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UPDATE: The Argentine Trade Balance missed surplus expectations by the most in 3 years (and 2nd most on record).
As those who follow Zero Hedge on twitter know, we have recently shown a keen interest in the collapse of the Argentine currency reserves – most recently at $29.4 billion – which have been declining at a steady pace of $100 million per day over the past week, as the central bank desperately struggles to keep its currency stable. Actually, make that struggled. Here is what we said just yesterday:
The decline continues: ARGENTINA’S RESERVES FELL $80M TODAY TO $29.4B: CENTRAL BANK
— zerohedge (@zerohedge) January 22, 2014
As of today it is not just the collapse in the Latin American country’s reserves, but its entire currency, when this morning we woke to learn that the Argentina Peso (with the accurate identifier ARS), had its biggest one day collapse since the 2002 financial crisis, after the central bank stopped intervening in currency markets. The reason: precisely to offset the countdown we had started several days back, namely “an effort to preserve foreign exchange reserves that have fallen by almost a third over the last year” as FT reported.
As the chart below shows, the official exchange rate cratered by over 17% when the USDARS soared from 6.8 to somewhere north of 8.
But as most readers know, just like in Venezuela, where the official exchange rate is anywhere between 6.40 and 11, and the unofficial is 78.85, so in Argentina the real transactions occur on the black market, where they track the so-called Dolar Blue, which as of this writing just hit an all time high of 12.90 and rising fast.
What happens next? Nothing good. “The risk of capital flight is rising by the minute. This will be very hard to control,” wrote Dirk Willer, strategist at Citigroup, adding that liquidity had “largely disappeared” with a risk of Venezuela-style capital controls. Ah Venezuela – that socialist paradise with a soaring stock market… even if food or toilet paper are about to become a thing of the past.
Some other perspectives via the FT:
Siobhan Morden of Jeffries said: “This is not an administration that respects or understands market pressure. They have been in the early stages of currency crisis since December, and yet their main strategy has been to pay off arrears and try to attract foreign direct investment.”
Luis Secco, Buenos Aires economist, said “It is hard to figure out what is the logic behind the authourities decision to let the peso so abruptly, without any other accompanying macroeconomic policy. It’s possible that the authorities would rather see a strong rise in the dollar, than lose, again, a large quantity of reserves.”
“It is a potentially dangerous situation…not least because it could give the impression that the authorities don’t have a very clear idea of how to manage the situation.”
Ricardo Delgado, Buenos Aires economist, said on Wednesday: “The government faces a dilemma. It wants to stop reserves from falling. But that means less imports and thus lower growth, as the economy is very dependent on imports. So the question is: do you want more growth, or higher foreign reserves.“
However, with the “currency run” having once again begun, absent a wholesale bailout and/or backstop by “solvent” central banks of Argentina, a country which has hardly been on good speaking terms with the western central banks, there is little that the nation can do.
So for all those morbidly curious individuals who are curious what the slow-motion train wrecked death of yet another currency will look like, below is a link to the DolarBlue website, aka the front row seats where the true level of the Argentina currency can be seen in real time. If and when this number takes off parabolically, that’s when the panic really begins – first in Argentina, then elsewhere.
Of course, it’s not just Argentina – most of the world’s emerging market FX is getting hammered year-to-date…
Banks bound by cooperation agreements in an interest-rate rigging probe are providing a windfall of information to U.S. prosecutors investigating possible currency manipulation, according to a Justice Department official and a person familiar with the matter.
“We’ve seen tangible, real results,” Mythili Raman, the acting head of the Justice Department’s criminal division, said in an interview. The cooperation “expanded our investigations into the possible manipulation of foreign exchange and other benchmark rates,” said Raman, who declined to name the banks or comment further on the probe.
The accords have compelled some lenders to conduct internal examinations of their foreign-exchange businesses and share findings with the Justice Department, speeding the government’s criminal probe into the $5.3 trillion-a-day market, according to a person with knowledge of the investigation.
Some banks are handing over lists of potential witnesses, making employees available for interviews and giving up documents without subpoenas, said the person, who asked not to be identified because the inquiry is confidential. Investigators are holding weekly and sometimes daily phone calls with the banks, the person said.
UBS AG (UBSN), Barclays Plc (BARC) and Royal Bank of Scotland Group Plc resolved a Justice Department investigation into how the London interbank offered rate, or Libor, was set, paying more than $800 million in criminal fines and penalties and agreeing to cooperate in other inquiries. The three lenders are among the largest currency traders in the world.
Dominik von Arx, a spokesman for UBS, Nichola Sharpe at Barclays and Sarah Small at RBS, declined to comment.
Rabobank Groep, which also paid the U.S. a $325 million criminal penalty to settle Libor-rigging allegations in a deferred-prosecution agreement, doesn’t rank among the top 20 currency traders in the world, according to Euromoney Institutional Investor Plc. (ERM)
“Rabobank fully cooperates with regulators pursuant to the deferred-prosecution agreement,” Roelina Bolding, a spokeswoman for the Utrecht, Netherlands-based firm, said in an e-mail. “Rabobank does not otherwise comment on pending investigations of Rabobank or of any other person or entity.”
In addition to the settlements with the four banks, the U.S. Libor probe, which is continuing, has led to criminal charges against eight individuals.
