Guest Post by Paul Craig Roberts and Dave Kranzler
The Federal Reserve and its bullion bank agents (JP Morgan, Scotia, and HSBC) have been using naked short-selling to drive down the price of gold since September 2011. The latest containment effort began in mid-July of this year, after gold had moved higher in price from the beginning of June and was threatening to take out key technical levels, which would have triggered a flood of buying from hedge funds.
The Fed and its agents rig the gold price in the New York Comex futures (paper gold) market. The bullion banks have the ability to print an unlimited supply of gold contracts which are sold in large volumes at times when Comex activity is light.
Generally, on the other side of the trade the buyers of contracts are large hedge funds and other speculators, who use the contracts to speculate on the direction of the gold price. The hedge funds and speculators have no interest in acquiring physical gold and settle their bets in cash, which makes it possible for the bullion banks to sell claims to gold that they cannot back with physical metal. Contracts sold without underlying gold to back them are called “uncovered contracts” or “naked shorts.” It is illegal to engage in naked shorting in the stock and bond markets, but it is permitted in the gold futures market.
The fact that the price of gold is determined in a futures market in which paper claims to gold are traded merely to speculate on price means that the Fed and its bank agents can suppress the price of gold even though demand for physical gold is rising. If there were strict requirements that gold shorts could not be naked and had to be backed by the seller’s possession of physical gold represented by the futures contract, the Federal Reserve and its agents would be unable to control the price of gold, and the gold price would be much higher than it is now.
Gold price manipulation is used when demand for delivery of gold bullion begins to put upward pressure on the price of gold and hedge funds speculate on the rising price of gold by purchasing large quantities of Comex futures contracts (paper gold). This speculation accelerates the upward move in the price of gold. The TF Metals Report provides a good description of this illegal manipulation of the gold market:
“Over a period of 10 weeks to begin the year, the Comex bullion banks were able to limit the rally to only 15% by supplying the “market” with 95,000 brand new naked short contracts. That’s 9.5MM ounces of make-believe paper gold or about 295 metric tonnes.
“Over a period of just 5 weeks in June and July, the Comex bullion banks were able to limit the rally to only 7% by supplying the “market” with 79,000 brand new naked short contracts. That’s 7.9MM ounces of make-believe paper gold or about 246 metric tonnes.” http://www.tfmetalsreport.com/comment/429940
In previous columns, we have documented the heavy short-selling into light trading periods.
See for example: http://www.paulcraigroberts.org/2014/07/16/insider-trading-financial-terrorism-comex/.
The bullion banks do not have nearly enough gold in their possession to make deliveries to the buyers if the buyers decide to stand for delivery per the terms of the paper gold contract. The reason this scheme works is because the majority of the buyers of the contracts are speculators, not gold purchasers, and never demand delivery of the gold. Instead, they settle the contracts in cash. They are looking for short-term trading profits, not for a gold hedge against currency inflation. If a majority of the longs (the purchasers of the contracts) required delivery of the gold, the regulators would not tolerate the extent to which gold is shorted with uncovered contracts.
In our opinion, the manipulation is illegal, because it is insider trading. The bullion banks that short the gold market are clearing members of the Comex/NYMEX/CME. In that role, the bullion banks have access to the computer system used to clear and settle trades, which means that the bullion banks have access to all the trading positions, including those of the hedge funds. When the hedge funds are in the deepest, the bullion banks dump naked shorts on the Comex, driving down the futures price, which triggers selling from stop-loss orders and margin calls that drive the price down further. Then the bullion banks buy the contracts at a lower price than they sold and pocket the difference, simultaneously serving the Fed by protecting the dollar from the Fed’s loose monetary policy by lowering the gold price and preventing the concern that a rising gold price would bring to the dollar.
Since mid-July, nearly every night in the US the price of gold remains steady or drifts higher. This is when the eastern hemisphere markets are open and the market players are busy buying physical gold for which delivery is mandatory. But as regular as clockwork, following the close of the Asian markets, the London and New York paper gold markets open, and the price of gold is immediately taken lower as paper gold contracts flood into the market setting a negative tone for the day’s trading.
Gold serves as a warning for aware people that financial and economic trouble are brewing. For instance, from the period of time just before the tech bubble collapsed (January 2000) until just before the collapse of Bear Stearns triggered the Great Financial Crisis (March 2008), gold rose in value from $250 to $1020 per ounce, or just over 400%. Moreover, in the period since the Great Financial Collapse, gold has risen 61% despite claims that the financial system was repaired. It was up as much as 225% (September 2011) before the Fed began the systematic take-down and containment of gold in order to protect the dollar from the massive creation of new dollars required by Quantitative Easing.
