December 17, 2019
The generalists, shills, and system apologists can continue to pretend that the fractional reserve and digital derivative pricing scheme is free, fair, and sacrosanct. For all of us who instead choose to exist and live in reality and not FantasyLand, here's an update.
First of all, and as many of you are aware, the U.S. Department of Justice is actively pursuing criminal charges against at least six former J.P. Morgan precious metals traders, including the former head of global precious metals trading, Michael Nowak. Last week, it was reported that the DoJ and CFTC are actively seeking a postponement of the "discovery phase" of the current civil cases against JPM and a few other bullion banks. I'm not a lawyer, but I don't think this is unusual, as criminal referrals often take precedent over civil cases.
The key fact is that the criminal case is ongoing, and it is being pursued under the RICO statute. Why is that potentially important? See here: https://en.wikipedia.org/wiki/Racketeer_Influenced...
And see this summary from the first link posted above:
The criminal complaint alleges that this covert price manipulation was inflicted almost dailyduring the years 2008-2015, a period which of course includes "The May Day Massacre" of silver on Sunday, May 1, 2011. But is that it? Did the price manipulation efforts of The Banks end in 2015? Of course not, and we've seen all sorts of unindicted dirty tricks in the years since.
Besides spoofing, one of the favored tools that The Banks have at their disposal is the contract issuance ability they maintain through their status as COMEX market-makers. We've written about this for years, and the most concise explanation of how The Banks use this strategy is linked here: https://www.tfmetalsreport.com/blog/8252/econ-101-silver-market-manipulation
As you likely know, the year 2019 has seen an incredible surge in the total amount of open contracts in COMEX gold. From a low of 427,589 contracts on April 29, total gold open interest has risen to ALL-TIME highs recently, with the most recent daily total showing 711,378 contracts. That's an increase of 283,789 contracts, or about 66%...all while price has rallied from $1305 to $1480, or about 13.4%.
And here's how it works...Speculators have been looking for "gold exposure" as interest rates have fallen and central banks reversed course. The Banks have created new contracts from nothing and sold them to these Speculators, taking the short side to the Specs long.
We can see the result on the weekly Commitment of Traders reports. Back at the end of April, the "Large Speculators" were NET long just 37,400 contracts, the "Commercials" were NET short about 57,400 contracts, and the total amount of open contracts stood at 440,048.
As of last week, the Large Speculators were now shown to be NET long 271,000 contracts, while the Commercials were NET short more than 302,000 with total open interest having grown to 690,000. The rise in total open interest almost equaling the rise in NET positioning of The Specs and The Commercials.
So, OK. The Specs bet that prices will go higher, and The Banks bet that prices will fall. But you must take time to consider how fraudulent and unfair this form of price discovery is.
• Specs demand futures contracts with no intention of ever taking physical delivery, and they generally purchase the contracts with borrowed funds (margin).
• Banks issue futures contracts with no intention of making delivery and have no physical metal to deliver if it is ever actually demanded.
The total amount of vaulted gold in the COMEX depositories rarely changes, and the tonnage of gold sold forward/hedged by producing miners remains low. So, for all intents and purposes, The Banks meet Spec demand for gold exposure by simply creating additional supply of contracts. Thus price discovery is not determined by factors of physical supply and demand. It is instead primarily determined by the supply and demand of the digital derivative futures contract.
The only apparent restraint on The Banks comes in the form of performance bond requirements from the CME Group, the owner of the COMEX. As total open interest surged to new all-time highs earlier this year, the CME Group amended their rulebook for the COMEX and allowed a new category of "pledged gold" to be utilized to meet these increased margin requirements. The suspected "Big Short" in COMEX gold is HSBC, and the bank was quick to utilize this new category last month. Dave Kranzler and I spent quite a bit of time dissecting and studying these developments, and you can read about our conclusions here: https://investmentresearchdynamics.com/cme-pledged-gold-did-the-comex-rescue-hsbc/
The point today is this: While it's refreshing to see the DoJ and CFTC go after the "low-hanging fruit" of daily Bank trading desk price manipulation, the larger issue remains. As we head into 2020, precious metal prices will likely move higher as investors and traders worldwide seek gold and silver in all their forms...physical metal, futures contracts, ETFs, unallocated accounts, and mining shares. However, as long as the digital derivative and fractional reserve pricing scheme exists, you can be certain that The Banks will fight the trend every step of the way, regardless of the possible financial and legal repercussions.