy, derivatives arrangements, leases, and accounting frauds that will shock and anger the real owners of the assets when their hidden and conflicted dealings with their cronies in the private banking sector are revealed?

Anyone at this point who says that the Fed would never engage in such obviously compromised and conflicted transactions, and then go to great lengths to hide them, has either not been reading the real news, or is as compromised as the central bankers and their cronies in government and the mainstream media are, morally and intellectually.

And if they will allow the equity markets to be manipulated, as any even modestly sophisticated trader with decent access to tools must now recognize and admit, why would they hesitate to enable and encourage the manipulation of the sovereign bond markets, and those markets that affect them, which are by far the most important markets of all?

The world is not big enough for them to find a place to hide from justice after the truth is revealed. So they will lie and obstruct, extend and pretend, increasingly desperate for power, corrupting all that is corruptible, until the very end, and the final downfall and collapse. And then will come the crocodile tears, and the claims of ignorance, and finally weak apologies that they thought they were doing the right thing, but were honestly mistaken.

Such is the case in all control frauds, white collar crimes, official corruption, and Ponzi schemes.

The banks must be restrained, the financial system reformed, and the economy brought back into balance, before there can be any sustained recovery.

Weekly Metals WrapUp with Ted Butler on King World News

Ted Butler April 16 Metals Review mp3

• The weekly change all occurred on Friday, related to the Goldman Sachs fraud scandal.
  
  
• GLD holdings are high or near the highs. But there are continuing noticeable withdrawals in SLV making a sharp decline in the metal claimed to back the silver exchange-traded fund SLV. This may signify that the metal is needed somewhere else amid a worsening shortage of metal that is at worst neutral and most likely bullish.
  
  
• Market analyst Jim Rickards' interview last week with King World News was important for citing the lack of transparency of the London Bullion Market Association and confirmed Ted's judgement. It's as "far away from transparency as you can get without being completely opaque." "You can't depend on anything the LBMA says," Butler complains, adding that the LBMA discloses "nothing verifiable" and "I wouldn't trust anything from the LBMA."
  
  
• Having sued Goldman Sachs for fraud on Friday, the U.S. Securities and Exchange Commission may give some backbone to the U.S. Commodity Futures Trading Commission to act against Goldman and J. P. Morgan and other banks in their manipulation of the precious metals and commodities markets. The SEC action is a real 'cage rattler' in the financial reform discussions in Washington.
  
  
• The only question is that maybe the 'commercial crooks' can work the metals market lower in the short term, but silver looks well set up to take off in the not too distant future.

NY Post: Trader Blows Whistle On Gold and Silver Price Manipulation

"Every society gets the kind of criminal it deserves. What is equally true is that every community gets the kind of law enforcement it insists on." Robert Kennedy

The CFTC hearing in Washington was about safeguards against, and limits on, naked short selling at the COMEX. The LBMA in London is a 'cash market' and while short selling is accepted, large leverage and blatant naked short selling is not. The crux of the scandal is that the Banks and hedge funds have been selling what they do not have in order to manipulate the price and cheat investors, in this market as they have been shown repeatedly to have done in other markets.

The story gets sticky in the States because, as disclosed in the motions in a New Orleans trial, the players filed a motion claiming immunity because they were acting in partnership with the Treasury and the Federal Reserve, and other central banks who were not within the Court's jurisdiction.

Watch this story unfold, and then make up your own minds. But be prepared for smears, diversions, misconceptions, and false denials. The accused parties will consistently try to ignore this, and change the subject. The attempts to pressure the media to ignore tihs altogether are a 'tell' if there ever was one.

I am shocked at the extent to which the Banks influence and control the American media. This was testimony at a public hearing, and it has been largely squashed. Judging by history, this is going to get ugly.

