Guest Post: Price Suppression Mechanics of GLD and SLV, by Andrew Maguire

227
Tue, Nov 20, 2012 - 12:34pm

Most of us have been baffled over the years by the almost daily withdrawals and additions to the primary metal ETFs, GLD and SLV. There are seemingly no correlations to price movements, just additions and subtractions of inventory without basis in fundamentals. Today, we attempt to solve this riddle.

The daily metal movements into and out of the funds is only a small part of the much larger trend. Do you recall these charts from the HardAssetsAlliance and Casey Research? They show that, even while prices have increased dramatically over the past three years, net additions have fallen precipitously.

The key word above is "NET". While there is clearly some metal flowing into the funds over time, there is also a tremendous amount that is being withdrawn. The question then becomes: Which firms make withdrawals and why?

I posed this question to our friend, Andrew Maguire, and asked him for an explanation. Are these withdrawals a normal part of the day-to-day operations of an ETF or is there something more nefarious going on? Are the Custodians and Authorized Participants simply managing the funds and their own risks or are they using these stores of metal as a vehicle to suppress price and meet the ever-increasing demand for physical metal?

What follows below is Andy's answer. He laid this out for "Army" members a couple of weeks ago and he has generously offered to share it with you today. The hope is that by gaining an understanding of the inner workings of this process, you will have a greater appreciation of the true depth of metals markets manipulation and price suppression. The Bullion Banks are currently playing every possible angle in their increasingly desperate attempt to maintain power and preserve the current Comex/LBMA system. Though simple supply and demand dynamics dictate that they will ultimately lose this fight, they are certainly "going down swinging" and may even bring about a permanent change in the global financial system as a result.

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{As an aside, Andy's weekly commentary and Paul Coghlan's daily technical analysis are just two of the additional services that Army members enjoy when they enroll in the program. I feel that I cannot recommend this service emphatically enough. It is essential to your comprehension of daily and weekly events in the metals. Additionally, if you're attempting to trade these markets and you're not utilizing this service, you're crazy! Andy has over thirty years of experience trading and working the paper and physical markets. His willingness to share this experience with Turdville represents an exclusive and once-in-a-lifetime opportunity to work with, and learn from, the best. More can be found by clicking here: https://www.tfmetalsreport.com/podcast/3621/tfmr-podcast-16-special-anno... and here: https://www.coghlancapital.com/daytrades-application?ak=turd_army}

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THE PRICE SUPPRESSION MECHANICS OF GLD & SLV

The bullion banks finance their ‘physical inventory’ by leasing it or selling it to GLD and SLV shareholders/investors, then the bullion banks in turn use these ETF’s inventories as a ‘flywheel’ to both manage and leverage their physical reserves. For this walk-through, I will use GLD as an example. (One can substitute SLV for all that is described below relating to GLD except the basket sizes are smaller, constituting 50,000 shares).

Baskets of GLD shares are bought and sold through a limited number of Authorised Participants. The authorised participants, (AP’s), are JPMorgan, Merrill Lynch, Morgan Stanley, Newedge (a joint venture between Société Générale and Credit Agricole CIB), RBC, Scotia Mocatta, UBS and Virtu Financial. This is how it is supposed to work. The size of each GLD basket comprises of 100,000 shares, each share representing just less than 1 troy oz. The AP’s, transfer ALLOCATED physical gold to the trustee who in turn creates the required number of new baskets of shares and then transfers these newly created shares back to the AP. To redeem the shares for physical gold or silver, the AP’s transfer any number of the baskets of 100,000 shares back to the trustee who then redeems these shares and transfers allocated gold back to the AP.

This is all well and good on the face of it, but there are a number of ways this ‘allocated’ gold backing the shares in the ETF can be diluted /hypothecated in order for the bullion banks to ‘manage’ their physical reserves.

