Inherent Unfairness

Tue, Jan 27, 2015 - 1:14pm

As painful as it may be, I'd like you to please take a moment and imagine yourself as resident CNBS stock huckster, Jim Cramer.

As ole Jim is often wont to do, let's pretend that you've found an undervalued equity with strong fundamentals. A potential home run that has been beaten down by years of aggressive selling and short-selling.

You recognize the value and begin to buy. Soon others join in, noticing the increasing momentum of the trade and surprised that they didn't notice earlier how fundamentally strong the case for owning the stock is.

Because there is a fixed amount of shares currently available to the investing public, the price of this equity begins to rise as buyers outnumber sellers and a new, daily equilibrium is reached. The stock, which had been at $12 rises to $13 and then to $14. As more buyers rush in, bids greatly outnumber offers and the price surges even higher, through $15 and even $16. Now up over 30% in a short period of time, the media begins to catch on and stories appear about this "turnaround story" that is "fundamentally sound" and "prices likely to rally further". Again, with a finite number of shares in the float, price must rally to reach an equilibrium where existing holders are willing to sell to prospective new buyers. Price moves higher, through $17 and $18, eventually even reaching it's old, all-time high of $19 that most pundits had claimed was a "bubble", never to be seen again.

At this point, you and ole Jimmy are as happy as pigs in a poke and ready to party!

But what if that's NOT how the stock market worked? What if, instead, the market makers and specialists of that equity you like so much had the ability to just simply create new shares on the fly. This tactic would allow them to "manage the flow" and "make an orderly market" in your beloved stock. Instead of reaching a daily equilibrium where buyers and sellers met at a price equitable and fair to both, the market makers of your stock simply supplied fresh shares to all those looking to buy or build a position. How would that turn out?

As your stock began to rally from , it would almost immediately hit resistance. Why? Because instead of being forced to find new sellers through a rising price, demand for your shares would be filled/met through the simple issuance of more shares. Oh sure, your stock might continue to slowly climb as buyers continued to rush in, but the operative word here is slowly. There would be no sudden, momentum-inspiring surges simply because price was never forced higher in order to find willing sellers.

Instead, your stock rallies to around . It stalls there as momentum wanes and then begins to turn lower. All of the recent buyers soon begin to exit the trade and, as they sell, the market makers buy back all of their recently-issued new shares and retire them back out of the existing float. Price languishes with just a small, overall gain and your big discovery, regardless of the screaming fundamentals, continues to trade sideways and cause you frustration. You're not happy and neither is Jim.

If this story sounds familiar to you, it should. I just described for you exactly how the paper gold "market" works. There is never an equitable meeting of holders of existing contracts because the de facto market makers...The Bullion Banks...are constantly intervening to provide new, naked short contracts to any willing buyer. Instead of a rising price that is the result of buyers out-numbering sellers, The Banks simply create new contracts and make them readily available each day.

Since the first of the year, the impact of this has been dramatic.

There was a Commitment of Traders Report survey taken on Tuesday, December 30, 2014. Price that evening closed at 00 and total Comex open interest was shown to be 373,892 contracts. When the CoT Report was issued the following Monday (delayed a day due to the 1/1/15 holiday), it showed a total Gold Commercial GROSS short position of 238,952 contracts. This number is already grotesque enough as it shows the largest Bullion Banks being naked short nearly 24 million ounces of paper gold or about 743 metric tonnes. I say "grotesque" because, as you likely know, the total Comex registered (available for immediate sale) gold vault shows just 800,000 ounces. This takes the effective leverage of the gold banks up to at least 30X. On its own, how is this even fair?

But that's not the point of today's exercise. Let's get back to our equity example, shall we?

Recall that Jim's stock soared by over 50% in a short period of time as price rose to find willing sellers for all of the new buyers. Because the float was finite (at least until the company filed for the eventual secondary offering that they always seem to do), a new daily price equilibrium had to be reached and the resulting rally was fair to all market participants. Again, though, that's not how "price discovery" works in paper gold.

As noted above, on 12/30/14, with price at 00 and total open interest at 373,892, the Commercial GROSS short position was 238,952 contracts. Now compare that to this:

Last Friday brought us the most recent Commitment of Traders Report. The survey was taken last Tuesday, January 20 with price at 94. Not too shabby, right? Price is up in three weeks or nearly 8%.

