Facts Behind Gold's Concentration

By Brad Zigler

Real-time Monetary Inflation (last 12 months): 4.5%

A certain number of market observers have long believed that the gold futures market has been manipulated downward by a cabal of U.S. banks. Their contentions have been based upon data published by the Commodity Futures Trading Commission showing a small number of domestic financial institutions holding lopsided short exposure. This has been taken as prima facie evidence of the banks' attempt to cap the metal's price.

We've looked into this issue more than once at Hard Assets Investor, starting with "Has Gold Been Manipulated?", followed up with "Gold Manipulation Redux" and rounded out with "More On Gold Manipulation."

Despite gold's climb to record nominal price highs, the notion of bank manipulation hasn't yet died. Yesterday's column, "Gold: A Bubble Brewing," which examined the recent outsized influence of money managers in gold's advance, elicited responses from more than one subscriber to the bank manipulation theory.

One reader's retort: "The record short positions held by the relatively few players of [sic] the bullion banks is key, in their effort to cap the price of gold and keep the price from breaking out. They are having a difficult time of it because of the Chinese position of buying any dips."

Sigh. "Keep the price from breaking out"? But, it did break out! Was it because the Chinese were buyers? Not unless they were trading in U.S. gold futures.

Here's the scoop, people. The single largest trading block in the U.S. gold futures market, measured by net open interest, isn't made up of banks. It's, instead, an amalgam of commodity trading advisers and other large fund-runners.

Here's a bigger news flash: These money managers are long. Very long. Fully 99 percent of their exposure is long. They're buyers. Big buyers.

Who's big on the short side? Commercial producers and users of gold. Net exposure for these traders, however, isn't as lopsided as the money managers' stake. About 70 percent of the exposure maintained by commercial traders is short.

Swap-dealing banks are also net short. Though their concentration is heavier - 83 percent of their exposure is short - their position size is only half that of commercial accounts.

It seems to me that any notion of overconcentration most appropriately applies to fund-runners, not banks.

Anybody wanna argue otherwise?

Comments

[kohalakid]

Of course they will still argue!!

When gold goes down it's all a manipulation. When gold goes up it's all the beginning of the "big move".

It's just so much easier to believe in a conspiracy that to do the actual work involved in understanding how the markets operate and who the players are.

Those who have done their homework, like Brad Zigler, and watch metal flows and know the market fundamentals, have an understanding that there is nobody, including the Fed, who is bigger than the market itself. The large players may be able to influence, and push prices around on a short term basis, but the fundamentals will win out over the medium to long term.

2009 Oct 27 04:53 PM

[Mad Hedge Fund Trader]

nvs The gold rush is back on in California. On my way back from Lake Tahoe last weekend I saw that every bend of the American river was dotted with hopeful miners, looking to make a windfall fortune. Weekend hobbyists were there panning away from the banks, while the hardcore pros stood in hip waders balancing portable pumps on truck inner tubes, pouring sand into sluice boxes. A sharp eyed veteran can take in $2,000 worth of gold dust a day. The new 2009’ers were driven by a record price of gold at $1,066 and the attendant headlines, but also by unemployment, and recent heavy rains that flushes new quantities of the yellow metal out of the Sierras. They were also no doubt inspired by the chance discovery of an 8.7 ounce nugget in May near Bakersfield, worth an impressive $9,200. Local folklore says that only 20% of the Sierra’s gold has been found, and the remaining 80% is still up there awaiting discovery. Out of work construction workers are taking their heavy equipment up to the mountains and using it to reopen mines that have been abandoned since the 19th century. The US Bureau of Land Management says that mining permits in the Golden State this year have shot up from 15,606 to 23,974. Unfortunately the big money here is being made by the sellers of supplies and services to the new miners, much as Levi Strauss and Wells Fargo did in the original 1849 gold rush.

2009 Oct 27 05:18 PM

[yellowhoard]

If you can make $2000 per day, I think your blue jean budget is pretty insignificant.

2009 Oct 27 05:41 PM

[kohalakid]

Two corrections to the Mad Hedge Funds post.

First, placer or nugget gold is not .9999 fine. Most averages 70-85% pure so a 8.7 oz nugget doesn't contain $9200 in gold.

Second, large sized nuggets usually bring a fairly nice premium so a 8.7 oz nugget containing $7000 in gold would probably fetch a 50-100% premium.

2009 Oct 27 06:30 PM

[Tom Szabo]

It's more like $2000 a MONTH for talented placer miners with ton-per-day-capacity equipment on good claims. You can't make diddly squat on any bend of the American River accessible to the general public. Also, it wasn't mining permits issued but number of unpatented claims. Still a big rise but most of it is on land that has no mineral potential. The BLM isn't complaining as it's a nice little source of revenue. The only other people making money are those locating claims or selling them to the gullible public. Tourism is generally down in the Sierra foothills as it is elsewhere so shop, restaurant and motel operators aren't raking in the dough by any means for the 49'er wannabes.

2009 Oct 27 06:33 PM

[HA65MPH]

Living in shouting distance of the yuba , american rivers and all smaller outlets ...you are correct about fineness of placer gold ...and the smaller towns , grass valley , nevada city , auburn ,,that used to be great for get aways , those related stores and services are begging for tourists...jobs up here are suffering , like any big- small towns ...we need jobs-jobs-jobs ......with this 'bunch in the white house , house of 'hoe`s , senate, .....good luck ...we are SCREWED !

2009 Oct 27 07:06 PM

[helios]

Have a look at

2009 Oct 28 08:56 PM