The Gold Spread and Wall Street Banks

78
Thu, Apr 24, 2014 - 11:32am

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: https://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:

https://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.

About the Author

  78 Comments

metalsbyamile
Apr 24, 2014 - 11:39am

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
Apr 24, 2014 - 11:46am

Will we Have Another WACO this time in Nevada?

Posted by Martin Armstrong

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. https://armstrongeconomics.com/2014/04/23/will-we-have-another-waco-this-time-in-nevada/

DeaconBenjamin
Apr 24, 2014 - 11:47am

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
Apr 24, 2014 - 11:49am

Gold is the anti currency

Be your own central bank Silver66

Apr 24, 2014 - 12:07pm

Excellent article

Well done, CaL!

erewenguy
Apr 24, 2014 - 12:14pm

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
Apr 24, 2014 - 12:18pm

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
Apr 24, 2014 - 12:21pm

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

Apr 24, 2014 - 12:24pm

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
Apr 24, 2014 - 12:31pm
Key Economic Events Week of 10/14

10/15 8:30 ET Empire State Fed MI
10/16 8:30 ET Retail Sales
10/16 10:00 ET Business Inventories
10/17 8:30 ET Housing Starts and Bldg Perms
10/17 8:30 ET Philly Fed MI
10/17 9:15 ET Cap Ute and Ind Prod
10/18 10:00 ET LEIII
10/18 Speeches from Goons Kaplan, George and Chlamydia

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Key Economic Events Week of 10/14

10/15 8:30 ET Empire State Fed MI
10/16 8:30 ET Retail Sales
10/16 10:00 ET Business Inventories
10/17 8:30 ET Housing Starts and Bldg Perms
10/17 8:30 ET Philly Fed MI
10/17 9:15 ET Cap Ute and Ind Prod
10/18 10:00 ET LEIII
10/18 Speeches from Goons Kaplan, George and Chlamydia

Key Economic Events Week of 10/7

10/8 8:30 ET Producer Price Index
10/9 10:00 ET Job Openings
10/9 10:00 ET Wholesale Inventories
10/9 2:00 ET September FOMC minutes
10/10 8:30 ET Consumer Price Index
10/11 10:00 ET Consumer Sentiment

Key Economic Events Week of 9/30

9/30 9:45 ET Chicago PMI
10/1 9:45 ET Markit Manu PMI
10/1 10:00 ET ISM Manu PMI
10/1 10:00 ET Construction Spending
10/2 China Golden Week Begins
10/2 8:15 ET ADP jobs report
10/3 9:45 ET Markit Service PMI
10/3 10:00 ET ISM Service PMI
10/3 10:00 ET Factory Orders
10/4 8:30 ET BLSBS
10/4 8:30 ET US Trade Deficit

Key Economic Events Week of 9/23

9/23 9:45 ET Markit flash PMIs
9/24 10:00 ET Consumer Confidence
9/26 8:30 ET Q2 GDP third guess
9/27 8:30 ET Durable Goods
9/27 8:30 ET Pers Inc and Cons Spend
9/27 8:30 ET Core Inflation

Key Economic Events Week of 9/16

9/17 9:15 ET Cap Ute & Ind Prod
9/18 8:30 ET Housing Starts & Bldg Perm.
9/18 2:00 ET Fedlines
9/18 2:30 ET CGP presser
9/19 8:30 ET Philly Fed
9/19 10:00 ET Existing Home Sales

Key Economic Events Week of 9/9

9/10 10:00 ET Job openings
9/11 8:30 ET PPI
9/11 10:00 ET Wholesale Inv.
9/12 8:30 ET CPI
9/13 8:30 ET Retail Sales
9/13 10:00 ET Consumer Sentiment
9/13 10:00 ET Business Inv.

Key Economic Events Week of 9/3

9/3 9:45 ET Markit Manu PMI
9/3 10:00 ET ISM Manu PMI
9/3 10:00 ET Construction Spending
9/4 8:30 ET Foreign Trade Deficit
9/5 9:45 ET Markit Svc PMI
9/5 10:00 ET ISM Svc PMI
9/5 10:00 ET Factory Orders
9/6 8:30 ET BLSBS

Key Economic Events Week of 8/26

8/26 8:30 ET Durable Goods
8/27 9:00 ET Case-Shiller Home Price Idx
8/27 10:00 ET Consumer Confidence
8/29 8:30 ET Q2 GDP 2nd guess
8/29 8:30 ET Advance Trade in Goods
8/30 8:30 ET Pers. Inc. and Cons. Spend.
8/30 8:30 ET Core Inflation
8/30 9:45 ET Chicago PMI

Key Economic Events Week of 8/19

8/21 10:00 ET Existing home sales
8/21 2:00 ET July FOMC minutes
8/22 9:45 ET Markit Manu and Svc PMIs
8/22 Jackson Holedown begins
8/23 10:00 ET Chief Goon Powell speaks

Key Economic Events Week of 8/12

8/13 8:30 ET Consumer Price Index
8/14 8:30 ET Retail Sales
8/14 8:30 ET Productivity & Labor Costs
8/14 8:30 ET Philly Fed
8/14 9:15 ET Ind Prod and Cap Ute
8/14 10:00 ET Business Inventories
8/15 8:30 ET Housing Starts & Bldg Permits

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