Is the Fed’s ability to manipulate the price of gold running out?
January 21, 2014 | Original Here Go here to sign up to receive email notice of this news letter
Is the Fed’s ability to manipulate the price of gold running out?
Paul Craig Roberts interviewed on USAWatchdog by Greg Hunter
http://usawatchdog.com/fed-they-do-not-have-any-more-gold-paul-craig-roberts/
Blogger's Note: The following video is what you would find, together with selected text, at the link above. It is long and chatty. By contrast, the article below the video is long only because it treats the highly detailed evidence of gold-market rigging by the Federal Reserve. Both are on the same subject, so take your choice.
http://youtu.be/p0rGaWcRiNo
The Hows and Whys of Gold Price Manipulation
January 17, 2014 | Original Here Go here to sign up to receive email notice of this news letter
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
manipulation consists of the Fed using bullion banks as its agents to
sell naked gold shorts in the New York Comex futures market. Short
selling drives down the gold price, triggers stop-loss orders and margin
calls, and scares participants out of the gold trusts. The bullion
banks purchase the deserted shares and present them to the trusts for
redemption in bullion. The bullion can then be sold in the London
physical gold market, where the sales both ratify the lower price that
short-selling achieved on the Comex floor and provide a supply of
bullion to meet Asian demands for physical gold as opposed to paper
claims on gold.
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 1990′s. 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 Reserve 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. GLD and other gold ETFs 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.