Without the cooperation agreements, the banks would have been less motivated to come forward about currency trading, said Laurie Levenson, a professor at Loyola Law School in Los Angeles.
“I don’t think they would have as much incentive and you’d have pushback from individuals at the bank who are saying ‘Why are we doing this?’” Levenson said in an interview. “‘This is our own business and we’re being overly cautious.’”
The cooperation agreements also allow the government to advance the probe without overtaxing law enforcement resources, which have been stretched by budget cuts, hiring freezes and furloughs in recent years. In addition to the Justice Department’s criminal and antitrust divisions, European Union antitrust regulators, the U.K. Financial Conduct Authority and the Swiss Competition Commission are probing rigging of currency benchmarks. The Federal Reserve also is examining the matter, Bloomberg reported earlier this month.
“You could be talking about potentially millions of e-mails and thousands of hours of tape,” said Douglas Tween, a former Justice Department lawyer, now at law firm Baker & McKenzie LLP in New York.
The Justice Department “doesn’t have the resources to cull through all of that times 10 banks or 20 banks. They really to a large extent rely on the banks to cooperate and essentially give them all this evidence on a silver platter.”
Authorities around the world are investigating alleged abuse of financial benchmarks by companies that play a central role in setting them. Other rates under investigation include the ISDAfix, used to determine the value of interest-rate derivatives. European and U.S. regulators also are reviewing allegations of collusion in crude oil and biofuels markets in scrutinizing how the Platts oil benchmark is set.
Financial institutions have paid about $6 billion so far to resolve criminal and civil claims in the U.S. and Europe that they manipulated benchmark interest rates.
To resolve the Justice Department’s charges, UBS, RBS and Barclays signed deferred-prosecution or non-prosecution agreements within the past two years that effectively put the banks on probation and obliged them to report possible misconduct and cooperate in benchmark-rigging investigations. The banks risk indictment if the government decides they aren’t being cooperative, Tween said.
“Once they’ve got you on one thing, they’ve really got you,” said Tween. “They’ll say ‘You haven’t been cooperative and haven’t lived up to the terms of your deferred-prosecution agreement, and we’re going to pull the plug on that and indict you.’”
Barclays, based in London, agreed to notify the Justice Department of “all potentially criminal conduct by Barclays or any of its employees that relates to fraud or violations of the laws governing securities and commodities markets.” Zurich-based UBS agreed to similar terms.
Edinburgh-based RBS promised to cooperate in “any and all matters” related to “manipulation, attempted manipulation, or interbank coordination of benchmark rate submissions.”
Bloomberg News reported in June that currency dealers said they had been front-running client orders and attempting to rig foreign-exchange rates for at least a decade by colluding with counterparts and pushing through trades before and during the 60-second windows when the benchmarks are set.
The world’s seven biggest foreign-exchange dealers have now all taken action against their employees: at least 17 traders have been suspended, put on leave or fired.
The Justice Department’s use of deferred- and non-prosecution agreements has been rising over the past decade from an average of four per year between 2000 and 2004 to 27 in 2013, according to data compiled by the law firm Gibson, Dunn & Crutcher LLP. Last year was the fifth consecutive year with at least 20 such settlements, the firm said.
“These agreements are now a fixture in the federal corporate law enforcement regime, and all indications point to their use holding steady for the foreseeable future,” the firm said.
The agreements help the government conduct broader investigations faster, said Robertson Park, a former federal prosecutor who worked on the Libor investigation.
“If suddenly you have an institution that is effectively giving you the information and documents and data you need, if they’re motivated to provide it in formats that are immediately available and useful to you and if they’re making witnesses available, that can be a significant time savings,” said Park, a lawyer at Murphy & McGonigle in Washington.
To contact the editor responsible for this story: Sara Forden at firstname.lastname@example.org
Submitted by Peter Schiff via Euro Pacific Capital,
Dedicated readers of The Wall Street Journal have recently been offered many dire warnings about a clear and present danger that is stalking the global economy. They are not referring to a possible looming stock or real estate bubble (which you can find more on in my latest newsletter). Nor are they talking about other usual suspects such as global warming, peak oil, the Arab Spring, sovereign defaults, the breakup of the euro, Miley Cyrus, a nuclear Iran, or Obamacare. Instead they are warning about the horror that could result from falling prices, otherwise known as deflation. Get the kids into the basement Mom… they just marked down Cheerios!
In order to justify our current monetary and fiscal policies, in which governments refuse to reign in runaway deficits while central banks furiously expand the money supply, economists must convince us that inflation, which results in rising prices, is vital for economic growth.
Simultaneously they make the case that falling prices are bad. This is a difficult proposition to make because most people have long suspected that inflation is a sign of economic distress and that high prices qualify as a problem not a solution. But the absurdity of the position has not stopped our top economists, and their acolytes in the media, from making the case.
A January 5th article in The Wall Street Journal described the economic situation in Europe by saying “Anxieties are rising in the euro zone that deflation-the phenomenon of persistent falling prices across the economy that blighted the lives of millions in the 1930s-may be starting to take root as it did in Japan in the mid-1990s.” Really, blighted the lives of millions? When was the last time you were “blighted” by a store’s mark down? If you own a business, are you “blighted” when your suppliers drop their prices? Read more about Europe’s economy in my latest newsletter.
