Even though Gold Prices are being Manipulated Downwards, Prices are Headed Much Higher in the Long-Term

Last Wednesday, the price of gold took a bit of a battering right at the start of trade on Comex when the price tumbled from $1735 an ounce to $17111 in less than 3 minutes. Just as the market opened there was massive, concentrated selling with some 35,000 lots sold which is equivalent to 3.5 million ounces. One sell order alone was believed to have been 24 tons or 770,000 troy ounces. An incredible 35% of daily volume was traded in just 60 seconds! 

Once again this action is a clear example of how the bullion banks intervene in the market. The issue of manipulation in the gold market has been well documented by several organisations, but the downright lies which have surrounded the issue for a long time are slowly beginning unravel and expose government market manipulation. The reason is that the Commercials (together the producers, processers, fabricators, bullion banks and swap dealers) have large short positions, so they have a vested interest in lower prices. 

For seven years GATA has discovered one piece of evidence after another supporting our long-held contention that the gold market is managed by certain central banks and their agents, the bullion banks. It is a price-fixing case involving some very powerful people and institutions … in fact it is a Gold Cartel.

Last week, there wasn’t any change in the key drivers behind the gold price. Yet, on Comex due to the quantity of contracts that were sold into the market, the price of gold tumbled. But, this “sell-off” in paper contracts will not alter the bigger picture for gold. It is like a “sucker punch” in the early stages of a fight that lasts for many rounds. It may have a short-term effect, but it will not be enough to change the eventual outcome.

This action occurs frequently on Comex where more than 95% of trades are speculative. It has occurred many times in the past and most of the time, these large price drops occur during opening of the US session on Comex, Traders there have no intention of taking delivery or even delivering and are merely betting on price action.

Of course mainstream media or either oblivious to this type of market action or have no interest in reporting this type of fraudulent activity, but, it is well known in the precious metals industry that in most instances the culprits are the bullion banks in particular JP Morgan. But this is not surprising at all. There are multiple cases of fraudulent and illegal trading by these banks.

According to a disciplinary notice issued by New York Mercantile Exchange (NYMEX JPMorgan Chase & Co executed wash trades on 10 separate occasions in U.S. crude oil and gasoline futures in the first half of 2011.

“On 10 separate occasions between January 1, 2011, and June 30, 2011, in an effort to manage position limits, traders employed by JPM executed block trades between separate legal entities with the same beneficial owner in WTI or Gasoline,” the notice said, referring to West Texas Intermediate (WTI), the main US crude oil futures contract.

The CME Group, which operates NYMEX, ordered JPMorgan to pay a fine of $30,000. One of the JPMorgan traders, Ebele Emelumadu, was fined a further $10,000.

The $30,000 fine, equivalent to just over one millionth of JPMorgan’s total employee compensation last year of $29 billion, comes as the bank’s trading practices are already under the spotlight after the now-infamous ‘London Whale’ racked up huge losses for the firm.

Earlier this year, the US Commodity Futures Trading Commission (CFTC) announced that JP Morgan Chase  agreed to pay a $600,000 civil monetary penalty to settle CFTC charges that it exceeded speculative position limits in  Cotton No. 2 contracts trading on the Intercontinental Exchange U.S. (ICE). 

According to the CFTC order, JPMCB held net short futures equivalent positions in Cotton No. 2 futures contracts in excess of CFTC speculative position limits on several days between September 16, 2010 and October 5, 2010 (the relevant period).  The CFTC’s speculative position limits for Cotton No. 2 futures are 3,500 contracts in a single month and 5,000 contracts in all months combined.  According to the order, during the relevant period JPMCB had a long-side hedge exemption in Cotton No. 2 futures, but its short-side positions remained subject to the 3,500 and 5,000 contract limits.  The order finds that JPMCB held short positions in excess of both the single-month and all-months speculative position limits during the relevant period.

In addition to imposing the $600,000 civil monetary penalty, the CFTC order requires JPMCB to cease and desist from further violations of Section 4a(b)(2) of the Commodity Exchange Act and CFTC regulation 150.2, as charged.

Back in September of this year, the CFTC fined Citigroup for violating wheat futures position limitsThe U.S. Commodity Futures Trading Commission (CFTC) issued an order filing and settling charges that Citigroup Inc. (Citigroup) of New York, N.Y., and Citigroup Global Markets Ltd. (CGML) of London, England, exceeded speculative position limits in wheat futures contracts in trading on the Chicago Board of Trade (CBOT), which is part of CME Group, Inc. The CFTC order required Citigroup and CGML to pay a $525,000 civil monetary penalty and cease and desist from further violations of section 4a(b)(2) of the Commodity Exchange Act and CFTC regulation 150.2, as charged.