Thanks to the NY Post for breaking ranks with the mainstream media. Despite some significant behind the scenes pressure, the Post is actually publishing some words that the Banks do not wish the American people to hear. And many Americans to not wish to hear it, because it shakes their faith in the system, and threatens them with the unknown. And too many, including economists and even bloggers, are only too willing to 'go along to get along' and be invited to the posh gatherings of the famous, and receive some sinecure from the monied interests.

I do not know if this is true or not, or what the truth may be. But I do have a strong passion for bringing the light of day to shine on this, and for these markets to be much more transparent, as a reform, to prevent frauds which we do know have occurred and most likely are still occurring. For me the light of day is not smearing the messenger and making their life dangerously miserable, but that is what too often passes for journalism in the US today, as is seen in the case of other whistleblowers, most famously in the Plame affair.

Naked short selling in size is a cancer in the financial markets. And the way in which the Banks are obstinately fighting against any and all reforms that attempt to limit naked short selling shows the objective observer that they are firmly committed to a status quo that is designed to distort the markets and the real economy for their short term advantage.

Let's be clear about this: naked short selling in size is not a trading strategy, it is a means to a fraud.

This may be the Madoff ponzi scheme writ large, the heart of the darkness in the financial fraud that is the US financial system. The crowning achievement of the financial engineers at the Fed, who have built a Ponzi economy and an empire of fraud.

NY Post
Metal$ are in the pits
By MICHAEL GRAY
4:33 AM, April 11, 2010

Trader blows whistle on gold & silver price manipulation

There is no silver lining to the activities of JPMorgan Chase and HSBC in the precious-metals market here and in London, says a 40-year veteran of the metal pits.

The banks, which do the Federal Reserve's bidding in the metals markets, have long been the government's lead actors in keeping down the prices of gold and silver, according to a former Goldman Sachs trader working at the London Bullion Market Association.

Maguire was scheduled to testify last week before the Commodities Futures Trade Commission, which is looking into the activities of large banks in the metals market, but was knocked off the list at the last moment. So, he went public.

Maguire -- in an exclusive interview with The Post -- explained JPMorgan's role in the metals pits in both London and here, and how they can generate a profit either way the market moves.

"JPMorgan acts as an agent for the Federal Reserve; they act to halt the rise of gold and silver against the US dollar. JPMorgan is insulated from potential losses [on their short positions] by the Fed and/or the US taxpayer," Maguire said.

In the gold pits, Maguire sees HSBC betting against the precious metal's price without having any skin in the game in the form of a naked short.

"HSBC conducts an ongoing manipulative concentrated naked short position in gold. Silver is much easier to manipulate due to its much smaller [market] size," Maguire added.

"No one at JPMorgan is familiar with Andrew Maguire," said Brian Marchiony, a company spokesman. HSBC declined to comment. (Maguire seems to be creeping into the corporate consciousness. Earlier, JPM tried to deny that he even existed. Now they admit he exists but no one there knows him, despite his have traded alongside them for 40 years, and traded at a sister firm, Goldman. HSBC has at least enough conscience to simply sulk. - Jesse)

Also during the CFTC hearing, Jeff Christian, founder of the commodities firm CPM Group, said that the LBMA, the physical delivery market for gold and silver in the UK, has been using leverage, which is another way to depress the price of gold and silver.

Christian said that the LBMA -- the same market Maguire trades in -- has leverage of about 100-1 on the gold bars settled on the exchange. In layman's terms, that means if 100 clients requested their bullion bars be delivered, the exchange could only give one client the precious metal. (Note: the LBMA is not a 'futures' market like the COMEX where naked short selling is an accepted, if not entirely explicit, practice. The CFTC hearing was essentially about safeguards against and limits on naked short selling on the COMEX, despite the noise and distractions surrounding it. - Jesse)

The remaining requests would have to be settled for cash equivalent. "That is tantamount to a default on the trade," says Bill Murphy, chairman of the Gold Antitrust Action committee...

Read the rest here.

