Best of the Week
Most Popular
1.The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - Doug_Wakefieldth
2.Tesco Meltdown Debt Default Risk Could Trigger a Financial Crisis in Early 2015 - Nadeem_Walayat
3.The Trend Every Nation on Earth Is Pouring Money Into - Keith Fitz-Gerald
4.Do Tumbling Buybacks Signal Another Stock Market Crash? - 26Mike_Whitney
5.Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - Nadeem_Walayat
6.Gold And Silver Price - Respect The Trend But Prepare For A Reversal - Michael_Noonan
7.U.S. Economy Faltering Momentum, Debt and Asset Bubbles - Lacy Hunt
8.Bullish Silver Stealth Buying - Zeal_LLC
9.Euro, USD, Gold and Stocks According to Chartology - Rambus_Chartology
10.Evidence of Another Even More Sweeping U.S. Housing Market Bust Already Starting to Appear - EWI
Last 5 days
More Downside Ahead for Gold and Silver - 31st Oct 14
QE Is Dead, Now You Tell Me What You Know - 31st Oct 14
Welcome to the World of Volatility - 31st Oct 14
Stocks Bear Market Crash Towards New All Time Highs as QE3 End Awaits QE4 Start - 31st Oct 14
US Mortgages, Risky Bisiness "Easy Money" - 30th Oct 14
Gold, Silver and Currency Wars - 30th Oct 14
How to Recognize a Stock Market “Bear Raid” on Wall Street - 30th Oct 14
U.S. Midterm Elections: Would a Republican Win Be Bullish for the Stock Market? - 30th Oct 14
Stock Market S&P Index MAP Wave Analysis Forecast - 30th Oct 14
Gold Price Declines Once Again As Expected - 30th Oct 14
Depression and the Economy of a Country - 30th Oct 14
Fed Ends QE? Greenspan Says Gold “Measurably” “Higher” In 5 Years - 30th Oct 14
Apocalypse Now Or Nirvana Next Week? - 30th Oct 14
Understanding Gold's Massive Impact on Fed Maneuvering - 30th Oct 14
Europe: Building a Banking Union - 30th Oct 14
The Colder War: How the Global Energy Trade Slipped From America's Grasp - 30th Oct 14
Don't Get Ruined by These 10 Popular Investment Myths (Part VIII) - 29th Oct 14
Flock of Black Swans Points to Imminent Stock Market Crash - 29th Oct 14
Bank of America's Mortgage Headaches - 29th Oct 14
Risk Management - Why I Run “Ultimate Trailing Stops” on All My Investments - 29th Oct 14
As the Eurozone Economy Stalls, China Cuts the Red Tape - 29th Oct 14
Stock Market Bubble Goes Pop - 29th Oct 14
Gold's Obituary - 29th Oct 14
A Medical Breakthrough Creating Stock Profits - 29th Oct 14
Greenspan: Gold Price Will Rise - 29th Oct 14
The Most Important Stock Market Chart on the Planet - 29th Oct 14
Mysterious Death od CEO Who Went Against the Petrodollar - 29th Oct 14
Hillary Clinton Could Be One of the Best U.S. Presidents Ever - 29th Oct 14
The Worst Advice Wall Street Ever Gave - 29th Oct 14
Bitcoin Price Narrow Range, Might Not Be for Long - 29th Oct 14
UKIP South Yorkshire PCC Election Win is Just Not Going to Happen - 29th Oct 14
Evidence of New U.S. Housing Market Real Estate Bust Starting to Appear - 28th Oct 14
Principle, Rigor and Execution Matter in U.S. Foreign Policy - 28th Oct 14
This Little Piggy Bent The Market - 28th Oct 14
Global Housing Markets - Don’t Buy A Home, You’ll Get Burned! - 28th Oct 14
U.S. Economic Snapshot - Strong Dollar Eating into corporate Profits - 28th Oct 14
Oliver Gross Says Peak Gold Is Here to Stay - 28th Oct 14
The Hedge Fund Rich List Infographic - 28th Oct 14
Does Gold Price Always Respond to Real Interest Rates? - 28th Oct 14
When Will Central Bank Morons Ever Learn? asks Albert Edwards at Societe General - 28th Oct 14
Functional Economics - Getting Your House in Order - 28th Oct 14
Humanity Accelerating to What Exactly? - 27th Oct 14
A Scary Story for Emerging Markets - 27th Oct 14
Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - 27th Oct 14
Europe Redefines Bank Stress Tests - 27th Oct 14
Stock Market Intermediate Correction Underway - 27th Oct 14
Why Do Banks Want Our Deposits? Hint: It’s Not to Make Loans - 26th Oct 14
Obamacare Is Not a Revolution, It Is Mere Evolution - 26th Oct 14
Do Tumbling Buybacks Signal Another Stock Market Crash? - 26th Oct 14
Has the FTSE Stock Market Index Put in a Major Top? - 26th Oct 14
Christmas In October – Desperate Measures - 26th Oct 14
Stock Market Primary IV Continues - 26th Oct 14
Gold And Silver Price - Respect The Trend But Prepare For A Reversal - 25th Oct 14
Ebola Has Nothing To Do With The Stock Market - 25th Oct 14
The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - 25th Oct 14
Japanese Style Deflation Coming? Where? Fed Falling Behind the Curve? Which Way? - 25th Oct 14
Gold Price Rebounds but Gold Miners Struggle - 25th Oct 14
Stock Market Buy the Dip or Sell the Rally - 25th Oct 14
Get Ready for “Stupid Cheap” Stock Prices - 25th Oct 14
The Trend Every Nation on Earth Is Pouring Money Into - 25th Oct 14 - Keith Fitz-Gerald
Bitcoin Price Decline Stopped, Possibly Temporarily - 25th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stocks Epic Bear Market

U.S. Government Investigation of Gold Price Manipulation

Commodities / Gold and Silver 2013 Mar 15, 2013 - 04:16 PM GMT

By: Midas_Letter

Commodities

Yesterday, the Commodity Futures Trading Commission, the regulator who ostensibly regulates the banks and major financial institutions who participate in the futures and commodities trading business, announced they were going to examine whether prices are being manipulated in the “world’s largest gold market”, according to a story in the Wall Street Journal.