The Journal is advancing a classic “wet sidewalks cause rain” argument, confusing and inverting cause and effect. It suggests that falling prices caused the Great Depression and in turn the widespread consumer suffering that went along with it. But this puts the cart way in front of the horse. The Great Depression was triggered by the bursting of a speculative bubble (resulted from too much easy money in the latter half of the 1920s). The resulting economic contraction, prolonged unnecessarily by the anti-market policies of Hoover and Roosevelt, was part of a necessary re-balancing.A bad economy encourages people to reduce current consumption and save for the future. The resulting drop in demand brings down prices.
But lower prices function as a counterweight to a contracting economy by cushioning the blow of the downturn. I would argue that those who lived through the Great Depression were grateful that they were able to buy more with what little money they had. Imagine how much worse it would have been if they had to contend with rising consumer prices as well. Consumers always want to buy, but sometimes they forego or defer purchases because they can’t afford a desired good or service. Higher prices will only compound the problem. It may surprise many Nobel Prize-winning economists, but discounts often motivate consumers to buy – -try the experiment yourself the next time you walk past the sale rack.
Economists will argue that expectations for future prices are a much bigger motivation than current prices themselves. But those economists concerned with deflation expect there to be, at most, a one or two percent decrease in prices. Can consumers be expected not to buy something today because they expect it to be one percent cheaper in a year? Bear in mind that something that a consumer can buy and use today is more valuable to the purchaser than the same item that is not bought until next year. The costs of going without a desired purchase are overlooked by those warning about the danger of deflation
In another article two days later, the Journal hit readers with the same message: “Annual euro-zone inflation weakened further below the European Central Bank’s target in December, rekindling fears that too little inflation or outright consumer-price declines may threaten the currency area’s fragile economy.” In this case, the paper adds “too little inflation” to the list of woes that needs to be avoided. Apparently, if prices don’t rise briskly enough, the wheels of an economy stop turning
Neither article mentions some very important historical context. For the first 120 years of the existence of the United States (before the establishment of the Federal Reserve), general prices trended downward. According to the Department of Commerce’s Statistical Abstract of the United States, the “General Price Index” declined by 19% from 1801 to 1900. This stands in contrast to the 2,280% increase of the CPI between 1913 and 2013
While the 19th century had plenty of well-documented ups and downs, people tend to forget that the country experienced tremendous economic growth during that time. Living standards for the average American at the end of the century were leaps and bounds higher than they were at the beginning. The 19th Century turned a formerly inconsequential agricultural nation into the richest, most productive, and economically dynamic nation on Earth. Immigrants could not come here fast enough. But all this happened against a backdrop of consistently falling prices.
Thomas Edison once said that his goal was to make electricity so cheap that only the rich would burn candles. He was fortunate to have no Nobel economists on his marketing team.They certainly would have advised him to raise prices to increase sales. But Edison’s strategy of driving sales volume through lower prices is clearly visible today in industries all over the world. By lowering prices, companies not only grow their customer base, but they tend to increase profits as well. Most visibly, consumer electronics has seen chronic deflation for years without crimping demand or hurting profits. According to the Wall Street Journal, this should be impossible.
The truth is the media is merely helping the government to spread propaganda. It is highly indebted governments that need inflation, not consumers. But before government can lead a self-serving crusade to create inflation, they must first convince the public that higher prices is a goal worth pursuing. Since inflation also helps sustain asset bubbles and prop up banks, in this instance The Wall Street Journal and the Government seem to be perfectly aligned.
This Graceless Age…
The consumption-oriented lifestyle could in no way scale across 7 billion people, so this was always a zero sum game between haves and have nots.
Global policy-makers saved the globalized ponzi scheme from itself in 2008. Now having squandered all resources, the odds that they can save it again are somewhere between zero and impossible. The first melt-down to weaken the model. This next one to kill it, for good…
The New Rome
Worthless political thought dealers. Vacuous media buffoons. Country club CEOs hell bent on liquidating their own country. Wall Street greed idolators. Self-important billionaires sprinkling their Central Bank-inflated wealth on the indolent masses. Hollywood’s fake gods and goddesses saving the world one comic book remake at a time. Steroid-bloated millionaire athletes pimping factory slave made sneakers to poverty-stricken inner city youth at $150 a pair. Testosterone-depleted boy-men running around like refugees, incapable of anything beyond their own immediate self-gratification. Idiocratic masses, stewing in a lethal cauldron of junk food and junk culture – too stoned to realize how stoned they are.
Life Without SUVs: Inconceivable
Third grade math indicates that the consumption-oriented lifestyle is in no way scalable across 7 billion people. In the U.S. alone, 5% of the world’s population consume 20% of global resources. It’s a tale of moral and intellectual bankruptcy that today’s thought dealers would allow so much legacy industrial assets to be liquidated just to propagate the fundamentally unsustainable for a few years longer. Despite doubling 229 years worth of national debt in just the past 7 years, today’s dumbfucked leaders, clueless academics, and the Idiocracy at large just can’t face the idea that their overriding mission to consume this planet, is now ending.
Anyone who reads this after-the-collapse, must come to terms with the fact that they were financially bludgeoned merely because they took all of the above decadence for granted – “business as usual”. And the fact that they were incapable of third grade math or otherwise had their heads buried straight up their own ass. Even at this late stage, the vast majority are totally bought in to the status quo and its inherent exploitation-based mentality. It’s totally unquestioned.
What to tell the grandchildren?
