"Cannon to right of them, cannon to left of them," wrote Tennyson of the ill-fated British Light Brigade's foray in the Crimean War. Sometimes gold investors and market commentators can feel equally shell-shocked by competing manipulation theories.
Yes, now you have a choice between conspiracies.
Readers of these pages are no doubt familiar with one theory already. We've gone several rounds with those who believe that banks are acting in collusion with the federal government to suppress the price of precious metals (see, for example, "Has Gold Been Manipulated?", "Gold Manipulation Redux" and "More On Gold Manipulation").
We're now being treated to the breathless claims of others who believe those very same banks are manipulating the price of gold and silver upward.
Peter Krauth, the editor of Global Resource Alert, a commodity-oriented newsletter published by an arm of Agora Inc., is promoting this notion while he trolls for new subscribers.
The basis for Krauth's contention lies in the quarterly reports filed by financial holding companies with federal banking regulators. Krauth's holy grail is the Form FR Y-9C, an analytical tool used to monitor financial institutions between on-site inspections. The manipulation smoking gun, says Krauth, is found in the summary of the banks' off-balance-sheet items.
By poring over the Y-9C forms filed by Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM) et al., Krauth claims to have tracked the movement of $4.68 trillion into the commodity sector in what he describes as the "the biggest bank manipulation in generations."
That's essentially the same argument used by advocates of the precious metals price suppression scheme, except for Krauth's assumption of long positions. (In contrast, the suppressionistas point to the banks' lopsided short positions in precious metals futures as evidence of the institutions' desire to drive prices down.)
Krauth backs up his argument by pointing to the banks' forecasts. He says:
In its 2010 forecast, Goldman Sachs called for gold prices to spike to $1350 and up to $1425 an ounce by 2011. That price should be easily attainable considering they're buying up gold. According to reports from the COMEX, Goldman Sachs and JPMorgan have begun taking delivery of thousands of ounces of physical gold, instead of settling their futures contracts in cash.
Now, that's odd, considering that COMEX gold warehouse stocks have actually been building on a net basis this year, not declining.
But let's get back to that form. If you're looking at the derivatives entries on the FR Y-9C, you can't tell how much of the futures positions carried by the reporting bank is actually in gold. All commodity futures contracts are lumped together.
Worse still, contracts used to hedge trading activities aren't reported separately on the form; they're consolidated in the report's gross numbers.
And those numbers are, indeed, gross. Derivative contracts—including futures, forwards and swaps—are carried at their notional, or face, value. Short and long positions aren't netted, either. You've got to scroll down to the bottom of the form's derivatives schedule to find the relative value of the banks' derivative positions. Positions carried at positive fair value represent trading assets, while those with a negative fair value are treated as liabilities.
But when you net these numbers, you quickly see that the banks' actual exposure is really quite small compared to the notional value of the positions. In other words, these financial institutions are more or less fully hedged.
All this hardly gives an impression of manipulation (in either direction, really)— certainly not like the corners attempted by Jim Fisk or the Hunt brothers — parallels drawn by Krauth.
Neither are all of the money-center institutions growing their commodity exposure. If you look at the year-over-year changes in the notional value of commodity contracts on the books of HSBC USA Bank (HBC) — one of the largest traders of commodities — you'll see they've actually declined over the past three years.
The lesson to be learned here is a simple one: Before subscribing to anything — a commodity newsletter or a manipulation theory — a little independent investigation can keep you from becoming cannon fodder.
Disclosure: No positions