is the gold price manipulated?€¦ · the final member of the gold triumvirate is the comex....

© 2009 Casey Research

Special Report

© 2009 Casey Research

Is the Gold PriceManipulated?

A special report from Casey Research

www.caseyresearch.com- 1 -

Is the Gold Price Manipulated?BIG GOLD

Is the Gold Price Manipulated? A Special Report from Casey Research

It’s a question some investors, supported by a great deal of Internet speculation, have been asking for years.

The answer: of course; probably; nah; who knows. Take your pick. Prepare to argue.

What we do know for sure is that manipulation is common in other markets. When central banks inter-vene on behalf of their national currencies, that’s manipulation. When OPEC hints at production cuts in order to drive up the price of oil, that’s manipulation. When the Fed’s tinkering with interest rates affects bond yields and prices, that’s manipulation. When the government enforces “emergency” regulations of securities, like those placed on the trading of financial company stocks last year, that’s manipulation. In fact, nowadays the only true free market, where supply and demand are the sole determinants of value, is probably eBay.

With all that goes on elsewhere, why should gold be any different? is a reasonable enough question.

And it leads to a series of interlocking related questions, like these: Is there an ongoing, organized con-spiracy to manipulate the price of gold, and if so, how does it work? Are any laws being broken? Is the U.S. government somehow involved, as it is almost everywhere?

And the biggie: If the gold market is rigged, then why would an intelligent investor want to put his or her money into the metal and the companies that produce it?

Let’s take a closer look.



Manipulation 101

Defining “manipulate” doesn’t present the same degree of difficulty President Clinton grappled with concerning “is.” While it generally carries the connotation of something unsavory, if not downright illegal, for a free-trading asset all it really means is to trade with the purpose of influencing the price – and succeeding.

With major stocks, the sheer size of the market makes this difficult to pull off. Just one of the 30 Dow Jones Industrial stocks, IBM, has over 1.3 billion shares outstanding, with a value, at about a hundred bucks a share, of $130 billion. Trading volume is about 11½ million shares per day, or over $1 billion. Trying to manipulate IBM, let alone the entire Dow, would test some very deep pockets.

In contrast, the world of commodities, and gold in particular, is quite small compared to stocks, bonds, or currencies. Regulation falls to the Commodities Futures Trading Commission (CFTC).

Because of the gold market’s size, large orders to either buy or sell can have a significant effect on the metal’s price, which is set in three different ways.

First there is the London Bullion Market Association (LBMA). Twice a day it establishes a price for gold, based on a conference with the major players. These are known as the morning fix and the afternoon fix, and they set a mutually agreed-upon price at which big buyers and sellers will transfer ownership of bulk bullion. Most of the world’s physical gold flows through the LBMA. Association members include both private banks and countries’ central banks. They deal in tons of the stuff, and where they fix their price serves as a starting point for the various gold exchanges around the world (the metal is now traded, somewhere, nearly twenty-four hours a day).

If you aren’t a trafficker in tonnage, then your transactions will involve either a retail dealer or the COMEX. The former are an important piece of the puzzle, because most investors will work through a dealer when they want to add to their

holdings of coins or small bars, and that dealer will set the street price.

Dealers will sell you gold by first checking on an up-to-the-minute spot price that they can lock in with their supplier, then make the sale to you based on that price + their markup. Or vice versa, when you want to sell back to them. That markup (also known as the buy/sell spread) can vary widely – according to dealer needs, market conditions, simple greed, and more. It’s also why you have to pay more than spot when you buy, and must sell for less.

In fact, dealers can be responsible for a hidden form of manipulation, says Bob Meier, a senior partner in the RMB (Rutsen Meier Belmont) Group, a leading commodity brokerage. Bob’s a longtime trader, and his experience stretches back to the last time gold went into the Mania

phase, around 1980. He warns us not to forget what happened then.

Getting to know and trust your dealer is critically important, because the history of the business is rife with fraudsters.

As the late ’70s mania for gold began to build, these people manipulated market sentiment for all they were worth (which often wasn’t much) – fanning the flames, urging customers to buy, buy, buy, because gold was going to the moon. Much as the early 21st century real estate bubble was created.

