Woe is Gold

James West

There’s a day out there on the horizon of time – distant perhaps, perhaps not – where the price of gold is going to suddenly and forcefully reverse course, and leap past its previous record. The primary cause of this reversal will be the widespread breakdown in the viability of the world’s fiat currencies, primarily the United States dollar.

The reversal in the price of gold will handsomely reward investors who have the financial fortitude to buy when everyone is selling, and the mental fortitude to ignore the dollar-interest diatribe against gold that has risen to a veritable cacophony in recent months.

Whereas formerly I was of the opinion that the unassailable laws of supply and demand must overcome the manipulation embodied in the corrupt futures marketplace, I am reoriented toward an understanding that the heights of human folly are without limit.

The only question here is when?

While believers in the inevitability of gold’s ascendance through $2,000 an ounce have been flummoxed by the persistent weakness in the gold price, they have nevertheless continued to clamour for an imminent breakout. Instead, what we keep seeing is imminent breakdowns.

The bottom line is this: the price of gold will not fairly and freely reflect the influences of supply and demand until the regulatory deficiencies in the derivatives markets for gold and silver are remedied.

Noise Filter

The degree to which our beliefs and subsequently, our actions are informed through exposure to external data and opinion is high. I am always impressed with the number of writers, analysts and researchers (really, all just writers) who adopt one of two possible stances on the side of any major question, and refuse to include nuanced influence from the opposing view’s camp. This results in a polarized dialogue that must by design overlook subtler contributions to and from either side. As species we prefer absolutes to hedged and conditional definition.

Nowhere is this more prevalent than in the international discourse on currency versus gold. The prevailing mainstream meme holds that currency is the modern medium of value exchange, and gold and silver are officially antiquated and obsolete. “A barbarous relic” is the common refrain in reference to gold, though that statement, uttered first by John Maynard Keynes, was in reference to the Bretton Woods agreement that suppressed a free and fair market for precious metals since since 1944.

Gold has been the primary weapon by which duplicitous governments conspire to project viability and integrity within their own financial policies to an apparently equally duplicitous mainstream financial media who amplify and broadcast the appearance of integrity when the gold price is manipulated downward.

How is the gold price manipulated downward? Through the forward selling of gold in futures contracts. If one person offers to sell 10,000 ounces of gold at a fixed price in the future that is lower than the current spot price of physical gold, that is perceived, through the power and scope of mass media transmission, as a negative influence on the future price of gold. But if 1,000 individuals offer 10,000 ounces on the same terms, there is arguably a commensurate and exponential degree to which negative sentiment toward the future price of gold is transmitted.

If the futures market were a fairly regulated entity, there would be rules in place to ensure that such speculation on the future price of gold did not occur as a result of someone offering to sell such a quantity of gold did not actually possess such a quantity to deliver to the counter party of the future sale contract upon that contract’s maturity.

However, no such rule exists. They exist for agricultural derivatives, not for metals.The largest financial institutions can arbitrarily offer as many contracts for the future sale or purchase of gold as it can, as long as it complies with the margin requirements that essentially ensure that if your trade goes sideways, you have the cash to pay for it. In other words, if you don’t have the gold, its okay as long as you have the cash.

To my thinking, this constitutes the most glaring and irrefutable evidence that the dominance of futures prices of gold over spot prices is due entirely to a regulatory deficiency. Its not a subtle one either. Its as in-your-face a loophole as the right for wealthy Canadians who can limit income tax payment on income earned by a Barbados-domiciled corporation to 3% through the use of offshore corporate banking entities.

The Commodities and Futures Trading Commission (CFTC) in the United States is the perennially ineffective agency that ostensibly governs futures markets. They recognize the potential for predatory abuses and were the primary proponent of the provision in the Dodd-Frank Act that would have in fact implemented such a restriction on the origination of such Large Speculators, which is the designated class of futures markets participants that don’t use physical gold or silver for anything except speculation, typically the very same institutions who conduct a nefarious trade in the gold and silver futures markets with obvious success, given that gold has now lost one third of its value since its September 2011 high of $1,920. This despite the growing divergence between rising demand against primary supply for physical gold. The CFTC is appealing the decision and has submitted a brief to that effect.
to the court in support of the appeal that focuses on the court’s erroneous interpretation of one of the rule’s components.

According to that brief, “…a trader who accumulates market power in the deliverable supply of the underlying commodity while also acquiring a substantial position in long futures contracts (i.e., contracts entitling the holder to receive delivery of the underlying commodity) has cornered the market, and is in a position to disrupt normal price convergence. A market squeeze also frustrates price convergence.5 By limiting the ability of speculative traders – acting alone or in concert – to amass a dominant position, speculative position limits can help prevent some of the conditions that facilitate corners, squeezes, and other forms of market manipulation.”

The first iteration of the rule was struck down in a court challenge in September 2012
mounted by the bank-sponsored Securities Industry and Financial Markets Association and the International Swaps and Derivatives Association.

“I believe it is critically important that these position limits be established as Congress required,” the agency’s chairman, Gary Gensler, said in a statement on Friday. “I am disappointed by today’s ruling, and we are considering ways to proceed.”

They physical gold price is established in a twice daily call among the financial institutions who are also the largest participants in the futures market. It is a defective and highly biased process that permits and exacerbates the opportunity for fraudulent activity among those institutions in relation to precious metals markets, and is the subject of a probe by the U.K.’s Financial Conduct Authority.

Markets are compromised

Where there’s smoke in financial markets, the last few years have shown us there is a 99% chance of fire. One need look no further than the investigation into the setting of world interest rates by the top banks and financial institutions in the world, who just happen to be same institutions dominant in the futures market for precious metals, and who participate in the fixing of the gold price daily.

So while it is irrefutable to intelligent human beings that the real demand for gold as a safe haven asset remains intact as evidence by China’s insatiable consumption of the stuff, it is equally irrefutable that as long as regulators, governments and financial institutions are able to undermine supply and demand fundamentals through collusion and mis-regulation, there can be little hope of a gold price recovery. And the most frustrating thing is that this could continue for years. After all, since the London Gold Pool was established in the 1960’s, the manipulation of gold markets to protect currencies has been the top priority of central banks.


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James West

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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