Best of the Week
Most Popular
1.Independent Scotland Will Disintegrate as Unionist Regions Demand Referendum's to Rejoin UK - Nadeem_Walayat
2.Bank of England Panic! Scottish Independence Bank Run Already Underway! - Nadeem_Walayat
3.Scottish Independence Referendum Result NO 55%, YES 45% - Vote Forecast - Nadeem_Walayat
4.Scotland Independence Result NO Win 55% to Yes on 45% - Nadeem_Walayat
5.US Dollar Forecast to Go Much Higher - David_Petch
6.Russian Union Of Engineers Accuses Ukraine Airforce In MH17 Crash - Raul_I_Meijer
7.The Emergence of the US Petro-Dollar - Gary_Dorsch
8.Don't Miss This Gold Buying Opportunity - Brien Lundinr
9.Silver Price: A Collapse and a Rally - DeviantInvesto
10.Silver Buyers Keep Stacking And Demand Higher Despite Falling Prices - 18th Sept 14 - GoldCore
Last 5 days
The Japanese Deflation Myth and the Yen’s Slump - 29th Sept 14
Epic Investor Optimism that Can Be Reversed Only by a Huge Stocks Bear Market - 29th Sept 14
Russia’s Gokhran Buying Gold Bullion In 2014 and Will Buy Palladium In 2015 - 29th Sept 14
The End of Monetary Policy - 29th Sept 14
Here's What Rising Interest Rates Really Do to Your Shares - 29th Sept 14
Is a Credible Stock Market Top Forming? - 29th Sept 14
Silver Price At or Very Close to an Important Low - 29th Sept 14
Gold Price Very Close to an Important Low - 29th Sept 14
Nihilism And The Unknown Future - 29th Sept 14
Stock Market S&P, NAS Change In Trend? None Apparent, But A Caveat - 29th Sept 14
UK Saved From I.S. Threat But Scottish Independence Nightmare is Not Over! - 29th Sept 14
U.S. Aggression - Will Russia and China Hold Their Fire? - 28th Sept 14
Currency Wars and the Death of the Euro - Audio - 28th Sept 14
Obscure Maritime Law Practically “Guarantees” Profits for These Energy Companies - 28th Sept 14
Stock Market Primary IV Underway? - 27th Sept 14
Darwin And The Climate Apocalypse - 27th Sept 14
The Global Middle Class and Copper Consumption, A Stop Spike Event - 27th Sept 14
Can Money Save The Climate? - 27th Sept 14
Gold And Silver - PetroDollar On Its Deathbed? PMs About To Rally? No - 27th Sept 14
Debt and Inflation Consquences of American Fear - 27th Sept 14
U.S. and Global Confidence are in Divergence - So Are Stock Markets - 27th Sept 14
Are U.S. Cars About to Crash? - 27th Sept 14
Why the U.S. Created and Armed ISIS From Libya to Syria - 27th Sept 14
Stock Market vs the Developing Bear Market for Liberal Democracy? - 26th Sept 14
Stock Market Major Selloff Looms - 26th Sept 14
How My Charts Uncovered Two Big Stocks That Are Soaring Like Small Caps - 26th Sept 14
What Cycles Reveal About Stock Market Crash - 26th Sept 14
Gold Not A Safe Haven On Terrorism, Middle East Bombing, Russia ... Yet - 26th Sept 14
Valuing Gold and Turkey Farming - 26th Sept 14
Gold $1200 Underpinned by Physical Demand - 26th Sept 14
Inflate or Die! When Leverage Fails and Market Hope Turns to Fear - 26th Sept 14
Market Forecasts for Stocks, Gold, Silver, Commodities, Financials and Currencies - 26th Sept 14
Gold and Silver Bear Phase III Dead Ahead - 26th Sept 14
The Home Depot Breach Boils Our Blood – and It Should - 26th Sept 14
Why the Pundits are Wrong About Crude Oil Prices - 26th Sept 14
Where’s the Economic Growth? - 26th Sept 14
Stock Market Future Bull - 25th Sept 14
The Specter of Global Debt Default is Once Again Rearing its Head - 25th Sept 14
All Major Market Analysis and Forecasts Investor Open House has Started! - 25th Sept 14
Federal Reserve Policies Cause Booms and Busts - 25th Sept 14
Currency Wars Deepen - Russia, Kazakhstan Buy Very Large 30 Tons Of Gold In August - 25th Sept 14
Strong U.S. Dollar Pressures Gold - 25th Sept 14
10 Things That Affect Your Purchasing Power - 24th Sept 14
US Government - The World’s Largest Subprime Debtor - 24th Sept 14
Venezuela's Gold Appears To Be Still In Venezuela But For How Long? - 24th Sept 14
The Washington-Wall Street "Corruption Corridor" - 24th Sept 14
The Poison Eating at the Heart of Macroeconomics - 24th Sept 14
Gold And Silver Voodoo Analysis Price Forecasts - 24th Sept 14
Stock Market Decline Below Wave (iv) Low - 24th Sept 14
How Falling Oil Prices Could Trigger an "Unpredictable and Dangerous Mess" - 24th Sept 14
The Quick Slide From Hope to Despair As War Returns--If It Ever Went Away - 24th Sept 14
Hedge Funds Surpass 2007 Leverage; New Era of 'Permanent Investigations' Confirms Imminent Reversal - 23rd Sept 14
Home Healthcare Cuts Threaten 500,000 Jobs and Female-Owned Businesses - 23rd Sept 14
Silver, Gold, Debt and Taxes - 23rd Sept 14
A Post-Petrodollar Play for Triple-Digit Gains - 23rd Sept 14
Regime Uncertainty Weighs on U.S. Economic Growth - 23rd Sept 14
Bread, Circuses and Bombs - Decline of The American Empire - 23rd Sept 14
Has The Gold Price Drop Run Its Course? - 23rd Sept 14
Stocks Rally Following Janet Yellen's Conference and Scotland's Historic Referendum Result - 23rd Sept 14
Why Isn’t U.S. Housing Market A Bubble? - 23rd Sept 14
The Macro View and the Stock Market - 23rd Sept 14
Gold, the Fed and the Looming Stock Market Correction Q&A - 23rd Sept 14
Can Gold Act as a Safe Haven Again? - 23rd Sept 14
Tesco Super Market Giant Fast Disappearing Down a Financial Black Hole - 22nd Sept 14
Where China and Japan Are Investing Billions - 22nd Sept 14
Scotland YES 71% - Global Youth Intifada Moves On - 22nd Sept 14
U.S. Dollar: The Last Hurrah? - 22nd Sept 14
China Moves To Dominate Gold Market With Physical Exchange - 22nd Sept 14
One Giant Cluster Ponzi - 22nd Sept 14
The Millenial Cult Of Global Warming - 22nd Sept 14
Dubai Residential is NOT a Property Bubble But the Party’s Over - 22nd Sept 14
Stock Market Topping Process Update - 22nd Sept 14
Indian Stock Market BSE SENSEX The Encore Rally - 21st Sept 14
ISIS Fear-Mongering Ahead of Another US False Flag? - 21st Sept 14
Ecology Politics And Haeckel's Tree Of Meaning - 21st Sept 14
ASX200 Stock Market Index Set For New Highs - 21st Sept 14
Scottish Referendum Not Avoiding The Future - 21st Sept 14
Five Lessons Learned from the Scottish Referendum - 21st Sept 14
The Problem With UKIP And Other I I P's - 21st Sept 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Most Exciting Event in the History of Technical Analysis

