Nov 052015

Last week I was in Sydney for the Precious Metals Investment Symposium. While the turnout was down on last year (surprising as the Australian gold price has been performing but I suppose people just look at the US price) the speaker turnout was excellent. For me the standouts were opening speaker John Butler, Keith Weiner and Jayant Bhandari. The presentations by Keith and Jayant were complimentary, with Keith covering his idea of yield purchasing power and how low interest rates were resulting in people eating their seed corn, and Jayant explaining why countries like India are so interested in gold (zero yield is better than negative yield), forecasting that the West is headed in the direction of negative yields/capital destruction.

On Monday night Mark from Gold Stackers roped me into helping him with the launch of the Back to the Future coins, which involved me putting on white coveralls and a wig to “act” as Doc Brown in a skit (emphasis on the double quotes around the word act). It was all good fun but thankfully I have not seen any pics of our attempt at acting circulating on the internet.

Tuesday night saw the Precious Metal Award Gala Dinner at which I was humbled to win the ‘Maggie’ Bullion Award, which is named in honour of an Australian coin dealer known for her exceptional focus on customers, who died unexpectedly last year.

Last night I recorded an interview with Dale Pinkert at FXStreet, covering a wide range of topics including:

  • bitcoin
  • personal vs third party storage
  • banning of gold in safety deposit boxes
  • manipulation
  • German repatriation
  • Chinese gold accumulation
  • price expectations for gold and silver

Towards the end I also discussed why gold has not responded to recent geopolitical and economic events, which is based on my view that everyone has a different level of trust in the politicians and central bankers to keep things under control.

Oct 192015

Dave Fairtex, writing for Peak Prosperity, claims he has The Smoking Gun Proving Silver & Gold Manipulation. In identifying all of the 0.5% or greater one minute price spikes over the past 6 years I’d argue he has proven how infrequent it is.

Dave’s main result is that there were a total of 135 gold events and 869 silver events where the price moved up or down more than 0.5% within a minute, with 66% of the gold events, and 54% of the silver, being downward moves. While the data shows a bias to the downside, Dave doesn’t put any of the results into context, undermining I think what is a worthwhile analytical approach.

Dave’s data set includes every 1 minute period between 4pm-3am US Eastern Time from late 2009. That is an 11 hour trading window over 6 years. The number of 1 minute periods in the data set is therefore:

(52 weeks x 5 trading days) less 10 public holidays) x 11 hours x 60 minutes x 6 years  = 990,000 periods

A total of 135 gold events within 990,000 periods is 0.0136%, or 1 event per 7,333 periods. For silver it is 0.087%. That is not a lot of manipulation events and in the case of gold, Dave shows that oil, gas, wheat and corn had more events.

Dave’s other observation is that when you compare the aggregate dollar change over all manipulation events and express them as a percentage of price, gold and silver have much bigger price effects (-33% and -120%, respectively), compared to a few percent for the other contracts investigated.

However, I see two problems with this comparison. Firstly, the total dollar changes are just compared to current spot price. A $10 change on $1000 is not the same as a $10 change when the gold price was $1900. It would been more informative to have added all the percentage changes for the manipulation events so that apples were being compared to apples, in terms of price impact at the time.

Secondly, just as with the 990,000 period example, a 4% total change for Crude Oil may not be directly comparable to -33% for Gold as the normal volatility for gold and oil differ. Having a total dollar change up and down over the other  989,865 non-manipulation events would reveal the real impact these events had for the overall price change for gold and silver within the time period investigated. Given that the average gold price over the time period is well above $1150 I’d say that -33% may be overstating the case.

The other aspect of the analysis that I think can be queried is the choice of trading window, which is explained thus:

“Most goldbugs like to say that gold and silver suppression attacks occur in the “wee hours of the morning.”  Loosely translated, I take this to mean during non-US and non-London trading hours.  So that’s the time range I will use: 4pm-3am Eastern; from just after US market close through to the London market open.”

If it wasn’t for the fact that Comex and London do trade significant volumes, I’d say this was a US-centric “we are sleeping so it doesn’t matter” view. However, do not those same “goldbugs” proclaim that US and UK trading is all paper, compared to the “real” physical markets in Asia, using charts like this to prove their point:


Below is a table of the key gold trading hubs and their usual trading hours. The highlighted areas are when those countries are operating their trading exchanges.


To argue that 4pm-3am is “when activity is relatively lighter than usual” is to argue that the huge physical markets of China, India, Japan and Dubai don’t matter when it comes to gold and silver prices. By the way, Perth is in the same time zone as China, which means the 300-400 tonnes of gold we trade each year must also not matter.

