The Gold Spread and Wall Street Banks

It is so obvious, and so apparent, that I wonder why commentators have only now seen fit to say something.

“It” of course, being the prounoun referencing the gold spread and the insane, short-term profits the Wall Street Banks have been reaping right before our eyes.  Let’s talk about it.

From Wikipedia: Arbitrage:

“In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices.”

When does arbitrage arise?

“Conditions for arbitrage - Arbitrage is possible when one of three conditions is met:

(1) The same asset does not trade at the same price on all markets ("the law of one price").

(2) Two assets with identical cash flows do not trade at the same price.

(3) An asset with a known price in the future does not today trade at its future price discounted at the risk-free interest rate (or, the asset has significant costs of storage; as such, for example, this condition holds for grain but not for securities).

Arbitrage is not simply the act of buying a product in one market and selling it in another for a higher price at some later time. The transactions must occur simultaneously to avoid exposure to market risk, or the risk that prices may change on one market before both transactions are complete. In practical terms, this is generally possible only with securities and financial products that can be traded electronically, and even then, when each leg of the trade is executed the prices in the market may have moved. Missing one of the legs of the trade (and subsequently having to trade it soon after at a worse price) is called 'execution risk' or more specifically 'leg risk'.

In the simplest example, any good sold in one market should sell for the same price in another. Traders may, for example, find that the price of wheat is lower in agricultural regions than in cities, purchase the good, and transport it to another region to sell at a higher price. This type of price arbitrage is the most common, but this simple example ignores the cost of transport, storage, risk, and other factors. "True" arbitrage requires that there be no market risk involved. Where securities are traded on more than one exchange, arbitrage occurs by simultaneously buying in one and selling on the other.”

But, conditions for arbitrage, at least in non-manipulated markets, normally lead to Price Convergence -

“Price convergence - Arbitrage has the effect of causing prices in different markets to converge. As a result of arbitrage, the currency exchange rates, the price of commodities, and the price of securities in different markets tend to converge. The speed at which they do so is a measure of market efficiency. Arbitrage tends to reduce price discrimination by encouraging people to buy an item where the price is low and resell it where the price is high (as long as the buyers are not prohibited from reselling and the transaction costs of buying, holding and reselling are small relative to the difference in prices in the different markets).”

So, let us apply this knowledge to the price of physical gold, as referenced by the Comex spot pricing, and most interestingly, with respect to Indian gold demand and their market conditions.

There is a dramatic price difference with respect to gold priced in USA federal reserve notes as compared to the price of gold in Indian rupees.  The situation is so readily apparent, that smugglers have taken to swallowing gold in quantity in order to profit from the price difference.

Of course, the price difference is caused by excessive government meddling, in this case, massive import taxes:

“The gold bars are valued not just by the owner but by the Indian government. In total they’d command an import duty of $17,000 dollars. It’s little wonder some people would go to extreme lengths to try to avoid that.”  

photo

Ouch!

Is price manipulated to allow for western banks to profit in the short term?  

Let us just examine the naked facts of the divergence in price between our western physical gold price, and the Indian physical gold price.  

In the normal course of events, that huge price difference would lead to price convergence, that is, the price of Indian gold should fall, while the price of western Comex gold should rise.  Indeed, this is what is expected from the academics: “The speed at which [divergent prices converge] is a measure of market efficiency.  Arbitrage tends to reduce price discrimination by encouraging people to buy an item where the price is low [increase in demand causes prices to RISE] and resell it where the price is high [increase in supply causes prices to FALL].”  

We can easily see that the so-called “markets” are neither markets nor efficient, because there is NO movement lower of the spread.  Instead, efforts are taken by Indian authorities to KEEP the prices artificially high through import restrictions and taxes.  But why?  Think hard on that one and the answer is IMMEDIATELY clear.  (Think in terms of incentives, of both sides to these transactions).

Let us also not forget about this assumption: “as long as the buyers are not prohibited from reselling and the transaction costs of buying, holding and reselling are small relative to the difference in prices in the different markets.”  Well lookey there . . . Bingo!

Indian import restrictions/taxes, i.e., “transaction costs,” on gold have lead to ARTIFICIALLY high prices, thereby encouraging arbitrage by preventing price convergence.  This is page one from the HUGE, multiple volume treatise entitled “Central Planning Failures.”  And, naturally, the question arises as to who benefits from this?

So, now that it is obviously apparent there exists a massive risk-free arbitrage opportunity, wouldn’t you expect the big Wall Street Banks to be right in the thick of it?  Of course!

From the article, here: http://www.wallstformainst.com/2014/04/24/dave-kranzler-gold-smuggling-in-india-is-enormous/ 

“[T]here’s evidence that Wall St smuggled a HUGE amount of gold from GLD into India to make huge premiums and fast money and that the amount of gold smuggling in India over the last 4 months was more than in the last 10 years prior to the Indian government doing stupid legislation!”

