A Brief Recent History Of Precious Metals Manipulation Investigations

[The following post is written by TDV Contributor, Justin O'Connell]

Originally appeared on GoldSilverBitcoin.

Although terms like “free market” are often used to describe modern life,  evidence of command-and-control markets keeps finding its way into headlines, most notably with Libor – the rigging of global interest rates (or the price of money) – shocking the world.

What fewer know is the consistent investigation by national authorities into the rigging of precious metals prices by major banks.  There have been more than a few. The Department of Justice antitrust division prosecutors investigation into the price-setting process, which was announced yesterday, is merely the most recent.

In 2010, Bill Murphy of GATA delivered groundbreaking testimony to the Commodities Futures Trading Commission (CFTC):

In 2013 a five-year investigation into the manipulation of the silver market closed. Reuters stated: 

 NEW YORK/WASHINGTON, Sept 25 (Reuters) – U.S. regulators on Wednesday closed a five-year investigation into alleged manipulation of the silver market, saying 7,000 staff hours of investigation produced no evidence of wrongdoing.

The decision by the Commodity Futures Trading Commission was a defeat for silver commentators and investors who urged the probe, saying big banks were using futures and options to hold prices down. Big traders had dismissed the investigation as a waste of time and the charges as a conspiracy theory.

…

Closing of the probe was a rare bright spot for Wall Street commodities players during a year in which the U.S. power market regulator has leveled record fines against two big banks, and the Federal Reserve is considering whether to rein in Wall Street’s ability to operate in physical markets. But Democrat commissioner Bart Chilton, who had championed the silver inquiry, said he was disappointed.

“For me, there’s not been a more frustrating nor disappointing non-policy-related matter at the CFTC,” he said in a statement after the agency’s announcement. The Gold Anti-Trust Action Committee, an advocacy group that believes the Federal Reserve and banks are colluding to keep gold and silver prices artificially low, said it was not surprised by the CFTC decision.

“We believe that the U.S. government is part of the trading operation. In essence, you are not going to have the CFTC turns against its own government,” GATA Chairman Bill Murphy said.

“We are not even slightly surprised and had expected this.”

A JPMorgan spokesperson declined to comment.

German’s financial regulator, Bafin, said in early 2014 that the precious metals manipulation case could be worse than Libor. As Bloomberg wrote.

Jan. 17 (Bloomberg) — Germany’s top financial regulator said possible manipulation of currency rates and prices for precious metals is worse than the Libor-rigging scandal, which has already led to fines of about $6 billion.

The allegations about the currency and precious metals markets are “particularly serious because such reference values are based — unlike Libor and Euribor — typically on transactions in liquid markets and not on estimates of the banks,” Elke Koenig, the president of Bonn-based Bafin, said in a speech in Frankfurt yesterday.

…

Bafin said this week it is investigating currency trading, joining regulators in the U.K., U.S. and Switzerland, who are examining whether traders at the world’s largest banks colluded to manipulate the WM/Reuters rates, used by money managers to determine the value of holdings in different currencies.

At least a dozen firms have been contacted by authorities and more than 13 traders suspended, fired or put on leave in the currency case. Regulators are examining how traders, who communicated in instant-message groups, exchanged information on client orders and agreed how to trade at the time of the fix, five people with knowledge of the probes said last month.

“That the issue is causing such a public reaction is understandable,” Koenig said. “The financial sector is dependent on the common trust that it is efficient and at the same time, honest. The central benchmark rates seemed to be beyond any doubt, and now there is the allegation they may have been manipulated.”

After the US governments recent announcement about an investigation, Switzerland’s financial regulator (FINMA) said it had found “serious misconduct” and a “clear attempt to manipulate precious metals’ benchmarks” by UBS employees in precious metals trading. Reuters reported at the time:

Switzerland’s financial watchdog said on Wednesday it had found a “clear attempt” to manipulate precious metals price benchmarks during a cross-market investigation into trading at UBS bank.

The FINMA regulator revealed its findings just days after the precious metals industry decided to automate the setting of reference prices for gold, ending the twice-daily “fix” by a panel of banks which has been used for almost a century.

Along with other precious metal benchmarks, the gold fix has come under increased regulatory scrutiny since a scandal broke in 2012 over manipulation of the Libor interest rate, followed by revelations of similar behavior on the global currency market.

Regulators fined six major banks on Wednesday a total of $4.3 billion over the foreign exchange manipulation, including a 134 million Swiss franc ($139 million) penalty that FINMA slapped on UBS, Switzerland’s biggest bank.

