Month: February 2020

Authored by James Rickards via The Daily Reckoning,

Is there gold price manipulation going on? Absolutely. There’s no question about it. That’s not just an opinion.

There is hard statistical evidence to make the case, in addition to anecdotal evidence and forensic evidence. The evidence is very clear, in fact.

I’ve spoken to members of Congress. I’ve spoken to people in the intelligence community, in the defense community, very senior people at the IMF. I don’t believe in making strong claims without strong evidence, and the evidence is all there.

I spoke to a PhD statistician who works for one of the biggest hedge funds in the world. I can’t mention the fund’s name but it’s a household name. You’ve probably heard of it. He looked at COMEX (the primary market for gold) opening prices and COMEX closing prices for a 10-year period.

He was dumbfounded.

He said it was is the most blatant case of manipulation he’d ever seen. He said if you went into the aftermarket, bought after the close and sold before the opening every day, you would make risk-free profits.

He said statistically that’s impossible unless there’s manipulation occurring.

I also spoke to Professor Rosa Abrantes-Metz at the New York University Stern School of Business. She is the leading expert on globe price manipulation. She has actually testified in gold manipulation cases.

She wrote a report reaching the same conclusions. It’s not just an opinion, it’s not just a deep, dark conspiracy theory. Here’s a PhD statistician and a prominent market expert lawyer, expert witness in litigation qualified by the courts, who independently reached the same conclusion.

How do these manipulations occur?

Currently the price of gold is set in two places. One is the London spot market, controlled by six big banks including Goldman Sachs and JPMorgan. The other is the New York gold futures market controlled by COMEX, which is governed by its big clearing members, also including major western banks.

In effect, the big western banks have a monopoly on gold prices even if they do not have a monopoly on physical gold.

The easiest way to perform paper manipulation is through COMEX futures. Rigging futures markets is child’s play. You just wait until a little bit before the close and put in a massive sell order. By doing this you scare the other side of the market into lowering their bid price; they back away.

That lower price then gets trumpeted around the world as the “price” of gold, discouraging investors and hurting sentiment. The price decline spooks hedge funds into dumping more gold as they hit “stop-loss” limits on their positions.

A self-fulfilling momentum is established where selling begets more selling and the price spirals down for no particular reason except that someone wanted it that way. Eventually a bottom is established and buyers step in, but by then the damage is done.

Futures have a huge amount of leverage that can easily reach 20 to 1. For $10 million of cash margin, I can sell $200 million of paper gold.

Hedge funds are now large players in the gold market. To a hedge fund, gold may be an interesting market in which to deploy its trading style. To them, gold is just another tradable commodity. It could just as well be coffee beans, soybeans, Treasury bonds, or any other traded good.

Hedge funds use what are called “stop-loss” limits. When they establish a trading position, they set a maximum amount they are willing to lose before they get out. Once that limit is reached, they automatically sell the position regardless of their long-term view of the metal.

Perhaps they don’t even have a long-term view, just a short-term trading perspective. If a particular hedge fund wants to manipulate the gold market from the short side, all it has to do is throw in a large sell order, push gold down a certain amount, and once it hits that amount, these stops are triggered at the funds that are long gold.

Once one hedge fund hits a stop-loss price, that hedge fund automatically sells. That drives the price down more. The next hedge fund hits its stop-loss. Then it sells too, driving the price down again. Selling gathers momentum, and soon everyone is selling.

Another way to manipulate the price is through gold leasing and “unallocated forwards.”

“Unallocated” is one of those buzzwords in the gold market. When most large gold buyers want to buy physical gold, they’ll call JPMorgan Chase, HSBC, Citibank, or one of the large gold dealers.

They’ll put in an order for, say, $5 million worth of gold. The bank will say fine, send us your money for the gold and we’ll offer you a written contract in a standard form. Yet if you read the contract, it says you own gold on an “unallocated” basis. That means you don’t have designated bars.

There’s no group of gold bars that have your name on them or specific gold bar serial numbers that are registered to you.

In practice, unallocated gold allows the bank to sell the same physical gold ten times over to ten different buyers.

It’s no different from any other kind of fractional reserve banking. Banks never have as much cash on hand as they do deposits. Every depositor in a bank thinks he can walk in and get cash whenever he wants, but every banker knows the bank doesn’t have that much cash. The bank puts the money out on loan or buys securities; banks are highly leveraged institutions.

If everyone showed up for the cash at once, there’s no way the bank could pay it. That’s why the lender of last resort, the Federal Reserve, can just print the money if  need be. It’s no different in the physical gold market, except there is no gold lender of last resort.

Banks sell more gold than they have. If every holder of unallocated gold showed up all at once and said, “Please give me my gold,” there wouldn’t be nearly enough to go around. Yet people don’t want the physical gold for the most part.

There are risks involved, storage costs, transportation costs, and insurance costs. They’re happy to leave it in the bank. What they may not realize is that the bank doesn’t actually have it either.