Really, now, you don’t say?  Gold has been secured at low prices from the western banks/gld scam, sold into the Indian markets for huge, short-term premiums, prices have NOT converged AT ALL, and we all wonder whether western gold prices are artificially low through manipulation?  No chance of that, none at all, right?

And finally, there is this:

http://www.usagold.com/cpmforum/2014/04/24/cme-plans-to-launch-physically-settled-asia-gold-futures/

Now why on earth would the CME want to establish an eastern futures market for gold?  

Perhaps because there is lots of gold in the east, dwindling amounts in the west, if at all, and the world’s capital engine for growth is shifting inexorably east in real time, right now?  What better place to open a futures market, no?

This last development should put the nail in the coffin on manipulation deniers.  It is fast time to prepare, please do so before it is too late.

78 Comments

metalsbyamile's picture

In first

i see a cup and handle on the 24hr gold chart . Then again maybe it is a Ukraine SHTF Bull flag .

On to the read from an always entertaining and enlightening author.

DeaconBenjamin's picture

Will we Have Another WACO this time in Nevada?

Posted by Martin Armstrong

WACO.jpg

The Feds are gathering and have brought in hired guns. We are more likely than not headed into a military confrontation – the first since WACO. Keep in mind that Obama’s head of the Justice Department, Eric Holder now Attorney General, called the shots on WACO back then. He got away with it before – why not again? There is a hope that if enough people show up the Feds will stand-down. The likelihood of the Feds ever backing down is highly unlikely, The Federal Government is severely disconnected from the people and views anyone who stands up to them as a criminal and domestic terrorist. This is merely a dress rehearsal for the next 5 years that we face – a rising confrontation between the people and the government. http://armstrongeconomics.com/2014/04/23/will-we-have-another-waco-this-time-in-nevada/

DeaconBenjamin's picture

Buy what the central banks are buying

Listened to a subscription-only podcast featuring Satyajit Das. He had an interesting comment at the end. When asked how people should invest, he answered that a drone following Janet Yellen is worth more than hundreds of stock analysts. Buy what the central banks are buying. Obviously that category includes gold.

Jim Puplava welcomes back Satyajit Das, author, journalist and commentator at EconoMonitor. Das and Jim cover the economic situation in China, which Das believes has exhibited many similarities to the US Financial Crisis of 2008. He notes that it now takes $4-$5 of debt to create $1 of GDP in China. Das also sees China facing many of the same problems as Japan in terms of demographics, due to its one-child policy of the last 30 years. He notes that China can’t export its way out of trouble today, as Japan has done in the past. However, Das doesn’t predict a hard landing for China, but more of a middle way, neither terrible nor easy, but a process in between. He sees very few signs of real reform in China.

silver66's picture

Gold is the anti currency

Be your own central bank

Silver66

Turd Ferguson's picture

Excellent article

MODERATOR

Well done, CaL!

erewenguy's picture

Was it as good for you as it was for them?

Looks like Wall St. shot its wad last night. Any other great news coming out this earnings period that can drive the market higher?

Bonds, gold, and silver are looking fair+ here to me.

Strongsidejedi's picture

Physician opinion

This Indian guy swallowed 12 gold bars.
I guess he couldn't digest the gold.
A golden Turd hat to his surgeon.

bullion only's picture

Rssia has a 1 kilo coin

A commemorative one kilo silver coin was minted at a private mint with Putin on one side and Crimea on the other.
What statement is Russia making?
RT

California Lawyer's picture

Thanks TF

I was finishing it up last night, but saw your post, so I waited until this am.

Also, the more I think about this, the more convinced I am that there is an ongoing effort to secure immediate profit in the short term, by any means, by the elite banksters. While there may be some long term planning, as Ivars points out, between the factions in London and the factions in USA, the day to day events just seem to be driven by short term gain, damn the consequences long term.

This concept, along with algo-driven trading, which paints the tape so effortlessly, is a profit machine that will not go away absent either something better coming along, or by force from the NEW masters.

This Ukraine situation is not within the control of the western banksters, either, unless one ascribes to Ivar's theory that it is an orchestrated chess game designed to keep western banksters in some form of control of some part of the world economy. On this, I am ambivalent, and need far more proof before I can draw any conclusions.

Finally, on a different note, ammunition prices seem to be decreasing somewhat. Time to stack that for sure.

metalsbyamile's picture

When interest rates rise what then?

Nana's picture

Cliven Bundy

Is NOT a racist.

I just listened to the interview and not one word I heard was "racist".......

Now the liberals are playing the race card because Cliven knows the Constitution and has them backed in to the corner....