However, total Comex gold open interest was shown to also be up as the stated total that evening was 430,128. So price was rising even though the market-making bullion banks increased the available "float" by 56,236 contracts or more than 15%. And how did they do it? On the same report, the total Commercial GROSS short position was shown to be 298,756 contracts. That's an increase of nearly 60,000 new naked just three weeks!

So let's do some math. 298,756 minus 238,952 = 59,804 new naked short contracts. Each contract supposedly represents a promise to deliver 100 troy ounces of gold at some point in the future. 59,804 contracts X 100 ounces = 5,980,400 ounces of paper gold promises or about 186 metric tonnes.

Apologists for the current system will attempt to convince you that this is all brand new "hedging" and simply normal operation of a futures market. Really? So we're supposed to believe that:

  • On gold's first decent rally in nearly a year...
  • With price only slightly above the recognized cost of production...
  • and with price already down 30% from it's all-time high three years ago...

Suddenly producers of gold are lined up at the bullion bank window, ready and eager to sell their product forward and lock in today's price? (Seriously?) And they do this en masse, hedging away over 5% of global mine production in just three weeks? (Uh-huh.) And when price begins to falter and this new open interest is closed back out, this is because the genius mining executives have expertly timed the market again and have covered their short hedges just in time to do it all over again on the next rally? (Rrriiigghhhtt. I might have been born at night but it wasn't last night.)

Instead, isn't it far more likely that the Bullion Bank trading desks are simply utilizing their tried-and-true strategy again of capping price into every rally? They do so by issuing as many naked shorts as necessary to meet the demand for paper gold and then, once the momentum exits the trade, these same banks cover their tracks by buying back their shorts in the face speculator liquidations, thereby retiring most or all of the recently-added open interest.

AND, IN THE END, ISN'T THIS INHERENTLY UNFAIR? No other "market" on the planet operates this way, only paper futures. And why is gold (and silver) even traded in this manner in the first place? Everyone recognizes that "the Comex is not a delivery market". So why even go through the charade of delivery, with "delivery" months and rolling contracts? So that producers can hedge? Heck, even GFMS admits that producer hedging has become nearly non-existent in recent years.

No, the bullion bank goal is clearly to cap and suppress price...and make some money in the consistently scalping the momo-chasing spec longs that play in the paper markets. Let the specs rush in from time to time. Create from thin air all of the paper metal required to meet demand. Slowly drain momentum from the "market" and then cash out by covering back up all of your recent shorts when price inevitably reverses.

AGAIN I ASK YOU, HOW IS THIS FAIR? The answer is: It's not. It's a rigged system designed to manage price and profit The Banks at the same time. Even an addle minded, Idaho potato farmer should be able to see that it's fallacious, unfair and terminally broken.

The good news is that global, physical markets are slowly supplanting the Comex in the role of price discovery. The bad news is that this process is gradual and the Bullion Banks and their apologists will cling to the existing system for as long as possible as they attempt to maximize their control and their profits.

In the end, the precious metals Comex is a "market" that is not to be trusted. It is designed and managed to suppress and manipulate price and it has been this way since Comex gold futures were first introduced on January 1, 1975. One day, true and fair price discovery for gold will once again be permitted. Until then, your only winning move is to avoid this "rigged casino" at all costs, choosing instead to stack physical precious metal at prices that continue to be deeply-discounted.


About the Author

turd [at] tfmetalsreport [dot] com ()


Jan 27, 2015 - 1:38pm


One of the best, most cogent explanations of the charade to date. Well done, Sir Turd.

Jan 27, 2015 - 1:45pm


I read the article. :(

gold slut
Jan 27, 2015 - 1:57pm


Gotta have that! Feels like making the first footprints in virgin snow.

Jan 27, 2015 - 2:01pm

The stock market used to be the same

There were cases in the 1800's where unlimited amounts of stock would be issued, usually to stop an investor that was trying to take control of a company by buying up the stock. But they never could as more and more stock was being issued. The most famous is the war over the Erie Railroad involving Cornelius Vanderbilt. Of course laws were enacted to prevent this in the stock market over a hundred years ago. Could we ever expect the same in the commodities markets?

Jan 27, 2015 - 2:08pm

Execllent Post

Awesome Post Turd with an excellent article on how it works....

Keep Stacking

Jan 27, 2015 - 2:08pm

Gosh, seeing this in print

makes a person quite sick to your stomach.