“Yeah, we thought it was odd – trying to borrow our way out of a debt crisis. And we really felt bad about bankrupting your generation, but those shopping sprees were fantastic. Personally, I was skeptical trusting the same morons with the global financial system after they crashed it in 2008, but then Bernanke gave them a free bailout and a lot more gambling money, so they seemed happy. I was really taken aback when the Chinese stopped lending us their money – after all, we’d been paying them $.10 on the dollar in wages. Totally ungrateful. Overall though, I’ll be honest, I was too busy watching the Dow, the NFL and Faux News, so I really had no clue what the hell was going on in the real world…”.
And now, we just learned, 400 Priests defrocked by the Pope over a two year period, for child molestation. A thousand plus years of shameful secrets disgorged in one exhale. Do we really believe that this is all a modern problem? That this legacy of sexual abuse has not been secretly propagated for centuries? Of course not. Suffice to say, This is a bad time to be left faithless, going into what will very likely be the most deadly period in human history.
I highly doubt that the U.S. would ever turn full blown communist – let’s face it, today’s phony Obama-socialism is nothing more than foodstamp-based riot control while billionaires complete the estate sale. Those Americans who honestly think that the U.S. is on the verge of socialism, need to take their first-ever trip outside of the U.S. and get some fucking perspective. That said, there are several well known countries where opinions are turning decidedly against capitalism, not the least of which is Japan. Suffice to say, the age of Sociopathic Corporations run by sociopathic frat boys is coming to its inevitable bad ending.
What difference can one man make in all of this madness? I’ve met enough good people in my lifetime to know that they are out there. They are just few and far between. Therefore the hope is that the impending “reset” bludgeons today’s amoral self-absorbed jackasses and their dumbfuck ideas into abject oblivion, all while keeping enough of decent humanity still intact to rebuild upon.
I realize that’s a stretch, but it’s all I’ve got…
P.S. Scroll down. My new blog background reflects the end of a graceless age and the (eventual) promise of a new and better one. Not the end. The beginning.
Or it might just be the stronger Prozac. Who knows?
Paul Craig Roberts and Dave Kranzler
The deregulation of the financial system during the Clinton and George W. Bush regimes had the predictable result: financial concentration and reckless behavior. A handful of banks grew so large that financial authorities declared them “too big to fail.” Removed from market discipline, the banks became wards of the government requiring massive creation of new money by the Federal Reserve in order to support through the policy of Quantitative Easing the prices of financial instruments on the banks’ balance sheets and in order to finance at low interest rates trillion dollar federal budget deficits associated with the long recession caused by the financial crisis.
The Fed’s policy of monetizing one trillion dollars of bonds annually put pressure on the US dollar, the value of which declined in terms of gold. When gold hit $1,900 per ounce in 2011, the Federal Reserve realized that $2,000 per ounce could have a psychological impact that would spread into the dollar’s exchange rate with other currencies, resulting in a run on the dollar as both foreign and domestic holders sold dollars to avoid the fall in value. Once this realization hit, the manipulation of the gold price moved beyond central bank leasing of gold to bullion dealers in order to create an artificial market supply to absorb demand that otherwise would have pushed gold prices higher.
The evidence of gold price manipulation is clear. In this article we present evidence and describe the process. We conclude that ability to manipulate the gold price is disappearing as physical gold moves from New York and London to Asia, leaving the West with paper claims to gold that greatly exceed the available supply.
The primary venue of the Fed’s manipulation activity is the New York Comex exchange, where the world trades gold futures. Each gold futures contract represents one gold 100 ounce bar. The Comex is referred to as a paper gold exchange because of the use of these futures contracts. Although several large global banks are trading members of the Comex, JP Morgan, HSBC and Bank Nova Scotia conduct the majority of the trading volume. Trading of gold (and silver) futures occurs in an auction-style market on the floor of the Comex daily from 8:20 a.m. to 1:30 p.m. New York time. Comex futures trading also occurs on what is known as Globex. Globex is a computerized trading system used for derivatives, currency and futures contracts. It operates continuously except on weekends. Anyone anywhere in the world with access to a computer-based futures trading platform has access to the Globex system.
In addition to the Comex, the Fed also engages in manipulating the price of gold on the far bigger–in terms of total dollar value of trading–London gold market. This market is called the LBMA (London Bullion Marketing Association) market. It is comprised of several large banks who are LMBA market makers known as “bullion banks” (Barclays, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorganChase, Merrill Lynch/Bank of America, Mitsui, Societe Generale, Bank of Nova Scotia and UBS). Whereas the Comex is a “paper gold” exchange, the LBMA is the nexus of global physical gold trading and has been for centuries. When large buyers like Central Banks, big investment funds or wealthy private investors want to buy or sell a large amount of physical gold, they do this on the LBMA market.
The Fed’s gold manipulation operation involves exerting forceful downward pressure on the price of gold by selling a massive amount of Comex gold futures, which are dropped like bombs either on the Comex floor during NY trading hours or via the Globex system. A recent example of this occurred on Monday, January 6, 2014. After rallying over $15 in the Asian and European markets, the price of gold suddenly plunged $35 at 10:14 a.m. In a space of less than 60 seconds, more than 12,000 contracts traded – equal to more than 10% of the day’s entire volume during the 23 hour trading period in which which gold futures trade. There was no apparent news or market event that would have triggered the sudden massive increase in Comex futures selling which caused the sudden steep drop in the price of gold. At the same time, no other securities market (other than silver) experienced any unusual price or volume movement. 12,000 contracts represents 1.2 million ounces of gold, an amount that exceeds by a factor of three the total amount of gold in Comex vaults that could be delivered to the buyers of these contracts.
