Although the primary purpose of the futures markets is to provide an efficient and effective mechanism for the management of price risks, when it comes to precious metals, and as we have seen in recent weeks, it has become nothing more than a casino run by a group of bullion banks that are acting as agents for the US Federal Reserve which is intent in manipulating these markets as they do all other markets. And, while much of the recent volatility has been caused by the options and futures market, the regulatory authorities of the CFTC who came up with a series of hikes in margins to stop the price of both gold and silver from rising, claiming that the markets were extremely volatile, I see they have done nothing to prevent the recent price drops.
The action or lack thereof by the regulatory authorities is most disturbing and would suggest that they themselves are colluding with the parties involved in this illegal manipulation of the gold and silver market.
How can they ignore the massive short sale that took place on Friday, April 12, 2013, when short sales of gold hit the New York market in an amount estimated to have been somewhere around 400 tons of gold? This enormous sale implies an illegal conspiracy of sellers intent on rigging the market or action by the Federal Reserve through its agents, the bullion banks. Last Friday, this suspicious selling resumed, with the equivalent of 17 tons sold on the New York Comex in two bursts in the morning, according to market sources.
Any normal seller that wanted to exit a position would do it discreetly and slowing thereby trying to ensure the best possible price and not simply dump an enormous amount all at once unless the goal was not profit but to smash the bullion price.
Interestingly, the futures markets were established to prevent such huge price swings in commodities. The business of trading futures is not new and in fact it is now more than 100 years old. It began in Chicago during the 1800’s.
Chicago was a growing city in the 1830s and a centre for the sale of grains grown nearby to be shipped to the East. Prior to the establishment of central grain markets in the mid-nineteenth century, the nation’s farmers carted their newly harvested crops up rivers or dirt roads to major population and transportation centres each fall in search of buyers. These seasonal supply gluts drove prices downward to giveaway levels and even to throwaway levels as corn, wheat and other crops often rotted in the streets or were dumped in rivers and lakes for lack of storage. Come spring, shortages frequently developed and foods made from corn and wheat became barely affordable luxuries.
By the early 1850s, the local merchants began to buy corn from farmers which they then sold to the Chicago merchants on time contracts, or forward contracts, to minimize their risk. The farmers risked not having anyone buy their corn or having to sell at rock-bottom prices, and the merchants risked not having any corn to buy or having to buy at sky-high prices. The forward contract set forth the amount of corn to be sold at a future date at an agreed-upon price. Forward contracts in wheat also started in the early 1850s.
As soon as the forward contract became the usual way of doing business, speculators appeared. They did not intend to buy or sell the commodity. Instead, they traded contracts in hope of making a profit.
Speculation itself became a business activity. Contracts could change hands many times before the actual delivery of the corn. During this time, contracts were negotiated and traded in public squares and on street curbs. Then in 1848, 82 merchants formed a centralized marketplace to trade grain, and this was the beginning of the Chicago Board of Trade – more commonly known as the CBOT, the oldest futures exchange in the world. Today it is one of the largest futures exchange in the world.
Now around the same time metals merchants living in London began to sell contracts of copper on forward contracts. Imagine for a few minutes that you are a metals merchant living in London in say 1890. You lease vessels to sail to Chile where you buy copper ore. However, the journey takes several months, and during this time the price of copper fluctuates so you have no idea what it’s going be by the time your vessels return. Hopefully, when your copper is finally delivered the price is high enough for you to cover all your expenses and make a small profit. On the other hand if prices have plummeted you are going to make a large loss. So, you are always at risk.
Now, suppose that while having a cup of tea with some other traders, one of them tells you that he is prepared to pay you a guaranteed price for a specific quantity of copper that you only have to deliver in 6 months’ time. You do your calculations and figure that this price is enough to cover all expenses as well as make you a small profit – risk free. So you agree to this. But in the meantime if prices soar, you cannot claim the higher price, but you are protected if prices plummet. This meant that no matter what the domestic conditions were, when your shipments of copper arrived, you would receive the price agreed upon a few months previously
Then, once again speculators arrived. They had no intention of taking physical delivery and instead they traded contracts in hope of making a profit. For example, let’s say that you were offered $0.40c per pound. Now some other trader who believes that prices will be a lot higher than this in three months’ time offers say 0.41c per pound, and then another trader makes an offer of say 0.42c per pound, and so on. So, before delivery is made, the actual contract can be traded many times over. And, this is how the London Metal Exchange began.