If recent precious metals manipulation investigations have shown us anything, it’s that the Department of Justice antitrust division prosecutors investigation into the price-setting process for gold, silver, platinum and palladium might levy some fines, but they will leave the system wholly unchanged at the end of the day and it is likely the fraud will persist. Similar results will come of the Commodity Futures Trading Commission civil investigation, announced yesterday.

According to Wall Street Journal, the banks currently being investigated for precious metals price setting by DoJ are HSBC Holdings Plc, Bank of Nova Scotia, Barclays Plc, Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc, JPMorgan Chase & Co, Societe Generale, Standard Bank Group Ltd and UBS Group AG. Formal requests have been made for information.

The CFTC subpoenaed HSBC Holdings PLC regarding precious-metals trading, the bank disclosed in its annual report, released Monday. According to the bank, the Justice Department has asked about documents relating to the abovementioned Bafin’s antitrust investigation which took place in November.

Precious metals markets are these days routinely investigated for manipulation.  But that doesn’t make them unique. It makes them like so many other markets we are learning about.  

Universal Market Hijinks

The 2008 financial crisis was caused by a bloated derivatives market via instruments such as credit default swaps (CDS).  (Some argue that derivatives have been manipulated for a long time and that the  $1,200 trillion dollar market is merely a financial liability for the entire planet) Is it a stretch to think that precious metals markets are manipulated when so many other markets are manipulated?

Reuters noted in September 2014:

A Manhattan federal judge said on Thursday that investors may pursue a lawsuit accusing 12 major banks of violating antitrust law by fixing prices and restraining competition in the roughly $21 trillion market for credit default swaps.

…

“The complaint provides a chronology of behavior that would probably not result from chance, coincidence, independent responses to common stimuli, or mere interdependence,” [Judge] Cote said.

The defendants include Bank of America Corp, Barclays Plc, BNP Paribas SA, Citigroup Inc , Credit Suisse Group AG, Deutsche Bank AG , Goldman Sachs Group Inc, HSBC Holdings Plc , JPMorgan Chase & Co, Morgan Stanley, Royal Bank of Scotland Group Plc and UBS AG.

Other defendants are the International Swaps and Derivatives Association and Markit Ltd, which provides credit derivative pricing services.

Bloomberg reported on interest rate manipulation in January 2014:

Royal Bank of Scotland Group Plc was ordered to pay $50 million by a federal judge in Connecticut over claims that it rigged the London interbank offered rate.

RBS Securities Japan Ltd. in April pleaded guilty to wire frauda s part of a settlement of more than $600 million with U.S and U.K. regulators over Libor manipulation, according to court filings. U.S. District Judge Michael P. Shea in New Haven today sentenced the Tokyo-based unit of RBS, Britain’s biggest publicly owned lender, to pay the agreed-upon fine, according to a Justice Department Justice Department.

Global investigations into banks’ attempts to manipulate the benchmarks for profit have led to fines and settlements for lenders including RBS, Barclays Plc, UBS AG and Rabobank Groep.

RBS was among six companies fined a record 1.7 billion euros ($2.3 billion) by the European Union last month for rigging interest rates linked to Libor. The combined fines for manipulating yen Libor and Euribor, the benchmark money-market rate for the euro, are the largest-ever EU cartel penalties.

Global fines for rate-rigging have reached $6 billion since June 2012 as authorities around the world probe whether traders worked together to fix Libor, meant to reflect the interest rate at which banks lend to each other, to benefit their own trading positions.

Just how big is the Libor scandal? Well, the scandal showed the world that the big banks worked together for years manipulating interest rates. It represented the largest insider trading scandal ever. That’s pretty big, right? It doesn’t end there…

Energy prices are manipulated as well, as the US Federal Energy Regulatory Commission charged JP Morgan with manipulating energy markets in California and the Midwest, earning itself tens of millions of dollars in overpayments at least.

In the age of High-Frequency Trading, any market can be manipulated it would seem, if even just a little. High-tech computers armed with algorithms manipulate stocks, bonds, options, currencies and commodities, including the precious metals. 

Nobel prize winning economist Joseph Stiglitz noted years ago: “The system is set so that even if you’re caught, the penalty is just a small number relative to what you walk home with.”

One day precious metals manipulation might catch the imagination of the mainstream media and be turned into a worldwide scandal, only to fade away the same way the Libor scandal did. For now, investigations of banks for rigging precious metals markets will remain ignored by the mainstream financial press. It’s merely a footnote in an encyclopedia of modern amoralism. Investigations aplenty have been launched and fines doled out but the underlying mechanisms of the modern mainstream financial system remain in place.

[Editor's Note: Justin's writing appears in the TDV Newsletter]

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