Best of the Week
Most Popular
1.War on Cash, Bank of England Planning Hyper QE, Scrapping Cash for Digital Currency - Nadeem_Walayat
2.Stock Market End Run Smash Crash Looks Imminent... - Clive_Maund
3.Europe Refugee Crisis, UK to Repatriate 120,000 Hungarian Economic Migrants Back to Hungary - Nadeem_Walayat
4.The Great Deflation Will Destroy All Bubbles – These Too - Harry_Dent
5.Deflation Signals Abound for U.S. Dollar, Forex Markets and Commodities - Rambus_Chartology
6.U.S. Housing Market Two Outs in The Bottom of The Ninth - James_Quinn
7.Poland, Czech, Slovakia and Hungary Refugee Hypocrisy After Flooding UK with 4 Million Economic Migrants - Nadeem_Walayat
8.The Two Real Reasons Crude Oil Prices Are Currently Slipping - Dr. Kent Moors
9.R.I.P. Interest Rates - Andrew Snyder
10.Steps from a Deep October Stock Market Selloff - Bob_Loukas
Last 5 days
Stocks Bear Market Apocalypse Imminent Crash Gets Nuked Again - 6th Oct 15
Redesigning Internet and Facebook to Explore Their Full Potentialities... - 5th Oct 15
Nightshades Curb Your Enthusiasm - 5th Oct 15
U.S. Recession Watch, High-Yield – Rising Defaults - 5th Oct 15
The Social Challenge to Find Humanity in Capitalism - 5th Oct 15
Fed Interest Rate Hike: "I don't care. It doesn't really make much of a difference" - 5th Oct 15
Gold Rose 2.2%, Silver Surged 5.4% After Poor Jobs Number On Friday - 5th Oct 15
Gold, Silver Precious Metals: a Critical Week Ahead - 5th Oct 15
Stock Market Correction Still in Force - 5th Oct 15
Gold Price Change in Character - 5th Oct 15
Putin’s Blitz Leaves Washington Rankled and Confused - 4th Oct 15
More Selling for Stock Market, Gold? - 4th Oct 15
Gold And Silver – A Reality Check - 3rd Oct 15
Stock Market Primary IV Still, or Primary V Underway? - 3rd Oct 15
The Oil Industry’s Day of Reckoning - 3rd Oct 15
U.S. Interest Rate Hikes Keep On Slippin' Into the Future; Treasury Yields Sink Again - 3rd Oct 15
China's Stock Market Crashing; Time for Panic or Restraint - 3rd Oct 15
SPX Stocks Bulls Struggle to Regain the Upper hand... - 2nd Oct 15
The Two Faces of Stock Market Volatility - 2nd Oct 15
Money Supply and the Fed’s Serious Inflation Risks - 2nd Oct 15
Stock Market How Bad Can This Get, And How Fast? - 2nd Oct 15
A Worrying Set Of Recession Signals - 2nd Oct 15
Negative Jobs Report Sents SPX, TNX Lower - 2nd Oct 15
Don't be Fooled by the Recent Equity market Rallies. Its a Bear Market, Stupid! - 2nd Oct 15
US Bond Market - How to Fix This - 2nd Oct 15
Survival Secrets from Colorado Resource Investing Front Lines - 2nd Oct 15
What Two Risks From Rising Interest-Rates Could Each Trigger A New Global Crisis? - 1st Oct 15
Stock Market S&P 500 Volatility-Based Price Probability Range - 1st Oct 15
Dow Stock Market About To Crash Like October 1929? Get Your Physical Silver - 1st Oct 15
Stock Market Negative Expectations Once Again - Will It Break Down? - 1st Oct 15
Advice for Biotech Investors: 'Hold Your Powder' 'til Winter - 1st Oct 15
Best Short-Term Commodity Market Opportunities - Video - 1st Oct 15
The Coming Corporate "Crime Wave" - 30th Sept 15
Stock Market Retracement May Have Run Its Course - 30th Sept 15
A Stocks Bear Market Is Now More Likely Than Not - 30th Sept 15
The Killer Ape, Human Evolution, Artificial Intelligence and Extinction End Game - 30th Sept 15
Junk Bond Market Imminent Collapse Threatens (Unwelcome) BIG Rate Rises - 30th Sept 15

Free Instant Analysis

Free Instant Technical Analysis

Market Oracle FREE Newsletter

U.S. Government Investigation of Gold Price Manipulation

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

By: Midas_Letter


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 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

© 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

© 2005-2015 - 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

Biggest Debt Bomb in History