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On January 17, 2014, we explained “The Hows and Whys of Gold Price Manipulation.”
In former times, the rise in the gold price was held down by central banks selling gold or leasing gold to bullion dealers who sold the gold. The supply added in this way to the market absorbed some of the demand, thus holding down the rise in the gold price.
As the supply of physical gold on hand diminished, increasingly recourse was taken to selling gold short in the paper futures market. We illustrated a recent episode in our article. Below we illustrate the uncovered short-selling that took the gold price down today (January 30, 2014).
When the Comex trading floor opened January 30 at 8:20AM NY time, the price of gold inexplicably plunged $17 over the next 30 minutes. The price plunge was triggered when sell orders flooded the Comex trading floor. Over the course of the previous 23 hours of trading, an average of 202 gold contracts per minute had traded. But starting at the 8:20AM Comex, there were four 1-minute windows of trading here’s what happened:
8:21AM: 1766 contracts sold
8:22AM: 5172 contracts sold
8:31AM: 3242 contracts sold
8:47AM: 3515 contracts sold
Over those four minutes of trading, an average of 3,424 contracts per minute traded, or 17 times the average per minute volume of the previous 23 hours, including yesterday’s Comex trading session.
The yellow arrow indicates when the Comex floor opened for gold futures trading. There was not any news events or related market events that would have triggered a sell-off like this in gold. If an entity holding many contracts wanted to sell down its position, it would accomplish this by slowly feeding its position to the market over the course of the entire trading day in order to avoid disturbing the price or “telegraphing” its intent to sell to the market.
Instead, today’s selling was designed to flood the Comex trading floor with a high volume of sell orders in rapid succession in order to drive the price of gold as low as possible before buyers stepped in.
The reason for this is two-fold: Driving down the price of gold assists the Fed in its efforts to support the dollar, and the Comex is running out of physical gold available to be delivered to those who decide to take delivery of gold instead of cash settlement.
The February gold contract is subject to delivery starting on January 31st. As of January 29th, 2 days before the delivery period starts, there were 2,223,000 ounces of gold futures open against 375,000 ounces of gold available to be to be delivered. The primary banks who trade Comex gold (JP Morgan, HSBC, Bank Nova Scotia) are the primary entities who are short those Comex contracts.
Typically toward the end of a delivery month, these banks drive the price of gold lower for the purpose of coercing holders of the contracts to sell. This avoids the problem of having a shortage of gold available to deliver to the entities who decide to take delivery. With an enormous amount of physical gold moving from the western bank vaults to the large Asian buyers of gold, the Comex ultimately does not have enough gold to honor delivery obligations should the day arrive when a fifth or a fourth of the contracts are presented for delivery. Prior to a delivery period or due date on the contracts, manipulation is used to drive the Comex price of gold as low as possible in order to induce enough selling to avoid a possible default on gold delivery.
Following the taper announcement on January 29, the gold price rose $14 to $1270, and the Dow Jones Index dropped 100 points, closing down 74 points from its trading level at the time the tapering was announced. These reactions might have surprised the Fed, leading to the stock market support and gold price suppression on January 30.
Manipulation of the gold price is a foregone conclusion. The question is: why is the Fed tapering?
The official reason is that the recovery is now strong enough not to need the stimulus. There are two problems with the official explanation. One is that the purpose of QE has always been to support the prices of the debt-related derivatives on the balance sheets of the banks too big to fail. The other is that the Fed has enough economists and statisticians to know that the recovery is a statistical artifact of deflating GDP with an understated measure of inflation. No other indicator–employment, labor force participation, real median family income, real retail sales, or new construction–indicates economic recovery. Moreover, if in fact the economy has been in recovery since June 2009, after 4.5 years of recovery it is time for a new recession.
One possible explanation for the tapering is that the Fed has created enough new dollars with which to purchase the worst part of the banks’ balance sheet problems and transfer them to the Fed’s balance sheet, while in other ways enhancing the banks’ profits. With the job done, the Fed can slowly back off.
The problem with this explanation is that the liquidity that the Fed has created found its way into the stock and bond markets and into emerging economies. Curtailing the flow of liquidity crashes the markets, bringing on a new financial crisis.
