‘Volcker Rule’ could hamstring big banks’ gold and silver trades

The implementation of the ‘Volcker Rule’ over the next two years will, in theory, prevent the big banks dealing in gold and silver for their own speculative purposes.

Much has been made, particularly by the gold and silver bulls, of High Frequency Trading (HFT) by the mega banks like JP Morgan and Goldman Sachs as the possible (or probable) reason for some of the big take-downs in the respective metals prices which seem to have been occurring with increasing frequency over the past two years. 

Trading patterns have been illogical with huge selling orders of paper metal into the futures markets, usually at a time of day when markets are thin, thus driving prices down enormously, and prompting even more stop loss sales from algorithmic computer trading programs.  It is felt that no trader would sell in this manner as it hugely reduces any trading profits that might be made on the downs, although can lead to substantial profits being taken on any subsequent recovery.

Thus, the ‘blame’ for these strange, enormous paper sales, that dwarf physical trade is very much felt to lie at the door of massive trades by the big banks.  JP Morgan and Goldman Sachs are oft quoted as the principal culprits – particularly as the trades often seem to follow very adverse comment on the likely movement of the gold and silver price by these banks’ commodity analysts – with the apparent takedowns taking place a couple of days later.

It is highly unlikely that such mega trades are made on behalf of normal clients, unless of course the clients are Western Central Banks which may have an agenda to keep the gold price down and thus give effective support for their fiat currencies, the value of which tend to be rated against the gold price.

But now there is U.S. legislation due over the next couple of years which could hamstring the banks from making these mega trades on their own account.  As Jeff Nichols puts it in his latest newsletter, this provision has come to be known as the ‘Volcker Rule’ and bans the largest U.S. banks from engaging in speculative trading, and has now been approved by the U.S. financial regulatory agencies – with, Nichols reckons, important implications for gold and silver.

The Rule, a provision of the 2010 Dodd-Frank Wall Street Reform Act, forthwith prohibits banks with federally insured deposits from trading activities undertaken for their own benefit. This practice, known as “proprietary trading,” involves acquiring or taking positions as principal for the bank’s own account any security, derivative, option, or contract for the sale of a commodity for future delivery for the purpose of selling the security or position in the near term or otherwise with the intent to resell in order to profit from short-term price movements.

The new legislation is due to come into effect in April next year, although full compliance is put off for another 15 months.  The banks, though, are being told in the meantime to report information to show they are making ‘good faith’ efforts to comply. 

In theory, as Nichols comments, this should mean that U.S. banks, including the likes of Goldman Sachs and JPMorgan, are now prohibited from trading gold and silver – including forward, futures, and options contracts – except on behalf of customers and not for their own short-term speculative gains. 

However, there is a possible flaw in this argument.  According to Nichols, controls would be implemented by the U.S. Fed and if the Fed is the primary client behind the massive gold take-downs, as many believe it to be, not much may change with respect to gold.

It may not, however, want to make itself be seen to be openly responsible for gold suppression – if it is so involved.   Silver is another matter though as the Fed may not concern itself overly with silver price movements, relying on it following the gold price up and down.  And in any case silver, being a much smaller market, may be more easily manipulated by the banks’ other well-heeled clients.

Nichols comments further  on the big banks’ market involvement that, when prices are trending lower, program selling exaggerates the downward trend – and contributes to prices falling beneath their fundamental equilibrium level.  Conversely, when prices are in a rising phase, large-scale buying at key chart points, exaggerates the bullish trend as it did in the 2011 run up to gold’s all-time high. What’s more, he reckons, this undercover trading, as he calls it, has been made even more profitable by the Fed’s near-zero interest rate policy and the easy access to liquidity necessary for large-scale trading.

Nichols’ conclusion is that once the Volcker Rule is fully in place, gold and silver fundamentals should matter much more and he feels these fundamentals are very positive – not least the huge flows of physical metal from weak hands in the West to much firmer ones in the East.

There is also, of course, the possibility – likelihood  perhaps – that the big banks will find ways of circumventing the Volcker Rule, perhaps with Fed help, and not much will change, but it should lead to perhaps a little more transparency in the sector, which would not be an adverse result.  

A far more cynical viewpoint comes from James West writing in his Midas Letter.  West comments that the long delay in implementation of the Volcker Rule “is to permit the various lobby groups and associations funded by the banks to mount an assault  in court before any of the positions that would technically be in contravention of the rule as of today need be unwound. This in turn is in full expectation by the duplicitous banks and regulators that the key foundations of the rule will, in fact, be thrown out in court by an equally duplicitous justice system.”

West goes on to comment, in even more extreme terms: What happens next” West comments, “is the subject of ongoing and intensifying chicanery among central banks, financial institutions at the top of the economic food chain, and our now obviously and (I hope you can’t find any fault with the categorization) criminally duplicitous government of the United States of America, and the U.S. Federal Reserve Bank. (Which in reality, is a branch of government, technicalities notwithstanding.)  So don’t be surprised that the temerity of the largest criminal enterprise in the history of the world now exists so confidently in broad daylight that the taking with one hand while giving back with the other is a matter for tandem press releases by the agency who acts as banker to the enterprise. Rather, expect more of the same”

This is obviously a veryy cynical and jaundiced viewpoint but West may have a point in that the policing of the Volcker Rule will be in the hands of the U.S Federal Reserve which many believe to be the instigator of much of the recent activity in the gold market which has been hugely successful in driving down the gold price.  Anyway, watch this space to see how things progress with the Volcker Rule implementation, if it does indeed come into force in its current form, or otherwisew,over the next year and a half. We reserve judgement for the moment.


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