The Intra-Day Pattern in Gold Trading

Nick Laird at sharelynx.com was kind enough to share this chart with us.

It shows the average pattern of gold trading intraday.

Nick has an amazing array of current and historic charts at his site, including many vintage charts from a variety of markets.

The pattern here seems a big regular. I have found it to be useful in picking entry points in certain positions.

For Warren Mosler: A Primer on the Difference Between Honesty and Fraud

Warren Mosler is "an economist specializing in monetary policy and running for Senator Dodd's Senate seat in the November elections." He has written the following piece for the Huffington Post. He is so incredibly off the mark that I thought a bit of correction to that spin might help his thinking before he hits the campaign trail.

Mr. Mosler. I have been following this case closely. No one at GATA, or anyone else looking at the state of the regulatory climate in Washington and the quality and tarnished reputation of US markets, is complaining about the normal sort of trading that has been going on 'for thousands of years.' Most of the people with whom I have spoken and questioned are seasoned traders with a profound understanding of the commodity markets, and equity markets, and derivatives.

What many people are complaining about is fraud. In this case fraud can loosely be defined as doing something and then lying about it. Saying you did not do something, or disguising the nature of what you have been doing, can turn even a prima facie benign action into a fraud, depending on the intention and degree.

Many people around the world are not complaining that the US has lent out its gold, and the 'depositories are filled with paper,' which may some day be replaced by gold again. Although they do point out that it will be replaced at MUCH higher prices if their suspicions are correct. They are pointing out that government officials have said repeatedly that they have never lent it out in the first place but refuse to submit to audits and transparent accounting. And if it did occur, such lending may be of questionable legal status, which is why so many have denied it has occurred. Only the Congress can allow for the attachment of binding claims to sovereign assets. Have they? And if, in exercising some new presidential prerogative, the executive has done so, where is the public disclosure? Where is the law?

And further, in the case of commercial entities like the TBTF bullion banks JPM and HSBC, they are not complaining about short selling that is backed by physical metal, duly paid and accounted for. They are asking questions about what appear to be enormous naked short positions against silver, questionable ownership and claims to collateral, and naked shorting by banks using public funds and powerful influence over the regulators, with selling patterns indicating the intention of manipulating the price in order to gain from it. Sound familiar? It seems as though this has been the very basis of the US financial system since the repeal of Glass-Steagall.

Although your essay contains a number of factual errors, this does stand out as a particularly misleading statement:

"If you hold gold, lending it is a way to make extra money with very little risk."

Tell that to the miners like Barrick that took a multi-billion dollar bath on their hedge book. Derivatives and transactions involving naked shorting and selling the same thing multiple times are never, ever relatively riskless or easy. There is always the real risk of the mispricing of risk and miscalculation of probability, and counterparty failure, which at times can reach the point of becoming systemically risky, as we most recently have seen in the case of AIG et al. This is the story of all bubbles and bank runs. Reckless leverage and mispricing of risk.

Janet Tavakoli sounded the alarm that a short squeeze in gold could bring JPM and the banks to their knees, and risk the global markets again. JPM is dealing in trillions of derivatives exposure, with a leverage that is breath-taking. To dismiss the complaints and concerns about this is as reckless as some of the more outlandish assurances made by Greenspan,and then Bernanke, just prior to the credit crunch about the housing bubble.

In the end the Fed had Paulson come running to Congress pleading for $780 billion in taxpayer money with no strings attached, or face a complete and utter meltdown, riots and martial law. Oh well, and tra la, today is a new day, and back to gorging on risk again, eh? Not to worry.

At the end of the day its about honesty. And playing by the rules, the same rules for everyone. Its about justice, for all, and not just the powerful few. Not privatizing outlandish profits, and then socializing the mispricing of risk that is at the heart of the imbalances creating those outsized profits for a few in the first place. That is the very basis of fraud, and it requires secrecy and regulatory annulment to flourish.