This manipulation by the Fed involves the short-selling of uncovered Comex gold futures. “Uncovered” means that these are contracts that are sold without any underlying physical gold to deliver if the buyer on the other side decides to ask for delivery. This is also known as “naked short selling.” The execution of the manipulative trading is conducted through one of the major gold futures trading banks, such as JPMorganChase, HSBC, and Bank of Nova Scotia. These banks do the actual selling on behalf of the Fed. The manner in which the Fed dumps a large quantity of futures contracts into the market differs from the way in which a bona fide trader looking to sell a big position would operate. The latter would try to work off his position carefully over an extended period of time with the goal of trying to disguise his selling and to disturb the price as little as possible in order to maximize profits or minimize losses. In contrast, the Fed‘s sales telegraph the intent to drive the price lower with no regard for preserving profits or fear or incurring losses, because the goal is to inflict as much damage as possible on the price and intimidate potential buyers.
The Fed also actively manipulates gold via the Globex system. The Globex market is punctuated with periods of “quiet” time in which the trade volume is very low. It is during these periods that the Fed has its agent banks bombard the market with massive quantities of gold futures over a very brief period of time for the purpose of driving the price lower. The banks know that there are very few buyers around during these time periods to absorb the selling. This drives the price lower than if the selling operation occurred when the market is more active.
A primary example of this type of intervention occurred on December 18, 2013, immediately after the FOMC announced its decision to reduce bond purchases by $10 billion monthly beginning in January 2014. With the rest of the trading world closed, including the actual Comex floor trading, a massive amount of Comex gold futures were sold on the Globex computer trading system during one of its least active periods. This selling pushed the price of gold down $23 dollars in the space of two hours. The next wave of futures selling occurred in the overnight period starting at 2:30 a.m. NY time on December 19th. This time of day is one of the least active trading periods during any 23 hour trading day (there’s one hour when gold futures stop trading altogether). Over 4900 gold contracts representing 14.5 tonnes of gold were dumped into the Globex system in a 2-minute period from 2:40-2:41 a.m, resulting in a $24 decline in the price of gold. This wasn’t the end of the selling. Shortly after the Comex floor opened later that morning, another 1,654 contracts were sold followed shortly after by another 2,295 contracts. This represented another 12.2 tonnes of gold. Then at 10:00 a.m. EST, another 2,530 contracts were unloaded on the market followed by an additional 3,482 contracts just six minutes later. These sales represented another 18.7 tonnes of gold.
All together, in 6 minutes during an eight hour period, a total amount of 37.6 tonnes (a “tonne” is a metric ton–about 10% more weight than a US ”ton”) of gold future contracts were sold. The contracts sold during these 6 minutes accounted for 10% of the total volume during that 23 hours period of time. Four-tenths of one percent of the trading day accounted for 10% of the total volume. The gold represented by the futures contracts that were sold during these 6 minutes was a multiple of the amount of physical gold available to Comex for delivery.
The purpose of driving the price of gold down was to prevent the announced reduction in bond purchases (the so-called tapering) from sending the dollar, stock and bond markets down. The markets understand that the liquidity that Quantitative Easing provides is the reason for the high bond and stock prices and understand also that the gains from the rising stock market discourage gold purchases. Previously when the Fed had mentioned that it might reduce bond purchases, the stock market fell and bonds sold off. To neutralize the market scare, the Fed manipulated both gold and stock markets. (See Pam Martens for explanation of the manipulation of the stock market:http://wallstreetonparade.com/2013/12/why-didn’t-the-stock-market-sell-off-on-the-fed’s-taper-announcement/ )
While the manipulation of the gold market has been occurring since the start of the bull market in gold in late 2000, this pattern of rampant manipulative short-selling of futures contracts has been occurring on a more intense basis over the last 2 years, during gold’s price decline from a high of $1900 in September 2011. The attack on gold’s price typically will occur during one of several key points in time during the 23 hour Globex trading period. The most common is right at the open of Comex gold futures trading, which is 8:20 a.m. New York time. To set the tone of trading, the price of gold is usually knocked down when the Comex opens. Here are the other most common times when gold futures are sold during illiquid Globex system time periods:
– 6:00 p.m NY time weekdays, when the Globex system re-opens after closing for an hour;
– 6:00 p.m. Sunday evening NY time when Globex opens for the week;
– 2:30 a.m. NY time, when Shanghai Gold Exchange closes
– 4:00 a.m. NY time, just after the morning gold “fix” on the London gold market (LBMA);
– 2:00 p.m. NY time any day but especially on Friday, after the Comex floor trading has closed – it’s an illiquid Globex-only session and the rest of the world is still closed.
In addition to selling futures contracts on the Comex exchange in order to drive the price of gold lower, the Fed and its agent bullion banks also intermittently sell large quantities of physical gold in London’s LBMA gold market. The process of buying and selling actual physical gold is more cumbersome and complicated than trading futures contracts. When a large supply of physical gold hits the London market all at once, it forces the market a lot lower than an equivalent amount of futures contracts would. As the availability of large amounts of physical gold is limited, these “physical gold drops” are used carefully and selectively and at times when the intended effect on the market will be most effective.
