Gold Manipulation Redux

By Brad Zigler

We at HardAssetsInvestor.com (HardAssetsInvestor.com) often hear the volume level rise precipitously in the conversation whenever the words "gold" and "manipulation" are strung together in the same sentence.

So it was no surprise that the recent publication of "Has Gold Been Manipulated?" excited the chattering classes. The article questioned an assertion made by newsletter publisher Ted Butler, among others, that short gold and silver futures positions held by U.S. commercial banks are artificially depressing the metals markets.

A subsequent interview ("Bill Murphy: Manipulation Of The Gold Market") with the chairman of the Gold Anti-Trust Action Committee [GATA] also lit up the discussion boards.

The flurry of comments that followed these pieces, as well as the assertions of GATA's Mr. Murphy, plentiful though they were, still fell short of establishing the existence of a futures market manipulation.

Murphy, and a lot of commenters, were quick to point to remarks made by then-Fed chairman Alan Greenspan to a 1998 House committee acknowledging central bank proclivities to lease gold in the face of rising prices. That, they aver, is evidence of government manipulation.

Central banks have, indeed, leased gold in the past, and they're likely to continue leasing as a tool to manage their currencies. That, like it or not, is a central bank's mandate: to deploy its reserves - of foreign exchange and metal - to tweak and fiddle with the value of the legal tender.

Our original article didn't weigh in on central bank gold leasing operations. The article's focus was, instead, the futures market. Ted Butler asserted that the precious metal sell-off of 2008 was, in fact, due to a criminal manipulation by "concentrated commercial shorts" on the COMEX division of the New York Mercantile Exchange. U.S. banks, according to Butler and Murphy, hold a smoking gun - a lopsided and persistent short interest in gold and silver futures.

U.S. banks do, in fact, account for a substantial portion of COMEX open interest. That interest, too, has been pretty much entirely skewed to the short side since the Commodity Futures Trading Commission [CFTC] started reporting banks' market participation two years ago.

But is the existence of a large short position prima facie evidence of a manipulation?

For a prosecution of manipulation under the Commodity Exchange Act to succeed, monopoly or domination of the market on the part of the alleged manipulators must be proven. In addition, it must be demonstrated that the perpetrators' manipulative acts resulted in the creation of an artificial price.

Put simply, making a futures manipulation charge stick boils down to answering two questions: Would the current gold price be different if the alleged manipulation hadn't occurred? More importantly, do the banks have the actual ability to influence the price of metal?

Bank Short Interest

As a percentage of total open interest, U.S. banks' short interest has grown nearly 23% since June 2007. Over that same time, the COMEX spot price has risen almost 47%.

Figure 1: U.S. Bank Short Interest in Gold Futures

Source: CFTC, NYMX

Table 1: Bank Participation in COMEX Gold Futures

(05-Jun-07 to 02-Jun-09)

Mean Reporting Banks	Median Long Interest	Median Short Interest	Short Interest Correlation to COMEX Price	Lagged Short Interest Correlation to COMEX Price
4	0.8%	13.7%	0.9%	14.0%

If banks were attempting to manipulate the price of metal downward over the past two years, they appear to have been singularly unsuccessful. Short interest in gold futures has ranged between 1.8% of the total market (July 2008) to 31.9% (June 2009). In that time, there has been no effective correlation (<1%) between the COMEX spot price and the size of banks' short interests. To prove the theory, we'd need to see a negative correlation. That would indicate that larger short interests coincide with lower metal prices.

Lagging the interest a month behind the price - in essence, allowing the short interest a month to impact the market - actually nudges the correlation in a positive direction. In other words, a build in the banks' short interest marginally correlates with increases in the price of gold.

There's really no conclusion to make here other than that banks' short futures exert little, if any, effect upon gold's cash price. If futures were being manipulated downward, COMEX prices should trade significantly under the London cash price. The standardized basis between the London A.M. fix and the COMEX spot settlement price has averaged just 2 basis points (0.02%) over the past year. Excursions outside one standard deviation (±1.8%) are mostly attributable to market volatility in the 8½-hour gap between the London fix and COMEX settlement. Of particular interest is the recent contraction in the variance, i.e., standard deviation halved to 0.9%, at the same time banks' short bias increased (see Figure 3).

Figure 2: COMEX Gold Basis

Source: LBMA, NYMX

Concentration

Much has been made of the supposed "concentration" in the U.S. banks' precious metals futures positions. Observers have noted that a bare handful of financial institutions hold a significant portion of market open interest. Because of the lopsided way in which short interest has outweighed the banks' long positions, these observers have posited manipulative intent.