From the table above you can see that all of the major Asian markets close down their overnight electronic platforms around 3pm New York. This is not coincidental, as that is when CME’s Globex is winding down. I would argue that a more realistic period during which the global precious metal markets are relatively illiquid would be from Globex close at 5pm (New York time) to 9pm when the SGE opens, and maybe 2:30am to 5:00am, between the China/Japan break and the setting of the AM London Price.

I have left a comment on the Peak Prosperity article asking Dave to re-run his program with a change to the trading window and accumulating percentage changes for all manipulation events as well as all 990,000 periods. Hopefully he will indulge. It would also be interesting to see the analysis run for the entire 24 hour window, to get an overall sense of potential manipulation events.

Oct 022015

The announcement that Switzerland’s Competition Commission has opened an investigation into some bullion banks for precious metal prices fixing created a bit of excitement in the gold blogosphere. I find it hard to get excited. Consider this recent history of precious metal manipulation investigations and lawsuits:

March 2013 – CFTC (US) “scrutinizing whether the daily setting of gold and silver prices in London is open to manipulation”
November 2013 –  Bafin (Germany) reviewing how banks participate in gold and silver price setting
December 2013 – Rosa Abrantes-Metz (US) publishes How to Keep Banks From Rigging Gold Prices in Bloomberg
December 2013 – Bafin (Germany) interviews Deutsche Bank employees as part of a probe into potential manipulation of gold and silver prices
January 2014 – The five banks that oversee the so-called London gold fixing form a steering committee to seek external advice on how the Fix process could be improved
January 2014 – Germany’s top financial regulator said possible manipulation of currency rates and prices for precious metals is worse than the Libor-rigging scandal
January 2014 – Deutsche Bank announces it will withdraw from gold and silver benchmark price setting
March 2014 – Academic Brian Lucey (UK) questions Rosa Abrantes-Metz methodology and findings
March 2014 – LBMA publishes article questioning Rosa Abrantes-Metz findings
March 2014 – Kevin Maher (US) files lawsuit accusing the five gold-fixing banks of manipulating prices over the last 10 years based on a draft study by Rosa Abrantes-Metz
March 2014 – AIS Capital Management files lawsuit against the five banks that set the London benchmark gold price, alleging that the banks conspired to manipulate the price of gold for their own gain
March 2014 – UBS reveals in its 2013 Annual Report that a review of its foreign exchange operations was widened to include its precious metals business
March 2014 – The 2nd U.S. Circuit Court of Appeals said silver investors failed to show that JPMorgan Chase & Co conspired to drive down the metal’s price
April 2014 – FCA (UK) visits Societe Generale SA to observe London fixing process
April 2014 – Over the past two months, U.S.-based investors and traders have filed nearly 20 separate antitrust claims accusing Barclays , Deutsche Bank , HSBC , Bank of Nova Scotia and Societe Generale of colluding to manipulate the gold price
April 2014 – Deutsche Bank resigns its seat on the London precious metal fixes without finding a buyer
July 2014 – FCA (UK): “no clear evidence” that banks are rigging the price of gold
July 2014 – J. Scott Nicholson (US) files lawsuit alleging that the silver fix banks manipulated the physical and COMEX futures market since January 2007
October 2014 – Lawsuits filed by investors since July over the alleged silver price-fixing were consolidated on Tuesday in the U.S. District Court for the Southern District of New York
November 2014 – FINMA (Switzerland) says found a “clear attempt” to manipulate precious metals price benchmarks during a cross-market investigation into trading at UBS
November 2014 – Modern Settings LLC sues Goldman, BASF, HSBC Holdings Plc and South Africa’s Standard Bank Group Ltd for having conspired to rig the twice-daily platinum and palladium “fixings”
January 2015 – Bafin (Germany) finds no evidence to support allegations of manipulation in the gold market
February 2015 – Justice Department (US) antitrust division scrutinizing the price-setting process for gold, silver, platinum and palladium in London
February 2015 – WEKO (Switzerland) looking into possible manipulation of price fixing in the precious metals market
May 2015 – UBS wins immunity from criminal fraud charges in a Justice Department (US) precious metals investigation
May 2015 – Barclays fined £26m by FCA (UK) for systems and controls weaknesses that allowed a trader to attempt to profit at a customer’s expense by influence the 3pm gold fixing on June 28, 2012
September 2015 – COMCO (Switzerland) opens investigation against UBS, Julius Baer, Deutsche Bank, HSBC, Barclays, Morgan Stanley and Mitsui into possible price fixing deals in respect of bid/ask spread

This is by no means an exhaustive list but note that after all that the only fine levied was a paltry £26 million on Barclays and not one successful manipulation lawsuit that I am aware of.