The problem with any bubble is that eventually it pops, and when it does there is always an insufficient number of buyers to take back all the inventory sellers want to dump. Thus it was with gold in 1980. After it peaked, the deceptive dealers pocketed profit and closed up shop. Those who remained in business had no choice but to offer buyback prices far below what investors had paid. Hundreds of gold dealers disappeared, and millions of people lost their shirts.

This scenario is rarely mentioned during manipulation discussions, but it is the result of manipulation, a particularly dangerous one because it’s not immediately obvious. We’ll have more to say on the subject at the end of this report.

Getting to know and trust your dealer is critically important,

because the history of the business is rife with fraudsters.



Where the Boys Are

The final member of the gold triumvirate is the COMEX. Although it is a major influence on the daily “spot” price, the COMEX doesn’t deal in on-the-spot transactions. It is a futures-only exchange, where traders bid on 100-ounce gold contracts, rather than physical metal. A contract calls for the buyer (who is long) to take delivery of the metal on a given date at a net cost fixed at the time of the trade, and calls for the seller (who has sold short) to deliver the gold on time and for the same net price.

But that’s largely theoretical. Until the delivery date arrives, ei-ther side can close out their position with an offsetting trans-action. For the original buyer, that would mean selling a con-tract; for the original seller, it would mean buying a contract.

At its inception, the futures market was intended to allow those in need of a form of insurance to hedge their positions. If they feared a retracement in the market, gold producers could sell short, locking in a future price for their metal that ensured profitability; and a consumer such as a large jewelry maker could go long, thereby guarding against a price spike at the future moment when he knows he will need to arrange a delivery.

Relatively simple, effective. Nowadays, however, it’s radical-ly different. Real producers and users are a very small part of a market that is divided into three categories of traders: com-mercials, non-commercials, and nonreportables.

Non-commercials are the pure speculators, gambling on a beneficial trend in the market that will reward them before they have to either make or accept a delivery. Getting involved with actual yellow metal is the last thing they want to do.

Nonreportables are those who don’t have to report what they’re doing to regulators, such as the individual investor who merely wants to buy a 100-oz. bar and knows that purchasing it on the COMEX is the cheapest way to do so. The COMEX buying process is a bit cumbersome, and it requires someone who can cough up (at this writing) about $95,000 per contract, but it’s the only way to acquire gold at the spot price.

Commercials includes miners, end users, and bullion banks. If, for example, you’re a fund and you want to buy a quarter-ton of gold, you might go through JPMorgan to make the deal for you. If you’re SPDR Gold Shares (GLD), the biggest gold ETF, you buy your gold through HSBC USA. This makes the banks commercial traders. They’re also deemed “legitimate” hedgers by regulators, i.e., those with a recognized need to hedge their positions so they won’t get ruinously slammed by adverse market developments.

Commercial status is desirable, in that it confers some advantages -- like tax breaks and exemption from certain position limits -- and in order to get it, the trader merely files the appropriate paperwork with the exchange and the

The Long and Short of ItThe expressions long and short mean something completely different in commodities markets like gold than they do with securities. It’s important to un-derstand the distinction, because it can lead to real confusion.

With stocks, an investor makes a short sale by bor-rowing shares from someone who already has them and selling them to a third party, hoping that the price goes down and he can buy back the stock at a later date for less, return the shares to the lender, and profit from the difference. There is no fixed relation-ship between shares outstanding and shares short, except that the latter cannot exceed the former. Typi-cally, traders are short a relatively small percentage of a company’s overall float; for example, they are currently short only 1.4% of IBM’s stock.

With gold, a COMEX transaction is initiated when a trader wants to either buy or sell one or more con-tracts. If the buyer initiates, it’s considered a long position; if a seller initiates, it’s a short. But there is a 100% correlation between the two. For every long, there has to be a short, and vice versa. The sum of all transactions, regardless of who initiated them, is known as the open interest in the metal, and it’s neutral.

Thus if someone is aggressively selling gold short, all that means is that they are willing to promise to deliver it at the agreed-upon price. On the other side, someone else always balances the books by agreeing to buy the same number of contracts at that price, i.e., he goes long equally aggressively.



CFTC. It’s also imperative for those making a market in gold. However, any trader deemed commercial must be prepared to defend his status to the exchange regulators, CFTC or IRS, if any of them challenge it.