We offer two explanations for the tapering. One is technical, and one is strategic.
First the technical explanation. The Fed’s bond purchases and the banks’ interest rate swap derivatives have made a dent in the supply of Treasuries. With income tax payments starting to flow in, fewer Treasuries are being issued to put pressure on interest rates. This permits the Fed to make a show of doing the right thing and reduce bond purchases. As a weakening economy becomes apparent as the year progresses, calls for the Fed to support the economy will permit the Fed to broaden the array of instruments that it purchases.
A strategic explanation for tapering is that the growth of US debt and money creation is causing the world to turn a jaundiced eye toward the US dollar and toward its role as world reserve currency.
Currently the Russian Duma is discussing legislation that would eliminate the dollar’s use and presence in Russia. Other countries are moving away from the dollar. Recently the Nigerian central bank reduced its dollar reserves and increased its holdings of Chinese yuan. Zimbabwe, which was using the US dollar as its own currency, switched to Chinese yuan. The former chief economist of the World Bank recently called for terminating the use of the dollar as world reserve currency. He said that “the dominance of the greenback is the root cause of global financial and economic crises.” Moreover, the Federal Reserve is very much aware of the flight away from the dollar into gold, because it is this flight that causes the Fed to manipulate the gold price in order to hold it down and in order to be able to free up gold for delivery.
The Fed knows that the ability of the US to pay its bills in its own currency is the reason it can stand its large trade imbalance and is the basis for US power. If the dollar loses the reserve currency role, the US becomes just another country with balance of payments and currency problems and an inability to sell its bonds in order to finance its budget deficits.
In other words, perhaps the Fed understands that a dollar crisis is a bigger crisis than a bank crisis and that its bailout of the banks is undermining the dollar. The question is: will the Fed let the banks go in order to save the dollar?
Paul Craig Roberts is a former Assistant Secretary of the US Treasury for Economic Policy.
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.
A Potential Massive Short Squeeze in Physical Gold is Becoming a Possibility | Capitalist Exploits – Frontier Markets Investing, Private Equity and IPO’s
By: Chris Tell
I recall a long time ago when I was easily excited by the unqualified love of young inebriated women, hedonistic experiences, fast cars, guns and seemingly unusual setups in financial markets, which promised fortunes if traded correctly.
I now find that I just enjoy a day with my kids and later a decent glass of red. Ah, simpler times! I’ve also realised that “unusual” setups in financial markets typically turn into nothing more than a loss of my capital. Betting on outcomes which seem “so damned obvious” isn’t as easy as one would think. Probabilities, as I discussed last week, are a key factor, as is risk/reward.
This is of course as it should be. The markets are there to extract money from inexperienced, gullible “traders”. OK, some are experienced and just careless, but many are newly minted dreamers, set out into the world by some seminar “guru” who convinced them they could day trade their life savings into a small fortune. You know what they say about small fortunes, right? Financial Darwinism!
Given this backdrop, I had a recent phone conversation with our friend Tres Knippa. For those that don’t know him, Tres is a broker and trader on the floor of the Chicago Mercantile Exchange (CME). Clearly not a Johnny-come-lately. Tres shared with me some numbers.
By the way, paying attention to “numbers” and trading them intelligently is far superior to chasing unqualified love from long-legged women. Traded intelligently has been known to pay for supercars and penthouses, which will inevitably attract said long-legged women, so fear not!
The numbers Tres shared with me were:
- -89,756.78 – This number represents the overnight movement of registered gold OUT of inventory at Brink’s, and INTO Eligible Inventory at J.P. Morgan.
- 370,137 – This is the number of ounces of Registered Gold for delivery.
- 300,000 – This is the number of ounces, represented in gold contracts, that any one entity can own (3,000 contracts).
- 81% – The percentage of supply at the Comex which would be exhausted should just ONE entity put on a “Limit Long” position, AND demand delivery.
These should be very scary numbers for the folks running the Comex, but even scarier numbers for anyone not holding physical gold and trading paper!