I doubt the COMCO investigation will find much, and it is a pretty limp claim – they did not mention actual manipulation of the price up or down, just the spread between buy and sell prices. Academic Brian Lucey found a chart of historical gold market spreads below (see his blog post for more details).

Note that if you convert this dollar spread into a percentage of the spot price it has, by my rough calculations, declined 50% from 0.12% to 0.06%. Decreasing spreads reduces a bullion bank’s profit and increases the attractiveness of gold to investors by reducing their trading costs – not sure how that is anti-competitive. While I guess one could still fine banks for conspiring to reduce costs, it is hardly the sort of manipulation smoking gun people have been looking for.

While there has been a lack of success in prosecuting bullion banks for manipulating gold and silver markets, I think Ross Norman is being a little too confident telling CNBC that “‘It is a good, clean, efficient market,’ … adding that certain banks have been investigated ‘dozens of times’ and ‘nothing untoward has been found’.”

The fact is that many of the major banks have been fined for manipulation of other markets and thus it would seem given the corporate culture these investigations have revealed that the odd are against their precious metals desks being 100% clean. Nevertheless, apart from the single Barclays case, nothing untoward has indeed been found.

I suppose the cynics would retort that maybe precious metals dealers are just a lot smarter than their LIBOR and FX mates, or that central banks don’t want regulators delving too deeply into how these markets work. It seems, frustratingly, that it is going to be a few more years before these cases work their way through the system and we get a definitive answer, one way or the other.

Sep 302015

Chris Powell of GATA took exception to my comments about the financialisation of the gold market in my post on Friday, saying that “the more that markets are ‘financialized,’ the more advantage passes to those with the greater access to financing”. I would argue that increasing financialisation increases the advantage of the average investor.

I was using the term “financialisation” in the sense of increasing use of financial instruments, like futures or ETFs. These products are another method by which investors can get exposure to gold, rather than traditional methods like buying gold over the counter and storing it at home. They are popular and have come to dominate over buy-and-hold because they reduce the cost of buying and selling and make it easier to transact. Do they introduce new risks, like exposure to promises of the parties at the other end of the contract? Yes, but then storing gold yourself is not riskless either.

Making it easier to buy, and yes, sell, gold does not give more advantage to the rich. If there were no futures markets the rich would have no problem contacting their private bankers and arranging to put $10 down and borrow the rest to control $100 worth of gold. If “only cash-on-the-barrelhead trading in gold [was] allowed” it would just limit leveraged buying (using borrowed money) and leveraged selling (using borrowed gold) to the professional players. The only advantage that would be “evaporated” would be that of the average retail investor, who would not have that ability in such a world.

Public futures markets, contracts for difference, FX platforms and so on provide easy access for retail investors to magnify their $10 into $100 of buying power. Given that retail investors have been observed to generally prefer long positions and not be comfortable shorting markets, it could be argued that increasing financialisation has been net positive for the gold market. Note also that ETFs opened up the gold market to funds who were restricted from holding physical gold by their terms.

Do such financial products make it easier to short markets? Yes, but that was always easy for the rich and professionals to do. I would also note the comment here that “numerous studies … agree that short selling is beneficial” and that “short-selling bans not only fail to achieve their intended aims, they also have adverse impacts on all market participants: reducing liquidity and increasing volatility”.

Financial gold products are just alternative tools for investing in gold. If a carpenter produces bad work, do we accept that the tools are to blame? Financial products make it easy to buy, or sell, gold. If market participants, including those with the ability to “create infinite money for futures trading purposes” as GATA claims, choose to sell gold then is that a problem with the financial tool, or the user of that tool?

I suggest the answer is to advocate, as GATA does, for transparency regarding public policy in respect of the gold market. As the BIS says, central bank autonomy requires clear objectives, balanced by transparency and accountability.

Aug 172015

Last week I explained why shortages occur and how they are generally caused by production capacity shortages. Often such shortages of retail coin products are spun by commentators into a shortage of raw gold or silver or a physical-paper disconnect and thus a sure sign that metal prices will rise.

Mike Shedlock, in his very direct style, says that “any time you see articles promoting the difference between physical gold and paper gold you are most likely reading a pile of crap”, referring to the fact that “one can get physical gold near spot rather easily” and giving the example of GoldMoney or BitGold.

Mike’s comments were in response to this article that argued that because “demand for physical metal is very high … yet, the prices of bullion in the futures market have consistently fallen during this entire period. The only possible explanation is manipulation.” Market manipulation is certainly a factor but claiming it is the only possible explanation is taking a limited view of the dynamics involved.