If, as is often the case, there is insufficient allocated inventory available to the bullion bank at the current Comex driven & discounted spot fix price to create the necessary new GLD shares backed by allocated gold, then it is possible for a bullion bank to borrow short these GLD shares from the ETF instead of providing the required Allocated physical to the trustee to meet this obligation thereby ‘fly wheeling’ this physical demand in order to meet obligations elsewhere, likely at the day’s gold fix. This obviously has the effect of manipulating price lower vs. the true immediate supply demand fundamentals as no allocated physical metal has to be bought on the open market at that days fix to meet this new share demand as should be the case.

This is now the point where transparency evaporates. The AP claims to be Short GLD while concurrently claiming to be backing it with an equal size long ‘UNALLOCATED’ spot gold position. However, LBMA unallocated gold accounts are run upon a fractional reserve requirement and leveraged around 100/1 so there is very little need to back this transaction with any real physical at this point; this is left until later as explained below. To unwind this short GLD position, the bullion bank has to ALLOCATE the required amount of unallocated gold and then transfer this gold back to the trustee thereby receiving back the required # of shares in order to repay the original GLD shares sold short.

However, in conjunction with concurrent concentrated short futures positions, the sole object of this entire charade is to assist in depressing the price of gold at times of strong physical demand so that the futures price can be capped, usually at key inflection points where the price would break out and also swamp the very large concentrated Comex short positions. If this were not the case, the bullion bank would simply bid up that days fix price until it reflected that days true supply demand price levels for that fix and provide allocated gold to meet this real demand at that higher price.

The resulting distortion now created between the real and paper market price is exacerbated through the use of heavy position concentration and leverage in the futures and derivatives markets, where these very same bullion banks then seek to profitably repay the shorted GLD shares at a lower price at the point at or below where the lines cross profitably. This then puts these bullion banks in a position to finally spot index UNALLOCATED gold against this naked short position only then moving to buy the now discounted unallocated gold into the Comex contrived dips. These discounted unallocated long spot index positions are then ALLOCATED at the upcoming fix, enabling both the repayment of the GLD short position at a profit but most importantly controlling the rise in price against much larger derivative positions elsewhere.

Conversely, as evidenced by the steady 12-year stair step rise in prices easily observed in the daily and weekly charts, despite this many-year capping, we have also seen an ever larger and untenable LBMA unallocated short positions grow to what I now consider to be extreme danger levels. The reason is as follows: When the Bullion bank needs to make good on the unplanned/unanticipated CB and sovereign physical allocations at the fixes, they have regularly achieved this by going long GLD vs. short/selling UNALLOCATED gold. They then immediately turn around and transfer the required number of baskets of GLD shares to the trustee and receive ALLOCATED gold in return. Instead of settling/covering the short UNALLOCATED leg with this ALLOCATED gold, they are forced to satisfy these CB and Sovereign allocations by providing them this metal instead. The longer term price charts reveal this stair step higher, whereas we see no reduction, in fact from 2008 an increase, in the naked short Comex, (and unallocated OTC), bullion bank positions.

I hope this has been helpful in providing an insight into the internal dynamics of the ETFs and how the bullion banks continue to operate in the shadows.

A.M.

About the Author

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turd [at] tfmetalsreport [dot] com ()

  227 Comments

Mr. Fix
Nov 21, 2012 - 1:28pm
Nov 21, 2012 - 1:43pm

careful reading

I am supposed to be educated and my eyes started glazing over. I'll read it again tomorrow.

I am confused as the difference between allocated and unallocated gold. does "allocated" means your ledger entry has a bar's particular serial number next to it? Or is there a post-it note on the bar in the vault with 100 names on it?

Fat Willie
Nov 21, 2012 - 1:44pm

Broke 50 Day?

Looks like a good break above the 50 DMA for silver. Hope it continues......

Happy Thanksgiving everybody. And a special thank you to Turd, who started it all.