Adding:

http://dirtyunclesam.com/from-constitutional-to-corporate-how-the-modern-american-slave-came-to-be/

Libero's picture

Nana

These are Bundy's words, “They abort their young children, they put their young men in jail, because they never learned how to pick cotton,"

Sounds pretty rascist to me but I would have fought for the North in the Civil war.

I always am suspicious of people when they use the word "they" a lot.

metalsbyamile's picture

Remember where Clive is from

do not think the comment about cotton picking is racist. He may have chosen words that can be mis construed but i believe he is saying they deprived them of work. What ever work that may be.

Libtards will grab a word, anything to play the racist card. You know when i was on your continent, albeit many moons ago,times were volatile. peace protests, groupies ect ect. Even back then REAL racism was rare. I'm not talking word racism but hate racism. Very rare.

Blown way out of proportion. Hard to imagine any one hating for color or race. Sure the South had it but seriously do we brand a whole nation, a continent, the world racist, because of ignorance of a few.

As i said it was very rare then and very rare now,

metalsbyamile's picture

Troops. That Bastard Putin

is going to defend his people while Freedom Constitutional Loving Obama imprisons more per capita than any nation on earth,swore he'd close Guantanamo, drone kills Americans and foreigners alike .

Russian army drill after Putin warns Kiev of “consequences”
DEBKAfile April 24, 2014, 5:15 PM (IDT)

The Russian defense minister said Thursday that the military was starting drills at Rostov on Don near the Ukraine border in response to Ukraine’s “military machine.” This followed President Vladimir Putin’s warning that the Ukrainian army’s use of force in east Ukraine was “a very serious war crime against its own people” and “there would be consequences.” Moscow’s sharp response was prompted by a Ukraine army attack that killed up to 5 pro-Russian militiamen manning three checkpoints outside the eastern town of Slaviansk. Moscow has repeatedly warned that that it would intervene if pro-Russian citizens came to harm at army hands in Ukraine

stephanie's picture

who are the real racists?

Most of the racism I see in America right now comes from the corporate left establishment that tries to paint any sort of lower class or heartland white person as a bumbling, retrograde "racist." In reality, anyone who calls a rural white person a "Teabilly" is a racist - and that includes the so-called "upper middle class" white progressives who throw those types of terms around like candy. Anyone who calls Sarah Palin "Caribou Barbie" and "white trash" is not only being racist, but misogynist and classist. But don't expect partisan haters to have any capacity for true self-reflection.

I just find it ironic that those people who are crowing the most about "tolerance" and "diversity" are the ones using broad brushes to demonize and paint certain groups of people as being beyond redemption.

And let's say Cliven Bundy had some racist ideas or thoughts in his head. Hey, my grandparents did too. Do you think a person who has a racial bias - or what used to be called "prejudice" - deserves to have their Constitutional rights trampled upon? Is not having any sort of racial bias - as deemed by the corporate left media - now a prerequisite to having a right to due process in this country?

Seems to me a lot of so-called "progressives" would take a bunch of drones and just straight out kill anyone they deemed "racist" and think they were actually helping the planet. You think we couldn't end up with "racism re-education" camps if this excessive focus on people's thoughts and motives is left to fester? Be careful when you throw the term "racism" around - what you are really doing is participating in an Orwellian tactic to destroy dissent in America.

Strongsidejedi's picture

Excuse me for butting into this thread

But how the hell did CaliLawyer's outstanding post about Wall Street banks arbitrage of the gold market get converted to a debate about racism in America?

The original posting was about how banks sit on algo's to gain immediate gains by manipulating the "market" price of gold.

I posted this morning about a kitco.com interview on the same analysis from a completely different researcher and then added the kitco charts showing the swing at 3 PM London time.

Somehow, you guys are way off track.

metalsbyamile's picture

stephanie

here here. well said.

This would make a excellent topic for your next guest post. You'd fire up TFMR for sure

ssj-yes this thread got hijacked. My apologies for contributing to the process but the original posters comments about CB being a racist could not go unchallenged.See below

For All the Clive Bundy supporters... Go Alex Jones...

Submitted by Libero on April 24, 2014 - 12:32pm.

Hat Tip!

0

He's an unabashed rascist...

http://news.yahoo.com/list-cliven-bundys-supporters-now-know-hes-pro-133625625.html

Nana's picture

Libero

Did you even listen to the interview?

Did you know there are blacks at the ranch right now protecting it and the very lives of the Bundy family?

Now, do you really think that blacks would protect the ranch and Bundy family if Cliven Bundy was really a "racist"?

The liberals are taking his words out of context.........when all else fails "they" play the race card  (opps, used that pesky "they" word)... to twist people words to make them look bad.

