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Are Big Banks Using Derivatives to Suppress Bullion Prices?
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We have explained on a number of occasions how the Federal Reserves’ agents, the bullion banks (principally JPMorganChase, HSBC, and Scotia) sell uncovered shorts (“naked shorts”) on the Comex (gold futures market) in order to drive down an otherwise rising price of gold. By dumping so many uncovered short contracts into the futures market, an artificial increase in “paper gold” is created, and this increase in supply drives down the price.

This manipulation works, because the hedge funds, the main purchasers of the short contracts, do not intend to take delivery of the gold represented by the contracts, settling instead in cash. This means that the banks who sold the uncovered contracts are never at risk from their inability to cover contracts in gold. At any given time, the amount of gold represented by the paper gold contracts (“open interest’) can exceed the actual amount of physical gold available for delivery, a situation that does not occur in other futures markets.

In other words, the gold and silver futures markets are not a place where people buy and sell gold and silver. These markets are places where people speculate on price direction and where hedge funds use gold futures to hedge other bets according to the various mathematical formulas that they use. The fact that bullion prices are determined in this paper, speculative market, and not in real physical markets where people sell and acquire physical bullion, is the reason the bullion banks can drive down the price of gold and silver even though the demand for the physical metal is rising.

For example last Tuesday the US Mint announced that it was sold out of the American Eagle one ounce silver coin. It is a contradiction of the law of supply and demand that demand is high, supply is low, and the price is falling. Such an economic anomaly can only be explained by manipulation of prices in a market where supply can be created by printing paper contracts.

Obviously fraud and price manipulation is at work, but no heads roll. The Federal Reserve and US Treasury support this fraud and manipulation, because the suppression of precious metal prices protects the value and status of the US dollar as the world’s reserve currency and prevents gold and silver from fulfilling their role as the transmission mechanism that warns of developing financial and economic troubles. The suppression of the rising gold price suppresses the warning signal and permits the continuation of financial market bubbles and Washington’s ability to impose sanctions on other world powers that are disadvantaged by not being a reserve currency.

It has come to our attention that over-the-counter (OTC) derivatives also play a role in price suppression and simultaneously serve to provide long positions for the bullion banks that disguises their manipulation of prices in the futures market.

ORDER IT NOW

OTC derivatives are privately structured contracts created by the secretive large banks. They are a paper, or derivative, form of an underlying financial instrument or commodity. Little is known about them. Brooksley Born, the head of the Commodity Futures Trading Corporation (CFTC) during the Clinton regime said, correctly, they the derivatives needed to be regulated. However, Federal Reserve Chairman Alan Greenspan, Treasury Secretary and Deputy Secretary Robert Rubin and Lawrence Summers, and Securities and Exchange Commission (SEC) chairman Arthur Levitt, all de facto agents of the big banks, convinced Congress to prevent the CFTC from regulating OTC derivatives.

The absence of regulation means that information is not available that would indicate the purposes for which the banks use these derivatives. When JPMorgan was investigated for its short silver position on Comex, the bank convinced the CFTC that its short position on Comex was a hedge against a long position via OTC derivatives. In other words, JPMorgan used its OTC derivatives to shield its attack on the silver price in the futures market.

During 2015 the attack on bullion prices has intensified, driving the prices lower than they have been for years. During the first quarter of this year there was a huge upward spike in the quantity of precious metal derivatives.

If these were long positions hedging the banks’ Comex shorts, why did the price of gold and silver decline?

More evidence of manipulation comes from the continuing fall in the prices of gold and silver as set in paper future markets, although demand for the physical metals continues to rise even to the point that the US Mint has run out of silver coins to sell. Uncertainties arising from the Greek No vote increase systemic uncertainty. The normal response would be rising, not falling, bullion prices.

The circumstantial evidence is that the unregulated OTC derivatives in gold and silver are not really hedges to short positions in Comex but are themselves structured as an additional attack on precious metal prices.

If this supposition is correct, it indicates that seven years of bailing out the big banks that control the Federal Reserve and US Treasury at the expense of the US economy has threatened the US dollar to the extent that the dollar must be protected at all cost, including US regulatory tolerance of illegal activity to suppress gold and silver prices.