GATA's Murphy said in his HAI interview: "That concentration is far greater than any other position a bank or any other firm has. It's very abnormal to have this size of concentration for the open interest."

Ted Butler, noting that the size of bank-held short futures was 85 times the size of the institutions' long positions, remarked, "It should be obvious that if the concentrated short positions held by the very few U.S. banks in gold and silver did not exist, the price would be substantially higher."

Figure 3: Bank Gold Futures Short/Long Ratio

Source: CFTC, NYMX

Table 2: Bank Short/Long Ratio in COMEX Gold Futures

(05-Jun-07 to 02-Jun-09)

Median Short/Long Ratio	High Short/Long Ratio	Low Short/Long Ratio
18.4	338.8	0.6

However, the correlation between gold futures prices and banks' short/long ratios appears to be no different than their price-to-short interest coefficient. Price depression isn't coincidental with spikes in the banks' short/long ratio.

Butler claims that short positions as large as those of U.S. banks in the gold market are unprecedented. Not so. The short interest in Australian dollar futures held by non-U.S. banks have, over the past two years, been twice as large as the gold positions held by American institutions.

Table 3: Bank Participation in CME Australian Dollar Futures

(05-Jun-07 to 02-Jun-09)

Mean Reporting Banks	Median Long Interest	Median Short Interest	Short Interest Correlation to Interbank Cross	Lagged Short Interest Correlation to Interbank Cross
4	1.3%	28.1%	24.0%	18.6%

If a speculative intent for the banks' short Aussie dollar positions was imputed, it would appear these institutions were more successful in suppressing the currency's value than U.S. banks were in keeping gold's price in check.

Aussie short/long ratios have exhibited much greater variance than those seen in the gold market. Most notably, the high ratio for the dollar was eight times the size of gold's high ratio. Bank short/long ratios in the currency have registered over 100-to-1 for a third of the two-year CFTC reporting horizon. Gold short/long ratios, in contrast, topped the century mark only once.

Figure 4: Bank Australian Dollar Futures Short/Long Ratio

Source: CFTC, Interbank

Table 4: Bank Short/Long Ratio in CME Australian Dollar Futures

(05-Jun-07 to 02-Jun-09)

Median Short/Long Ratio	High Short/Long Ratio	Low Short/Long Ratio
14.8	2,835.9	0.0

What's The Point?

Advocates of the manipulation argument assert that banks are engaging in an inherently speculative venture. Since large short interests in gold futures seem to have little effect upon metal prices, though, one naturally has to wonder why these for-profit enterprises would engage in these transactions. After all, bank management must answer to shareholders and directors. Unproductive or, worse, unprofitable, lines of business would likely raise eyebrows in the boardroom.

No tenable scenario has been offered to explain how these institutions would actually profit from the supposed suppression of gold prices. The banks' relationship to the Federal Reserve is often posited as evidence of a collusion of some sort, but the mechanics remained unspecified.

Commercial banks do, indeed, aid the Federal Reserve in the execution of monetary policy. That is, in fact, exactly what primary dealers - money center banks that bid at each auction of Treasury paper - do.

Knowing that these dealers will provide a minimum bid for each offering of bills, notes and bonds allows the government to reliably refund at least a portion of its debt, and gives the primary banks an opportunity to obtain inventory that can be subsequently marketed to secondary financial institutions.

The bottom line is that the 16 or so banks and brokers that make up the primary market - including the dealing desks of the big gold derivatives players, HSBC Bank USA and JPMorgan Chase - undertake risk in exchange for a profit opportunity by acting as a wholesaler of government paper.

There's no clear business model put forth by advocates of the manipulation argument for banks' short gold futures dealings.

Of course, there is another plausible argument - hedging.

The speculative position limit for COMEX gold futures is 6,000 contracts. The latest CFTC report shows three U.S. banks holding an aggregated net short position in excess of 123,000 contracts. If the banks were trading a proprietary speculative strategy, they'd be collectively limited to an 18,000-contract net position. Exemptions to position limits, however, are granted for bona fide hedge transactions - that is, positions that reduce a commercial enterprise's risk arising from changes in the value of its assets or liabilities. A short futures hedge would mitigate the risk engendered by a bank's undertaking of long metals exposure through physicals, forwards and swap agreements transacted with customers. Hedging would allow the banks to become more or less indifferent to the metal's market price.

At the very least, then, 105,000 contracts, or 85% of the banks' net gold futures positioning is the likely consequence of customer business flows rather than proprietary or manipulative interests. A look at the financial institutions' call reports will confirm the size of the over-the counter gold derivatives on their books.

