Guest Post: "Rigged Gold Price Distorts Perception of Economic Reality", by Paul Craig Roberts and "Denver" Dave Kranzler

80
Mon, Sep 22, 2014 - 12:03pm

A perfect post for this moment in time. (It cites TFMR so of course I like it!)

"Rigged Gold Price Distorts Perception of Economic Reality"

by, Paul Craig Roberts and Dave Kranzler

The Federal Reserve and its bullion bank agents (JP Morgan, Scotia, and HSBC) have been using naked short-selling to drive down the price of gold since September 2011. The latest containment effort began in mid-July of this year, after gold had moved higher in price from the beginning of June and was threatening to take out key technical levels, which would have triggered a flood of buying from hedge funds.

The Fed and its agents rig the gold price in the New York Comex futures (paper gold) market. The bullion banks have the ability to print an unlimited supply of gold contracts which are sold in large volumes at times when Comex activity is light.

Generally, on the other side of the trade the buyers of contracts are large hedge funds and other speculators, who use the contracts to speculate on the direction of the gold price. The hedge funds and speculators have no interest in acquiring physical gold and settle their bets in cash, which makes it possible for the bullion banks to sell claims to gold that they cannot back with physical metal. Contracts sold without underlying gold to back them are called “uncovered contracts” or “naked shorts.” It is illegal to engage in naked shorting in the stock and bond markets, but it is permitted in the gold futures market.

The fact that the price of gold is determined in a futures market in which paper claims to gold are traded merely to speculate on price means that the Fed and its bank agents can suppress the price of gold even though demand for physical gold is rising. If there were strict requirements that gold shorts could not be naked and had to be backed by the seller’s possession of physical gold represented by the futures contract, the Federal Reserve and its agents would be unable to control the price of gold, and the gold price would be much higher than it is now.

Gold price manipulation is used when demand for delivery of gold bullion begins to put upward pressure on the price of gold and hedge funds speculate on the rising price of gold by purchasing large quantities of Comex futures contracts (paper gold). This speculation accelerates the upward move in the price of gold. The TF Metals Report provides a good description of this illegal manipulation of the gold market:

“Over a period of 10 weeks to begin the year, the Comex bullion banks were able to limit the rally to only 15% by supplying the “market” with 95,000 brand new naked short contracts. That’s 9.5MM ounces of make-believe paper gold or about 295 metric tonnes.

“Over a period of just 5 weeks in June and July, the Comex bullion banks were able to limit the rally to only 7% by supplying the “market” with 79,000 brand new naked short contracts. That’s 7.9MM ounces of make-believe paper gold or about 246 metric tonnes.” https://www.tfmetalsreport.com/comment/269275

In previous columns, we have documented the heavy short-selling into light trading periods.
See for example: https://www.paulcraigroberts.org/2014/07/16/insider-trading-financial-te....

The bullion banks do not have nearly enough gold in their possession to make deliveries to the buyers if the buyers decide to stand for delivery per the terms of the paper gold contract. The reason this scheme works is because the majority of the buyers of the contracts are speculators, not gold purchasers, and never demand delivery of the gold. Instead, they settle the contracts in cash. They are looking for short-term trading profits, not for a gold hedge against currency inflation. If a majority of the longs (the purchasers of the contracts) required delivery of the gold, the regulators would not tolerate the extent to which gold is shorted with uncovered contracts.

In our opinion, the manipulation is illegal, because it is insider trading. The bullion banks that short the gold market are clearing members of the Comex/NYMEX/CME. In that role, the bullion banks have access to the computer system used to clear and settle trades, which means that the bullion banks have access to all the trading positions, including those of the hedge funds. When the hedge funds are in the deepest, the bullion banks dump naked shorts on the Comex, driving down the futures price, which triggers selling from stop-loss orders and margin calls that drive the price down further. Then the bullion banks buy the contracts at a lower price than they sold and pocket the difference, simultaneously serving the Fed by protecting the dollar from the Fed’s loose monetary policy by lowering the gold price and preventing the concern that a rising gold price would bring to the dollar.

