3 Minute Gold News
A Quick Read for Busy People
This interview is 43 minutes and very in depth about gold price manipulation.
The synopsis will probably take more than 3 minutes to read. The extra few minutes are worth it. ;)
Gold is Low Right Now
Gold Price Change
Gold Price Manipulation
The London Fix
Who is Manipulating
The End Game
Inflation is Coming
September 24, 2014
Nothing has changed long term on the ground in the Ukraine.
It looks like the ceasefire is holding.
What is significant to Jim is that Putin is getting what he wants. It’s not that Putin has backed off or backed away, and the market reflects that.
The sanctions are not working. Not only has Putin not been punished, but he’s getting a lot of gains.
The reason for the ceasefire is that it was in everyone’s best interest — the Ukrainian forces had gone into pretty much full retreat and the Russian-backed forces, including Russians themselves, had gone on the offensive.
The Kiev government’s best interest is for the ceasefire because they were in retreat.
It was in Putin’s best interest because he was getting what he wanted and it’s also good PR, from a humanitarian aspect.
Looking into the future, nothing has been resolved.
Putin is going to insist that the eastern Ukraine republics become true republics, and perhaps join the Russian Federation.
Good news that there’s a ceasefire, and markets have calmed down, but this is far from over. If the West, Kiev and NATO are going to insist that Russia back off, and Russia is going to insist that these republics break away, then it’s really not over and it will flare up.
For now we’re in a quiet period.
No one wants to see the price go down but it’s important to do two things:
1. Keep your eye on the long term (which is the reason you got in).
2. Understand what’s going on behind the price (why it is where it is).
Jim has always recommended between 10 – 20% gold, assuming you have 80 – 90% in other things.
Jim has gold but he also has, for instance, fine art – which has been doing well. Stocks have done well and private equity has also done well.
You should never be all in, or even 50% in.
Right now is a good entry point to buy gold because the price is low. It’s not that it couldn’t go lower, it might, but it’s shown good resilience.
It’s had several draw downs recently, and it’s come back strongly both times.
So this is the third time in recent months and Jim is impressed with the resiliency.
Gold is seasonally strong in the fourth quarter and we’re coming up on the fourth quarter in a couple of weeks — coming up on wedding season in India, China demand is still strong, and supply is still weak.
Jim just came back from Australia where he met with one of the largest bullion dealers in Australia, who said they sell the most when the price is low and customers have been lined up out the door.
“Price” really means the COMEX price, which is subject to a lot of manipulation.
GOLD IS LOW RIGHT NOW
The price of gold is simply the inversion price of the dollar.
Right now we have an extremely strong U.S. dollar so gold is low. The Euro has come down, the Chinese yuan is down, the Japanese yen is down, Australia just cut interest rates to try to cheapen their dollar, and even the British pound sterling is down because of fears about Scotland.
So, around the world it’s “King Dollar” again.
You expect gold to be down right now.
The question is “Can it last?”
The answer is “Absolutely not.”
GOLD PRICE CHANGE
The U.S. allowed the dollar to go up because the other countries desperately needed help.
The European economy is back in a recession. The U.S. allowed the Euro and the Yen to go down. They don’t want the Chinese yuan to be weak but it went down anyways because the Chinese government manipulates it. Sterling stubbed its toe over the Scottish referendum.
The reason gold has gone down is because the U.S. dollar is so strong.
The reason the U.S. dollar is so strong is because the U.S. let the Euro and the Yen cheapen.
This is what the currency wars are all about.
That cycle is nearing an end and the U.S. dollar is going to weaken because the FED needs some inflation in the United States.
That means a stronger gold price ahead.
GOLD PRICE MANIPULATION
If your goal is to keep the price of gold from going up, or from going up in a disorderly way, you only have to manipulate it when it’s going up a lot.
The manipulation kicks in when gold is strong or going up.
When gold got up to $2,000, an important psychological barrier, it could have gone up a lot further from there. The Central Banks had to pull out all the stops to keep the price down.
The way they do this is —
1. Dump physical gold.
The Central Banks sell gold.
This was done for decades. In the 1970s, when Nixon went off the gold standard, the price of gold skyrocketed. At the beginning of the 70s it was $35/ounce, then it went up to $800/ounce in 1980.
Central Banks tried desperately and secretly to suppress the price of gold with gold sales, which is covered in Chapters 9 and 11 in The Death of Money.
The U.S. and the IMF dumped 1,700 tonnes of gold — a lot of gold. It didn’t work.
“Brown’s Bottom” is when Gordon Brown dumped England’s gold on the market to manipulate it.
In the early 2000s Switzerland was a major seller of gold.
The problem with dumping gold you run out of gold.
Now the physical dumping has stopped because it’s not working, there are ready buyers, and they are running out of gold.
2. You manipulate paper gold.
The easiest way to to manipulate paper gold is through COMEX futures.