The hedge exemption would also explain the apparent difference in the regulatory attitude toward bank futures dealings and those of the Hunt brothers in the 1979-1980 silver market. In his HAI interview, GATA's Murphy attempted to draw a parallel between banks' futures trading and that of the infamous Texas siblings.

"They [regulators] told Nelson Bunker Hunt that his concentrated long position was not to be allowed," said Murphy, "and they forced him out. Well, why do they allow J.P. Morgan to do the same thing on the short side?"

The essential difference, of course, is intent. The Hunts attempted to corner the market by amassing long positions in physical silver and silver futures. The Hunts were engaged in a purely speculative venture; on one side of the market. There was no legitimate business risk offset by their long futures positions, and therefore no hedge exemption was warranted.

Wrapping Up

It's unlikely that the points raised here will quiet the manipulation argument. These things tend to have lives of their own.

Remember, though, that this, like the previously published article, is a challenge to the assertion of criminal activity in the futures market alleged against U.S. banks and not an apologia for the government's monetary policy.

What we can say is that, so far, there's been no evidence put forth to indicate that banks' futures market trading has risen to the level of criminal activity.

Comments

[DONE_SONZ:]

-Would the current gold price be different if the alleged manipulation hadn't occurred? More importantly, do the banks have the actual ability to influence the price of metal?-Yes for both.- one naturally has to wonder why these for-profit enterprises would engage in these transactions. After all, bank management must answer to shareholders and directors-Wouldn't that be nice.

Jul 01 08:26 AM

[Chris Powell:]

For a fairly comprehensive reply to this commentary, please visit:

www.gata.org/node/7547

Jul 01 08:40 AM

[The Geoffster:]

Gold price is among the factors the Fed looks at in determining inflation expectations. Many commentators believe that inflation is deliberately under reported. Suppressing the price of gold would further such a policy of currency protection.

Jul 01 09:11 AM

[one eye:]

Why would Banks Manipulate Anything? Take last year's spike in Oil prices or this years predictions by Goldman as a Bank be considered Manipulation?

Last Year, GS had $150 oil by July. This Year its $85 by year end.
This year they have predicted Gold will rise to $1,500.

When a Company(s) gives a certain kind of Guidance which other companies reiterate, Like Morgan S. last year also, I call it Manipulation. You can call it whatever else you wish.

Jul 01 10:05 AM

[doubleguns:]

Fiat money was created and now it must be manipulated by the central banks and govts. Strong dollar, weaker dollar policys.

It is the manipulation of the fiat dollar that has created this disease. Gold price manipulation is but a symptom of the true disease which is fiat money manipulation.

Jul 01 10:41 AM

[Nathaniel C:]

Gold is the only real threat to fiat money. The Federal Reserve views gold as a competitor to is dominance over money and needs to keep the price of gold down. If gold suddently exploded to its inflation adjusted high of between 1,800-2,300, the public would start to worry about inflation and start selling dollars (along with institutions, foreign entities, etc). This could easily cause a run on the dollar. The Fed cannot let this happen.

Jul 01 02:33 PM

[whidbey:]

I know that I feel better.

But there is a will if not the way to do some manipulation. Just the existence of large positions are an inhibition to other traders (shear position sizes), but if you say there could be commercial motives for holding the positions I suppose we are just sore losers. Right?

Jul 01 05:12 PM

[GMiki1:]

I do believe what Ted Butler says--he's a great deal more knowledgeable than I and if he says the very concentration of the shorts in the silver market constitutes manipulation, I can only trust that it's true. The other thing is the amount of silver the shorts claim to hold--no way in hell do they hold that much.

Goldman had its best year ever last year--how interesting. Amid the utter chaos and trillions of dollars of losses by smaller investors. It's almost as if they knew someone at Treasury. And sometimes I think that J. P. Morgan might be the primary shareholder at the Fed. But, no. I'm simply a conspiracy theorist. Surely the Fed is an agency at work for the U.S. citizens. Say what I'm thinking ain't so, Joe.

Jul 01 06:40 PM

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Jul 02 04:40 AM

[nonedare:]

This paragraph is so stupid and illogical I read no further.
"If banks were attempting to manipulate the price of metal downward over the past two years, they appear to have been singularly unsuccessful. Short interest in gold futures has ranged between 1.8% of the total market (July 2008) to 31.9% (June 2009). In that time, there has been no effective correlation (<1%) between the COMEX spot price and the size of banks' short interests. To prove the theory, we'd need to see a negative correlation. That would indicate that larger short interests coincide with lower metal prices."
The shorts could have kept the price of gold from moving up as much as it "would have" which would not be shown in such a simplistic comparison as "gold went up as shorts went up, therefore no correlation."
Such lack of basic logic immediately destroys the article credibility.