Since mid-July, nearly every night in the US the price of gold remains steady or drifts higher. This is when the eastern hemisphere markets are open and the market players are busy buying physical gold for which delivery is mandatory. But as regular as clockwork, following the close of the Asian markets, the London and New York paper gold markets open, and the price of gold is immediately taken lower as paper gold contracts flood into the market setting a negative tone for the day’s trading.

Gold serves as a warning for aware people that financial and economic trouble are brewing. For instance, from the period of time just before the tech bubble collapsed (January 2000) until just before the collapse of Bear Stearns triggered the Great Financial Crisis (March 2008), gold rose in value from $250 to $1020 per ounce, or just over 400%. Moreover, in the period since the Great Financial Collapse, gold has risen 61% despite claims that the financial system was repaired. It was up as much as 225% (September 2011) before the Fed began the systematic take-down and containment of gold in order to protect the dollar from the massive creation of new dollars required by Quantitative Easing.

The US economy and financial system are in worse condition than the Fed and Treasury claim and the financial media reports. Both public and private debt burdens are high. Corporations are borrowing from banks in order to buy back their own stocks. This leaves corporations with new debt but without income streams from new investments with which to service the debt. Retail stores are in trouble, including dollar store chains. The housing market is showing signs of renewed downturn. The September 16 release of the 2013 Income and Poverty report shows that real median household income has declined to the level in 1994 two decades ago and is actually lower than in the late 1960s and early 1970s. The combination of high debt and decline in real income means that there is no engine to drive the economy.

In the 21st century, US debt and money creation has not been matched by an increase in real goods and services. The implication of this mismatch is inflation. Without the price-rigging by the bullion banks, gold and silver would be reflecting these inflation expectations.

The dollar is also in trouble because its role as world reserve currency is threatened by the abuse of this role in order to gain financial hegemony over others and to punish with sanctions those countries that do not comply with the goals of US foreign policy. The Wolfowitz Doctrine, which is the basis of US foreign policy, says that it is imperative for Washington to prevent the rise of other countries, such as Russia and China, that can limit the exercise of US power.

Sanctions and the threat of sanctions encourage other countries to leave the dollar payments system and to abandon the petrodollar. The BRICS (Brazil, Russia, India, China, South Africa) have formed to do precisely that. Russia and China have arranged a massive long-term energy deal that avoids use of the US dollar. Both countries are settling their trade accounts with each other in their own currencies, and this practice is spreading. China is considering a gold-backed yuan, which would make the Chinese currency highly desirable as a reserve asset. It is possible that the Fed’s attack on gold is also aimed at making Chinese and Russian gold accumulation less supportive of their currencies. A currency linked to a falling gold price is not the same as a currency linked to a rising gold price.

It is unclear whether the new Chinese gold exchange in Shanghai will displace the London and New York futures markets. Naked short-selling is not permitted in the Chinese gold exchange. The world could end up with two gold futures markets: one based on assessments of reality, and the other based on gambling and price-rigging.

The future will also determine whether the role of reserve currency has been overtaken by time. The US dollar took that role in the aftermath of World War II, a time when the US had the only industrial economy that had not been destroyed in the war. A stable means of settling international accounts was needed. Today there are many economies that have tradable currencies, and accounts can be settled between countries in their own currencies. There is no longer a need for a single reserve currency. As this realization spreads, pressure on the dollar’s value will intensify.

For a period the Federal Reserve can support the dollar’s exchange value by pressuring Japan and the European Central Bank to print their currencies with which to support the dollar with purchases in the foreign exchange market. Other countries, such as Switzerland, will print their own currencies so as not to endanger their exports by a rise in the dollar price of their exports. But eventually the large US trade deficits produced by offshoring the production of goods and services sold into US markets and the collapse of the middle class and tax base caused by jobs offshoring will destroy the value of the US dollar.

