Inherent Unfairness

72
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 shorts...in 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. https://www.reuters.com/article/2014/07/04/gold-hedging-idUSL6N0PF2J8201...

No, the bullion bank goal is clearly to cap and suppress price...and make some money in the process...by 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.

TF

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  72 Comments

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ivars
Jan 30, 2015 - 6:12am

(No subject)

GSR strong move up this week-potential to continue in direction of 80-84 which has been the usual high many years ago (outside this chart) .

tyberious
Jan 29, 2015 - 7:04pm

 LBMA Data Points to Gold and

LBMA Data Points to Gold and Silver Default

Click Jay Taylor Media to Listen and Download

A Weekly Look at Gold Market Fundamentals with David Jensen..

Gold and silver bullion is massively inadequate to meet bullion demands should investors lose confidence in the existing monetary system and demand delivery. Decades of central planning have disallowed capitalism to work and thus guarantee a day of reckoning for gold and silver bankers.

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nadgeskaul
Jan 29, 2015 - 6:02pm

Silver Margin Hike

The banks were a bit peeved that it rallied from $14 to $18, so they had the CRIMEX institute further limitations on real, interested purchasers.

This will finally be the death blow to COMEX pricing as the charts head towards ZERO. Suppression of western paper demand...done.

So, we shouldn't even look at it, nor analyze it anymore. Let's start pooling online retailers and amalgamate their all-in sale price, including the premium and go from there.

Let's move these discussions away from the CME, for it is no longer relevant.

JQuest
Jan 29, 2015 - 5:17pm

Best Article on How The Game is Played!

This is the BEST article on how the game is played I've ever read!

Great work Turd!

Meanwhile today Jan. 29 the crooked suckers stomped gold down $25+ and then cap it steady for 5 hours straight just below 1260.

Market Rigging is too nice a word!

Joseph Warren
Jan 29, 2015 - 12:27pm

LoL

Artists gotta make art !

Joseph Warren
Jan 29, 2015 - 12:08pm

I know

My apologies for inflicting that upon you but I had to do it for artistic purposes.

Joseph Warren
Jan 29, 2015 - 12:07pm

Did I get the flu again ?

No, it was just a false alarm. I had a sick feeling in my gut for a few moments after reading

" 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."

AlienEyes
Jan 28, 2015 - 5:12pm

H B T !

Happy birthday , Turd !

Visit the FAQ page to learn how to track your last read comment, add images, embed videos, tweets, and animated gifs, and more.

CPE
Jan 28, 2015 - 5:07pm
ArtL
Jan 28, 2015 - 5:06pm

Maybe this is how the USD will go "poof"

Like Jim Willie said the USD would dissappear.

https://www.zerohedge.com/news/2015-01-28/swiss-franc-will-collapse

this is the link that @Fatso posted above. It does talk about the CHF, but why does it not also apply to the USD?

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