(Republished from PaulCraigRoberts.org by permission of author or representative)
 
• Category: Economics • Tags: Gold, Wall Street 
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  1. Realist says:

    The fact that uncovered shorts are allowed in the gold market is amazing.

    • Replies: @MarkinLA
  2. […] Are Big Banks Using Derivatives To Suppress Bullion Prices? – The Unz Review […]

  3. A retrospective look at the fate of a small nation who defied the international bankers.

    Follow the Money
    To the Shores of Tripoli

    Our old friend “Deep Throat” provided a road map to so many of the major puzzles of our era with those infamous words. “Follow the money” indeed, this time to a continent sized pile of gold. Forget the oil barons, small change. Look instead to the real players in this nasty little war.

    ” It seems that the rebels might actually be under the overall supervision of the international banking industry, rather than the oil majors”. Alexander Cockburn

    More at:
    http://noabominoidshere.blogspot.com/2011/04/follow-money.html

  4. MarkinLA says:
    @Realist

    The idea is that more liquidity makes for a more stable market.

    This nonsense about “holding the price of gold down” has been floating around for at least 20 years. There was some goldbug pushing this nonsense forever. I think he even tried to sue the Comex or the Fed over it. I used to work with a true believer and he had all this down.

    Gold has almost no real value and silver does have industrial value but its main use was in photography and that is over forever.

    When you write a contract you have to have a relatively small amount of money in your account (margin). When the price moves against you, you get a margin call if you don’t have enough. If you don’t add more money the brokerage takes you out at a big loss.

    Given that the paper market is big, there is always somebody who will sell you a contract and let you out of your position. However, suppose there isn’t. If you are short your contract date will approach and you will be required to have in a Comex vault the required amount of registered silver or gold bars so the person on the other side of your trade can take delivery. Now, since many on the other side never want delivery you will be let out at a loss but you could conceivably get squeezed like what the Hunt Brothers tried. I don’t know what happens if you don’t make delivery on time.

    • Replies: @Realist
  5. MarkinLA says:

    For example last Tuesday the US Mint announced that it was sold out of the American Eagle one ounce silver coin. It is a contradiction of the law of supply and demand that demand is high, supply is low, and the price is falling.

    If anything was truly meaningless it would have to be this. The US mint is producing Silver Eagles pretty much like all those “collectables” you see on TV. They are not minted to be put in circulation. The mint buys a large chunk of silver (probably from the Comex) and mints as many Silver eagles from that as they can and sells them at a small premium to the price of silver. Big deal this is a minuscule amount compared to all the delivered contracts on the Comex and all the transactions taking place on the spot market. The idea that this is enough to push the price of silver one way or the other is ridiculous.

    There are millions of ounces of silver and gold sitting in bullion coins and bars sitting in coin and precious metal shops all around the country and they usually charge based on a price spread around the daily spot price for silver or gold. These are either minted at private mints or they are things like Krugerrands where the only thing of value in them is the silver or gold, there is no numismatic value. You could buy a one ounce round of silver cheaper than you can buy a one ounce Silver Eagle if you really believe in silver as a protection against the coming Zombie Apocalypse.

  6. Conspiracy theorists and doom mongers who spread themselves outside their areas of competence quickly undermine their general credibility. As MarkinLA has shown Roberts is no expert.

    As a private investor and derivatives trader I found good reason in aspects of tax law that I sniffed out to take advantage of OTC options provided by a Goldman Sachs affiliate or subsidiary. It was pretty obvious that they would be useful too for executives with options that they were meant to hold for a number of years but wanted a way round it. Nothing necessarily illegal in that.

    It makes logical sense that the US Treasury and Fed might wish to damage anything which some big investors might conceive of as competition for the $US and that one way of doing that might sometimes be the driving or holding down of the gold price. Short selling would tend to have that effect though at some risk to even the big short sellers as memory of George Soros great coup in the opposite direction to the Bank of England should serve to remind people.

    The shock horror at uncovered shorts is misconceived. Like selling a futures contract on the S&P 500 on 5 or 10 per cent margin the contract is only ever going to be cashed out (or rolled). To complain about the uncovered short in gold is a bit like complaining about bookmakers giving credit.