Jul 02 09:39 AM

[SisyphusStone:]

C'mon Guys, isn't there a lone voice in support of Brad and HAI???

.... of course GS et al are manipulating - and profiting as a result - left, right and centre: it's a wonder they've not got acute 'fiddler's elbow'!

Just because GATA are being blocked from obtaining the evidence through FOI requests, doesn't mean that the crime hasn't been committed, or am I naive and the world is in fact flat and no jury ever convicts on overwhelming circumstancial evidence?

Take heart, revenge is a dish best served cold.....

Jul 02 01:21 PM

[kohalakid:]

If a bank takes a speculative position, they are put in the same category as a hedge fund---Non-Commerial Trader for CFTC position reporting.

But the huge open interest that everyone complains about is in the Commercial Trader position, which means it's hedging. If you don't believe me, go to the CFTC website and see. So how can a position, if it is part of a hedge transaction, be part of a speculation on the part of the big bank.

Sorry, fellahs....

This article tells it like it is.

Jul 02 03:41 PM

[kohalakid:]

I can't figure out how the manipulation crowd says the banks have been making SSOOOOOO much money by shorting gold for the last ten years as the gold price has gone from 252 to over 1000.

That doesn't sound like a winning short to me.



On Jul 02 01:21 PM SisyphusStone wrote:

> C'mon Guys, isn't there a lone voice in support of Brad and HAI???
>
>
> .... of course GS et al are manipulating - and profiting as a result
> - left, right and centre: it's a wonder they've not got acute 'fiddler's
> elbow'!
>
> Just because GATA are being blocked from obtaining the evidence through
> FOI requests, doesn't mean that the crime hasn't been committed,
> or am I naive and the world is in fact flat and no jury ever convicts
> on overwhelming circumstancial evidence?
>
> Take heart, revenge is a dish best served cold.....

Jul 02 04:09 PM

[msgtb:]

If GOLD wasn't manipulated it would be $10,000 and ounce and people would be using it for currency. The manipulation is to keep people from finding out the true value of GOLD and how they are being shafted by the Fiat currencies. What the governments fear most is for the world to go back to the GOLD Standard. Which protects the common man at the expense of the world order governments. We may not be able to prove it but it is clearly happening. People of the world unite and make the governments to go back to the gold standard or at least some percentage in GOLD. Paper is only good to start a fire with.

Good luck and good trading

Dave

Jul 02 04:55 PM

[HBWOW:]

Does the banking regulations and legal authority cover shorting /gambling in the gold/silver market? Aren't the banks supposed to be in the business of lending, cash handling for depositors, and public affairs?
But wait, these same people were the ones that heavily gambled with
stockholder and depositors' funds on highly risky derivative products.
Banking needs to revert to "real banking" not part banking, part casino.
The culprits still are in house and in charge, simply amazing.

Jul 02 04:56 PM

[kohalakid:]

Well, if the dollar's value has fallen 95% since the implementation of the Federal Reserve System and gold WAS money and worth $20.67 per ounce before then, then gold's true purchasing power now should be around $400 per ounce. I'm not sure how you figure it should be $10,000 but I guess you are, like me, long a lot of gold.
That's good.
But you also need reasonable expectations of it's value and potential.


On Jul 02 04:55 PM msgtb wrote:

> If GOLD wasn't manipulated it would be $10,000 and ounce and people
> would be using it for currency. The manipulation is to keep people
> from finding out the true value of GOLD and how they are being shafted
> by the Fiat currencies. What the governments fear most is for the
> world to go back to the GOLD Standard. Which protects the common
> man at the expense of the world order governments. We may not be
> able to prove it but it is clearly happening. People of the world
> unite and make the governments to go back to the gold standard or
> at least some percentage in GOLD. Paper is only good to start a fire
> with.
>
> Good luck and good trading
>
> Dave

Jul 02 05:14 PM

[buddhabill:]

Thank you for clarifying why some of the US Major banks have huge Gold short positions - as bona fide hedges.

A different article also added some interesting information with the explosion in 'Paper' gold trades vs physical gold - something like 140X contracts exist compared to physical. In this way Gold already IS money: the hedging is a way of securing value, the paper contracts are a way of exchanging value measured in dollars in a relative sense.

Jul 02 07:28 PM

[Plebian:]

July 2, per Bloomberg, 6 banks in Illinois and 1 in Texas have been shut down by regulators...they were seized by regulators as the deepening financial crisis pushed the toll of failed US banks this year to 52... This is the most since 1992!

Time to buy real silver and gold...

(The real 'manipulation' of silver and gold began when the US first went off of the silver standard, then off of the gold standard... substituting fiat money instead... the rest WILL be history).