"The very word 'secrecy' is repugnant in a free and open society; and we are as a people inherently and historically opposed to secret societies, to secret oaths, and to secret proceedings." John F. Kennedy

So thank you for the primer on gold lending. I see you have also read the primer about answering the question you wish you had been asked, rather than the one which you have been asked, in order to divert the conversation away from something you do not wish to discuss at all.

Huffington Post
A Primer on Gold Lending

"Recently there have been a lot of what I believe to be gross misconceptions regarding the lending of gold and the absence of actual gold in various gold depositories. I'm writing this to clarify the lending process itself and the further ramifications of gold lending...

GATA (Gold Anti-Trust Action Committee) is complaining that the US govt. has lent gold and is therefore artificially keeping the price of gold lower than it would otherwise be. There is some truth to the idea that lending keeps spot gold prices lower than otherwise, as it keeps the spreads between spot an forward prices 'in line' but you can just as easily say that lenders selling spot and buying forward keep the forward prices higher than otherwise, giving gold producers a better price than otherwise.

So all that gold 'missing' from depositories is in the form of cash in the depositories and contracts to buy gold in the forward markets. And with gold being produced in large quantities for untold years into the future it's hard to say for sure that there isn't enough gold coming to market over that time to satisfy the demand. In fact, market theory would say the continuously changing clearing price means there is always exactly the right amount."

P.S. OMG, I cannot believe you resorted to the 'efficient market hypothesis' to attempt to prove that market fraud cannot exist, given all that has happened over the past ten years. That is truly embarrassing. Even Chris Dodd knows better than that. That prompted me to take a look at your CV. Word of advice. Peter Schiff is going to hammer you in the unlikely event you agree to debate him, unless you tighten up your thinking a bit.

"So all that gold 'missing' from depositories is in the form of cash in the
depositories and contracts to buy gold in the forward markets. And with gold
being produced in large quantities for untold years into the future it's hard to
say for sure that there isn't enough gold coming to market over that time to
satisfy the demand. In fact, market theory would say the continuously
changing clearing price means there is always exactly the right amount."

Like Daniel Drew said, "He who sells what isn't his'n, Must buy it back or go to prison." And it seems that lately the price the financiers have had to pay to buy it back, and make good on their promises, is punishingly higher than they have reserved, arranged or accounted for, especially when calculating their salaries and bonuses. This is the undercurrent of the frauds that have been perpetrated in this brave New World of innovative financing and dodgy derivatives and bonuses paid on the if-come. And the public is being forced to make up the difference and pay the price, for the good of the system, don'tcha know. And they are not even allowed to ask 'why?'

"How to Corner the Gold Market" By Janet Tavakoli

Janet Tavakoli wrote an interesting essay that was just posted over at the Huffington Post called "How to Corner the Gold Market" which can be read in its entirety from her website here. I started to comment at the HuffPost, but the system there limits comments to 250 characters, so I left a brief comment which is probably still being moderated (note: and still is five hours later - J) and will post my entire comment here while it is fresh in my mind.

First I wanted to thank Janet for dropping me a note about this piece. She knows I have an abiding interest on this topic of market imbalances and regulation in general. I find the US markets fascinating these days, in particular where they involve leverage and derivatives. And Janet is one of the most 'on the ball' and smartest people that I know who are looking at this, and making the good calls well in advance of the situation.

What struck me as odd is that I just wrote a blog piece along similar lines on the same topic today, raising many of the same issues, but that is from the opposite perspective. You can read The Case for Position Limits: What is the Spot Price and How Is It Set? here.

I think Janet and I come to the same conclusions but from a very different perspective, the other side of the table in fact, I wanted to reflect at length on her essay because I think it is important, and in some ways a good formula for manipulating a market from either the short of the long side. In the metals markets today, most of the 'gorillas' are the TBTF crowd, and they seem to be on the short side. That does not mean that they are not being sized up for a market showdown that could be destructive if there is a mispricing of risk and market imbalance.