The CFTC order found that on several occasions in December 2009, Citigroup, via two of its wholly owned subsidiaries, including CGML, held aggregate net long positions in the wheat contract traded on the CBOT in excess of the CFTC’s all months speculative position limits. Additionally, on one or more days in December 2009, CGML individually held net long positions in wheat contracts that exceeded the all month’s speculative position limits established by the CFTC, the order finds. The position limit for CBOT wheat was 6,500 contracts for all months combined.

In the meantime central banks constantly try to manipulate the currency market using the terminology “intervention.” This has been going for decades. Similarly, these central banks also manipulate the interest rate market. 

On 27 June 2012,Barclays Bank was fined $200 million by the Commodity Futures Trading Commission $160 million by the United States Department of justice and £59.5 million by the Financial Services Authority for attempted manipulation of the Libor and Euribor rates.

Barclays manipulated rates for at least two reasons. Routinely, from at least as early as 2005, traders sought particular rate submissions to benefit their financial positions. Later, during the 2007- 2-12 global financial crisis they artificially lowered rate submissions to make their bank seem healthy.

The Libor is an average interest rate calculated through submissions of interest rates by major banks in London. Libor underpins approximately $350 trillion derivatives and is controlled by the British Banker’s Association.

In spite of the clear examples of bank manipulation, fraud and theft, and despite empirical evidence that has been obtained over years, banks, central banks and the regulatory bodies of the various futures markets continue to deny the fact that the gold market is manipulated in any way. However, why should it be any different to all the other markets?

The price of gold is traditionally a proxy for the value of money. A soaring bullion price is indicative of a lack of faith in fiat currency. Our current global monetary system is backed by nothing apart from debt and governments’ promises. The process that allows commercial banks to create 97% of our money supply through debt is what is known as fractional reserve banking. Fractional reserve banking involves the issuance and creation of money through a commercial bank, giving banks the ability to increase our money supply through loans.

Through fractional-reserve banking banks keep only a fraction of money deposited in a bank in reserve and lends out the remainder. This practice is universal in modern banking. However, central banks are now printing more money despite the lack of any increased productivity in their respective economies. And, the money printing, now commonly referred to as Quantitative Easing is only of benefit to two parties – governments and banks. Governments are now able to borrow more and borrow cheaper than it otherwise would have done because QE money is used to buy bonds, forcing down yields. The Government then uses this money to finance both existing debt and an expansive welfare state.

And, the money the central banks print goes directly to banks that are able to sell their government bonds at a profit. In theory they may use this to even up their balance sheet.

Of course the consequences of this “expansionary monetary policy” will inevitably be higher prices of many asset classes, and eventually a scenario of higher inflation. It could also lead to complete financial disaster as countries who have taken more debt to pay existing debt simply cannot afford to repay their loans and are forced to default.

As more money flows into the system, and without a proportionate growth in GDP, the value of that money is going to decline versus other currencies. In the end, the currency will fail as a medium of exchange as it will become worthless, but gold and silver on the other hand will still have some intrinsic value. This is why numerous central banks are loading up on gold. Other central banks that have a gold holding are now beginning to worry about their gold holdings. 

Recently there has been a spat of articles about the gold holdings of various banks. For years, these banks refused to divulge any information to their citizens about their gold holdings, and also the correct amount of gold in their holdings. Recently, the Mexican government forced their central bank to provide information about their gold. More recently questions have been asked about the German Bundesbank’s gold. In the Netherlands and in Austria people are now wanting to know where their country’s gold is.

As it turns out, in most instances, the gold is not being held in the respective country and is probably being held in New York and/or London. And, as a consequence, governments are beginning to demand the central banks to repatriate their gold from New York and London.  This new development is going to be filled with some surprises— that is for sure. But, no matter what, it is clear that gold is beginning once more to ascend to its role as an alternative substitute to the fiat currencies in the monetary system.

While most of the worlds’ population is more intent on watching a dance video entitled Gangnam Style, and have little to no interest in what is going on in the global monetary system, there are investors out there who are aware of what is going on. And, that is why they ignore these regular price smashes, and remain focused on the bigger picture and continue to accumulate precious metals like gold. Gold holds its value when paper money loses value.

TECHNICAL ANALYSIS

While the price of gold has slipped back below its 50 day MA, it is still well supported around the $1700/oz., level.  It seems that prices may trade sideways for a few sessions before moving to the upside again.

By David Levenstein

About the author
David Levenstein is a leading expert on investing in precious metals . Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.

 His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.

David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.
For more information go to: www.lakeshoretrading.co.za

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.