The US economy and financial system are in worse condition than the Fed and Treasury claim and the financial media reports. Both public and private debt burdens are high. Corporations are borrowing from banks in order to buy back their own stocks. This leaves corporations with new debt but without income streams from new investments with which to service the debt. Retail stores are in trouble, including dollar store chains. The housing market is showing signs of renewed downturn. The September 16 release of the 2013 Income and Poverty report shows that real median household income has declined to the level in 1994 two decades ago and is actually lower than in the late 1960s and early 1970s. The combination of high debt and decline in real income means that there is no engine to drive the economy.
In the 21st century, US debt and money creation has not been matched by an increase in real goods and services. The implication of this mismatch is inflation. Without the price-rigging by the bullion banks, gold and silver would be reflecting these inflation expectations.
The dollar is also in trouble because its role as world reserve currency is threatened by the abuse of this role in order to gain financial hegemony over others and to punish with sanctions those countries that do not comply with the goals of US foreign policy. The Wolfowitz Doctrine, which is the basis of US foreign policy, says that it is imperative for Washington to prevent the rise of other countries, such as Russia and China, that can limit the exercise of US power.
Sanctions and the threat of sanctions encourage other countries to leave the dollar payments system and to abandon the petrodollar. The BRICS (Brazil, Russia, India, China, South Africa) have formed to do precisely that. Russia and China have arranged a massive long-term energy deal that avoids use of the US dollar. Both countries are settling their trade accounts with each other in their own currencies, and this practice is spreading. China is considering a gold-backed yuan, which would make the Chinese currency highly desirable as a reserve asset. It is possible that the Fed’s attack on gold is also aimed at making Chinese and Russian gold accumulation less supportive of their currencies. A currency linked to a falling gold price is not the same as a currency linked to a rising gold price.
It is unclear whether the new Chinese gold exchange in Shanghai will displace the London and New York futures markets. Naked short-selling is not permitted in the Chinese gold exchange. The world could end up with two gold futures markets: one based on assessments of reality, and the other based on gambling and price-rigging.
The future will also determine whether the role of reserve currency has been overtaken by time. The US dollar took that role in the aftermath of World War II, a time when the US had the only industrial economy that had not been destroyed in the war. A stable means of settling international accounts was needed. Today there are many economies that have tradable currencies, and accounts can be settled between countries in their own currencies. There is no longer a need for a single reserve currency. As this realization spreads, pressure on the dollar’s value will intensify.
For a period the Federal Reserve can support the dollar’s exchange value by pressuring Japan and the European Central Bank to print their currencies with which to support the dollar with purchases in the foreign exchange market. Other countries, such as Switzerland, will print their own currencies so as not to endanger their exports by a rise in the dollar price of their exports. But eventually the large US trade deficits produced by offshoring the production of goods and services sold into US markets and the collapse of the middle class and tax base caused by jobs offshoring will destroy the value of the US dollar.
When that day arrives, US living standards, already endangered, will plummet. American power will have been destroyed by corporate greed and the Fed’s policy of sacrificing the US economy in order to save four or five mega-banks, whose former executives control the Fed, the US Treasury, and the federal financial regulatory agencies.
Sad but very true, and the bastards will probably go door to door in the aftermath confiscating weapons and precious metals. These truly are the “good old days”. Why do I feel like Walter Brennan?
What I take away from this article is that ‘paper’ gold price is being riggered.
Please correct me if I am wrong.
Kill Bill—I hope this isn’t news to you. GATA has been saying this longer than I can remember.
The only one that denying it is Doug Casey. Go figure.
PCR said more than that. Read it again.
I did.
Homer, the dollar is no longer based on gold.
Paper. Gold paper, oil paper, silver paper, copper paper…
Synthetics.
I have several co-workers who know that I’m a precious metals accumulator. They think I’m nuts. I’m comfortable with that.
They smirk when the price of gold and silver plummet (the fact that they even track this should tell you something). It confuses them when I respond with an ear-to-ear grin.
The things I want are being put on sale! Why would a big price dip distress me? The things that will maintain their value when the Federal Reserve note approaches zero are on the clearance rack.
Folks, back up the truck. Don’t look a gift horse in the mouth. Buy low, sell high. Pick your figure of speech.
But whatever you do, trade in the worthless pieces of paper for gold and silver while you still can. When your friends are wondering WTF happened to their 401(k)s, IRAs and pensions, you’ll be sitting pretty.