It is so criminal. No wonder the rest of the world is losing respect for the "fairness" or "rule of law" the USA is supposed to represent

Jan 27, 2015 - 2:15pm

Great work Craig

That is all.

Mr. Fix
Jan 27, 2015 - 2:25pm

imagine I am Jim Cramer?

That makes my brain hurt too. Don't think about it too much, just stack!

Fred Hayek
Jan 27, 2015 - 2:37pm

Great piece, Turd! But, imagine that I'm Jim Cramer . . !

First of all, Jim Cramer only seems to show occasional interest in the fundamentals of a company. He seems just as happy to cite what boils down to the likelihood of greater fools amongst the game playing class.

Second, Jim Cramer is fucking evil. Seriously. The man is positively evil. This man *knows* that he's trying to enlist more sheep to a slaughter. He knows it and he enthusiastically recruits them.

Whitecastle123 -SilverIsMoney-
Jan 27, 2015 - 2:39pm


watching that guy is like looking at a strobe light. I feel like I am on the verge of a seizure.

Jan 27, 2015 - 3:13pm


"Even an addle minded, Idaho potato farmer"

Man, that hurts Turd.

Jan 27, 2015 - 3:30pm

That is probably the clearest

explanation I've read. Thanks, Turd.

Jan 27, 2015 - 3:33pm

Trust me

Even if YOU are actually an Idaho potato farmer, that line wasn't meant for you personally.

Jan 27, 2015 - 3:36pm

Along the same lines

This is excellent, from Chris Powell.

Seems he's had enough of Idaho potato farmers, too.

Jan 27, 2015 - 4:05pm

potato farmers

I thought he was talking about the incident where J.R. Simplot, Idaho potato farmer, french fry king, was convicted of manipulating potato futures in 1976 - selling potatoes they didn't have, contracts had to be settled in cash.

Jan 27, 2015 - 4:36pm

Funny you should mention that

I wrote about the Maine Potato Scandal a couple of years ago. Might be worth reviewing as it is still relevant:

Jan 27, 2015 - 4:40pm

Printed out and sitting

on my desk. Allocate to physical and if you have trapped money to a bullion fund and NOT GLD!


Jan 27, 2015 - 4:42pm

Jan 27, 2015 - 4:51pm

An outstanding piece, TF

I would encourage folks to link to this (as it is a public thread) in your various travels on the interwebz- if this were more widely understood in the investing public, more people would be willing to add metals as a part of their investments. Unfortunately, all most people know about gold and silver is that they "have been down" without really knowing why, as TF examine here.

Great work, Turd!

Jan 27, 2015 - 4:55pm

Count Your Blessings

At least he didn't say addle minded Oregon pig farmer. Just sayin' . .

Jan 27, 2015 - 4:57pm

Just saw your

article on Nice!

Can't Happen Here
Jan 27, 2015 - 5:01pm
Jan 27, 2015 - 5:04pm
Mr. Fix
Jan 27, 2015 - 5:07pm

In the Zero Hedge comments section:

Tue, 01/27/2015 - 16:10 | 5712759Clueless Economist

Whew! Off the lows of the day is all that matters! Booooyahhh


Tue, 01/27/2015 - 16:16 | 5712803dimwitted economist

*Yawn... it means nothing. the shadow of crisis has passed..


Tue, 01/27/2015 - 16:25 | 5712849McMolotov

I think this is the first time on ZH that I've seen a dimwitted economist reply to a clueless economist. It happens all the time on CNBS.


Tue, 01/27/2015 - 16:36 | 5712916saints51

Nice catch!!!!!!!



Jan 27, 2015 - 5:24pm



Dyna mo hum
Jan 27, 2015 - 6:10pm
Jan 27, 2015 - 6:54pm

Crammer bumbling fool

'Stephanie Link is better than John Kerry's sister. But Crammer is a total bum smooch in front of anything looking female. What a AH. If he could fart the Star Spangle Banner I would have more respect for him.

Jan 27, 2015 - 7:22pm

Hey Trader Dan

Stick it in your butt!


Jan 27, 2015 - 8:17pm

This article alone

was worth my $10 this month!! Now I'm going to listen to the podcast.

Steve Silver
Jan 27, 2015 - 8:24pm

Excellent article

Especially the part about staying away from the comex. They need specs to screw or the game fails.


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