Just remember the article you posted is from The New York Times, a liberal paper that has been caught in lies and quotes Potok of the SPLC, who lies about people.

What Cliven was saying is, the government took them out of slavery and put them under a different kind of slavery. He was questioning which one was worse.....

stephanie's picture

@nana - yep, some of the militia members are black

When I was watching the InfoWars live feed on the day of the stand-off one of the militia members that David Knight spoke to briefly was a black guy dressed up in camouflage and carrying a rifle - totally blowing the stereotype of the white "racist" militia. Just like there were black veterans helping remove the "barrycades" during the government shutdown protest last fall, and MSNBC failed to show them in an attempt to paint the protesters as racist.

And you're right, SSJ, this is off-topic on an excellent article by California Lawyer. I wil say that anyone who holds physical gold should be watching what happens in Nevada very closely, because what they do there may impact what the Powers That Be may do if they decide they need to confiscate your gold like they did back in the 1930. And part of what they are going to tell people is that holders of precious metals are "racist" white guys bunkered up like Cliven Bundy. 

Nana's picture

California Lawyer

My apologies, I did not intend to hi-jack your well written article.

Bad Nana......

Dagney Taggart's picture

19usd Buy Stop Filled this AM. Whew!

Nice ORD!!

Fortunately there were no appointments today. In Couer d'Alene now picking up 1,000 ounces of Ag. Hudson's sounds good for lunch.

Next buy targets 17 or 23.

Dagney Taggart's picture

@Turd

Please throw Libero in the hole for a month for hijacking CL's fine post.

PS. @Nana: ignore him next time, please.

PPS. @SSJ: 100 HTs

Libero's picture

responded to deaconbenjamin post @11:36 AM

so please don't put me in the hole, I'm already in the hole with PM stocks!

erewenguy's picture

That'll leave a mark

From SRSRocco article Turd linked:

According to the data just released by the USGS, the United States exported a stunning 57 mt of gold bullion to Hong Kong in January.

Other markets:

Gold Bullion:

Australia 3.1 mt, Thailand 2 mt, Switzerland 1.5 mt & Singapore 1.0 mt

Dore’ & precipitates:

Switzerland 10.6 mt, India 2.7 mt & United Arab Emirates 1.4 mt

AlienEyes's picture

@ erewenguy

Makes me wonder why the US can't "export" the German's gold to them.  surprise

Dr Jerome's picture

Demonizin Cliven

I just read the article about Harry Reid's response to Cliven Bundy and the NYT article that cited his "racist" remarks about the work ethic of people in Vegas who were living on public assistance. Reid has the gall to say we are a country of laws after arming a "management" agency to the teeth and sending them after a rancher in what ought to be a legal matter between the state and feds. But that's who Reid is.

Thanks to Reid and his parroting press, Mr Bundy is not just a racist, but a "hateful racist." Now, anyone who supports his "cause" is also a hateful racist. Bundy, you are now a "moocher," a "hypocrite," you "endanger women and children," you are "irresponsible" and a "dangerous extremist." Not to mention a "domestic terrorist." Reid says so, the media reports it dutifully, therefore it must be true.

Reid does not play fair and he is good, very good, at propaganda battles. He will twist, stretch, and lie to distort the public impressions of this controversy. I don't imagine he wants any journalists digging into this own stake in the land either.

But Cliven, you are not helping your own cause. The work ethic of people in Las Vegas has little to do with cattle and tortoises in the desert and who really is in control of that land.

The "Patriots" have come to your aid over the issue of Federal encroachment over state jurisdiction.

When one argues or gets into a conflict, one ought to stay on ground that you can defend. Stick to the issue--that grazing fees should go to the state of Nevada not the Feds. That the Feds are illegally confiscating your herd. Steer the issue onto ground where the Feds look bad. And for God's sake, Cliven, keep your mouth shut and don't throw steaks like the 'racist card" to these ravenous liberal wolves.

If we see the "domestic terrorist" rhetoric get ramped up, then we need to beware. THAT is what the Feds will use to sway public opinion to their side, and once they feel they are on safe ground, they will move decisively.

This is not over.

erewenguy's picture

Alieneyes

THAT is the question of the day!

I guess the only difference is that the gold exports may be privately owned and sold gold, whereas the Treasury has.... no.... gold.....?

Who's gold is moving?

Lemme go check my stack. BRB.

Dagney Taggart's picture

Regarding this Cliven Bundy and his Supporters

If I may since I do own property in Nevada as a foreigner. Who the hell cares if he and his supporters are now called "hateful racists"?

The appropriate response now is "So what? What are you going to do about your opinion, Mr. Reid?"

The race card, be it black, jewish, whoever, is an old joke now. And they brought it upon themselves to the point that actual racism in the future will be ignored.

Have a good afternoon, guys.

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