Best of the Week
Most Popular
1.Election Forecast 2015 - Opinion Polls Trending Towards Conservative Outright Win - Nadeem_Walayat
2.UK Solar Eclipse - End Time Sign, Judgement Day, Doomsday! - Nadeem_Walayat
3.Gold And Silver - When Will Precious Metals Rally? Not In 2015 - Michael_Noonan
4.Preparing for the Next Stocks Bear Market - Forecast 2015-2016 - Gary_Savage
5.Is a Stock Market Crash Imminent? - David Eifrig
6.Gold Price Slumps as US Dollar Soars, What's Next? - Nadeem_Walayat
7.US Dollar Forex Pairs and Gold Chartology - Rambus_Chartology
8.Election Forecast 2015: The Day Labour Lost the General Election - Nadeem_Walayat
9.The ECB Should End QE Next Month - EconMatters
10.Silver Price Poised to Surge - Zeal_LLC
Last 5 days
Ed Miliband Debate Election 2015 Analysis - Labour Spending, Debt and Economic Collapse - 31st Mar 15
Gold and Misery, Strange Bedfellows - 31st Mar 15
Why are Interest Rates So Low? Ben Bernanke, Confused as Ever, Starts His Own Blog to Prove It - 31st Mar 15
Don’t Celebrate the U.S. Housing Market Recovery Yet - 30th Mar 15
A Middle East Nuclear Holocaust - 30th Mar 15
Peak Gold? – Goldman Sachs Research Warns of Peak Gold Production - 30th Mar 15
With Yemen Burning, Arab Spring II Is Underway - 30th Mar 15
No FED Bets From the BIS - 30th Mar 15
Election Forecast 2015 - Debates Boost Labour Into Opinion Polls Seats Lead - 30th Mar 15
Economic Recovery, Geopolitics and Detergents - 30th Mar 15
U.S. Dollar, Commodities and the Gold Miners GDXJ ETF Analysis - 30th Mar 15
Stock Market Short-term Downtrend - 30th Mar 15
David Cameron Election 2015 Debate Facts Check - Employment, Immigration, Debt & Deficit - 29th Mar 15
Stock Market About Ready to Crash! - 29th Mar 15
Reflections in a Golden Eye - Gold Market Rejection, Repatriation and Redemption - 28th Mar 15
Stock Market Inflection Point - 28th Mar 15
Gold And Silver - What Moved Price? Bab el-Mandeb And Uranus Square Pluto. What?! - 28th Mar 15
Stock Market Investment Parachutes; Do You Have Yours? - 28th Mar 15
Peak Gold Misunderstanding, is Gold About to Run Out? - 28th Mar 15
Deflation Watch: Key U.S. Economic Measures Turn South - 27th Mar 15
The Hard-Earned Truth About Recreational Real Estate - 27th Mar 15
Bitcoin Price Still in Important Territory - 27th Mar 15
Stocks Bear Market Conditions - Index Market Range Warning - 27th Mar 15
BEA Leaves Q4 2014 U.S. GDP Growth Essentially Unchanged at 2.22% - 27th Mar 15
Brazil Economy Victim of Vulgar Keynesianism - 27th Mar 15
Gold to Fuel Silver Price Upleg - 27th Mar 15
Gold and Silver Stocks Will Rise Again! - 27th Mar 15
Risk of ‘World War’ between NATO and Russia on Ukraine as Yemen Bombed - 27th Mar 15
FOMC Minutes Turned The Gold Tide - 27th Mar 15
Sheffield Hallam Election Battle 2015 - Lib Dems Go to War Whilst Labour Sleeps - 27th Mar 15
Gold Effect On Mining & Shale Wasteland - 27th Mar 15
How Stock Investors Should Play the 2016 Presidential Race - 26th Mar 15
MidEast Energy Alert: Why the Crisis in Yemen Could Get Ugly Very Fast - 26th Mar 15
Stock Market Downward Spiral of Dumbness - 26th Mar 15
The Monetary Approach Reigns Supreme - 26th Mar 15
Stock Market Large Gap Down, Despite the Algos' Push Back - 26th Mar 15
Crude Oil Surges, Gold price Spikes as Middle East Tensions Escalate - 26th Mar 15
The U.S. Housing Market Recovery Is Fabricated Optimism - 26th Mar 15
Why Yemen Is The Next Saudi-Iranian Battleground - 26th Mar 15
The Crude Oil Price Crash and China Economic Slow Down - 26th Mar 15
Global Financial Markets Are More Distorted Than Ever Before - 26th Mar 15
One More Stock Market Rally and Then a Huge Drop Expected - 26th Mar 15
Danger Will Robinson - Stock Market Crash Warning - 25th Mar 15
Learn the Basics of Corrective Elliott Waves - 25th Mar 15
Why CNBC Is Hazardous to Your Financial Health! - 25th Mar 15
Will Your Retirement Accounts Survive The Coming Tax Code "Revolution"? - 25th Mar 15
US Dollar - Americas Phoenix - 25th Mar 15
California’s Epic Drought: Only One Year of Water Left! - 25th Mar 15
What’s Wrong With Silver? - 25th Mar 15
SPX Futures Appear Weak. WTIC and Gold May Be at Max Retracement - 25th Mar 15
We’re at the Dawn of a “New Energy Age” - 25th Mar 15
A Very Weak U.S. Economic Recovery - 25th Mar 15
Zero UK CPI Inflation Rate Prompts Deflation Danger Propaganda For Fresh Money Printing - 25th Mar 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

US Economy Still on Life Support

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

© 2005-2015 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