Tres also shared the chart below with me. This is a graphical representation of the amount of paper gold versus the Registered Gold available for delivery:
Zerohedge recently posted an excerpt from a video Tres did here. Now, for those who are paying attention, the similarities between this little setup and an extended game of Jenga cannot be dismissed out of hand!
Zerohedge also posted a neat little story about the German’s only having recovered a paltry 5 Tons of gold from the US, after a year! You can read all about it here. In short they have repatriated just 37 tons of the 674 tons they have promised to repatriate. At least the Comex may get forewarning of any demand for delivery from the NSA, who is likely still monitoring Sausage Lady’s iPhone. Regardless, it’s unclear to me what they would do about it should that demand for delivery actually come down the wire.
Over 2 years ago when we put together our Japan report I mentioned to Tres that I preferred to go long Gold, short Yen. At that time his preferred trade was centered around the JGB options market, and to be long the USD short the Yen. Looking back he was right and I was wrong. The USD has indeed performed better, and likely will continue to outperform in 2014. Although up to this point it’s been more a factor of a breather in the gold bull market than USD strength.
I’m a gold bull, not a gold bug. I do believe that the long term trend for gold is bullish. This current setup clearly has the potential for some fireworks. Maybe nothing happens (doubtful), but the risk/reward setup is rather favourable from where I sit. Heads I win, tails I win.
Whatever you choose to do with the above information, I encourage readers to never ever confuse “trading for profit” with investing. I’m happy to trade futures contracts, buy gold in the FX spot markets – essentially trade paper in one form or another, but I would NEVER let that obfuscate the fact that I need to hold PHYSICAL GOLD as protection. Timing a profitable trade is like passing gas, it is largely a matter of knowing when it is inappropriate, and acting accordingly!
Grant Williams, the prolific editor of Things That Make You Go Hmmm… said it perfectly in his latest missive:
“Gold is a manipulated market. Period.“2013 was the year that manipulation finally began to unravel.“2014? Well now, THIS could be the year that true price discovery begins in the gold market. If that turns out to be the case, it will be driven by a scramble to perfect ownership of physical gold; and to do that you will be forced to pay a lot more than $1247/oz.Count on it.”
Think about this as a parting thought. Would the Comex, if under pressure for delivery, ever void your positions in order to “stabilise” the market? Or, would that just not be palatable in the Land of the Free? As Grant said above, “Count on it.”
For the traders out there, Tres shared with me another anomaly in the gold markets which he’s been trading successfully for the last couple of months. I’m in the process of translating this from “trader speak” into English, and it will be sent out to members of our currently complimentary Trade Alert service shortly. You can get access to this and more by dropping your email here.
While the topic of rehypothecation and the shortage of physical gold is well covered here at Zero Hedge (and the ever-changing COMEX gold vaults’ inventories), it appears the concept of the exploding “leverage” or default risk of the COMEX has now hit the mainstream media. As BNN reports, veteran trader Tres Knippa, pointing to recent futures data, says “there may not be enough gold to go around if everyone with a futures contract insists on taking delivery of physical bullion.” As he goes on to explain to a disquieted anchor, “the underlying story here is that the people acquiring physical gold continue to do that. And that’s what is important,” noting large investors like hedge fund manager Kyle Bass are taking delivery of the gold they’re buying. Knippa’s parting advice, buy physical gold; avoid paper.
One of the problems…
That won’t end well…
And the excellent summary from a veteran trader:
Knippa warns that if 1 entity asks for delivery of a position-limit-size long in gold, it will absorb 81% of COMEX’s inventory… and if 2 entities were to do so… COMEX has a problem…
Last evening (January 12, 2014) I sat down to create a compilation of beliefs I hold about the world complex. The first twenty that popped into my head were pretty easy with the last few (I only went as far as once through the alphabet) requiring a little thinking. In no particular order I offer this quickly composed list with some links to articles/websites to support them:
a) Economic markets are rigged.
b) Gold has been moving from the West to the East.
c) The world’s primary reserve currency never lasts forever.