The authors start by claiming that “for four years the price of bullion has been falling in the futures market despite rising demand for possession of the physical metal”. As proof, they mention prior periods of coin shortages. While there have been periods of resurgent demand, the fact is that retail bullion dealers have had a tough time since gold prices peaked and many have scaled back the size of their business. One would not see bullion dealer bankruptcies like Tulving or Bullion Direct in a market with rising demand. I’d argue that scaling back of inventories as demand waned was probably a contributing factor in the recent shortages.

The authors also ignore the rest of the gold market. Certainly Chinese demand has provided a base but Indian demand was affected during the last four years with their Government’s raising of duty levels. We have also lost the demand that came from ETFs, which has swung from a net 1,407 tonnes in the 15 quarters from Q1 2008 to Q3 2011 to minus 712 tonnes in the subsequent 15 quarters, a change of over 2,100 tonnes in the supply/demand balance.

After going over Supply & Demand Curves 101 they then argue that it is “nonsensical” to argue that “the drop in precious metals prices unleashed a surge in global demand for coins” because “price is not a determinant of demand but of quantity demanded. A lower price does not shift the demand curve. Moreover, if demand increases, price goes up, not down.”

This view ignores the feedback nature that price has upon demand. Most certainly price shifts the demand curve – people adjust their personal demand curves over time and price is one input into that. The Perth Mint has a lot of clients who bought gold at around $300 an ounce and I’m sure in 1999 if asked they probably would have agreed they’d sell when it got to $1,000. However, many did not and held on because the trend upwards in the price made them revise their perceptions of what was a fair price.

The authors also assume that gold has a normal demand curve, that is, if price goes up then quantity demanded will go down. However, as Paul Mylchreest asks in this article, maybe gold is a Giffen good, where quantity demanded goes up when the price goes up. Ted Butler makes a similar observation in this article, noting that “managed money technical traders … buying on rising prices and selling on declining prices”. Looking at a graph of retail bar & coin demand as reported by the World Gold Council versus price seems to lend weight to the Giffen good argument.


Apart from two surges, quantity demanded seems to increase, and decrease, with price. If I take the data from the chart above and plot it as price versus quantity demanded, then you get the chart below.


The red line is a line of best fit, and it certainly doesn’t look like the demand curve the authors refer to. This is by no means a proof that gold is a Giffen good, but it certainly points to the fact that gold does not neatly fit into an Economics 101 view of the world and the reality of gold investor behaviour is more complex.

The authors then seek to argue that the only other explanation of a lower price, using Supply & Demand Curves 101 theory, is that supply must have increased. They then claim that “there are no reports of any such supply increasing developments. To the contrary, the lower prices of bullion have been causing reductions in mining output as falling prices make existing operations unprofitable.”

Regarding unprofitability, an analysis of the top mining companies’ financials by Adam Hamilton notes that “the gold-mining industry’s cost structure is far lower than that $1200 number often thrown around … on a cash-cost basis, they could weather an $800-gold anomaly for many quarters”. This may be why GFMS figures show no reduction in mine production, with Q2 2015 tonnage of 786.6 up 3.1% on Q2 2014, with the chart below showing that mine production has been rising all during the “four years the price of bullion has been falling”.


The authors then refer to futures market speculators and manipulations. Certainly, gold’s low liquidity allows for manipulative events, which can affect market sentiment in the short term. However this is not enough to supress the price over the long term, or four years, where market fundamentals are the main driver.

Ultimately, the authors’ problem is with speculators, who they see as “selling naked shorts [as] a way to artificially increase the supply of bullion in the futures market where price is determined.” They get so close to the actual nub of the problem but miss it when they say that “if purchasers of these shorts stood for delivery, the Comex would fail.”

The fact is that the longs are as naked as the shorts. Both are using all their available money to fund their margin requirements so as to maximise their leverage, so the shorts don’t have the metal but the long don’t have the money. That is why delivery rates have always been so low on Comex and there is nothing to indicate that this will change. You have gamblers on one side betting the price will go up versus gamblers betting it will go down. If there is any manipulation, one could argue that it is the policy of low interest rates which encourage such excessive speculative behaviour.

The authors conclude that a “rational speculator faced with strong demand for bullion and constrained supply would not short the market” but as I’ve shown above, demand has been weak and supply has been rising. That is not to say that the short speculators are entirely rational continuing with their trade, as many have noted the market is reaching extremes on a number of measures. The nature of markets these days seems to favour trend following rather than fundamentals, which is fine until the trend changes. One thing I can be sure of is that when it does you will not see any article complaining about speculators “buying naked longs”.

