For over a decade, people at the Gold Anti-Trust Action Committee (GATA) have claimed that the gold commodity markets were being manipulated. This manipulation was alleged to at least partially involve the selling of non-existent “paper” gold.
For example, the COMEX might agree to sell 20 tons of gold on the futures markets when it actually had only 10 tons available for sale. By offering to sell an “extra” 10 tons of imaginary (fraudulent) “paper” gold, the commodity market essentially doubled the apparent supply. Under the fundamental rules of Supply and Demand, if the supply doubles while the demand remains constant, the price should be reduced—perhaps by as much as half.
Why would the market masters manipulate the market to suppress the price of gold? Because, so long as the price of gold stayed down, the apparent value of the fiat (paper) dollar was held up. When gold goes up, the dollar typically goes down. Conversely, when gold goes down, the apparent value of the dollar generally goes up.
Thus, the commodities markets for physical gold and silver were allegedly manipulated to protect the perceived value of the paper dollar.
The logic in that explanation is apparent, but the alleged manipulation still seems unlikely since we’re left to wonder how the purported manipulators could get away with this scheme. Wouldn’t the market manipulators be quickly exposed if they promised to sell 20 tons of gold but could only deliver 10? Their fraud would be instantly apparent and some very wealthy people would wind up in jail—right?
Wrong. For the past several generations, most people who participated in commodity markets were there as gamblers rather than investors. The typical commodity “investor” was merely placing bets on the future price of some commodity, not trying to buy and take possession of that commodities. People bet paper dollars on the future price of gold and if they won their bet, they accepted payment in the form of a check. They didn’t want the physical gold. It was too clunky and inconvenient. They preferred the convenience of paper.
As a result, COMEX could theoretically offer to sell 20 tons of gold when it had only 10 because it knew very well that the “bettors” (“investors”) wouldn’t ask to take delivery of the 20 tons. They’d settle for paper.
Given that the object was to protect the dollar, the U.S. government and/or Federal Reserve System would ensure that the market manipulators always had enough paper, fiat dollars to “pay off” on the “bets” made on gold prices. So the scheme and resulting illusion of dollar value could be sustained indefinitely.
However, about two years ago, the scheme began to show the first signs of unraveling when people began to predict that commodity market “bettors” would soon start demanding to take delivery of the physical gold they’d “invested” in—rather than simply take their winnings in the form of more paper dollars. Once the “bettors” demanded to take possession of the physical gold, the gold-price manipulation scheme would be exposed and all Hell would break loose among the commodity markets and gold bullion banks.
Apparently, those predictions are now coming true. Investors are demanding that the commodity markets deliver the physical gold they’ve promised to sell, and the commodity markets are balking.
Earlier this week, Rob Kirby wrote an article entitled “Disinformation or Ignorance?”. In that article, Mr. Kirby described recent reports of shortages of physical gold bullion that have been surfacing around the world. He offered several “empirical observations” to support these reports:
1) Mints are seeing a sharp rise in sales due to interest so strong that dealers are reporting a shortage of products such as Krugerrands and one-ounce bullion coins.
2) China is now pushing its citizens to buy gold and thereby increasing world demand for gold.
3) Gold and silver brokers report heavy “net withdrawal of physical metal” at COMEX depositories, thereby “raising doubts as to whether there is gold in inventory to match existing warehouse receipts”.
4) Foreign countries like Germany, Hong Kong and Dubai are pulling their physical gold out of US and London depositories. Private investors and Swiss Exchange Traded Funds are also moving their gold from London to their own countries. This movement indicates a lack of trust in American and London gold depositories.
5) Large money managers who were formerly in paper gold are now demanding physical gold bullion.
But here’s the anecdote from Kirby that really rang my bell:
“Anecdotal accounts [indicate that] large physical transactions in gold were settled in London under VERY strange circumstances. Banks like JPMorgan and Deutsche Bank sold endless amounts of gold futures at prices of $950 to $1,025 per ounce but then tried to make “side deals” with the folks they sold the futures to—offering them spot + 25% (around $1,275 per ounce) to settle in fiat currency—after their counter-parties demanded [delivery of] substantial tonnage of physical gold bullion.”
In other words, very big investors apparently believe that gold is hugely underpriced and likely to achieve a more legitimate (and higher) price in the near future. These same investors are simultaneously losing confidence in the dollar and seeking to “dispose of” dollars rather than “invest” them. Therefore, instead of merely “betting” on the price of gold futures and taking their winnings in the form of paper dollars, these investors now want to take delivery and possession of the tons of physical gold in which they’ve invested.