The important point, though, is that the COMEX is overwhelmingly a paper market. Most metals traders on the exchange never see an ounce of the real thing, because only a tiny fraction of trades are seen through to delivery: longs or shorts held by producers, industrial users, investors, and wholesale dealers who have to buy or sell physical gold. Consequently, the COMEX needs to maintain relatively small gold reserves in its warehouses; it only needs to be able to cover those transactions that make it to delivery day.

(As a final layer of protection for buyers who do want their physical gold, the exchange maintains a relationship with an AAA-rated insurer known as a clearing corporation. The clearing corp. guarantees that those holding long contracts will get their metal if they want it, regardless of whether the short seller defaults on his end of the deal.)

Of the daily action in paper – which nevertheless sets the real spot price at any given moment – some of it is normal, legitimate hedging action by banks that are laying off their risks or, perhaps, supplying the short side of a buy order entered by an ETF like GLD. But there is also a good measure of pure market play going on, attempts to capture short-term profits from price swings in gold. And because it’s such a small market with large profit potential, it stands to reason that there will be attempts to influence it.

How small? The flurry of daily COMEX activity is not even as big as it seems. Trading volume for an average COMEX session is about 85,000 gold contracts, representing 8.5 million ounces of gold. That sounds like a lot. But contracts can be margined, at an average of only about 10%. Besides, most of those trades are transient, positions that are opened and closed out with an offsetting trade over short periods of time. The net change to open interest each day -- the sum of buys and sells not closed at the end of the session -- is likely to be only a couple thousand contracts.

So a player with enough capital might attempt to profit by trading gold futures in a big way to “manipulate” the price. A sizeable initiation of short sales, for example, would tend to knock the price down. In order to satisfy COMEX regs, the trader might have to balance a move like that by taking out some options elsewhere, thereby showing the exchange he had access to enough gold to satisfy the “sales” he just made, should buyers demand delivery. But it could be done.

Then, if the initial decline gave the illusion of a trend, and triggered selling by others, the price would decline even more. So the trader could buy back his short contracts, closing out his position and capturing a profit. This would clearly be manipulative. But notice that it can work only if there are sellers after the price has already gone down. Otherwise, if the price of gold either goes up or fails to fall below the trader’s sell price, he gets his head handed to him.

Do such accommodating sellers exist, and if so, wouldn’t they come to know they’re being used? Are some just asleep at the

switch? We put the questions to Ed Steer, a member of the Gold Anti-Trust Action Committee (GATA: www.gata.org), an organization dedicated to the investigation and publicizing of gold price fixing.

Worse than that, Ed replied. He pointed the finger at hedge funds, saying that, “These funds’ trading accounts are held by their brokers – all bullion banks – so the bullion banks not only place their trades, they are probably taking the other side of the trade against their own clients. They know when the funds are ‘all in’... and it’s normally at that point that the bullion banks pull the pin. The fund guys are brain dead. They’re mechanical traders, basing everything on moving averages and such. They have their black box computers, and that’s all they follow.”

Could be. Program trading (trades conducted by computer based on rigid buy/sell levels, without human intervention) certainly has become common. Problem is, there’s no way for an individual investor to substantiate an allegation that this has provided an easy road to manipulation.

But if it were going on, wouldn’t a regulatory agency be interested? That, presumably, depends on how diligent and effective that agency is.

Problem is, there’s no way for an individual investor to

substantiate an allegation that this has provided an easy road to

manipulation.



For an opinion on that, we asked Jeffrey Christian, who’s been in the gold business for thirty years. He’s a founder of CPM Group, one of the world’s leading precious metals consultancies. Jeff advises U.S. government officials, as well as foreign central banks, on gold-related matters.

Jeff is no conspiracist, quite the contrary, but he agrees that the above sort of manipulation routinely takes place. It’s made possible not just by the market’s tiny size, but because, in Christian’s words, it is “grossly underregulated.”

His opinion, however, is not shared by Bob Meier, or by another market expert, Dave Hightower, a veteran commodity watcher and publisher of the Hightower Report. Both men give the CFTC high marks, saying the agency is very diligent in scrutinizing futures market trades, quick to jump on any perceived irregularities, and far more efficient than its securities counterpart, the SEC.