Gold Markets Are Not Efficient, Don't Reflect Fundamentals and Understate Market Value

Commodities / Gold and Silver 2013 Oct 10, 2013 - 04:42 PM GMT

By: Julian_DW_Phillips

Commodities

It may be in the reader's mind that somehow all gold markets come together at some point and an exact representation of demand and supply is given by the gold price. The reality is that most markets are entirely separate from each other and reflect the buying and selling in that individual market only.

These markets are only joined by the 'arbitrage' activity, usually only by the professionals in the market -- banks mainly -- who can both electronically and physically move gold from one market to another.


Arbitrage, or dealing between two markets for instant profits, has always been very profitable. An arbitrageur will often deal in gold and currencies simultaneously, profiting on each 'book' throughout a day.

With the world's richest banks involved in nearly all global financial markets and capable of moving prices to suit themselves, it becomes easy to ensure prices either do or don't reflect demand and supply. We look into the different markets and how that can happen below. We start with the best known of the U.S. gold financial markets: COMEX.

COMEX

A fact that is usually overlooked in the media when they comment on COMEX is that the physical transactions that take place there, account for a maximum of 5% of transactions. It is only these that could have a direct bearing on the gold price. How?

Ninety-five percent of transactions in the futures and options markets are terminated before they reach the date on which gold has to be delivered. The purpose of this is not simply to make profits (which are the sole purpose of the speculator) but to hedge a physical position. As we discussed in an earlier part of the series, such moves are to protect against the risk gold prices pose to a miner or manufacturer who profits from the business of producing gold products.

But they can be used by a speculating institution, such as Goldman Sachs or J.P. Morgan Chase, who as they did in April, sold around 400 tonnes of gold on COMEX with the full intention of buying the gold back before the contracts matured. Let's be clear: this was not a gold transaction, but a financial transaction only linked to the gold price. It did not involve the movement of gold, nor did it affect the gold price directly (except through the psychological impact on the gold market itself).

In conjunction with the positions established in the futures and options markets, the banks and their clients sold 100 tonnes of physical gold very quickly so as to swamp the gold market, as the SPDR gold ETF was seeping gold from U.S. gold funds. Since the beginning of the year to May, the U.S. sold around 1,000 tonnes of gold. Together this huge amount of physical gold (in a market whose daily supply of gold is just over 11 tonnes) reaped around $6 billion in speculative profits and knocked back the gold price around $460 an ounce.