The futures prices long ago replaced the London Gold Fix.
The London Gold Fix is the old ring of dealers who sat on the phone with their customers and fixed the price twice a day.
That was more significant 75 – 80 years ago, or perhaps more recently than that, but since the creation of gold futures the COMEX has really been the benchmark, and the London Fix has tagged along with that, independent of its own manipulation.
Rigging the futures market is child’s play.
You just wait for a little bit before the close and put in a massive sell order. That scares the other side of the market and they back away.
3. You manipulate hedge funds.
Gold isn’t a traditional hedge fund activity but today there’s quite a few who do.
Hedge funds don’t really know that much about gold – it’s just another commodity to them.
The hedge funds use leverage, follow trends and use tight stops. Tight stops means that if the trade works against you, you get out.
So, let’s say you have a bunch of hedge funds in gold. They are leveraged with tights stops. You come in with a big sell order. That slams the price. What happens is the hedge fund stops get triggered. They sell, which drives the price down further. That makes others sell and it cascades down.
That’s the most visible way.
4. Gold Leasing and Unallocated Funds
A lot of people buy gold and they call up a dealer, J.P. Morgan or HSBC or Citibank for instance, and they say they want to buy gold.
The banks says to send in the money, but if you read the contract it says you’re buying unallocated gold. It’s a euphemism for the fact that you don’t have designated gold bars.
It means there’s no group of gold bars that have your name on it or specific serial numbers specifically traceable to you.
It means that the bank has a bunch of gold in a vault, and they sell perhaps ten times as much gold as they actually have physical gold.
It’s no different than any other kind of fractional reserve banking.
If every holder of unallocated gold showed up at the bank all at once asking for their gold there wouldn’t be enough to go around.
People don’t want the gold. There’s risk, transportation costs, storage costs and insurance costs. They’d rather leave it in the bank, but what they don’t realize is that the bank may not actually have it.
A Central Bank can lease gold to one of these big banks.
So let’s say you have the Federal Reserve (FED) as a physical agent where people are storing their gold in New York. That’s not U.S. gold, it’s German, Japanese, Dutch, IMF and other people’s gold.
So, the FED has other people’s gold and they can act as a physical agent and lease it, usually through the BIS (Bank of International Settlements). The BIS can lease it to commercial banks, the LBMA members.
This is stated in the footnotes of the BIS Annual Reports.
So, the Central Banks lease to the commercial banks through the BIS.
The commercial banks then have title to a certain amount of physical gold. They then sell ten times as much gold than they have title to out in the marketplace on an unallocated basis.
They don’t have to physically have the gold, they can just keep on selling it.
5. You manipulate the ETFs
In particular the GLD ETF.
The GLD is a trust. The trustee has physical gold.
If you want to sell the ETF you buy some gold and give it to the trustee. The trustee puts the gold in the warehouse and issues shares to you.
You can then sell the shares into the market.
So when someone buys an ETF they are not buying gold. They are buying a share or unit in a trust that owns some gold. They don’t have the ability to get the physical gold, unless they’re a large player.
So we’ve got physical gold trading one way, ETF’s trading another way and they should be closely aligned.
But there’s an arbitrage in there.
If I’m a big trader and I notice that the physical price is above the paper price then I buy the paper and short the physical gold. Now I take the paper share to the trustee, and cash it in for the physical gold. I deliver that physical gold to cover my short, and I pocket the difference.
That takes the gold out of the warehouse.
Let’s say there’s gold in the GLD warehouse in London, which there is. I go into the futures market and I slam the price the gold. This spooks the little guy. They start selling their shares and that drives down the price of the shares. Meanwhile the smart money is thinking that this price is a good entry point and they’re buying the physical gold.
The little guy is dumping his shares. The big guy is buying physical… a lot of that buying is coming from China.
If I’m the dealer here’s what I do: I sell physical gold that I don’t have to China.
I don’t have the gold but I sell it short to China. I then buy the shares from the little guy who is scared to death and selling.
I cash in my shares and get the physical gold. I deliver the gold to China and pocket the difference.
That would mean the gold in the GLD warehouse is going to China.
Jim was in Switzerland not that long ago, and the refiners were telling him that that is exactly what is happening.
This is a big deal.
When gold is in the GLD warehouse it is part of the supply that supports the leveraged trading that was just discussed.
When it goes to China then it’s no longer in the floating supply in London.
Five hundred tonnes left the GLD warehouse in 2013, doing exactly the thing Jim just mentioned.
Manipulation can last for a long time but it always fails in the end.
THE LONDON FIX
The fix was basically a small group of dealers with customers who want to be anonymous.
Gold is a funny market. It’s very liquid but it’s also thin.
That’s unusual and says there’s always a demand for gold.