Best-

FW

question
Nov 21, 2012 - 1:49pm

Thanks Andy and Turd For the Light

Nassim Taleb has a new book out that addresses somewhat the fragility that these scumbags have introduced into our financial world; ashes, ashes, we all fall down (fortunately for us stackers we'll have less far to fall than most)

Here's a link to a summary of his new book "LEARNING TO LOVE VOLATILITY"
Adapted excerpt from a WSJ article by Nassim Nicholas Taleb

https://www.bfi-capital.com/mountainvision/newsletter.php?view=7e7757b1e1

Fat Willie
Nov 21, 2012 - 1:49pm

A word from the heartland

https://www.theheartlandusa.com/index2.htm

I’M TIRED AND I WANT TO GO HOME

By Greg Evensen ▪ November 16, 2012

Like many of you, my memories now span over 62 years and ten lifetimes it seems of experience and horrific change. As I have observed the past five years, I am consumed with the dreadful sense of shame and guilt that I have failed to walk my children and grandchildren into a brighter future than what I had. Now when I stand with a group of veterans, many heads hang low when we talk of wars fought, battles won or lost and all for what…..? Daily heroism, lives cut short and friends lost because the call to “duty” was answered by men and women who believed they were advancing freedom for others and reinforcing the freedom we had been given 236 years ago. And when taps sounded in the hearts and minds of so many, each night as stillness and contemplation made its way into the room, heartbreak and a deep sense of the loss of country cannot be dismissed. The heart and soul of America has been held hostage to greed, tyranny and destruction for decades, but the crime bosses have entered that pitiful room where our nation’s dreams were imprisoned. The beating continued until finally, mortally wounded, America could withstand no more. In a moment of time, her soul was defeated, her deeply compassionate spirit was crushed and life as we knew it----ended.

ancientmoney
Nov 21, 2012 - 1:51pm

Raison de etre for SLV and GLD

The only reason the bankers created SLV and GLD was to deflect investment demand for physical gold and silver into a paper vehicle (for the investors) they could control and manipulate.

And, the bankers still control those ETFs' physical holdings, as the custodians (JPM for SLV and HSBC for GLD) have the ability, as per the prospectus, to replace all the physical holdings of silver and gold, with dollars.

It's all there in plain black-and-white print in the prospectii.

babaganoush2307
Nov 21, 2012 - 1:59pm

Fat Willie

That was deep so true

enflow
Nov 21, 2012 - 2:06pm

You Had Me At...

... UnAllocated !

......................StackaSarus wisely chooses the transparent door... No. 4... with Physical behind it...

Monedas
Nov 21, 2012 - 2:08pm

The Missing Link ?

Maybe this is what I've been wanting from Harvey Organ all this time .... the mechanics of the manipulation .... not just a report of fantasy inventory ! Monedas 1929 Comedy Jihad The Who And Why Is Not Enough Without The What, The Where, The How And The When World Tour

Nov 21, 2012 - 2:19pm

Pie storage business update

I am sad to report that my pie business is experiencing a short squeeze.

It is the day before the Thanksgiving holiday in the US.

I thought I was so clever to sell unallocated pies and to re-hypothocate them 10x, then collect storage fees to keep them in my freezer that I leased from Monsanto. Alas, the business model is failing as hundreds of angry pie-stackers are demanding delivery of their pies. My first response was to start mass-selling empty pie boxes on the markets to drive the price down (buying them back before they were eaten) as well as buying advertisements and news stories telling of the risks of eating pie. But my manipulative efforts are providing diminishing returns. There is this tradition of pie-stacking and eating at Thanskgiving, and these barbarous relics are in high demand.

Perhaps I should set up and manage a Pie ETF where further and deeper manipulation of price and meta-physical delivery were possible. Then perhaps I could keep things solvent long enough to scrape my egregiously lavish retirement funding off the bottom--just like our friends on Wall street.

If only I had bought those pie default swaps that Ferd Torgenson was selling!

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