Speculators will argue that they are part of the supply/demand equation and they are, but are not part of the big picture of either supply or demand. This is because their short-term positions are always closed out. They are, as we described in the first part of the series, like waves on the seashore going both ways, but not affecting either the tide or the current.

Because they're part of the highly sophisticated market mechanisms, including high speed computer trading, they can, and freely do, affect prices in the short-term.

But what happened to the gold that was sold out of the U.S.? It went to refineries in Switzerland, in particular, and from there to Asia, never to return. That final move is part of the current and tidal effect of the market.

Just as the massive hedging of the last century we looked at in the second part was 'de-hedged', post 2005, to accelerate the rise of the gold price, so will any attempt to buy back the gold into the U.S. impact the gold price and take it higher.

Distribution of Gold, Globally

As unseen, potential manipulator of the gold price lies in the distribution system itself.

You will note how in both China and in India, there are premiums on the gold price of varying sizes. For instance, in India the premium on the gold price has been as high as $40, but it has now dropped to between $5 and $7. In China it has also varied around $15.

The difference between the two nations is that in China, the gov't wants the Chinese market to import more and more gold, whereas in India the gov't wants to import less and less gold.

So why are there any premiums at all in China? The bullion banks that supply the Chinese market will no doubt cite the rising demand runs ahead of the volume of supplies they expected to be brought in. This is a weak argument, for any normal supplier carries stock to meet unexpected demand, particularly from a country where they know demand is rising. But for some reason, supplies have usually been less than demand, which has had to wait for new supplies, hence the premium. But this premium is the additional cost of gold over and above the price, which goes into the pockets of the suppliers. This is of course a form of manipulation.

That's also why it is not surprising that the Chinese authorities have expanded the number of import licenses to include manufacturers importing more than 10 tonnes a year. As these licenses are used, we would expect these premiums to dissipate over time.

It may be that the banks that import bullion to China were delaying or reducing import orders to engineer the premiums that they received, but it would also happen if they wanted to slow the rise of the gold price. What is clear is that the importing banks have a means of manipulating the gold price in the shipping of gold.

Gov't Price Manipulation

Over in India, the gov't attacked the importing of gold by raising import duties, initially. Add to this the confusing nature of the actual legislation and Customs at the airports where gold is flown in, halted the release of the gold until they were clear on how the new system of 20% for export and 80% for import would work. Both these gov't actions slowed imports of gold to almost a halt in August, resulting in 3.5 tonnes of gold imported in August against the usual amount close to 70 tonnes.

The aim of these measures was not to interfere with the price of gold, it was to reduce the Current Account deficit. We know that these measures will only work in the short-term as smuggling will replace the import deficit of gold.

The Indian family expects misgovernment and interference such as this and is happy to ignore it, for in the last century there was a period when gold imports were actually banned. But the gold continued to come in from Dubai and across the long coast of western India. Boats would meet the fast speedboats with silver and exchange it for gold, thus avoiding risks on the Rupee.

The Indian gov't is fully aware of this, but the advantage of taking such a line is that the official Current Account Deficit will fall while unreported imports of gold avoid adding to the CAD. The CAD will in reality rise still but be off the books. This too is a manipulation of the gold price as pent-up demand adds to the premiums being charged.

Evidence of this was seen in the last couple of weeks when the premium fell from over $40 an ounce of gold to $5 - $7, as Customs released imported gold, to the internal gold market. Now gold imports volumes will jump, restrained only by the need to import 20% of the gold order for re-export. Indian importers are wily enough to export to known buyers who will alter the gold sufficiently so as to send it back to India.

With a superb Monsoon giving the farming community bumper harvests the demand from October onwards will be very strong.

So what's the Indian government's next move? We see it as a politically incorrect move on the part of gov't to interfere with the Indian gold market until after next year's elections.

Before then, the Indian gov't may be faced with a reserves crisis as its indebtedness relative to reserves becomes critical. It has already made exploratory moves to see what gold they can 'harness' to support the Rupee. But this will prove a very positive for the gold price, but this may have to wait until after the elections.

The point is that gov'ts can act directly to manipulate gold prices inside their country, whether to its detriment or positively.

Additional moves that government's use are the addition of Value Added Taxes, limitations on the amount to be imported, but most significantly - and one we expect in the near to medium-term -- is outright confiscation of gold.

This need not take the form it did in the U.S in 1933. A gov't can supply gold 'bonds' (3 years term, in the case of India is proposed) against the voluntary delivery of gold to its agencies with interest in the form of cash or gold paid to citizens. Then it is simply a matter of extending the term at the government's option.

Where gold is already sitting in bank deposits, the 'harnessing' of gold is easier. We think of how cash and gold deposited in this way becomes unsecured loans (remember Cyprus!). It's a small step to instruct banks to pass that gold to them 'for a period'. When a country believes it is in its national interests to take such measures, they will be taken.

Hold your gold in such a way that governments and banks can't seize it! Enquire @ admin@StockbridgeMgMt.com

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2012 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Julian DW Phillips 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