(Tough to argue with. After the Madoff, Enron, and numerous other frauds went undetected for so long, one might legitimately question whether the SEC is on watch at all. About the best we can say in its defense is that it does have a pretty large universe of companies, funds, and other financial instruments to keep an eye on. And perhaps that’s why the smaller commodities world ruled by the CFTC hasn’t had comparable major scandals.)

Hightower goes as far as to say that the CFTC “will go after someone even if it’s unlikely that they’ll win,” just to discourage even marginal impropriety.

A further measure of oversight is added by the National Futures Association (NFA), an independent, self-regulatory, non-governmental entity created in 1982 by the futures industry. The NFA’s proclaimed mission is to promote the success of the futures markets by ensuring “that the highest levels of integrity are demanded of all market participants and intermediaries.”

The NFA can issue fines and prohibit members from trading; however, compliance with its regulations is voluntary. A cynic might suggest that this is the fox in charge of the henhouse,

but again, those with direct experience dealing with the organization believe it to be an effective backup watchdog.

Bottom line, nearly everyone agrees that the small size of the gold market makes it potentially susceptible to up and down pressures from well-heeled investors. In addition, Christian points out another important factor: the small number of active big players. Gold traders underwent a “massive constriction” during the bear market that ended in 2001, he says, as many banks exited the business with no plans to return. Setting up a gold book takes time, the right people, and plenty of money; not many can be bothered. Thus it’s no surprise that the few remaining banks making a market in the metal dominate the action and wield a lot of power.

A final complication is that the international gold trade is about as opaque as it could be. It’s not easy to learn who is doing what, to or with whom, at any given moment. Details must be sleuthed out by sifting clues from multiple sources.

For the futures market, the COMEX website provides daily trading data, while the CFTC publishes a weekly “Commitments of Traders” (COT) report and a monthly “Bank Participation in the Futures and Options” report.

The COT report shows how open interest broke down on that particular reporting day. It separates open interest into longs, shorts and, in the case of non-commercial traders, spreads (used by speculators to defer “delivery” indefinitely). The report tells how many contracts there are in each category, and how many traders are involved in each. What the COT does not reveal is which specific player initiated the long or short positions, nor in what quantity.

The over-the-counter (OTC) market, essentially unregulated, is where a huge amount of action takes place in gold derivatives. It doesn’t directly affect the spot price, but is a behind-the-scenes force to be reckoned with. It is covered by the Office of the Comptroller of the Currency’s (OCC) “Bank Derivatives Activities” quarterly report, which does name names, telling us specifically which banks had the largest amount of gold derivatives on their books, but with an extra three-month lag time.

After the Madoff, Enron, and numerous other frauds went

undetected for so long, one might legitimately question whether the

SEC is on watch at all.



In the end, manipulation of the gold futures market seems feasible and, given the deep pockets of some of the players and the potential profit, would be tempting to try. So it would be a surprise to learn that it never happens. At the same time, there is sufficient oversight in place to prevent outright illegal activity. Therefore, those who support the idea that price fixing is going on will have to show that the regulators are either incompetent or, as some contend, in on the game. Or both.

(Note: The CFTC has, since last fall, been formally investigating allegations of manipulation of the gold and silver markets. It hasn’t yet issued any statements about the matter, nor offered a timetable for release of its conclusions, but past investigations have always yielded terse findings of no wrongdoing. If that happens again, we can be sure that the CFTC’s supporters will declare the case closed, while the skeptics will continue to dismiss the CFTC as part of the problem.)

The Central (Fog) BanksThere is another possible source of manipulation.

To try to determine how much gold is where is to encounter a thick granite wall without a public door. The U.S. Treasury Department, for example, says it holds 260 million ounces of gold, yet there has been no independent audit of its vaults since the Eisenhower administration! Fort Knox may be filled only with cobwebs, for all we know.

Or consider that in late April of 2009, the Chinese State Administration of Foreign Exchange revealed that over the past six years, it has surreptitiously added 14.6 million ounces to its gold hoard. That shocked the market, but given that China last reported its gold reserves in 2003, we might have guessed that a surprise could be coming.

