Accusations of manipulation in the Gold Market have been around for a very long time, whether from bodies like GATA who believe that there is a cartel whose purpose is to manipulate the gold price and to keep it down, or at commercial banks that are in it for their own account, or at central banks from 1985 until the end of the century, when they encouraged an oversupply of gold from mining companies.
It is impossible not to conclude that it is in the interests of central banks, commercial banks and wealthy individuals all have, are or will attempt to manipulate gold prices. For central banks, it has been done in attempts to wean investors off the idea that gold is money and onto the concept that government issued currencies are the only real money.
The very structure of markets used for achieving profits confirms this. After the revelations that interest rates in the form of the LIBOR [London Interbank Offered Rate - upon which trillions of dollars of transactions are based] are being investigated comes the news that the London Gold Fixing prices are under investigation in the U.K. and Germany.
In this piece we not only look at the ways it has been done, but at how markets lend themselves to managing prices, either by those who keep prices down to support currencies or to acquire gold at discount prices.
The London Gold Fix
The U.K. Financial Conduct Authority is examining how prices are set in the $20 trillion gold market. They have asked those who administer major, non-interest rate-related benchmarks, including gold, to assess, by July next year, how they comply with new global regulatory principles governing all types of indexes following the Libor scandal.
Their focus is on how traders can trade on prices being looked at in the Fix before that knowledge is in the market. After all both the banks involved and their clients are able to trade in the gold market and the gold derivatives while the price is being fixed. It can take a few minutes, to as long as an hour to set these prices.
We would not think that this is so large as to be called price manipulation. This would be a form of insider trading if it is happening.
The London fix is the price upon which contracts in gold the gold industry are based throughout the world. The participants cover all the professionals in the industry together with wealthy speculators. These include mining companies, jewelers and central banks. The Fix is set twice daily after a telephone call between the five gold bullion banks; Barclays Plc, Deutsche Bank AG, Bank of Nova Scotia, HSBC Holdings Plc and Societe Generale SA., who [also linked by phone to their clients] weigh up a balance between the demand and supply that comes to them and Fixes the price at that balance. Then all the deals done at that Fix are done at that price. It is believed that 90% of the global physical demand and supply pass through that market.
It has now come to light that the German banking regulator Bafin has demanded documents from Deutsche Bank as part of a probe into suspected manipulation of benchmark gold and silver prices by the banks. Bafin has interrogated the bank's staff during several on-site inspections over the past few months.
If it is established that this is what is happening we expect limitations on the method of Fixing and the way the banks take positions in the derivatives and other markets during the Fixing. We would not expect to see a change in the actual system of the Fixing.
Commercial Bank gold Price Manipulation
When a bank has clients investing in gold markets and invests for its own account the danger of a conflict of interests is ever present. Now add to that its actions as a Custodian [one of the Bullion banks] for gold ETF funds and its ability to buy and sell client's gold you see their ability to influence gold prices. More control can be added to such banks if they are the ones that transport the gold internationally plus own the warehouses that hold gold for market participants and you have all the market operation facets in your hands. By manipulating each facet in conjunction with the other facets you can influence market demand and supply to a large extent to ensure a price that suits your position.
If you believe that falling prices can fall much lower by using your influence in, market forecasts, backed up by co-ordination of client's and your own positions, forcing 'stop loss' orders to be activated by heavy rapid trading at quiet times of the trading day, you can increase volatility tremendously at any given time you choose. In total you can direct gold prices to suit yourself.
The classic recent example of this was in April 2013, when in two days, due to aggressive, massive selling by the leading two U.S. banks the gold price was forced to fall $200 in two days.
This is market manipulation! We have heard of accusations that such actions were backed by central banks with central bank gold involved. We are not in a position to agree or disagree.
Central Bank Manipulation
It is a matter of history that developed world central banks have a vested interest in manipulating gold prices. The direct selling of gold as far back as 1975 by the U.S.A. initially, then the I.M.F. [with the agreement of its members], followed by Washington Agreement then the Central Bank Gold Agreements were direct attempts to squash gold prices and to dampen the gold price down from its $850 peak to its 1999 low of $275. The motive was to elevate the importance of national currencies as real money. The dollar took this as far as becoming the world's sole global reserve currency. That long-term manipulation of gold prices was totally successful - for a time!