When that day arrives, US living standards, already endangered, will plummet. American power will have been destroyed by corporate greed and the Fed’s policy of sacrificing the US economy in order to save four or five mega-banks, whose former executives control the Fed, the US Treasury, and the federal financial regulatory agencies.

About the Author

Founder
turd [at] tfmetalsreport [dot] com ()

  80 Comments

Sep 22, 2014 - 12:09pm

One added thought

This passage here:

"But eventually the large US trade deficits produced by offshoring the production of goods and services sold into US markets and the collapse of the middle class and tax base caused by jobs offshoring will destroy the value of the US dollar."

Expanding upon this theme is something I've been planning to write about but haven't found the time. I will soon. However, in the meantime, just as the republocrats like to blame each other for the destruction of middle-income purchasing power, they also blame each other as they lament the "loss of manufacturing and offshoring of jobs".

You must understand that this is all by design over the past 40 years. To support the dollar and petrodollar recycling scheme that funded the growing political class and welfare state, manufacturing had to be offshored so the the US would become a consumer society instead of a producer society.

Again, I hope to expand upon this idea and completely spell it out for you someday soon.

Safety Dan
Sep 22, 2014 - 12:21pm

Also By Design Over Time

See this short 5min video history of 8 countries without a Central Bank starting from 2000.

Now only 3 Countries Left Without a Rothschild Central Bank.

Only 3 Countries Left Without a Rothschild Central Bank

What country's Military invaded those 5 countries?

ancientmoney
Sep 22, 2014 - 12:54pm

The real reason Saudi Arabia soon to be fingered in 9/11...

https://www.silverdoctors.com/jim-willie-the-crash-heard-round-the-world...

SA has been cozying up to China for some time now, and Willie says its soon to pull the plug on the Petro-dollar agreement (SA prices oil in dollars in exchange for protection of the House of Saud).

Meanwhile, several 9/11 commissioners are suddenly "coming clean" about the missing 28 pages of documents that likely implicate Saudi Arabia as the main evil-doer in 9/11 plotting (of course they had almost nothing to do with it--CIA and Mossad the ring leaders).

ancientmoney
Sep 22, 2014 - 1:05pm

CIA uses ISIS as next "terrorist group" on merry-go-round

ISIS was created and trained by the CIA in Jordan to fight and depose Assad regime in Syria.

ISIS continues to receive food, arms, whatever it needs. How?

It seems ISIS is another arm of the U.S. shadow government, used to continue providing a reason to foment war in the ME, the much-needed "war on terror-2."

https://www.veteranstoday.com/2014/09/18/isil-operating-with-help-of-for...

foxenburg
Sep 22, 2014 - 1:06pm

www.royalmintbullion.com

A few minutes I got an email from the UK Royal Mint (I buy the odd coin so am on their mailing list) informing me that

"The Royal Mint has today launched a new bullion website, www.royalmintbullion.com"

It's interesting to read the stuff on their website. Among the many gems

Q"Why buy gold?"

A"The answer, quite simply is that gold is the ultimate store of value. It doesn’t rust or fade and whilst the items we can make from gold can occasionally be counterfeited, the actual element itself cannot be faked, printed or inflated. Over the very long run, it has historically held its worth."

Their emphasis, not mine. From the horse's mouth! lol

Lintltj5
Sep 22, 2014 - 1:24pm

Place your bets....

.....on which comment # is first to claim the market is not manipulated.

ancientmoney
Sep 22, 2014 - 1:30pm

Stock market "high" bells ringing . . .

"the Hindenburg Omen, which signals an increased probability of a stock market crash, flashed red on Friday.

There was also this unequivocal pronouncement from the Elliott Wave Theorist after the Dow Industrials came within a single point last week of fulfilling their long-term rally target at 17280: "Next week, the U.S. stock averages should begin their biggest decline ever." As for your editor, Rick's Picks has been drum-rolling a key "Hidden Pivot" target at 2028 in the S&P 500 Index that has been 27 years in coming. On Friday, the index hit a record 2019.