The European central banks’ sales are controlled by the Central Bank Gold Agreement, which limits such sales to a collective 500 metric tons (16 million ounces) per year. But adding to the uncertainty about what they physically hold -- and by implication, how much is in circulation -- is that the

central banks lend gold out to private bullion banks (those making a market in the metal), in two different ways.

They can lease it, which means they hand it over in exchange for a promise to return it later. The borrower also pays a leasing fee (ordinarily at a rate below 1% per annum). This arrangement provides the central bank with income on an asset that otherwise would only generate storage expenses. And it opens a carry trade for the bullion bank, whereby it has the opportunity to lease the gold to a third party at a better rate or simply to sell it and invest the proceeds in a higher-yield instrument. In theory, the gold must be returned to the central bank at the expiration of the lease, and the lessee is likely to do that if the price of gold has dropped in the interim.

Otherwise, he’s usually allowed to just roll the loan over.

Central and bullion banks can also engage in a gold swap. Here the gold is traded for immediate cash at a specified price, with a commitment to repurchase the gold at a predetermined price on a future date.

We don’t know how much leasing and swapping goes on, because the players aren’t talking. Worse, central banks are allowed to carry leased gold on their books as though it were still in the vault, yet another reason to mistrust official inventory figures.

All told, it’s one startlingly dense fog bank. As Chris Powell, GATA’s secretary/treasurer, puts it: “If you go online, you can find out how to build a nuclear weapon, but you won’t find any detailed records on central bank gold reserves.”

Could swaps and leases affect gold’s price? They could. If a large amount were leased out and quickly sold into the market, that would tend to knock the spot price down. Of course, it could also raise the price on the back end, but that would depend on how much was bought back and how much rolled over.

Proving intent is one of the toughest jobs faced by any prosecutor. It’s at least equally difficult when dealing with central banks that don’t like anyone to know precisely what they’re doing. These banks buy and sell their gold, in rather

In the end, manipulation of the gold futures market seems

feasible and, given the deep pockets of some of the players

and the potential profit, would be tempting to try.



large quantities, but that can be for any number of reasons, few of them sinister.

In addition, several authorities we consulted – including Jeff Christian, who deals with bankers all the time and has been surprised at their level of ignorance about the gold market – told us that both U.S. and European financial officials spend almost no time talking or even thinking about gold. The prevailing philosophy is in line with Keynes’s depiction of gold as a “barbarous relic,” irrelevant in the modern electronic world. We think they’re going to have a rude awakening, and soon, but that’s another story.

So, is there any hard evidence that the central banks, and perhaps their lessees, are in collusion, intervening in the market with the specific intent to depress the price of gold? If there is, we haven’t uncovered any.

This isn’t to say that there haven’t been tantalizing hints left here and there by central bankers, as well as by officials of the Bank for International Settlements (BIS), the big bankers’ global clearinghouse. Those exist. But that’s it.

Where Are the Cops?One thing’s for certain: defining unlawful manipulation is damnably difficult. It’s somewhat akin to the debate over pornography that led Supreme Court Justice Potter Stewart famously to declare that while he couldn’t come up with an objective test for it, “I know it when I see it.”

Going to the primary source documents doesn’t help much either.

First came the Commodity Exchange Act (CEA) of 1936 (under which the CFTC was created in 1974). The CEA was intended, in part, to prevent the kinds of manipulation that had happened in the past. But when it came to spelling out what exactly constitutes price fixing, the Act turned unaccountably vague.

Excessive speculation in any commodity under con-tracts of sale of such commodity for future delivery . . . causing sudden or unreasonable fluctuations or unwar-ranted changes in the price of such commodity, is an undue and unnecessary burden on interstate commerce in such commodity.

Doesn’t mean much without defining “excessive,” “unreasonable,” or “unwarranted.”

In any case, there matters stood for nearly 65 years, until Congress decided to update the 1936 legislation with the Commodity Futures Modernization Act of 2000.

This version aimed to put some restraints on the derivatives markets (we all know how well that one worked out), but still didn’t lay down what kind of manipulation is illegal.

Overall, prohibited market manipulation appears to be simply whatever the CFTC deems it to be, and enforcement is purely at its discretion. Not exactly comforting, but let’s take a peek at the historical record.