For long time observers of the gold price and the fundamental and not-so-fundamental influences on its price movements, the announcement might have elicited a gasp of delight in the spirit of “It’s about time!”


No such excitement or relief will be long-lived, however. According to the Wall Street Journal piece, “The CFTC is looking at issues including whether the setting of prices for gold—and the smaller silver market—is transparent.”

Gold and Silver Spot Price

They’re referring to the process whereby twice daily, in the case of gold, and once daily, in the case of silver, the spot prices for those metals is set by teleconference by representatives from each of five banks: Barclays, Deutsche Bank AG, , HSBC Holdings, Bank of Nova Scotia, andSociété Générale. The silver pricing involves Bank of Nova Scotia, Deutsche Bank and HSBC.

While that process may indeed be compromised in terms of legitimacy to some degree (what process involving a major financial institution is not?), barring the revelation of large scale collusion and outright arbitrary price setting, it is not expected to unveil any major irregularities. That’s because the manipulation of the prices for precious metals is not a case of overt nominal manipulation. The prices set by the participants in the daily teleconferences is set by an examination of the existing orders to buy physical gold, versus orders to sell. More sellers than buyers, the price goes down, and vice versa.

The whole exercise is an opportunity for the perception management team at the banks to prove that, “Hey! See? The spot price of gold isn’t manipulated!” Well nobody is pointing to the setting of the spot price and saying that it has ever been manipulated. That’s a Red Herring of the first order, and this whole charade will be nothing more than a PR stunt that will feed media and justify mainstream media skepticism for years to come.

Futures Market Needs to be Regulated

It is the persistent unlimited origination of contracts for both gold and silver in the futures market for future purchase and sale of gold and silver many times the possible global supply that constitutes manipulation, in that they influence the demand for physical gold and silver by signaling future price direction. Which is contrary to the original function of futures markets, which was to provide a framework whereby banks could determine how much to lend a farmer for seed and equipment in the spring by estimating the price for the crops he would sow when harvested in the fall.


Amount of open interest was at an all year low at the end of August, which set the stage for physical demand to take the price higher.

The mechanism was maintained as a future price discovery tool by the existence of limits on the amount of commodity that could be traded in the future market based on what the total possible future market supply could be. Futures markets in wheat, for example, pre-empted by regulation any end-user, or buyer from issuing contracts to sell or to buy more wheat than could be produced in a given year.

Historically, the futures contract price for wheat was determined, simplistically, by a model that incorporated total world demand for wheat at time of sale versus total world availability of wheat relative to the cash price for wheat now. The participants were the farmer (supply) and the bank (financier), as well as the baker (demand). The financier’s role was limited to figuring out how much to safely lend the farmer, and also how much he could back the baker’s commitment to future delivery of wheat a set price. These were culturally governed roles where the interests of all participants was aligned toward mitigating loss and maximizing profit by offsetting risk.

As the futures exchanges evolved, and banking became more of a predatory profession as opposed to a facilitative one, the futures contracts themselves have become the objects of a gambling casino, and one where the house is the banks, as they originate and “roll over”, or negotiate a new contract sale or purchase instead of making good on a failed transaction. The commodities exchanges became gambling houses, where punters could buy and sell contracts without any intention of actually delivering or taking delivery.

The modern gambling hall is NYMEX and COMEX, where, with the cooperation of the CFTC and other government regulators, the rules governing the establishment and sale of futures contracts have been stripped down to the point where, today, futures contracts are originated with no requirement to reflect the actual supply and demand of any given commodity. They create the supply in paper form, and collude with each other to roll over contracts and swap losses in various further derivative instruments, and the net effect is a complex system of wagering and hedging that lets the banks drive spot commodity demand by generating as much paper supply as they require. Purchasers of the physical commodity are thus induced into selling, or refraining to buy, gold, silver, oil and any other commodity such a racket can be set up around.

This probe is meaningless, and a mere publicity stunt.

Bart Chilton Strikes Again

The idea was put forward by CFTC commissioner Bart Chilton, who said, “The idea that pervasive manipulation, or attempted manipulation is so widespread, it should make us all query the veracity of the other key marks. What about energy, swaps, the gold and silver fixes in London and the whole litany of ‘bors’?” he said, referring to Libor, Euribor and other benchmarks.

Bart’s last investigation into specific irregularities in silver trading, announced in 2008, was never formally concluded and no results have ever been announced. It appears to have been quietly swept under the rug, as the New York Times requests for comments were not responded to.

Until the regulatory deficiencies that permit exponentially excessive contract volume in futures and forwards, collusion among the major market participants, and no limit on positions by speculators are addressed, all of the misguided and sham investigations the CFTC can muster will have the same predictable outcome – business as usual for the futures markets participants who inflate, confound, and thus manipulate the prices of gold, silver and every other commodity they choose.

James West is the publisher of the highly influential and widely respected Midas Letter at midasletter.com. MidasLetter specializes in identifying emerging companies in gold and silver exploration at the beginning of their share price appreication curves, and regularly delivers 10 baggers (stocks that increase in value by at least a factor of 10) to his premium subscribers. Subscribe at http://www.midasletter.com/subscribe.php.

© 2013 Copyright Midas Letter - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Midas Letter Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014