First, and its not really a quibble, I think the Hunt Brothers attempt to corner the silver market back in the 1970's was overturned not only by a pre-emptive action by the Fed (and it was not an accident as I recall but a conscious response to inflation speculation) but also actions by the exchanges that broke the corner by altering the rules. I have not read the essay she references but I recall the situation first hand since my stock broker at Bache, Halsey Stuart was keeping close track of it, and liked to discuss it with me. Since I was not trading that market at such a tender age, it was a interesting voyeuristic experience, being in the stands watching the men in the arena. When I saw a spec silver trader in their office breaking out in hives during the trading day, being crushed and ruined lock limit down, I resolved to stay away from that sort of action.

This is important because today, having apparently learned their lesson, the exchanges are generally willing to increase the margin requirements when there appears to be undue speculation, especially on the long side of the trade by the speculators not in the in-crowd with the exchange. This is probably more common in the commodity markets, but most commodity traders are well aware these margin changes. They have to be since it requires them to put up more capital, and the specs are often thinly capitalized.

Second, I believe that the commodity exchanges already have the ability to force a cash settlement between counterparties in the event of a market imbalance. I think they even have the option to force a settlement in a commodity ETF, including some which Janet discusses as possibly being the objects of manipulation.

So think in sum that there is little evidence that anyone is willing to take on the exchanges, even the big players, and try and force a corner or even a squeeze against what they perceive as mispricing, such as Soros and so many other big players did with the British Pound , and most recently other big hedge funds did with mispriced products from the latest bubble in the debt markets, and financial stocks. They may be vilified after the fact, but they were right and served a valuable market function. Whether they did anything illegal is another matter.

The piece I wrote today and reference above is about a situation in the precious metals markets which has the potential to become another serious problem for almost the same basic reasons as the debt markets in our most recent financial crisis: excessive leverage concentrated in a few TBTF institutions, lack of transparency, regulatory laxity, and a mispricing of risk.

Janet alludes to the same thing. My prescription is position limits and accountability the collateral and any other deliverables backing the trade. If indeed there are excessively naked shorts, then not squeezing them is of course one resolution, but the other is to rein them in. I should add that the major players claim that they are not naked short, and reference hedges which I believe are undisclosed.

It was kind of odd to hear this story told in a conspiratorial way, referencing the Hunt Brothers. Anyone who would take on the government sponsored banks like JPM and HSBC at this point would have to be rather well-heeled and gutsy indeed. And what is most ironic is that a whistle-blower's testimony appeared at the recent CFTC hearing, and seemed to allege that JPM is manipulating the silver market. It was widely covered in the blogosphere, but very little of it in the mainstream media. I don't think it was covered at all at the Huffington Post, so Janet may not have seen it.

And of course there was the subsequent story about the man and his wife being struck by a hit and run driver the next day in London, and the usual fear of smears and intimidation that must accompany all those who testify against the vested interests. That story remains to unfold. I hope it turns out better than that of Harry Markopolos, who was widely ignored until the worst happened and the Madoff Ponzi scheme collapsed. As I recall he was subject to intimidation and fears for his safety, warranted or otherwise. It must be hard to come forward with this sort of knowledge.

But let's cut through the verbage. Here we are again, with TBTF institutions playing the excessive leverage games and possible naked shorting and mispricing of risk in under-regulated markets, and putting the 'global markets' stability at risk.

If Janet has any specific knowledge about a conspiracy to take advantage of this she should immediately contact the CFTC. I recommend Bart Chilton because I hear he is responsive and interested in this very topic, and just helped to sponsor hearings on this topic as I understand it. If I knew anything at all like this I would as well. So far all I see is a market relatively dominated by the usual TBTF suspects. If some longs are sizing them up there is certainly nothing wrong with that, and if they are vulnerable to a default, then we can either ban short selling (or I guess in this case it would be buying what they are short) or we can try and tighten up the market and correct any obvious imbalances that might exist now in an orderly manner.