The Great Phony Potato GlutAttempting to track down legal precedents in this area is frustrating and (trust us on this) very time consuming. There just ain’t much to find. With little in the way of clear, underlying law, it’s no surprise that there have been few prosecutions for manipulation in the commodity markets.

And, since proponents of gold market manipulation focus on the short side, we went poking around in that area. We found nothing.

In fact, the only instance we found of any commodity short seller being hauled into court for price fixing was a 1976 case involving a seller’s default on delivery of 1,000 potato contracts (about 50 million pounds of spuds). There, the defendants were found guilty of conspiring to “reduce the price of the 1976 Maine potatoes futures contracts. Defendants accomplished this by purchasing vast amounts of the ‘short’ side of futures contracts and becoming obligated to deliver millions of pounds of Maine potatoes that they did not have. By purchasing so heavily on the short side, the conspirators artificially inflated the perceived supply of Maine potatoes, thereby driving down both the futures prices and cash prices.”

Is that what’s happening with gold? Critics say so. And if it is, the 1976 decision is a blueprint for dealing with it. So authorities have the hammer. Are they searching for the nail?



Well, let’s look at the numbers and you decide. If you consult the CFTC’s Bank Participation Report for late July (the most recent delivery month at this writing), you find that three unspecified U.S. banks had sold short a total of 116,895 contracts, or over 11½ million ounces of gold. That’s a lot of ounces, and for just three players.

The only other numbers given: the same three U.S. banks were long only 528 contracts; 21 non-U.S. banks were long 25,425 contracts and short 36,250; and total open interest (where 1 long + 1 short = 1 contract) was 372,985 contracts outstanding. Thus about 31% of all contracts were shorts held by three U.S. banks.

Looking elsewhere for clues, we can study the OCC’s Derivatives Report. As noted earlier, it covers the OTC market, where the true Wild West cowboys play.

Near the bottom of the report, you’ll find a table detailing “Notional Amounts of Derivative Contracts by Contract Type & Maturity -- Top 5 Commercial Banks and Trust Companies in Derivatives.” It tallies things in dollars, rather than in ounces, and there’s no distinction between longs and shorts. But it does name names.

By this report (most recent available), at the end of 1Q09, JPMorgan Chase held gold derivatives of less than one year duration with a notional value of $68 billion; HSBC USA’s contract total was $18.8 billion; and Citi’s was $1.8 billion worth. We can disregard everyone else, since these three represent 99.3% of the OTC market.

Are these the same three banks that are short 31% of the COMEX contracts? Many gold watchers think so, but we can’t be sure, because it’s not reported anywhere.

It’s an important question, because the COMEX sets the spot price of gold, while the far larger OTC market follows along. So if you’re short on the OTC and can influence the price down on the COMEX, you’ll reap enhanced rewards on the former, a highly speculative proposition.

If it goes the other way, it’s a disaster, thus the widely held belief that the big players keep the COMEX on a short leash, in order to protect these highly concentrated OTC positions.

Of course, it could also simply be that participants are using the OTC market to balance their COMEX positions, or

On the HuntYou may believe that the Hunt brothers were indicted for their alleged attempt to “corner the silver market” back in the late 1970s. In truth, they weren’t.

At the peak of their buying, the Hunts held 77% of the world silver supply, either physically or in the form of futures contracts. Unsurprisingly, many thought they saw blatant price manipulation – during the spree, silver rose from $2 to $50/ounce – and you’d think the CFTC would have done something.

Well, they did, sort of. But they didn’t call in a U.S. Attorney. Instead, they made a few simple rule changes that effectively kicked the Hunt brothers under the bus. The Texans’ great silver empire came crashing down, and everyone cheered that market integrity had been preserved. Or had it? Many ob-servers now believe the CFTC’s actions were aimed primarily at helping friends who were short silver and were getting squashed. Frustrating the grandiose plans of the Hunts, according to this line of reason-ing, was a secondary consideration.

A blizzard of lawsuits followed the fiasco. But all that litigation resulted only in Nelson Bunker Hunt set-tling with the CFTC during bankruptcy proceedings by paying a $10 million fine and, without admitting or denying guilt, consenting to findings that he had illegally manipulated silver prices. Pretty watery, especially if this really were the biggest and most nearly successful attempt ever to corner a commodi-ties market.

