Tuesday, September 29, 2015

On the New Investigation Into So-Called Gold Manipulation

I see where Swiss regulatory authorities have launched an investigation into so-called gold price "manipulation."

Bloomberg reports:
Switzerland’s competition regulator identified seven banks that are being investigated as part of a probe into whether companies in Europe, the U.S. and Japan colluded to manipulate the prices of gold, silver and other precious metals.
UBS Group AG, Deutsche Bank AG, HSBC Holdings Plc, Barclays Plc, Morgan Stanley, Julius Baer Group Ltd. and a unit of Tokyo-based trading company Mitsui & Co. Ltd. are part of the probe, which was opened in February, the Competition Commission said in a statement Monday.

It is hard for me to get around what this so-called manipulation is about. Any significant trader in any market realizes at some point that with sufficient buying/selling power he can create certain reactions from other traders, over a very short-term period---perhaps just minutes or seconds.

Should traders for some reason on a free market not be allowed to trade based on an understanding of these patterns? Should more than one trader not be allowed to team up on the free markets with other traders?

It strikes me that this is simply denial of a basic freedom to transact. Is anyone forcing anyone to trade with these people?

The only place there is real price manipulation is when a government is involved. When a central bank manipulates interest rates, when a regulatory body prevents, say, the entry of taxi cars in a region and regulates prices. That is manipulation. But a trader or a group of traders taking a position in a market does not prevent any trader or group of traders to take an opposite position and attempt to move the market in the opposite direction.

Furthermore, unless you are a central bank that can print money at will, it is impossible to force a market in a direction it doesn't want to go, for any significant period of time.

If you don't have the skill set to trade where other skilled short-term traders trade, then don't, just like you shouldn't be buying stocks long-term if you don't know how to evaluate stocks.

If you understand how these short-term traders think, then it is pretty easy to trade against them or use their trading strategies to your advantage, Further, this type trading is very short-term in nature. There is not a trader alive that can keep a market from going in the direction the buying/selling pressure is pushing it long term,

There is an impression that these so-called "manipulations" are keeping prices substantially different over the long term then where they would be without the manipulations, Not a chance.

There is no trader alive or investment bank that can "manipulate" a market opposite a massive wave of buying or selling.



  1. I don't know what they do. There could be a situation where there are multiple claims to the same physical gold. The Treasury and the Fed are another matter. The Fed says the gold it shows on its books are gold certificates, not real gold. Pretty weird.

  2. I agree with you RW, but, my gut tells me the real answer as to what's going on and why is being kept from those of us outside of a privileged position.

  3. "There is no trader alive or investment bank that can "manipulate" a market opposite a massive wave of buying or selling."

    When you're allowed to sell the same shares a security many times over, that sounds like manipulation to me.

    1. The investigation I referenced in my post has zero to do with non-delivery, it is about so-called "collusion" over bids and spreads.

      Non-delivery problems are not a free market situation, no company in their right mind would list on an exchange that would allow abusive non-delivery, if they had an option. To the extent they don't, it is becasue of government regs. .

    2. You should address the elephant in the room Wenzel. That central banks are the ones that are doing the manipulating. Or didn't you remember that they have the power to do this?

  4. "Is anyone forcing anyone to trade with these people?...The only place there is real price manipulation is when a government is involved."

    Yes and yes. Financial exchanges are heavily regulated and not subject to free market competition. For example, crony U.S. cartel banks have access to COMEX limit order placement data other speculators cannot obtain. If known by only a select few, this is priceless data for purposes of market manipulation.

    Starting a competing gold exchange that conceals limit order placements for all (or reveals them to all) can't overcome the prohibitive regulatory hurdles established by the cartel. The government involvement here is indirect, but no less effective at conveying privileged advantage to crony banksters.

    1. You really have no idea what you are talking about. The article RW references is about spot trading. There are about a million places you can buy spot gold that have nothing to do with COMEX.

    2. COMEX is an illustrative example of the principle of indirect leverage of government power in commodities markets. Since that example seems to have confused and distracted you from the principle under discussion, I’ll stay literal and walk you through the longer story of how government power is leveraged to increase spreads in global spot gold markets. The underlying principles in both cases are the same.

      Four diving factors spot gold traders consider when choosing where to trade physical gold are:

      1. Political Risk - Risk of government seizure, levies, or export controls determines where people choose to store and trade large amounts of physical gold. Stable, established, prosperous countries with governments less inclined to confiscate are a must. There is a reason global gold isn’t kept in Sudan or Venezuela.

      2. Counterparty Risk - People perceive trading with a chartered TBTF bank financially propped up and legally privileged by governments to be safer. Safer to trade gold with J.P. Morgan than Lucky Chan’s mom-and-pop operation that lives and dies by its own merits.

      3. Liquidity - Who wants to pay wide spreads, especially on large transactions. Who wants to call 20 different entities to find the best price. Centralized markets with higher volumes offer more liquidity and easier price discovery.

      4. Settlement Costs - If gold is all stored centrally in one location, settlement cost is negligible, the stroke of a pen transfers ownership. If stored in multiple vaults, storage costs per tonne are higher and a bevy of additional costs are incurred for assay, transportation, insurance, etc.

      The political risk and counterparty risk concerns of gold trading effectively limit the field of trading partners to TBTF banks operating in a handful of lower risk jurisdictions like England, Switzerland, or the U.S. The scale advantages provided by centralization of trading and centralization of storage create a large cost advantage, strongly financially incentivizing market participants to trade in a highly centralized marketplace helping render irrelevant any smaller, more expensive would-be competitors.

      The LBMA fits all of the above perfectly. London has very low political risk versus most other countries. London is a global hub for TBTF banks which comprise the elite 11 LBMA members allowed to make spot gold market prices. Liquidity is extremely high due to a long history of active trade. Settlement costs are tiny as most gold is centrally held at the Bank of England and a handful of other vaults.

      On top of all the government-supplied advantages each LBMA member enjoys of its own accord as a TBTF bank, the LBMA is a legally recognized cartel enjoying still more special legal privileges under British law. Same situation as COMEX under US law. Operating while so effectively sheltered from competition, these LBMA market makers can easily afford to raise their backdoor “fees” by colluding to worsen spreads. They are effectively monetizing their government-privileged positions, making people pay more for market-valued advantages they possess that are directly traceable back to their government ties and not available to potential competitors.