But based on the last three years experience of financial misdeed exposed, I would hesitate to account for something by a criminal or even conspiratorial intent what can be attributed to short term greed and sheer reckless stupidity, crony capitalism and regulatory capture, and some intelligent market players seeing this and using legitimate means to confront it, and give it the market players a thrashing they may deserve. But there could be things happening well behind the scenes that I, a reasonably intelligent and trying-to-be-informed market participant cannot see. Is the squid on the hunt again? It is hard to imagine anyone big enough to take on the jokers that seem to be batting the US markets around at will these days. But therein lies the problem to my way of thinking - opaque and excessively leveraged markets that favor the big predatory trading desks.

As anyone who reads my blog knows, I do not think the contrarians are at the heart of our issues here, those who were shorting the mortgage bubble and the derivatives associated with them, although there is always that possibility. I am much more concerned about the establishment, those who are pulling the strings of power, and influencing the regulators, and I found a resonant chord in Janet's essay about this.

The markets are in need of reform. And as concerned as I was before, as shown by the blog which wrote earlier today, I am even more concerned now because Janet seems concerned, and we are coming at this from two very different perspectives: her from the possibility of an engineered short squeeze, and I from the dangerous condition I think I see in the market structure as it is today, with many of the same large institutions at the epicenter of the most recent crisis doing the same thing all over again, different day, different market. same players and modus operandi.

If there are elements trying to manipulate the markets from either side of the trade, then I agree with Janet, that I wish nothing to do with them, and want to see them exposed and prosecuted. But so far that does not seem to be happening very much, anywhere in the system except for some relative 'small fry.'

It feels like groundhog day.

Jesse

What is the 'Spot Price' of Gold and Silver And How Is It Set?

When you ask even a relatively experienced and sophisticated precious metals trader "what is the spot price of gold or silver?' you will generally hear a pause, and then they will come back with a price after checking their computer screen for the latest spot price from some ubiquitous and reliable provider of such quotes, or one of the lesser known, diverse providers of this information.

But when you say, "No what I was asking is 'what is the spot price, where does it come from, who sets it?'" you will most often hear that this is the last physical trade, or the current market price of physical bullion.

Well, is it?

Actually despite what you might think or what you might have heard, it is not.

The reason for this is that there is no centralized and efficient market for the sale of physical bullion in the US at anything resembling a 'spot price.' What is their number, where are their prices and trades posted? Who is buying and selling what, TODAY, with the real delivery of bullion as the primary objective?

There are several large markets for physical bullion in the world, where real buying and selling occurs, with delivery given and taken. The most famous is the London Bullion Market Association, which is an dealer association, over the counter market where the price is set twice a day as the 'London fix' but each counterparty stands on their own with no central clearing authority. From the perspective of bullion the LBMA is 'where the action is' and the Comex is a sideshow. Although there are recent revelations and suggestions that the LBMA is also slipping into a paper market with multiple claims on the same unallocated bullion, fractional reserve bullion banking as it were. Nothing new. It just gets more out of hand at certain times in history.

The reason that physical trading in bullion became so highly concentrated in London was best explained to me by one large bullion dealer. "This situation exists because of the gold confiscation in the US in 1933. When that happened, physical metal trading in the US came to a complete stop. When gold ownership was again made legal on December 31, 1974, the physical metal trading had become so developed outside of the US that it stayed there and never really returned."

But once the London Fix is over, and the day moves around the world, the New York markets open and become more dominant. Where and how is that price obtained? Where is the price discovery.

The fact of the matter is that the bullion market in the US is highly fragmented among many, many dealers in bullion. Yes they have their 'wholesale' sources, but even those sources are more fragmented than I would have imagined.