Now, one might argue that the CFTC did its job, and that may be so. On the other hand, why didn’t the CFTC say: this is an illegal manipulation and we’re going to prove it in court? That would have estab-lished an extremely useful precedent. Didn’t happen, and we can only speculate as to why.

In any event, the Hunts have always stoutly main-tained that it was never their intention to profit from price manipulation; instead, they were concerned that a collapse of the U.S. dollar was imminent, and to protect their wealth, they decided to stockpile silver as a hedge. The reader is forgiven for feeling a bit of a chill in the air. Because that’s exactly, allow-ing for differences of scale, what many precious met-als investors believe. Caveat emptor, indeed..



that the concentrated short positions consist of bundled transactions from a number of a market maker’s clients.

It would be nice to know what’s really going on, so we could draw some more useful conclusions. And that won’t happen until things become less opaque.

Are There No Limits?Yes, there are.

COMEX rules provide for “Position Accountability Levels and Limits” concerning the number of contracts in a given commodity that any one trader may hold at any time. The rule is, “any one month/all months: 6,000 net futures equivalent, but not to exceed 3,000 in the spot month.” The end of the spot month is when the holder of the long side of a contract can require actual delivery of the commodity.

That would seem to place strict limits on how many contracts a trader can control. But the CFTC’s July 7 Bank Participation Report tells us that three banks were short a total of 116,000 contracts. Even if they were divided up equally, somebody had to have more than 38,000 contracts, far beyond the apparent permissible limit. And 38,000 would represent more than 10% of a total open interest of 372,000 contracts, hard to overlook.

We suspected that the meaning of the limit clause must be a bit more complicated than at first it would appear. So we placed a call to Tom LaSala, the NYMEX’s Chief Regulatory Officer, and he confirmed our suspicions.

We learned that until a contract reaches the spot month, the “accountability levels” aren’t hard and fast limits. They are merely levels at which a trader’s position might draw regulatory attention. It’s up to regulators to decide whether to require the trader to reduce its position, based on what they know about the business of that particular trader. The accountability levels and position limits are, in LaSala’s words, “tools to detect and deter problems, such as manipulation.”

Hard position limits only kick in on the eve of delivery. The

rules state that: “The current delivery month position limits for physically delivered metals contracts are effective as of the close of business on the business day prior to the first notice day for any delivery month.”

So, prior to the beginning of the delivery cycle, pretty much anything goes. A trader could have tens of thousands of open contracts, so long as nothing looks fishy to the chief regulatory officer. And add to that one other detail: the rules contain an abundance of “exemptions” to position limits that cover an awful lot of contingencies, so we don’t know what’s going on there.

Still, we did ask LaSala whether a single-trader position of 35,000 contracts out of an open interest of 225,000 (figures for April, the time of our conversation) would be enough to catch his eye.

“Not in and of itself,” he said. “I’ve been doing this for twenty years, and I know all these banks, what assets they have on hand, the warrants they have backing their positions. And anything I don’t know, I can find out in a couple of minutes

with one phone call. So that’s what, a 15% concentrated position? That wouldn’t necessarily get me excited unless there were some other red flags I knew about.”

Nevertheless, he conceded that large banks whose trading patterns are well known to regulators are not likely to come under much scrutiny if they always settle up their business properly and promptly. 35,000 contracts (or more) seems like a pretty concentrated position, enough to have a decided effect on the market, depending on when it’s put on and in what increments. But such a holding is apparently legal and, according to the chief enforcement officer, if it were made by a familiar entity, it’d be unlikely even to warrant a second look.

(Note: With anti-speculative fervor heating up in Washington, among the many “reform” proposals floating around town these days is one that would grant the CFTC the power to create and enforce its own -- presumably strict -- position limits. High on the political wish list is enhanced regulation of oil and food, but precious metals could be added to the list, too.)

So, prior to the beginning of the delivery cycle, pretty much

anything goes.



The Invisible HandAn important point to make is that, while our research suggests that powerful banks can and probably do influence prices, that does not collusion make. An entity acting in its own self-interest is just that. Only when two or more parties work in concert can we call it conspiracy.