Jul 02 09:31 PM

[Spartacuss:]

And then there were those blind men who were challenged to describle the elephant by groping.

Obviously, something is suppressing the price of gold, or at least maintaining a range peculiarity.

Notwithstanding seasonal effects, gold is for some reason not showing that investors are inclined to beleive that gold is the answer.

I tend towards conservatism. As the markets consolidate and losses acrue, people turn to traditional hedges and savings to protect. Here we see that in shoring up, so to speak, I beleive that people are not on average able to think outside the dollar. I do not beleive the average investor sees gold in terms of a hedge. See that always and everywhere we see the mantra to hold 5 to 10 percent in gold and silver. Why this figure?

Certainly if we knew or even suspected, really, that the metal prices were about to explode, we would want on board significantly.

In short the metal markets are small compared to markets in general and constitute a cadre of beleivers who want to have some gold in the closet to cozy up to like ammunition for those guns every one seems to be buying these days.

In short, I think right now, people are very confused and having been stung a little in this meltdown are looking for a way out of the forest. Me being one of them. Yes I hold the metals and will continue to hold as a sort of court of last resort thing. However, I still puzzle over how I can cart a gold coin to the market and buy something with it.

But then it is sort of 'any port in a storm' mentality as we face a very dicey future as the 'green shoots' appear to be withering.

The dollar, short term, still seems to be relatively strong, does anyone want to posit when and why this might change? As long as we are continuing the deleveraging I think the dollar will not budge.

But, then, hell, have some gold just in case we become another Zimbabwe.

Jul 03 07:23 AM

[H. T. Love:]

Don't forget that GS stated $300 oil was likely last year.

HardToLove


On Jul 01 10:05 AM one eye wrote:

> Why would Banks Manipulate Anything? Take last year's spike in Oil
> prices or this years predictions by Goldman as a Bank be considered
> Manipulation?
>
> Last Year, GS had $150 oil by July. This Year its $85 by year end.
>
> This year they have predicted Gold will rise to $1,500.
>
> When a Company(s) gives a certain kind of Guidance which other companies
> reiterate, Like Morgan S. last year also, I call it Manipulation.
> You can call it whatever else you wish.

Jul 03 01:18 PM

[kohalakid:]

As a wholesale metal trader for 35 years, I've seen a huge change in the precious metals markets. The widely available means of taking long or short positions in foreign currencies or stock index futures or foreign bond funds...you name it...there are now 1001 ways to hedge against a falling dollar. Gold is one option. Short dollar index another. Since even in Zimbabwe they have kept right on using paper currency, I don't see the day when my local grocer takes Krugerrands. So while owning physical metals appeals to many people, I think the majority, right or wrong, feel perfectly comfortable using other financial instruments to execute their hedges against the dollar.

But 30 years ago, I think there would have been much greater demand for physical product.

On Jul 03 07:23 AM Spartacuss wrote:

> And then there were those blind men who were challenged to describle
> the elephant by groping.
>
> Obviously, something is suppressing the price of gold, or at least
> maintaining a range peculiarity.
>
> Notwithstanding seasonal effects, gold is for some reason not showing
> that investors are inclined to beleive that gold is the answer.<br/>
>
> I tend towards conservatism. As the markets consolidate and losses
> acrue, people turn to traditional hedges and savings to protect.
> Here we see that in shoring up, so to speak, I beleive that people
> are not on average able to think outside the dollar. I do not beleive
> the average investor sees gold in terms of a hedge. See that always
> and everywhere we see the mantra to hold 5 to 10 percent in gold
> and silver. Why this figure?
>
> Certainly if we knew or even suspected, really, that the metal prices
> were about to explode, we would want on board significantly.
>
> In short the metal markets are small compared to markets in general
> and constitute a cadre of beleivers who want to have some gold in
> the closet to cozy up to like ammunition for those guns every one
> seems to be buying these days.
>
> In short, I think right now, people are very confused and having
> been stung a little in this meltdown are looking for a way out of
> the forest. Me being one of them. Yes I hold the metals and will
> continue to hold as a sort of court of last resort thing. However,
> I still puzzle over how I can cart a gold coin to the market and
> buy something with it.
>
> But then it is sort of 'any port in a storm' mentality as we face
> a very dicey future as the 'green shoots' appear to be withering.
>
>
> The dollar, short term, still seems to be relatively strong, does
> anyone want to posit when and why this might change? As long as we
> are continuing the deleveraging I think the dollar will not budge.
>
>
> But, then, hell, have some gold just in case we become another Zimbabwe.
>

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Sep 07 07:14 AM