Jul 292015

Yesterday Chris Powell of GATA criticised an article by Clif Droke on market manipulation. One point caught my eye, where Chris identified “an ‘ipse dixit’, an assertion made without authority” that Clif made, namely that “the market for gold is immensely huge and virtually impossible for any one entity to control its price swings … Even a coterie of interests devoted to pushing gold prices lower would meet with certain failure due to the enormous size and complexity of the market.”

It is one thing for Clif to claim that one entity could not control the gold market, but it strikes me as quite bold to claim a “devoted coterie” could not do it. To assess Clif’s claim we need factual examples of gold market liquidity so that we can “assert with authority” and solve this ipse dixit problem. Being the gold nerd that I am, over the past few years I have accumulated a number of statements about actual gold market liquidity (primarily because I’ve been annoyed with trite statements about how gold is “highly liquid” without any quantification) and thankfully now I have a use for them.

My simplistic understanding of “liquidity” is how much gold one can trade without affecting the market price. Below are some quotes that refer to actual trade sizes by people in the industry and their effect on price, both approximate and quantified.

  • Me, Feb 2012: “One could execute up to a tonne in one lot with a bullion bank at spot. … If someone was silly enough to ask a bullion bank to commit to a price for a 10 tonne lot, then from what I have been able to establish, the bank would adjust their spot price by around $10.”
  • Edel Tully, Nov 2012: “Brazil’s holdings expanded 17.2 tons last month … This is a chunky purchase … and was one of the key factors that gave prices a reasonable floor last month”
  • Mark Dow, June 2013: “Buying $300mm [7 tonnes] of gold can move the market up by less than a percent [$12 an ounce] in a normal market. But when sentiment for gold turns adverse, selling $300mm can drive it down, say, 2-3%.”
  • CNBC, Oct 2013: “Gold lost $25 in two minutes … a single sell order could be the culprit. It appears to have been an order to sell 5,000 gold futures contracts [15 tonnes] at market, Eric Hunsader of Nanex told”
  • ICE Benchmark Administration, Gold Auction Specifications: “Maximum Order Size 100,000 oz [3 tonnes] … This is a simple fat finger test designed to prevent the accidental input of large orders. In the event a user wishes to place an order greater than the maximum size they have the option to break the order down into smaller chunks”
  • Reuters, May 2015: “each interbank call would ‘shift orders of 50,000 ounces [1.5 tonnes] a time’, providing significant liquidity flows … Customers with smaller volumes are probably getting tighter spreads and better prices … but when somebody has size to do, especially with algos out there, it can hit pockets of illiquidity and cause spikes or flash crashes”
  •, May 2015: “if you want to transact in a decent size, which used to be 100,000 [3 tonnes] to 200,000 [6 tonnes] ounces. That has become harder to get away with without influencing the price unduly”
  • Me, Jul 2015: Gold drops $48 on 22 tonnes.

My takeaway from the above is that one can deal a couple of tonnes without affecting the gold price much – a bullion bank may widen the spread by tens of cents. However, once you get above 5 tonnes you will affect the price. From the quotes we get these figures:

  • $12 with 7t = $1.70 per tonne
  • $10 with 10t = $1.00 per tonne
  • $25 with 15t = $1.66 per tonne
  • $48 with 22t = $2.18 per tonne

What is 20 tonnes worth? At $1,100 per ounce it equals $700 million. Yes that is a lot, but there is a lot of money out there – for example, see this post where I calculated that if just “four groups decided to use only 2% of the $281.7 billion they manage to short gold. That would total 145 tonnes of gold”. Or consider what Ray Dalio said in this Sep 2012 interview “the capacity of moving money into gold in a large number is extremely limited … So the players in the world that … I have contact with, who are — who’ve got money — really don’t view gold as an effective alternative”.

That last quote is probably the best counter to Clif’s claim: the reason Ray Dalio and the coterie of players he has contact with don’t view gold as an effective alternative is because they would move the price, a lot.

Some may argue that such manipulations only affect the price in the short term and the price would recover as the manipulator buys back their position. True, if one wanted to cover themselves within the same day. But consider the July 20th price smash – yes the price has recovered, but it is still $30 below where it was before the selling. If the 22 tonnes was one person they could have bought back their position by now by buying only 3 tonnes a day, which as we have established above, would not move the price.

Chris argues that “is the gold market or any market really bigger than institutions that are fully empowered to create infinite money — central banks?” I would say the quotes above show that one hardly needs infinite money, as the gold market does not have the legendary but vague liquidity that many have claimed it has.