What made the exercise so effective was that the central banks 'leased' gold to major gold miners so that they could finance new operations and accelerate the supply of gold to the market. The gold miners sold the gold forward gaining huge 'contangoes' [the interest that accrues on a forward selling contract added to the price of the sale] as the sale could be sold forward five years and more. This is called 'hedging'. Around 3,000 tonnes of gold was 'hedged' in this way. The mines appreciated that because the gold was sold into a market whose price was being forced to decline and yet they achieved future prices way above market prices. The newly mined gold from the new mines was then used to repay the central bank. The central bank therefore restored its reserves to levels they had at the start of the exercise.
Initially, it was a most profitable exercise for the miners. But when the price turned and started to rise, these hedges earned prices that were below market prices. Shareholders objected and the mining companies had to 'buy back' their hedges at losses.
In turn, the buying back of 3,000 tonnes of gold in the open market, took prices back to where they likely would have been before they accelerated the supply of gold. Today, we see the first consequence in that new gold discoveries have fallen off the cliff from 4,977 tonnes [160 million ounces] in 1995 to fewer than 155 tonnes [5 million ounces] in 2011.
With gold prices falling even further in the last two years we are seeing exploration also fall off the cliff and mine lives being cut short by the practice of only mining higher grades, where possible.
So, central banks today cannot repeat the acceleration of supply. Prices are already down so low that the viability of mining is being questioned at today's prices. Mining companies are not keen to hedge again because they were badly burned at the end of the day with executives losing their jobs for speculating on the gold price with shareholder's money.
Many competent analysts believe that central banks are now using either their or the unallocated gold of other central banks, whose gold resides in their vaults, to supply the banks to force the gold price down further. Perhaps that's why Germany has decided to repatriate half its gold reserves?
Chinese buying - a form of Manipulation
And here is where another form of manipulation may be at work.
It is in China's interests to allow the developed world to succeed in keeping gold prices down. This allows them to acquire the huge tonnages of gold they are getting now at bargain prices. If they can somehow get the gold either 'on the dip' or from sources that don't go through the London market, then their buying will not influence gold prices.
Buying gold mines and directing that gold production to them is one way, buying locally produced gold direct into their reserves [they are the largest producer in the world now at 430 tonnes per annum] is another way. Buying direct from other producers [using the London Fixing as a reference for those amounts] is another way.
We will never be given accurate statistics on Chinese gold buying unless it suits them for us to know. What is clear is that they have managed to acquire between 2,000 and 2,800 tonnes of gold in 2013, while the price of gold has been dropping. That's some feat. We are not accusing them of price manipulation, but by being as savvy as the Bullion banks while buying on the fall could well be a new form of manipulation?
Consequences
Gold price manipulation is a matter of history, It happened, it happens and, so long as both governments and bankers resent and oppose the discipline gold forces on paper money issuance, it will happen. But there are deeply troubling consequences on the way!
Taking a 43 year view we can see that attempts to manipulate the gold price down have failed. In the early 1970's gold stood at $42 an ounce. In the mid-eighties gold peaked at $850 an ounce before real central bank manipulation began. When it was muted by the Central Bank Gold Agreements from 1999 onwards the gold price rose. When these central banks stopped selling, the gold price moved up to $1,200 an ounce in 2007 before retreating in the 'credit crunch'. With the loss of confidence in the monetary system it rose through to $1,920 an ounce before retreating again under various forms of manipulation [above] to current levels. All that has been achieved is that nations have sold their gold far too cheaply and ahead of times when that gold may restore credibility to national currencies when needed most.
The devaluing of currencies through over-issuance cannot be escaped by selling gold. Already we are seeing a massive division on the subject between the developed world [whose interests are in elevating national currencies at the expense of gold] and Asia, whose, almost rapacious, acquisition of gold has an underlying monetary basis.
The selling of gold to squash the price can only succeed if other governments follow the same road. China won't and has been buying the physical gold the West has sold. This break in the ranks of central banks is a time bomb.
If western central banks do not have the gold they say they have, the damage to their reputation and to the trust in national currencies will implode.
If gold returns to a pivotal position in the global monetary system, then the developed world will have to follow the largest economy in the world. This is in the process of changing from the U.S. to China.
With the monetary ruptures that have to follow the price of gold will move up to a point that reflects the loss of value in national currencies alongside the loss of confidence in them.
Hold your gold in such a way that governments and banks can't seize it!
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