The dealers know what the supply and demand looks like, while the customers want to remain anonymous. The dealers would go through a price discovery so the sellers and buyers would agree on the price.
There are two problems with the London Fix.
The COMEX became so dominant that the dealers just piggybacked the price and there wasn’t real price discovery.
More importantly, they found that they could front run their own customers.
The scandal that happened was that the dealers in the fix were using their own customer books to front run their own customers. They were buying physical gold ahead of the fix to front run their customers who were trying to participate in the fix.
That’s come to light. There’s been an investigation with fines and penalties. There’s ongoing investigations and class action law suits.
Scotia Bank stepped down from being a member and a bank in China would like to become a member.
The world now looks to the COMEX as the benchmark, and the COMEX is heavily manipulated so we don’t have good reference prices for gold. What we have is theater.
WHO IS MANIPULATING?
There are two players who have the motive to manipulate the price of gold.
One is the United States and the other one is China.
They are motivated by different things.
The U.S. FED doesn’t want the dollar to collapse, but they do want a weaker dollar because they desperately want inflation. The most recent economic data is showing the U.S. currenly has deflation.
One way to get inflation is to have a cheaper dollar, because imports cost more. So the FED wants a higher gold price as this means a cheaper dollar.
But here’s the catch — they want the rise to be orderly.
They fear a disorderly increase in gold prices but they’re fine with an orderly increase.
China wants a lower price because they’re buying gold.
They know it will go up a lot in the end, but they want to buy now so they want it to be lower while they buy.
The U.S. has 8,000 tonnes of gold and China wants to look the U.S. in the eye. China’s economy is half the size of the U.S. economy but is growing a lot faster than the U.S.
China right now says they officially have just over 1,000 tonnes. We know that’s a lie. We know it’s a larger number but it’s hard to know exactly how much.
Jim estimates that they have 3,000 – 4,000 tonnes.. But they want a certain gold-to-GDP ratio, which Jim talks about more specifically in his book The Death of Money.
China is a huge buyer.
There are only about 35,000 official tonnes in the world, owned by Central Banks and sovereign wealth funds – apart from jewelry and personal gold.
China is looking to buy 10% of all the official gold in the world. That’s huge.
If China made their intentions known then the price would run up like crazy, so of course they don’t want to show their hands.
They have the motive to manipulate because they are still buying.
The U.S. Treasury, to some extent, has to accommodate Chinese wishes, because China owns several trillion dollars in U.S. treasury notes.
The FED wants inflation and the Treasury wants inflation, and if you’re China you don’t want to see the value of your treasuries erode through inflation.
So you want to dump treasuries, which will raise interest rates in the United States which could sink the U.S. stock market or housing market. The Treasury doesn’t want that.
So China say, fine, if you don’t want us to dump treasuries then you have to let us buy gold because that’s our insurance policy against inflation.
If the U.S. wants to inflate their currency and steal from China by making the treasuries worth less, then it’s okay as long as China can buy gold and make up the loss with their gain on the gold side.
So, China is buying gold to hedge their treasuries position.
The Treasury has to accommodate that, or else China will dump the treasuries.
Jim says he’s spoken to officials from the IMF and they have confirmed this, and that it’s a global re-balancing of gold from west to east.
So you have China manipulating to buy more cheaply and the FED manipulating occasionally so that the price rise isn’t disorderly.
THE END GAME
The game ends when China has enough gold and stops buying, and then reveals how much they have.
Then inflation kicks in and the price of gold skyrockets.
At that time the Treasury and the FED will be comfortable because China will have 8,000 tonnes, the U.S. has 8,000 tonnes and both countries will be winning on the price of gold, and have the same gold-to-GDP ratio.
The losers will be people who don’t have gold, and who will go to buy it and find out it’s too late.
In the short run you can’t beat the big players, but in the long run you will always beat them, because these manipulations are finite and there is an end game.
All the manipulations in the end have failed.
Once China has enough gold then the manipulation will stop and the price of gold can go where ever it wants.
INFLATION IS COMING
The FED thinks they can dial inflation down a bit if they want and up a bit if they want, but what they’re going to find is that they’re playing with a nuclear reactor, and it will melt down and spin out of control.
We’re not there yet. This could be another year or perhaps two years.
There will be volatility and the price might go lower first, but you need to understand the dynamics behind the price, what the manipulations are, what the end game is, and what the physical gold supply and demand looks like.
If you look at this, and Jim covers it more specifically in his book The Death of Money, then it’s pretty obvious the price of gold is going to go a lot higher.
Jim Rickard’s book The Death of Money is available through Amazon.
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words by Rudyard Kipling and music by Elaine Diane Taylor
copyright 2009 Intelligentsia Media Inc.
All rights reserved.
Available on iTunes.
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words and music by Elaine Diane Taylor
copyright 2009 Intelligentsia Media Inc.
All rights reserved.
Available on iTunes.