The primary purpose for short-selling futures contracts on Comex is to protect the dollar’s value from the growing supply of dollars created by the Fed’s policy of Quantitative Easing. The Fed’s use of gold leasing to supply gold to the market in order to reduce the rate of rise in the gold price has drained the Fed’s gold holdings and is creating a shortage in physical gold. Historically most big buyers would leave their gold for safe-keeping in the vaults of the Fed, Bank of England or private bullion banks rather than incur the cost of moving gold to local depositories. However, large purchasers of gold, such as China, now require actual delivery of the gold they buy.
Demands for gold delivery have forced the use of extraordinary and apparently illegal tactics in order to obtain physical gold to settle futures contracts that demand delivery and to be able to deliver bullion purchased on the London market (LBMA). Gold for delivery is obtained from opaque Central Bank gold leasing transactions, from “borrowing” client gold held by the bullion banks like JP Morgan in their LBMA custodial vaults, and by looting the gold trusts, such as GLD, of their gold holdings by purchasing large blocks of shares and redeeming the shares for gold.
Central Bank gold leasing occurs when Central Banks take physical gold they hold in custody and lease it to bullion banks. The banks sell the gold on the London physical gold market. The gold leasing transaction makes available physical gold that can be delivered to buyers in quantities that would not be available at existing prices. The use of gold leasing to manipulate the price of gold became a prevalent practice in the 1990s. While Central Banks admit to engaging in gold lease transactions, they do not admit to its purpose, which is to moderate rises in the price of gold, although Fed Chairman Alan Greenspan did admit during Congressional testimony on derivatives in 1998 that “Central banks stand ready to lease gold in increasing quantities should the price rise.”
Another method of obtaining bullion for sale or delivery is known as “rehypothecation.” Rehypothecation occurs when a bank or brokerage firm “borrows” client assets being held in custody by banks. Technically, bank/brokerage firm clients sign an agreement when they open an account in which the assets in the account might be pledged for loans, like margin loans. But the banks then take pledged assets and use them for their own purpose rather than the client’s. This is rehypothecation. Although Central Banks fully disclose the practice of leasing gold, banks/brokers do not publicly disclose the details of their rehypothecation activities.
Over the course of the 13-year gold bull market, gold leasing and rehypothecation operations have largely depleted most of the gold in the vaults of the Federal Reserve, Bank of England, European Central Bank and private bullion banks such as JPMorganChase. The depletion of vault gold became a problem when Venezuela was the first country to repatriate all of its gold being held by foreign Central Banks, primarily the Fed and the BOE. Venezuela’s request was provoked by rumors circulating the market that gold was being leased and hypothecated in increasing quantities. About a year later, Germany made a similar request. The Fed refused to honor Germany’s request and, instead, negotiated a seven year timeline in which it would ship back 300 of Germany’s 1500 tonnes. This made it apparent that the Fed did not have the gold it was supposed to be holding for Germany.
Why does the Fed need seven years in which to return 20 percent of Germany’s gold? The answer is that the Fed does not have the gold in its vault to deliver. In 2011 it took four months to return Venezuela’s 160 tonnes of gold. Obviously, the gold was not readily at hand and had to be borrowed, perhaps from unsuspecting private owners who mistakenly believe that their gold is held in trust.
Western central banks have pushed fractional gold reserve banking to the point that they haven’t enough reserves to cover withdrawals. Fractional reserve banking originated when medieval goldsmiths learned that owners of gold stored in their vault seldom withdrew the gold. Instead, those who had gold on deposit circulated paper claims to gold. This allowed goldsmiths to lend gold that they did not have by issuing paper receipts. This is what the Fed has done. The Fed has created paper claims to gold that does not exist in physical form and sold these claims in mass quantities in order to drive down the gold price. The paper claims to gold are a large multiple of the amount of actual gold available for delivery. The Royal Bank of India reports that the ratio of paper claims to gold exceed the amount of gold available for delivery by 93:1.
Fractional reserve systems break down when too many depositors or holders of paper claims present them for delivery. Breakdown is occurring in the Fed’s fractional bullion operation. In the last few years the Asian markets–specifically and especially the Chinese–are demanding actual physical delivery of the bullion they buy. This has created a sense of urgency among the Fed, Treasury and the bullion banks to utilize any means possible to flush out as many weak holders of gold as possible with orchestrated price declines in order to acquire physical gold that can be delivered to Asian buyers.
The $650 decline in the price of gold since it hit $1900 in September 2011 is the result of a manipulative effort designed both to protect the dollar from Quantitative Easing and to free up enough gold to satisfy Asian demands for delivery of gold purchases.
Around the time of the substantial drop in gold’s price in April, 2013, the Bank of England’s public records showed a 1300 tonne decline in the amount of gold being held in the BOE bullion vaults. This is a fact that has not been denied or reasonably explained by BOE officials despite several published inquiries. This is gold that was being held in custody but not owned by the Bank of England. The truth is that the 1300 tonnes is gold that was required to satisfy delivery demands from the large Asian buyers. It is one thing for the Fed or BOE to sell, lease or rehypothecate gold out of their vault that is being safe-kept knowing the entitled owner likely won’t ask for it anytime soon, but it is another thing altogether to default on a gold delivery to Asians demanding delivery.