There seems to be no central market for physical gold and silver in the US, except for the largely paper futures markets. Because the fact of the matter is that the spot price of gold and silver are a type of Net Present Value (NPV) calculation based on the futures price in the nearest month, or the front month.

I had not been able to obtain the actual calculation used by any of the principle quote providers. And I am not saying that they are doing anything wrong at all. Or right for that matter, since I do not audit them or look over their shoulder. I do not know how accurate anyone's reportage might be, or how to explain the discrepancies between the futures prices and the spot prices that occur all too frequently these days. How can one without more transparent knowledge?

For those of you that are familiar with it, the spot price would be calculated from the futures in much the same way that the 'Fair Value' price is obtained for a stock index like the SP from the futures trade, essentially an NPV calculation.

FORMULA FOR DETERMINING FAIR VALUE

F = S [1+(i-d)t/360]

Where F = Fair Value futures price

S = spot index price

i = interest rate (expressed as a money market yield)

d = dividend rate (expressed as a money market yield)

t = number of days from the current spot value date to the value date of the futures contract.

So like most net present value calculations we would have some 'cost of money' figure used to discount the time decay from the strike time of the contract to the present. There is no dividend with gold for example, but there is a lease rate, and a proper calculation should include some allowance for this.

The details are not so important, again as I say, unless you wish to start up your own quotations service, or do your own pricing as a large dealer to make sure you know what a fair price might be.

What is important is that almost all retail transactions for physical bullion in the US key off a 'spot price' that is derived from a paper market which is not based in the reality of physical supply, since the futures exchanges explicitly allow for the settlement in cash if physical bullion is not available. In fact, the vast majority of transactions are settled in cash, and are little more than derivatives bets it seems, and often hedges related to other things like another commodity or interest rates.

So that is the truth of the spot price of gold and silver in the US as best as I can determine it. I am not saying that anyone is doing anything wrong or illegal. I am saying the system is inefficient in that it suffers from the lack of a robust physical market to 'keep it honest.'

Also, almost every trader I speak with does not really understand what the spot price really is, or the implications of what price discovery looks like in a fragmented market where the pricing is set by a group of speculators that rarely deal in the actual commodity itself.

I am surprised that indeed some smart entrepreneur has not consolidated the buying and selling of physical bullion on demand into a highly transparent and efficient market which is the real price setter, rather than the commodities exchanges in which arbitrage can be easily crushed by the very rules of the exchange that allow for unlimited position size, extreme leverage, cash settlement as an easy alternative to shortage, unaudited and unallocated stores of supply, and secrecy. We even recently saw the scandal where a large Wall Street broker was selling bullion and even charging the customer annual storage fees without ever having purchased the bullion for them in the first place!

The actual prices for stocks are published on a price by transaction basis on public exchanges whereas gold and silver have no such facility. That is a key difference, and why the futures market has a significant need for tighter reins on speculation including position limits, accountability for deliverables, and limits on leverage and speculation, more so than any other market. The metals markets are thin and small compared to the forex and financial asset markets, and therefore the most vulnerable when they intermix.

The futures market will be efficient and honest the more it takes on itself the rigors of a physical market. Even Alan Greenspan alluded to this, that the dollar reserve currency standard 'would work' as long as the Fed had the discipline to manage it as if it had the rigor of an external standard like gold. Well, you can toss that vain assumption about the self restraints of human nature out the window. Do you really think that bonus hungry traders are more virtuous and selflessly devoted to the public good than the economists at the Fed? Please.

And I have not spent any time discussing it, but when one has a price that is derived from even a publicly available albeit flawed price like the front month futures, without transparency in the derivation and updating the opportunity to skin pennies all day long is there as a temptation, since there is no official or easily calculable method to check its accuracy.

I contacted a few big dealers hoping to get intimations that there was some sort of a private wholesaler network, in which two or three regional distributors set prices based on available supply. There is a 'dealer market' in which prices in lots of twenty five bars of London ready gold is quoted, but that seems to be part of the parallel market in physical bullion centered around the LBMA that is divergent from the continuous paper price and the 'spot price.'