The actual London Metal Exchange (LME) was officially formed in 1877. And it’s because of the merchants in Chicago and London that the process known as hedging began. And as these exchanges grew, more and more contracts were added. Futures trading is now a global industry, and futures can be traded electronically outside the United States in more than 80 countries. While electronic trading is becoming more and more popular, a huge amount of business is still done in the pits.
Now the gold and silver futures markets are not being used for their original purpose, but are being used to manipulate prices by some entity that does not want to see prices of precious metals move higher. As this is certainly not what the producers want, it is reasonable to surmise that the institution behind this is the US Federal Reserve. While, this has always been considered as another conspiracy theory, it is widely known that central banks and other major financial institutions have been manipulating Libor, bonds, equities as well as the foreign exchange market. So, it is absolutely plausible that they are manipulating precious metals, in particular gold and silver
Before the spike in gold prices that took place on Monday, the price of gold has dropped by more than $100 over the past seven sessions. The last time gold fell for eight consecutive sessions was in 2009, with that run ending on March 4. Since April the price is down by more than $200 an ounce and down by around 16% since the beginning of the year.
In the same time, global equities have advanced and the US dollar has gained against its major peers. The Dow Jones Industrial Average and benchmark S&P 500 stock index surged to new closing highs in a rally that has pushed both indices this year up 17%. The DOW made another record close at 15354 while S&P 500 also had a record close at 1667. The FTSE 100 made a five year high at 6723 while DAX also closed at another record high of 8389. And, the Nikkei closed above 15000 at 15138.
The U.S. dollar index which measures its value against a basket of six major currencies, rose to 84.371, it’s highest in nearly three years. However, much of the dollar’s recent gains can be attributed to the euro, which fell to a six-week low on talk the European Central Bank could introduce negative deposit rates, a move that effectively would make banks pay to park their cash overnight with the ECB.
The latest EU figures released Wednesday show full year-and-a-half of contraction in the Eurozone as tens of millions of individuals remain unemployed.
EU data agency Eurostat said output across the 17 states that share the euro — which are home to 340 million people — fell by 1.0% compared to the same quarter last year. France has also slipped into recession with a 0.2% quarter-on-quarter contraction, with unemployment already running at a 16-year high.
While outflows of gold exchange traded funds continue, demand for physical gold remains robust especially from Asia. The latest World Gold Council Gold Demand Trends report, covering the period of January to March 2013 has indicated that demand for gold jewellery continues to grow. Total jewellery demand was up 12% year-on-year in Q1 2013, primarily driven by Asian markets. Jewellery demand in China was up 19% and stood at a record 185 tons, with demand in India and the Middle East was up 15% and in US demand increased 6%, for the first time since 2005.
Demand for gold in China and India was also driven by an increase in bar and coin sales – up 22% year-on-year in China and 52% in India. In the US demand for bars and coins was up 43% compared with the same quarter in 2012. Globally bar investment was up 8% and official coins such as American Eagles and Canadian Maple Leafs were up 18%. Gold-backed ETFs, which in 2012 accounted for 6% of the world’s gold demand, fell by 177 tons.
Marcus Grubb, Managing Director, Investment at the World Gold Council said “The price drop in April, fuelled by non-physical moves in the market, proved to be the catalyst for a surge of buying that has left many retailers short of stock and refineries introducing waiting lists for deliveries. Putting this into context, sales of bars and coins, jewellery and consumption in the technology sector still make up 81% of the market. What these figures show is that even before the events of April, the fundamentals of the gold market remain robust with; growing demand in India and China, central banks consistently adding gold to their reserves and strong buying of investment products such as gold bars and coins.”
According to the report, investment demand in India was up by 52% compared to last year, despite an increase in import duties from 4% to 6% in January. Gold bars and gold coins continued to attract strong demand despite an increase in import duties which took place in January.
US investment demand in bars and coins increased in the first quarter and a surge in investment pushed Thailand to the third largest market for gold bars and coins in the first quarter. Meanwhile European investment demand slowed and investment across the Middle East was unchanged.
Total mine production in Q1 2013 was up 4% on last year at 688 tons and recycling fell 4% resulting in a total supply that is 1% higher than a year ago. However according to several gold analysts, global gold production is set to decline in the coming years.
While global stock markets, which have been propped up by the unprecedented debt-monetization scheme of central banks in particular the US Federal Reserve and the Bank of Japan, demand for physical gold remains robust. I also believe that the demand for gold in the second quarter is going to be substantially greater than the demand seen in the first quarter.
With increased demand for physical gold I have no doubt that the price will soon rebound.
David Levenstein is a Johannesburg-based expert on investing in precious metals. He began trading silver through the LME in 1980 and over the years 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. 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.