JPMorgan and Deutsche Bank have reportedly responded with a counter-offer. Instead of delivering the actual, physical tons of gold that were purchased at, say, $1,025 per ounce, those banks would instead pay the investors the current spot price (say, $1,020) plus 25 PER CENT. This payment would be made by check and in the form of paper, fiat dollars.
Imagine you’d invested $100 million in the gold commodity market for roughly 3 tons of gold. If the spot price of gold was roughly $1,000 per ounce when you opted to take delivery, your 3 tons of gold would be worth roughly what you’d “bet”: $100 million. But then imagine that Deutsche Bank or JPMorgan said, “Gee, why bother taking all those clunky old bars of physical gold that’s worth just $100 million? Instead, why don’t we just write you a nice, tidy, paper check for $125 million?”
That’s a 25% markup on the current “spot” price of gold. TWENTY-FIVE PERCENT.
It’s pretty hard to turn down a 25%, $25 million profit.
Mr. Kirby does not report whether the investors took the spot-plus-25% deal or still demanded delivery of their physical gold. I suppose that some investors took the deal, others probably continued to demand delivery.
OK—this may be an interesting story, but what’s the big deal?
Here’s the big deal(s):
1) Motivated by the rising price of gold and the falling value of dollars, big investors are finally starting to demand delivery of the physical gold sold by the commodity markets. That means that IF the markets are really being manipulated by selling tons of non-existent “paper” gold, that manipulation is about to be publicly exposed and some very wealthy people may be soon going to jail.
2) If the gold manipulation scheme is finally unraveling and people are likely to go to jail, it’ll be hard to find new people willing to continue to implement the criminal scheme and therefore almost certainly wind up in the slammer. If the manipulation of gold prices is therefore about to end, then gold is about rise dramatically in a true “free” (un-manipulated) market to God-only-knows-what price.
3) Big financial institutions like Deutsche Bank and JPMorgan may be about to face criminal and civil penalties that could be crippling or even cause those banks to collapse. These potential problems might afflict virtually any of the major bullion banks. Whether the bullion banks are “too big to fail” or “too corrupt to survive” remains to be seen. But if the gold manipulation scheme fails, the financial repercussions could be spectacular—and even unbearable. How many bullion banks can fail before the global economy collapses?
4) You can bet that if the surprising “spot plus 25%” offer was made to gold investors in October, investors who claim gold futures in December will probably demand an even better deal. Maybe “spot plus 35%”. Maybe even “spot plus 50%”.
And here, Ta-da!, is the really “big deal”:
5) By offering to pay “spot plus 25%” for gold futures, Deutsche Bank and JPMorgan have at least implied that the “true” price of gold—right now—is at least $1,275.
It’s true that the Deutsche Bank and JPMorgan may have paid that enormous 25% premium to conceal the fraud of selling gold they didn’t have and thereby avoiding criminal liability (at least for now). But how hard would it have been for JP & Deutsche, unable to produce the tons of gold they offered to sell for $1,020 per ounce to go out and buy replacement tons from some other source for, say, $1,100? If the price of gold were not manipulated and known by “insiders” to be far greater than “spot,” wouldn’t most dealers jump at the chance to sell their bullion for $1,100—or even $1,150?
Sure, JP and Deutsche would take a big loss, but they’d deliver the physical gold to the big buyers as promised and defuse current speculation that they’ve engaged in fraud. Assuming the “real” spot price of gold was $1,020, it make no sense to pay a man $1,275 for physical gold that you should be able to supply for $1,100. Why take a loss of $175 per ounce on several TONS of gold?
To me, the only way the reported conduct of JPMorgan and Deutsche Bank make sense is if the people and institutions able to supply TONS of gold aren’t about to sell for $1,100 or $1,200 or even $1,275 because they know: 1) the “real” prices of gold is higher, much higher; 2) the spot price is sure to find that “real” price in the near future; and 3) anyone who’d sell his gold right now for “spot” is a fool.
IMPLICATION: IF the Kirby story is true, it appears that two of the world’s biggest banks (Deutsche Bank & JPMorgan) have effectively “set” the current “real” price of gold to be at least $1,275—almost $175 higher than the current spot price. IF so, there’s going to be a “gold rush” as the “spot” price of gold rises suddenly to match the “real,” free market price.
Did you notice that I used the word “IF” twice? We don’t know that the Kirby story is accurate. IF it is, the spot price of gold should go up dramatically.
But IF not, the spot price of gold should still continue to rise pretty much as it has for the past eight years—at an average rate of over 20% per year.
So, what do you think? Will gold rise “dramatically” . . . or “leisurely” at 20% per year?
Got gold?
1 Comment
November 12, 2009 at 2:17 AM
This compliments Jim Willie’s article from last May.
http://www.gold-eagle.com/editorials_08/willie052709.html