    I hadn’t heard this old gold bug’s complaint before. It might reflect a small element of truth but it could only be a short term, maybe occasional opportunistic, venture to warn off the big gold bugs (small Gulf States?). After all if it was a persistent strategy just think how the really big players who understood the US strategy could punish even a big Wall Street bank.

    • Replies: @Realist
  7. Realist says:
    @MarkinLA

    “The idea is that more liquidity makes for a more stable market.”

    That has been the excuse for all the market manipulation bullshit over the years. “Like we must have instantaneous computer driven stock trades.’ These are so called market products designed to make those in power rich.

    “When you write a contract you have to have a relatively small amount of money in your account (margin). When the price moves against you, you get a margin call if you don’t have enough. If you don’t add more money the brokerage takes you out at a big loss.”

    Gee thanks for the market tutorial . But we are talking about naked short selling.

    “Gold has almost no real value and silver does have industrial value but its main use was in photography and that is over forever.”

    As opposed to turning on the ‘printing presses’ and producing ‘paper money’ with no backing or intrinsic value?

    If you read the article you would know that the point is to price gold on the demand and supply for real gold, not paper contracts for gold.

    Naked short selling in the stock market is illegal! It should be illegal in precious metals also.

    • Replies: @MarkinLA
  8. Realist says:
    @Wizard of Oz

    Why is naked short selling OK in precious metals but not the stock market?

  9. MarkinLA says:
    @Realist

    You seem to misunderstand what the futures markets are. You agree to deliver a commodity at a future date for an agreed upon price today. Somebody else agrees to buy it from you and have it delivered then. Some times the commodity already exists – registered gold and silver bars in a Comex vault. Sometimes it is being produced because a lot of it has been consumed. Wheat that the flour company bought but the farmer still has to grow it.

    Naked short selling in the stock market means that you did not really borrow the shares you shorted. The market makers do this all the time and are allowed to to make a market, individuals no. Many people think short selling of stocks in general should not be allowed. Why should the brokerage be allowed to lend out your shares to somebody who is betting on the price going down so that the brokerage can make more money? That is the trade-off when you put your shares into a brokerage for easy tradability and they are now technically in the broker’s name.

    In the futures market you might be a gold miner. Your mine is producing 1000 ounces a month. You write contracts for future delivery to take advantage of the price differences between the spot market and to ensure you have a buyer for your gold at a reasonable price. You know 9 months out that you will be able to service ten 100 once Comex contracts. You make a decision to sell it now or wait for it to be in your hands and sell it on the spot market. It just gives producers and consumers some more flexibility.

    The jeweler has bought one of those contracts because he knows in 9 months that he will use that that gold in his business. He doesn’t have to worry about a price rise or possibly buying it now and storing it at his business (a lot of jewelry gold and silver is purchased in smaller lots from big distributors that buy those Comex contracts, at least according to a guy who told me he could buy silver shavings from the 1000 oz bars the Comex uses at a small premium to the spot price).

    I( think PCR is using the wrong terminology to call it naked short selling. He is trying to make a distinction between people speculating on the price movement and actual producers and consumers of the commodity. A producer can also be caught naked as well – the gold miner may only have produced 900 ounces of gold during a month when he wrote 10 contracts. Is he a naked short seller? A speculator can also take delivery and store the bars in the Comex vaults and pay a storage fee so that later he can write a contract against it.

    • Replies: @Realist
  10. Realist says:
    @MarkinLA

    “The market makers do this all the time and are allowed to to make a market, individuals no.”

    That is bullshit. On September 17, 2008, the SEC issued new rules that market makers are no longer given an exception.

    It appears you seem to misunderstand what the rules for naked short selling are.

    • Replies: @MarkinLA
  11. MarkinLA says:
    @Realist

    Well I haven’t been trading since 2007 and haven’t paid any attention since then. Now that everything is done electronically and there are no floor traders like there used to be on the NYSE floor there probably is no need. However, there are still calls by people who think their great stock going down is some nefarious plan by naked short sellers that I assumed it was still going on.

  12. Realist says:

    “However, there are still calls by people who think their great stock going down is some nefarious plan by naked short sellers that I assumed it was still going on.”

    Yes, but it is illegal, as it should be.

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