d) Central banks have been coordinating their monetary policies from interest rates to ‘money printing’ to ‘forward guidance’ that is resulting in currency devaluations
e) Central banks have been monetizing sovereign debt through increased holdings of government bonds.
f) Sovereign nations are in extreme debt.
g) Private households are in extreme debt.
h) All fiat currency experiments eventually end.
i) Robotic technology is replacing increasing number of jobs.
j) There exist trillions of dollars of IOUs supporting the financial system.
k) Unemployment has skyrocketed across western nations, especially for the young (under 25).
l) Production of conventional oil has begun to decline.
m) New technologies and dirtier sources are being increasingly required to sustain fuel production.
n) Fuel production barely sustains demand.
o) The Shale Oil Revolution is not.
p) Models of future fuel production rely on significant ‘yet-to-be-discovered’ sources.
q) Fossil fuel extraction, transportation, and use have polluted the planet with numerous toxins.
r) Climate extremes are increasing in frequency, duration, and magnitude.
s) Polar ice caps are melting.
t) We are experiencing peak water.
u) Deserts are expanding.
v) Sea levels are rising.
w) Honeybees have been decimated by human chemical use.
x) Governments are spying on their citizens.
y) Governments are spying on each other and themselves.
z) Governments are manipulating the data they provide to the public.
I know many people would prefer to hear a message of hope but when these ‘realities’ exist I can’t help but be fairly pessimistic about our chances of a ‘sustainable’ future or a ‘soft landing’ for our economic woes. Unless some unforeseen miracle can save us from ourselves, I can only conclude that the day of reckoning is quickly approaching; it’s a matter of when, not if. Some event, minor or major, will be that snowflake that begins a cascading collapse of our interrelated, complex world. And by collapse, I mean a sudden, devastating drop in the standard of living (similar to Dimitry Orlov’s Five Stages of Collapse) OR an elongated, slow contraction (similar to James Howard Kunstler’s The Long Emergency or John Michael Greer’s The Long Descent); to me, these are not too dissimilar and require simply a change in time perspective to interpret the change as either ‘sudden’ or ‘lengthy’.
To quote William Catton Jr., from his book Overshoot: “…the pressure of our numbers and technology upon manifestly limited resources has already put out of reach the previously acceptable solutions to many of our problems. There remains steadfast resistance to admitting this, but facts are not repealed by refusal to face them. On the other hand, even the ‘alarmists’ who have been warning of grave perils besetting mankind have not fathomed our present predicament…” (p. 5).
Update 1. January 17, 2014
1. Far more ‘paper’ precious metals exists than actual ‘physical’ metal in existence (a type of ‘fractional reserve’ banking):
2. Large Western financial institutions (i.e. U.S. Federal Reserve; Bank of England) have sold/leased their gold holdings and misled their clients about this:
3. The United States government and/or people within it have carried out domestic assassinations of numerous leaders:
4. The Fukushima Daichii Nuclear Plant disaster is far worse than the corporate media is letting on:
5. ‘Democratic’ countries are becoming more secretive and totalitarian through ‘legislation’:
Interesting thoughts: Murray Rothbard, Anatomy of the State (ISBN 978-80-87888-43-8):
“…the government is not ‘us.’ The government does not in any accurate sense ‘represent’ the majority of the people…Briefly, the State is the only organization in society which attempts to maintain a monopoly of use of force and violence in a given territorial area; in particular, it is the only organization in society that obtains its revenue …by use of complusion; that is, by the use and the threat of the jailhouse and the bayonnet. Having used force and violence to obtain its revenue, the State generally goes on to regulate and dictate the other actions of its individual subjects…The State provides a legal, orderly, systematic channel for the predation of private property; it renders certain, secure, and relatively ‘peaceful’ the lifeline of the parasitic caste in society….The State has never been created by a ‘Social Contract’; it has always been born of conquest and exploitation…”
Feel free to offer some further ‘beliefs’, and three ‘credible’ links, in the comments. I will update the list periodically.
- Bomb Suspect Is Charged and Could Face the Death Penalty – New York Times (nytimes.com)
- Alleged terror plot targeting Via train thwarted – CBC.ca (cbc.ca)