Is a major top at hand? It is often said that bells do not ring to signal the end of a bull market. But if the broad averages were in fact to plummet in the weeks ahead, never forget that bells did indeed ring."

https://www.silverbearcafe.com/private/09.14/knell.html

Safety Dan
Sep 22, 2014 - 1:37pm

World's Largest Pension Dumps Hedge Funds & $4 Billion

If you have a hedge fund managing your investments, you might take note!

CalPERS Hedge Fund Exit: Earthquake or Godzilla?

SEPTEMBER 18, 2014 BY ATTAIN CAPITAL LEAVE A COMMENT

The big news in the alternatives world this week is of course that the largest pension in the world CalPERS is ditching it’s Absolute Return unit and unloading $4 Billion worth of hedge funds. Is this the end of hedge fund investing by institutional investors (an earthquake), typical performance chasing by an investor (albeit a very large one), or a result of their enormous size (Godzilla).

If you believe Barry Ritholtz over at Bloomberg – this is an “earthquake” for hedge funds, with other pensions following suit and advisors and the rest eventually waking up to the realization that hedge funds don’t provide higher returns than equities.

This is a huge change… It has enormous potential for disrupting the consultants and infrastructure of the 2 & 20 firmament.

If you believe some hedge fund managers who were quoted in a Business Insider piece – this isn’t about the hedge fund industry’s ability to meet investor expectations, it’s about CalPERS inability to pick managers who could meet their expectations. We even get a little insight into how their manager selection may have suffered:

They got what they paid for since they only invested in managers who would cut fees. So the best funds wouldn’t do that, so they had a mediocre portfolio.

So is this proof that hedge funds don’t deliver on their promise (note to Mr. Ritholtz, most hedge fund’s “promise” isn’t to get “higher” returns than equities… it’s about non correlated returns and better risk adjusted returns), or is it about CalPERS being a poor investor?

We agree with Ritholtz that there are a lot of under performing hedge funds out there and a lot of them are expensive. But institutional investors don’t seem to be as upset about fees and correlation and all the rest of it. A recent survey showed 95% of institutional investors planned on maintaining or increasing their hedge fund allocations (58% maintaining, 36% increasing).

Continue Reading...

ivars
Sep 22, 2014 - 1:45pm

Sounds like a religion or

Sounds like a religion or selling snake oil; no proofs on the effect on physical price; no numbers other than created paper gold amounts; settlement in cash- meaning even less influence on real gold deliveries prices.

Must be a popular theory to be able to sell with so little proof. But then, I may have missed basics as I am no trader.

Still i do not get it how paper prices in gold whose stocks abound can set the price for physical so that everyone is forced to sell physical for that price..if they do not, will that imply that buyers will turn to COMEX for delivery at lower prices? But that can not happen as need to deliver will drive prices in COMEX up immediately. Even guys at London OTC handling 10 times more gold volumes with yearly turnover of 12,5 trillion USD are settling at prices decided by COMEX? Why? Can someone explain with simple mathematics not hyperboles.

Safety Dan
Sep 22, 2014 - 1:46pm

Interactive Annual Asset Class Returns

Annual Asset Class Returns

The chart below shows several issues investors struggle with all the time. It’s difficult to pick the best performing investment year after year, yet for many investors it’s an annual event. They look for an encore, picking the best asset class last year with the hope of a repeat performance. Yet, betting on last year’s winner rarely works out.

Assets at the top of the chart one year could be at the bottom the next, and vice versa. Much of this is due to reversion to the mean. But over the long-term, those big swings even out. The chart shows annual returns for eight asset classes against a diversified portfolio. Diversification works to smooth out those big swings in the short-term. While you’ll never get the biggest gains of any year, you avoid the huge losses.

The table below ranks the best to worst investment returns by asset class over the past 15 years. Hover over the table to highlight the asset class returns.Get your copy.

And...

150 Asset Class Returns in One Chart

We love these new looking charts that keep popping up, showing how the different asset classes go from the top to the bottom, to the middle, and so forth depending on the year. But we have two issues with these charts. Here’s our amended graphic… Continue Reading...

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