Default on delivery of purchased gold would terminate the Federal Reserve’s ability to manipulate the gold price. The entire world would realize that the demand for gold greatly exceeds the supply, and the price of gold would explode upwards. The Federal Reserve would lose control and would have to abandon Quantitative Easing. Otherwise, the exchange value of the US dollar would collapse, bringing to an end US financial hegemony over the world.
Last April, the major takedown in the gold price began with Goldman Sachs issuing a “technical analysis” report with an $850 price target (gold was around $1650 at that time). Goldman Sachs also broadcast to every major brokerage firm and hedge fund in New York that gold was going to drop hard in price and urged brokers to get their clients out of all physical gold holdings and/or shares in physical gold trusts like GLD or CEF. GLD and CEF are trusts that purchase physical gold/silver bullion and issue shares that represent claims on the bullion holdings. The shares are marketed as investments in gold, but represent claims that can only be redeemed in very large blocks of shares, such as 100,000, and perhaps only by bullion banks. GLD is the largest gold ETF (exchange traded firm), but not the only one. The purpose of Goldman Sachs’ announcement was to spur gold sales that would magnify the price effect of the short-selling of futures contracts. Heavy selling of futures contracts drove down the gold price and forced sales of GLD and other ETF shares, which were bought up by the bullion banks and redeemed for gold.
At the beginning of 2013, GLD held 1350 tonnes of gold. By April 12th, when the heavy intervention operation began, GLD held 1,154 tonnes. After the series of successive raids in April, the removal of gold from GLD accelerated and currently there are 793 tonnes left in the trust. In a little more than one year, more than 41% of the gold bars held by GLD were removed – most of that after the mid-April intervention operation.
In addition, the Bank of England made its gold available for purchase by the bullion banks in order to add to the ability to deliver gold to Asian purchasers.
The financial media, which is used to discredit gold as a safe haven from the printing of fiat currencies, claims that the decline in GLD’s physical gold is an indication that the public is rejecting gold as an investment. In fact, the manipulation of the gold price downward is being done systematically in order to coerce holders of GLD to unload their shares. This enables the bullion banks to accumulate the amount of shares required to redeem gold from the GLD Trust and ship that gold to Asia in order to meet the enormous delivery demands. For example, in the event described above on January 6th, 14% of GLD’s total volume for the day traded in a 1-minute period starting at 10:14 a.m. The total volume on the day for GLD was almost 35% higher than the average trading volume in GLD over the previous ten trading days.
Before 2013, the amount of gold in the GLD vault was one of the largest stockpiles of gold in the world. The swift decline in GLD’s gold inventory is the most glaring indicator of the growing shortage of physical gold supply that can be delivered to the Asian market and other large physical gold buyers. The more the price of gold is driven down in the Western paper gold market, the higher the demand for physical bullion in Asian markets. In addition, several smaller physical gold ETFs have experienced substantial gold withdrawals. Including the more than 100 tonnes of gold that has disappeared from the Comex vaults in the last year, well over 1,000 tonnes of gold has been removed from the various ETFs and bank custodial vaults in the last year. Furthermore, there is no telling how much gold that is kept in bullion bank private vaults on behalf of wealthy investors has been rehypothecated. All of this gold was removed in order to avoid defaulting on delivery demands being imposed by Asian commercial, investment and sovereign gold buyers.
The Federal Reserve seems to be trapped. The Fed is creating approximately 1,000 billion new US dollars annually in order to support the prices of debt related derivatives on the books of the few banks that have been declared to be “to big to fail” and in order to finance the large federal budget deficit that is now too large to be financed by the recycling of Chinese and OPEC trade surpluses into US Treasury debt. The problem with Quantitative Easing is that the annual creation of an enormous supply of new dollars is raising questions among American and foreign holders of vast amounts of US dollar-denominated financial instruments. They see their dollar holdings being diluted by the creation of new dollars that are not the result of an increase in wealth or GDP and for which there is no demand.
Quantitative Easing is a threat to the dollar’s exchange value. The Federal Reserve, fearful that the falling value of the dollar in terms of gold would spread into the currency markets and depreciate the dollar, decided to employ more extreme methods of gold price manipulation.
When gold hit $1,900, the Federal Reserve panicked. The manipulation of the gold price became more intense. It became more imperative to drive down the price, but the lower price resulted in higher Asian demand for which scant supplies of gold were available to meet.
Having created more paper gold claims than there is gold to satisfy, the Fed has used its dependent bullion banks to loot the gold exchange traded funds (ETFs) of gold in order to avoid default on Asian deliveries. Default would collapse the fractional bullion system that allows the Fed to drive down the gold price and protect the dollar from QE.
What we are witnessing is our central bank pulling out all stops on integrity and lawfulness in order to serve a small handful of banks that financial deregulation allowed to become “too big to fail” at the expense of our economy and our currency. When the Fed runs out of gold to borrow, to rehypothecate, and to loot from ETFs, the Fed will have to abandon QE or the US dollar will collapse and with it Washington’s power to exercise hegemony over the world.
Dave Kranzler traded high yield bonds for Bankers Trust for a decade. As a co-founder and principal of Golden Returns Capital LLC, he manages the Precious Metals Opportunity Fund.