Gold holders should expect these games to continue until a fundamental development drives the price to a permanently higher plateau.

How does the individual investor stand up against such forces?

In the short run, you can’t beat them, but in the long run, you always will, because these manipulations have a finite life.

Eventually the manipulators run out of physical gold, or a change in inflation expectations leads to price surges even governments cannot control. There is an endgame.

History shows manipulations can last for a long time yet always fail in the end. They failed in the 1960s London Gold Pool, with the United States dumping in the late 1970s, and the central bank dumping in the 1990s and early 2000s. The gold price went relentlessly higher from $35 per ounce in 1968 when the London Gold Pool failed to $1,900 per ounce in 2011, the all-time high.

Price manipulation always fails. And the dollar price of gold will resume its march higher. The other weakness in the manipulation schemes appears in the use of paper gold through leasing, hedge funds, and unallocated gold forwards.

These techniques are powerful. Still, any manipulation requires some physical gold. It may not be a lot, perhaps less than 1% of all the paper transactions, yet some physical gold is needed. The physical gold is also rapidly disappearing as more countries are buying it up. That puts a limit on the amount of paper gold transactions that can be implemented.

My advice to investors is that it’s important to understand the dynamics behind gold pricing. Understanding these dynamics lets you see the endgame more clearly and supports the rationale for owning gold even when short-term price movements are adverse.

Gold will win in the end.

The pope catching the coronavirus would certainly make an interesting sequel to Netflix’s “Two Popes.”

After breaking with his typical practice of waving and instead making a point to shake hands with revelers during his Ash Wednesday audience in St. Peter’s Square, media reports claim Pope Francis has fallen ill with a “slight illness”.

However, observers noted that he sounded hoarse and already appeared to have a slight cold during the Ash Wednesday service, quieting fears that he might have picked up the virus during the public audience, that was attended by thousands despite the outbreak in Italy sparking fears of public gatherings. The pope reportedly coughed during the service repeatedly.

As the Catholic season of Lent begins, the pope tweeted a blessing a few hours ago.

We pray, fast, and perform the works of mercy in this time of grace, so that the Lord might find our hearts ready and fill them with the victory of His love. #Lent

— Pope Francis (@Pontifex) February 27, 2020

In a sign of strength from the Vatican, His Holiness will complete his regular schedule on Thursday after cancelling an event at a Rome basilica.

“Because of a slight indisposition, he preferred to stay inside Santa Marta,” the Vatican said, referring to the Vatican guest house where the 83-year-old pontiff lives.

“All other commitments will go ahead regularly,” spokesman Matteo Bruni said.

Bloomberg reports that the Vatican released a picture of the pope and Cardinal Antonio Tagle, a Filipino who has recently taken a new post in the Vatican, meeting on Thursday morning with members of the Global Catholic Climate Movement, an international environmental group in a meeting near the pope’s guest house. Many of the members of crowd on Wednesday wore protective gear including facemasks, even as the pope didn’t.

The pope looked markedly better than the Iranian ministry who appeared feverish during a public press conference.

For those who aren’t closely familiar with the pope’s background, his biographer reminded the press that Francis is missing a part of one lung from a brush with tuberculosis in his native Buenos Aires. He was in his early 20s when it was removed. He also reportedly suffers from sciatica, for which he regularly undergoes physical therapy, which is why he often has trouble climbing stairs.

With Chritsine Lagarde blowing up the market’s hopes for an emergency coordinated central bank rate cut, traders have decided to switch to the “stick” approach, and instead of asking nicely for another bailout from the Fed, they have decided to force one through.

As a result, even as the latest overnight index swaps are cratering on Thursday as money markets start to price in a rate cut at the March FOMC meeting with the first Fed-dated OIS for March meeting dropping as low as 1.415% Thursday, implying 16.5bp of rate cuts, before settling around 1.44% after the Lagarde statement (around a 60% chance of a 25bps March rate-cut).

…but, aggressive eurodollar option traders have started to hedge for more than 25bp of easing at the March 17-18 meeting, i.e., the volume of calls betting on more than one 25bps cut are soaring.

Going further down the curve, some are going for broke, and betting on as many as 5 rate cuts by mid-year, which would send the Fed Funds just above 0%. As Bloomberg’s Edward Bolingbroke notes, “one of the largest eurodollar options flows Thursday morning targets a total of 125bp of rate cuts into the June 2020 futures, which are currently pricing in 55bp of cuts.” He adds that “the buying in the 99.50 strike was aggressive, including 125k bought at 1.25 ticks.”

Meanwhile, following the manic moves in the Eurodollar strip, 3-Month USD Libor fixes are catching up, or rather down, with the front-end rally and has now dropped 11.6bp since last Wednesday to 1.58038, and from 1.61325% on Wednesday…

…  just marginally above current 1.58% effective Fed funds rate.