Kill Bill—I think Nixon pretty much kill that link. G to P
“Homer, the dollar is no longer based on gold.” I get it, that’s the problem. But I am missing what your trying to say.
Steve Hogan—They laughed at Noah, they laughed at Galileo, they laughed at Columbus, they laughed at Fulton, I think you’re are in good company.
Kill Bill—Ya might want to look at this. It is about gov and central bank manipulation.
http://news.goldseek.com/GoldSeek/1411395120.php
a few things about this piece bother me. the authors write:
“Gold serves as a warning for aware people that financial and economic trouble are brewing. For instance, from the period of time just before the tech bubble collapsed (January 2000) until just before the collapse of Bear Stearns triggered the Great Financial Crisis (March 2008), gold rose in value from $250 to $1020 per ounce, or just over 400%.”
really? ok, now was this due to increased demand of paper gold, physical gold? or was the gain tied directly to the price of oil, gold mining’s largest input cost? gee, let’s see. price of oil in january 2000 was $25 and in march 2008 it was $103, for a gain of, yep you guessed it “just over 400%” !! coincidence? i doubt it. note to roberts and kranzler: the buying of physical gold has nothing (or very little) to do with the quoted price. physical gold buying has been ferocious for over two decades. nearly every ounce is owned by someone or some entity. but this has nothing to do with price. gold is traded as a commodity even though it isn’t one, no different than wheat or copper. if we were privy to off market gold sales we would find a very different and much higher price! as long as the price of gold is determined by paper gold, we will not see the price go to da moon, whether it is being manipulated or not. i agree with steve hogan–the price is a godsend. go lower indeed!
from “guide to financial markets” by marc levinson: “although there is a limit to the amount of copper that can be mined in a given year, there is no limit to the number of copper futures contracts that can be traded.” just substitute gold for copper and there you have it. there can be 10 contracts or 10 gazillion contracts traded–all legal. no doubt there can be, by definition, only a handful of players who play this game–these big banks. after all, who can afford to play around with tens of thousands of 100 oz contracts with obscene leverage? if there is a complaint it is this. position limits apply, but “do not usually apply to investors who can prove to the exchange that they are hedgers.” (from levinson) in any case, there is zero chance that the banks will be held to account by the regulators. so why get your knickers in a twist? the fed and the participating banks are the market in everything–stocks, bonds, you name it.
the authors write:
“Since mid-July, nearly every night in the US the price of gold remains steady or drifts higher. This is when the eastern hemisphere markets are open and the market players are busy buying physical gold for which delivery is mandatory. But as regular as clockwork, following the close of the Asian markets, the London and New York paper gold markets open, and the price of gold is immediately taken lower as paper gold contracts flood into the market setting a negative tone for the day’s trading.”
there you go again. why is this surprising? paper will always swamp physical.
the authors write:
“China is considering a gold-backed yuan, which would make the Chinese currency highly desirable as a reserve asset. It is possible that the Fed’s attack on gold is also aimed at making Chinese and Russian gold accumulation less supportive of their currencies. A currency linked to a falling gold price is not the same as a currency linked to a rising gold price.”
what exactly does “gold-backed yuan” mean? i hear this phrase a lot. does it mean that i can exchange yuan for gold, like in the old days of the gold standard? are we going back to a gold standard? i doubt it. or maybe it means that foreign countries can redeem their paper for gold? like the old bretton woods arrangement. maybe, but i doubt it.
i agree with the authors on the decline of the dollar and our standard of living.
archie—“Gold serves as a warning for aware people that financial and economic trouble are brewing. ”
Yes, and that is why it is so heavily manipulated. See link above for a better understanding of the extent of the manipulation and the reasons for it.
“…now was this due to increased demand of paper gold, physical gold?” Probably both, China and India accumulating physical and the exchanges selling into a rally. The small customer is not the market maker. They can only take advantage of the market makers and that involves a steely resolve which investors (speculators) don’t have as they are after dollar profits. The knock down from $1900 gold to
$1200 gold probably has more to do with geo-political reasons than just the support of the dollar.
Gold does track oil closely. I have seen the chart and it appears to be a close relationship. Whether it is coincidence or causation I don’ know. Maybe it has something to do with the gold trade dollar the the US gave to Saudi Arabia for oil.
Gold and silver have never traded as a commodity like wheat or copper, sorry but it is true. You never find naked short selling in other commodities. The CFTC allows it in PMs and claim it can find no instance of manipulation. This serves the Gov’s agenda in support of the dollar. Te fact that the Liberty Dollar was prosecuted so vigorously indicates that gold and silver are not commodities regardless of the Gov assertions.