This article first appeared at Paul Craig Roberts’ new website Institute For Political Economy. Paul Craig Roberts was Assistant Secretary of the Treasury for Economic Policy and associate editor of the Wall Street Journal. He was columnist for Business Week, Scripps Howard News Service, and Creators Syndicate. He has had many university appointments. His Internet columns have attracted a worldwide following.
Disputes over land in Honduras’ Bajo Aguan Valley have led to the deaths of 63 people, mostly peasants [AP]
|An internal World Bank investigation says the bank’s private lending arm violated its own social and environmental rules in approving a $30m loan to a Honduran palm oil magnate allegedly tied to the forced eviction and deaths of dozens of land activists.
The months-long investigation found the bank’s International Finance Corporation (IFC) failed to properly vet Honduran powerbroker Miguel Facusse’s Corporacion Dinant, a palm oil and food giant embroiled in one of Honduras’ deadliest land conflicts in recent history.
The IFC said it was “deeply saddened” by the loss of life resulting from the land conflicts – risks the agency determined were “manageable” when it initially assessed the palm oil project in 2008. Both the IFC andDinant said they disagree with parts of the audit released Friday but that they are taking the allegations seriously.
The audit by the Office of the Compliance Advisor Ombudsman (CAO) says a standard news search required by the World Bank revealed damning allegations against Facusse. Public news articles show Facusse allegedly misused his political influence, was accused of involvement in the murder of an environment activist and land disputes with indigenous communities, had an arrest warrant issued in relation to environmental crimes, and had his properties used for drug trafficking.
The search, the CAO said, shows “IFC staff either knew about these allegations and perceptions and failed to deal with them as required … or did not conduct the required news agency searches”.
David Pred, executive director of Inclusive Development International, said the case shines a spotlight on the kind of “dirty business” the World Bank is increasingly engaged in as it expands its investments in high-risk environments.
“This audit, and the Bank’s response to it, shows that IFC’s social and environmental requirements, touted as the ‘gold standard’, come with a wink and a nod that companies like Dinant can literally get away with murder and still boast the World Bank’s stamp of approval,” Pred said in an email to Al Jazeera.
A history of conflict
The blood is being shed in Honduras’ northern Aguan Valley, where land disputes are age-old. Agrarian reforms of the 1970s saw indigenous-held land redistributed to farmer cooperatives. Those cooperatives ended up in bankruptcy with neoliberal reforms, and in the 1990s, the government and cooperatives sold the land to a few wealthy Hondurans, including Facusse.
Activists claiming ownership of Dinant properties are known to play a game of cat and mouse with security forces, occupying disputed properties, being evicted, and then returning. The confrontations often turn violent, according to groups like the International Federation for Human Rights, which have monitored the conflict.
The CAO audit notes the murders of at least 102 people affiliated with the peasant movement in the Aguan Valley between January 2010 and May 2013, according to civil society groups. Forty of those deaths, the CAO said, were specifically linked by human rights groups to Dinant properties and security forces.
The audit also notes allegations that at least nine Dinant security personnel were killed by affiliates of the peasant movement.
Dinant’s spokesman Roger Pineda has denied the company’s involvement in violence against anyone embroiled in land disputes surrounding Facusse’s property. He told Al Jazeera Dinant’s security forces are the victims of attack by armed invaders trespassing on the palm plantations. Pineda also rejected allegations Facusse’s landing strips were used to transfer drugs. He told Al Jazeera that drug traffickers had forcibly taken over the property and that Facusse surrendered his airstrip to local military authorities until recent months.
The five-point plan issued by the IFC in response to the audit said it would help Dinant conduct a massive security review and that the company would collaborate with local authorities to investigate credible allegations of unlawful or abusive acts.
“Moving forward, we will continue to monitor the implementation of Dinant’s environmental and Social Action Plan, and look to bolster our procedures in relation to environmental and social risks in fragile and conflict-affected areas,” the IFC said in response to the audit.
Leaving the job of investigating abuses to the people allegedly complicit in them is wrong, according to Jessica Evans, senior international financial institutions researcher and advocate at Human Rights Watch.
“Instead of the accurate, adequate, and objective assessment of the allegations its policies require, the IFC is leaving the job to the fox that raided the chicken coop in the first place,” Evans said. “Human lives and livelihoods are at stake here. The IFC should demand an external, expert investigation that could create a framework for Dinant to remedy any violations of its responsibility to respect human rights.”
The IFC said Dinant would lose its funding if it doesn’t comply with the action plan. The lending agency already put a hold on half of its $30m loan to Dinant in mid-2010, following human rights complaints by the Washington-based group Rights Action.
However, that did not stop the IFC from calling Dinant owner Facusse a “respected businessman” and later approving a $70m investment in one of Dinant’s biggest lenders, Banco Financiera Comercial Hondurena (Ficohsa). The investment will give the IFC a 10 percent stake in the Honduran bank.
The Word Bank watchdog found the IFC’s “deficiencies” are a by-product of its culture and incentives that measure results in financial terms.
“In a risk-averse setting, accountability for results defined primarily in financial terms may incentivise staff to overlook, fail to articulate, or even conceal potential environmental, social and conflict related risks,” the CAO said. “The result, however, as seen in this audit is that the institution may underestimate these categories of risk.”
The CAO is conducting another investigation into how smart the risks were in another IFC project in Honduras. Its query into the human rights impact of the IFC’s investment in Ficohsa, and its relationship to Dinant, is due to be completed in June.