Naked Gold Shorts: The Inside Story of Gold Price Manipulation
The
deregulation of the financial system during the Clinton and George W.
Bush regimes had the predictable result: financial concentration and
reckless behavior. A handful of banks grew so large that financial
authorities declared them “too big to fail.” Removed from market
discipline, the banks became wards of the government requiring massive
creation of new money by the Federal Reserve in order to support through
the policy of Quantitative Easing the prices of financial instruments
on the banks’ balance sheets and in order to finance at low interest
rates trillion dollar federal budget deficits associated with the long
recession caused by the financial crisis.
The
Fed’s policy of monetizing one trillion dollars of bonds annually put
pressure on the US dollar, the value of which declined in terms of gold.
When gold hit $1,900 per ounce in 2011, the Federal Reserve realized
that $2,000 per ounce could have a psychological impact that would
spread into the dollar’s exchange rate with other currencies, resulting
in a run on the dollar as both foreign and domestic holders sold dollars
to avoid the fall in value. Once this realization hit, the manipulation
of the gold price moved beyond central bank leasing of gold to bullion
dealers in order to create an artificial market supply to absorb demand
that otherwise would have pushed gold prices higher.
The manipulation
consists of the Fed using bullion banks as its agents to sell naked gold
shorts in the New York Comex futures market. Short selling drives down
the gold price, triggers stop-loss orders and margin calls, and scares
participants out of the gold trusts. The bullion banks purchase the
deserted shares and present them to the trusts for redemption in
bullion. The bullion can then be sold in the London physical gold
market, where the sales both ratify the lower price that short-selling
achieved on the Comex floor and provide a supply of bullion to meet
Asian demands for physical gold as opposed to paper claims on gold.
The
evidence of gold price manipulation is clear. In this article we
present evidence and describe the process. We conclude that ability to
manipulate the gold price is disappearing as physical gold moves from
New York and London to Asia, leaving the West with paper claims to gold
that greatly exceed the available supply.
The
primary venue of the Fed’s manipulation activity is the New York Comex
exchange, where the world trades gold futures. Each gold futures
contract represents one gold 100 ounce bar. The Comex is referred to as
a paper gold exchange because of the use of these futures contracts.
Although several large global banks are trading members of the Comex, JP
Morgan, HSBC and Bank Nova Scotia conduct the majority of the trading
volume. Trading of gold (and silver) futures occurs in an auction-style
market on the floor of the Comex daily from 8:20 a.m. to 1:30 p.m. New
York time. Comex futures trading also occurs on what is known as
Globex. Globex is a computerized trading system used for derivatives,
currency and futures contracts. It operates continuously except on
weekends. Anyone anywhere in the world with access to a computer-based
futures trading platform has access to the Globex system.
In
addition to the Comex, the Fed also engages in manipulating the price
of gold on the far bigger–in terms of total dollar value of
trading–London gold market. This market is called the LBMA (London
Bullion Marketing Association) market. It is comprised of several large
banks who are LMBA market makers known as “bullion banks” (Barclays,
Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorganChase,
Merrill Lynch/Bank of America, Mitsui, Societe Generale, Bank of Nova
Scotia and UBS). Whereas the Comex is a “paper gold” exchange, the LBMA
is the nexus of global physical gold trading and has been for
centuries. When large buyers like Central Banks, big investment funds
or wealthy private investors want to buy or sell a large amount of
physical gold, they do this on the LBMA market.
The
Fed’s gold manipulation operation involves exerting forceful downward
pressure on the price of gold by selling a massive amount of Comex gold
futures, which are dropped like bombs either on the Comex floor during
NY trading hours or via the Globex system. A recent example of this
occurred on Monday, January 6, 2014. After rallying over $15 in the
Asian and European markets, the price of gold suddenly plunged $35 at
10:14 a.m. In a space of less than 60 seconds, more than 12,000
contracts traded – equal to more than 10% of the day’s entire volume
during the 23 hour trading period in which which gold futures trade.
There was no apparent news or market event that would have triggered the
sudden massive increase in Comex futures selling which caused the
sudden steep drop in the price of gold. At the same time, no other
securities market (other than silver) experienced any unusual price or
volume movement. 12,000 contracts represents 1.2 million ounces of
gold, an amount that exceeds by a factor of three the total amount of
gold in Comex vaults that could be delivered to the buyers of these
contracts.