Yup, listen to the link above.
Once confidence is lost, it’s lost, gone, skidooled. You have to go back to a redeemable paper currency to restore trade. It ain’t gonna be Bretton Woods re-visited. Once you’ve been to the city you can’t go back to the farm. I hope I got this right.
homer i don’t think we disagree on much here. it is beyond dispute that the gold price is managed or manipulated. this has been documented over and over. i do not deny that a rising gold price reflects poorly on the dollar, but i simply disagreed with the author’s implication that the price rose because of the reasons stated. it’s much more plausible that the price of gold is linked with the price of oil. otherwise, the price would not have retreated in the last few years since confidence in the dollar has faded not increased.
what i am saying is that as long as paper gold, whether traded in the futures market or the fx market, and physical gold are linked by price, we should not expect the moonshot that people are expecting similar to what happened in 1980. which i believe would take gold past $2500. when gold is unshackled from the paper market, which will happen when gold stops flowing, or when people no longer want paper gold or when the dollar flops face down in the mud or a black swan, then we will see a massive jump in price, consistent with its use, not as a commodity, but as the best store of wealth in human history.
so, i tire of commentary like the above, and many others i read, which cries foul in the PM markets. no shit there’s manipulation. every market is manipulated to some degree–the big banks and central banks have their thumb print on all markets. i have been hearing about this moonshot from PM pumpers for many years now. it cannot happen for the reasons they themselves articulate, and for the reasons i cite: namely that as long as these paper markets are functioning we should expect nothing. arguably, the principle reason why gold rose for the 2000 decade was the rising price of oil and a general commodity bull market. it had nothing or very little to do with physical buying, the appetite for which has been insatiable for at least two decades now.
archie—Considering a moonshot in PMs. I’ll relate this to you. It concerns the confiscation of G.
The IMF, i believe, came out with a policy paper that said the confiscation is not necessary and probably wouldn’t be successful. It was recommended the the gov institute a very high price, upward of $100K per ounce. Then the holders would jump at the chance to sell, considering themselves investment geniuses. This certainly qualifies as a moonshot.
This is my thinking. First, drive down the price of PMs to discourage accumulation and encourage selling. Secondly, raise the price upward to ridiculously high prices, drawing more PMs out of hiding.
After all, the gov is buying it with un-backed fiat money, newly printed, no loss to them. This happens just before the final collapse, which is most likely hyper inflation . The gov get something of real value for something of no value or lessor value. The gov doesn’t want to get stuck with the ‘old maid’. The people get stuck with worthless paper, like always and the Chinese and Russians get the blame. The gov gets out of debt and mines the Chocolate mountains and comes out with a gold backed dollar to match the Chinese and Russians, but only redeemable at $50K to $100K at a time, eliminating the small fry from redeeming them.
What do you think?
homer, i do believe that a much much higher price of physical gold is likely, if not inevitable. but stated as such in an IMF policy paper? no way, really? do you have a link?
if gold stops flowing, there is no reason why a large organization like the IMF or the BIS can’t offer to buy gold at a ridiculously high price. whether this happens before a currency crisis or after i can’t say. i don’t think governments need to do this though. they already have gold either in vaults or underground. even if uncle sam has leased or sold our gold there is still an estimated 3000 metric tonnes underground.
i still don’t know what a gold-backed dollar or yuan is. there is no way in hell we are going to return to a gold standard. i think jim willie says stuff like this. or was it a gold trade note, whatever that is. as far as i’m concerned paper fiat currencies are here to stay. but i guess we will just wait and see how this all plays out.
archie—I don’t have the link. I don’t collect them although I do save graphs that I think are pertinent. It was so long ago, Sorry
I think that J H kunstler is mostly correct about the dissolution of mega governments and a trend back to regionalism and family. I think that dwindling energy resources are part of this trend as well as the lack of a gov solution to the economic crisis. The same thinking the got you into this mess isn’t the thinking that will get you out of this mess. Gov like most folks don’t think, they’re reactive. A crisis occurs and they react to it. Central planning is an oxymoron, they go from one crisis to another crisis with a mental awareness lasting 24hrs or until the next sound bite occurs. We are a tabloid nation. Yesterdays paper is only good for wrapping fish in.
Govs will fight a gold standard tooth and nail. Without fiat money they are done for. I think individuals will eschew gov mandates and decide on their own what they will use to get what they want.
The gold standard evolve from the people, gov, as always, latch onto it and used it to their advantage.