There is always a wholesale cost and a retail price with a markup. That is not an issue. What seems to be the problem is that when a few players can crush price with paper positions, this tends to remove the discpline of arbitrage of market mispricing from the picture. This is the only part of the efficient markets hypothesis that ever made any sense. If there is a price discrepancy, market players will move in to fill it. This is the case against manipulation.

Except they cannot really address any serious market mispricing because the price is set in the paper markets which are not amenable to efficient arbitrage. Unlimited leverage through derivatives, and the willingness of central banks to sell into the gold market to manage price spikes, again as Chairman Greenspan admitted, takes care of that. Not even a motivated buyer with deep enough pockets like China would take on this market openly because all they would do is buy against themselves, and drive a default which would be cash settled by force.

You might ask at this point, why would anyone ever wish to engage themselves in this market, besides those who must obtain supply for industrial or cosmetic uses? Few do actually, except to buy physical bullion at the retail level, and hold it as protection against the devaluation of currency and the monetization of the debt.

There are always professional speculators, but they tend to go with the momentum for the reasons outlined above. Its an easy trade. I sometimes play the arb myself, or at least maintain an awareness of it. You can't fight the Fed in the short term, and the financial engineers and statists hate anything that threatens to rival or even limit their power. But that does not mean that one might not insure themselves against the eventual failure of the new masters of the universe to control the large forces and unintended consequences of world markets. What I find so disappointing is that Greenspan knew all this. and wrote eloquently about it, before he sold himself to those who he had spent the bloom of his intellect opposing. I was never interested in this subject until I started reading his various biographies to understand his thinking better in the late 1990's, and then went on to read his early works on the state and freedom. If he had been a more noble figure his fall might have been a tragedy. As it is, it just seems to be another dishonorable failure of stewardship and conscience.

This is what you have. Whether it works well or not is another matter and it seems a personal opinion heavily biased on where you sit at the playing table. But from a purely economic perspective if I were going to set up a mechanism to allow price fixing and fraud to occur, I could do little better, except perhaps to set up something more like an opaque monopoly such as the Federal Reserve with the ability to create supply out of nothing. The investors and producers are largely at the mercy of those who control the paper markets And this says nothing about the involvement of the central banks in influencing the price, which they admit that they do, if only obliquely.

Sure one can say. If you don't like the price you can keep taking delivery, except that you can't. The price is set on the Comex, which delivers paper dollars at will, and has a history of changing its rules at the drop of a hat to rescue trapped suppliers and speculative shorts. This is the sort of odd market that resolves itself in executive actions precipitated by breakdowns and default.

There is nothing here that could not be greatly improved by position limits and much greater transparency and accountability for counterparty risk. CFTC Commissioner Bart Chilton has shown himself to be remarkably insightful and courageous in promoted these changes to the US futures markets in the metals. Far from an efficient and vigorous market, as Adrian Douglas said at the CFTC hearing the US is merely a "sidehow" to the London market when it is open for trading at least with respect to actual product. But as amenable as this paper based market is to the 'easy skim' one might imagine there is a status quo that would fight any reform vociferously.

To use a poker analogy, I don't mind a 'no limits' game as long as it is table stakes where you put your 'stash' on the table for all to see, which again this is not, and the pot is split if you are raised beyond your bankroll, which this is also not. I would not imagine that a no limits game in which the big players are also often the dealers, and can see the cards that other cannot because of their seating, is the best sort of a mechanism with which to conduct price discovery for the average person in the market, who only wishes to play a few hands on a limited budget, or a small producer who wishes to bring their product to market.

As someone who approaches it as an amateur economist, and has been looking at its dynamics for the past few years, I may be missing something, but this seems less like an efficient market mechanism for price discovery and capital allocation, and more like a carney game.