The tireless folks at GATA, and others, do strongly believe there is collusion to suppress the price of gold, and they contend that the conspiracy includes not only all the major bullion banks, but the U.S. government, the Federal Reserve, and the central banks of several foreign countries.

Their conclusions, if we understand them correctly, are largely inferential. But we encourage readers to examine the evidence at GATA’s website and make up their own minds whether or not the organization’s argument is persuasive.

That said, while we haven’t signed on to their point of view, we listen. Because it bears upon a theme that makes more than a little sense.

It goes like this: The gold standard always served as a brake on monetary inflation. Without it, the government and its sidekick, the Federal Reserve, were freed to print unlimited dollars out of thin air and devalue the currency, whenever and to whatever extent it cared to. Since we abandoned gold convertibility in the early 1970s, that’s exactly what it has done, in spades. But the powers-that-be don’t like anything to remind the public that they are steadily and purposely robbing them blind through the silent theft of inflation. Thus they welcome any retardation in the rise of the price of gold, because that helps to prolong the illusion that our fiat currency has more than firestarter value.

But does it work the way the manipulation proponents theorize, with the orders emanating from Washington? Do Mssrs. Geithner or Bernanke call up JPMorgan Chase from time to time and urge the bank to short gold? Does the Fed swap out gold to European central banks with whispered instructions to leak it into the market? If we ever find out, it won’t be by simply asking.

Conclusions

In the end, the case for a concerted, interventionist meddling in the gold market, in order to control prices, is inconclusive. It’s a structure built on bits and pieces of evidence and a lot of conjecture. Still, even conspiracy skeptics admit that there are anomalies in the day-to-day trading patterns of gold that are difficult to explain in the absence of manipulation. One man who does an admirable job of connecting the dots is GATA’s Ed Steer, and his column, Ed Steer’s Gold & Silver Daily, is available free from Casey Research.

While the large traders may be working the gold price in order to make a profit, U.S. government or Fed involvement seems like a stretch. At least it’s not a call we can make with confidence.

Nor are we convinced that international banks collude with governments, or with one another, to fix prices. And we’ll remain in the dark until the day some insider whistleblower takes the stand, or until the Bank for International Settlements – the bank for bankers – decides to let the public have a look inside its steel-and-glass fortress in Basel, Switzerland. In a word, not likely.

But should the average investor be wary of putting money into gold? That’s the overarching question we asked at the beginning. And our answer is an emphatic No.

Because the good news is that we know for certain what ultimately drives commodities markets, gold included:

price manipulations notwithstanding, supply/demand considerations always have the final say. Always. And they have pushed gold steadily higher for eight years now.

We’re indifferent to the short term. We don’t trade in and out of gold. Our core belief is that we are on the side of an unstoppable trend that has a long way yet to run, and we’re content to let it work for us, however that may happen.

We do, however, have one final cautionary note to sound. Recall what we wrote earlier about how much money people lost during the 1980 mania for gold. When the Mania stage of the current gold bull market arrives, and it will, it’ll be important to profit from it and not get hurt. Don’t wait

The gold standard always served as a brake on monetary inflation.

http://www.caseyresearch.com/gsd/



around for the bubble to burst. Once gold’s price has been driven to insupportable heights, we’ll know it. As Doug Casey is fond of saying, Time and Newsweek will feature covers showing a golden bull tearing apart the New York Stock Exchange.

Having physical gold in your possession is never a bad idea. But while gold may reach $2,000 or $3,000 per ounce within the next few years, other gold-related investments can give you great upside… right now. One of them has been so

steadily successful – even in 2008, when the Dow and S&P 500 were tanking – that we call it “48 Karat Gold.”

The Casey Research web site & Kitco Casey web site, Casey’s Investment Alert, Casey’s International Speculator, BIG GOLD, Casey’s Energy Confidential, Casey’s Energy Report, Casey’s Energy Opportunities, Casey’s Trend Trader, The Casey Report, Casey’s Extraordinary Technology, Conversations With Casey, and Casey’s Daily Dispatch are published by Casey Research, LLC. Information contained in such publications is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained in such publications is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. The information in such publications may become outdated and there is no obligation to update any such information.

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