In short, if the Fed won’t agree to cut rates on its own, the market will force its hand.

By far the largest annual gathering of humans in the world is the pilgrimage to Mecca, which in 2018 alone saw about 2.4 million Muslims make the religious trip. 

Given approximately a whopping quarter of world’s population identifies as Muslim, and each adherent is supposed to make the trip as a “religious duty” at least once in their lives, the latest coronavirus news out of the Middle East is almost unprecedented and hugely disruptive to travel patterns into the gulf region.

Saudi Arabia has now suspended entry visas for pilgrim’s wishing to visit the kingdom’s holy sites, the foreign ministry has announced. 

The AFP reports:

The government is “suspending entry to the Kingdom for the purpose of Umrah and visiting the Prophet’s Mosque temporarily”, the foreign ministry said in a statement, referring to the Islamic pilgrimage to Mecca that can be undertaken at any time of year.

Umrah attracts tens of thousands of devout Muslims from all over the globe each month.

“Saudi Arabia renews its support for all international measures to limit the spread of this virus and urges its citizens to exercise caution before travelling to countries experiencing coronavirus outbreaks,” the Saudi foreign ministry statement said. “We ask God Almighty to spare all humanity from all harm.”

Simultaneously, the Saudi foreign ministry said it’s suspending visas for any tourists coming from countries considered a “danger” for the spread of coronavirus. 

Annual number of Hajj pilgrims to Saudi Arabia from 1999 to 2018:

Countries surrounding Saudi Arabia have lately begun to report their first cases, especially the United Arab Emirates, which now has at least 13 confirmed cases, in a worrisome sign in could hit the gulf region hard, given also it’s a major international transport hub straddling east Asia and the West.

Kuwait, Bahrain, and Oman have also each reported a handful of cases, while numbers look to be soaring in panic-stricken Iran across the Persian Gulf.  

Though millions visit Mecca and Medina throughout the year, the surge of pilgrims reaches a peak during the 10-day Hajj, which is this year set for late July into early August. Spread of disease has always been a major concern, given the extremely “close quarters” during the major religious event.

Coronavirus around the region, according to the below Middle East Eye map. Iran’s numbers are now believed much higher than official figures.

According to Al Jazeera:

The earliest recorded outbreak came in 632 as pilgrims fought off malaria. A cholera outbreak in 1821 killed an estimated 20,000 pilgrims. Another cholera outbreak in 1865 killed 15,000 pilgrims and then spread worldwide.

More recently, Saudi Arabia faced danger from a related coronavirus that caused Middle East respiratory syndrome, or MERS.

Analysts are calling this latest banning of pilgrims to the kingdom “unprecedented” but necessary given the extreme danger for rapid spread of the virus. 

But given that the last major outbreaks recorded in the 19th century collectively killed a total estimated 35,000 people – authorities are taking no chances. 

Covid-19 has infected 80,000 people globally, mainly in China, and the CDC has this week admitted the outbreak could go in “any direction”.

Authored by Andrew Fenton via Coin Telegraph.com,

The US Securities and Exchange Commision has rejected New York based firm Wilshire Phoenix’s Bitcoin Exchange Traded Fund (ETF) application, citing ongoing concerns over market manipulation and a lack of surveillance-sharing agreements.

image courtesy of CoinTelegraph

Commissioner Hester ‘Crypto Mom’ Peirce has publicly disagreed with the rejection.

NYSE Arca had submitted a proposed rule change to allow the listing and trade of Wilshire Phoenix’s United States Bitcoin and Treasury Investment Trust. The proposal included both US Treasury Bonds and Bitcoin and hoped to address the SEC’s concerns over market manipulation by automatically rebalancing into bonds during periods of BTC price volatility.

Explaining the reasons behind its Wednesday ruling the SEC said the company had been unable to provide enough proof that it can protect itself from “fraudulent and manipulative acts and practices” in the Bitcoin market in order “to protect investors and the public interest.”

The SEC noted:

“The Commission must disapprove a proposed rule change filed by a national securities exchange if it does not find that the proposed rule change is consistent with the applicable requirements of the Exchange Act — including the requirement under Section 6(b)(5) that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices.”

In her dissent to the rejection, Commissioner Peirce stated that the commission had “once again disapproved of a proposed rule change that would give American investors access to Bitcoin through a product listed and traded on a national securities exchange subject to the commission’s regulatory framework.”

“This line of disapprovals leads me to conclude that this Commission is unwilling to approve the listing of any product that would provide access to the market for Bitcoin and that no filing will meet the ever-shifting standards that this Commission insists on applying to Bitcoin-related products — and only to Bitcoin-related products.”

The SEC has rejected at least nine previous Bitcoin ETF applications to date including applications from Bitwise Asset Management, VanEck/SolidX and Direxion. Kryptoin and Crescent Crypto still have crypto ETF proposals awaiting decisions from the SEC.