From examining the roll data of gold futures I have found no evidence of gold price suppression. One of the most discussed subjects in the gold space is long-term gold price suppression on the COMEX futures market in New York. It’s an interesting theory because we know that in the past the United States has been active in “stabilizing” the gold price to make to dollar look stronger. But that was done openly in the 1960s and 1970s by selling physical gold. Is any entity still suppressing the gold price, and does it use the futures market?
A lot of the 'noise' from those that think gold is suppressed is that they do not understand why the bullion banks have short futures positions.
Gold leasing books are now (mostly) funded by balance sheet (cash) as central bank lending reduced significantly in recent years as the yield crashed so the risk/reward was no longer there.
To fund gold leasing where the bullion banks lend metal to customers, which add up to significant volumes, they buy OTC gold (loco London for instance) and cover this position by selling futures. The banks are square, they have no significant short (or long for that matter) as is constantly claimed by some. As this short position reaches expiry they need to roll it as they remain long the OTC for the leasing book. Clean and simple.
This was evidenced last year when the pandemic lockdowns initially hit the EFP market where the difference between the London OTC market and the COMEX futures widened to levels never thought imaginable. This was because whilst the banks were long the London effectively, they were short the COMEX, and the global stoppage in transportation put those shorts in position whereby, even if they wanted to, they could not deliver metal to New York. Market participants knew this and offers dried up faster than a puddle in the Sahara. Mark to Market 'losses' on the books for some bullion banks that first week as a result were quite daunting with some closing them out. Others knew this would be temporary and held on to see this 'loss' evaporate. The less educated in the market initially claimed this was a flight to quality (of the COMEX gold) but failed to understand that it was a lack of liquidity that caused this as those that could offer knew they could just sit back potentially and cash in as those that capitulated realized their losses.
The problem we have is that there are too many experts, and that is a loose use of that term, that seem to only see the COMEX gold contract as the price of gold alone, and not understand the whole eco-system of gold. The price of gold is interlinked between the Comex, the OTC market and all the other places like the Indian physical market, the Shanghai gold exchange and central banks activity for it to be manipulated by just one of the cogs in that wheel.
Tin-foil hats off, reality googles on for some I think.
I would be most grateful if you could answer GATA's points below:
That is, the data does not show whether governments and central banks are selling gold contracts through brokers on the exchange.
If governments and central banks are selling gold futures, then gold price suppression is indeed government policy -- and there is much evidence that they are. For example:
1) At a hearing in U.S. District Court in Boston in November 2001 on GATA consultant Reg Howe's gold price manipulation lawsuit against the U.S. Treasury Department, Federal Reserve, Bank for International Settlements, and bullion banks that trade gold on the Comex, an assistant U.S. attorney declared that the U.S. government has the authority, under the Gold Reserve Act of 1934 and related statutes, to act on the gold price exactly as Howe's lawsuit complained:
2) Through its Central Bank Incentive Program, the operator of the New York Commodities Exchange, CME Group, gives governments and central banks special volume discounts for trading all futures contracts sold on the exchange, including gold contracts:
Such trading must be conducted through brokers approved by the exchange, which would provide camouflage for official interventions.
Would CME Group offer the discount program if it was never being used by governments and central banks?
3) The U.S. Commodity Futures Trading Commission, which regulates the New York Commodities Exchange, repeatedly has refused to say, even for a member of Congress, whether the commission has jurisdiction over manipulative futures trading undertaken by or at the behest of the U.S. government:
The commission's refusal to answer such a simple question about its jurisdiction is effectively confirmation that the U.S. government indeed is meddling in the gold futures market to defend the dollar and U.S. interest rates.
Analysis of futures market trading data doesn't tell much unless you also know the identities of the parties behind that trading. If governments and central banks are doing a big part of the selling in gold futures via intermediary brokers, the trading data alone won't reveal it. So Nieuwenhuijs' analysis here really doesn't address the price suppression issue. He's looking in the wrong place.
I think you misunderstand the driving forces around future expiry. It’s true: at expiry both long and short positions need to be rolled.
The price effect depends on who has a stronger need to roll. Banks know that most speculators have an absolute need to roll as they are not equipped to take (or give) delivery.
Banks are advantage of this situation: when they are long and the shorts need to roll prices go up. When they are short prices go down.
You can’t derive from this whether the banks established their position with the intent to suppress prices or not.
I enjoyed this piece, Jan. Thanks for writing it. One obvious counterpoint to the gold suppression theory is this: if it were really a goal of CBs to suppress the gold price, they did a lousy job of it between 2001 and 2011. On the other hand, the work of Dimitry Speck, specifically his empirical work on intraday gold price movements, is instructive and points in the opposite direction. Look at chapters 6 and 7 in his Book, "The Gold Cartel." (Palgrave/Macmillan, 2013). He demonstrates, statistically, that over a 5-year period intraday prices during Comex trading hours were almost certainly affected negatively by ongoing intervention. He also pinpoints a precise date when that behavior commenced: August 5, 1993. I'd be curious to hear your (or anyone's) refutation of his data and conclusions.
BTW - I have a real question for you. Look at something like this: https://www.nber.org/system/files/working_papers/w19892/w19892.pdf. There are many others like that. Basically over the last decade investing in commodity futures by index investors has increased a lot but this has not affected prices.
How could that be true? Think about it: if the short side actually took the commodity off the market to hedge their exposure then certainly prices would have had to increase, right?
Here's how I explain it for myself: since investors are systematically long via index investments someone else (e.g. banks) needs to take the other side. What these players have figured out is that only very few market participants ever take delivery. So as soon as the price rises by more than they have established as fundamentally justified these market participants are happy to sell exposure without hedging themselves on the spot market, earning "storage costs" for free. That way commodities only rise in price via fundamentals on the spot market, not by specs piling in.
I think it might be similar with gold - whenever bullion banks sense that price exceeds what's implied by longer term spot demand/supply they are happy to write contracts since they know specs don't have staying power. And sometimes they help the spec exit process along a bit by pulling bids.
My personal experience is that specs have to pay for the roll while commercials make the money rolling their contracts. Essentially specs have to roll while commercials are fine either way. Palladium for example is currently very spec short. You get a positive roll yield on the long side. Basically the front contract will get more expensive relative to the next contract during the yield period. And its opposite for the normal situation where commercials are short.
From that perspective commercials could still be short - and just roll using the their normal strategy knowing that specs won't take delivery.
Long term shorting doesn't make a whole lot of sense since the trend is up and long term shorts would pay up. But short term shorting is a different matter and in my view quite apparent in the intraday price action. Big traders just know that when everybody is in and excited but no more money is coming in you can club it down and people will sell on the way down.
I don't know any other asset which is as easy to short intraday as gold is. You won't get retraces or similar complications. When the time is ripe you'll just get a clean waterfall down for 1.5-2%.
When the bullion banks suddenly come in with hundreds of tonnes of unbacked short contracts at illiquid times, the falling price makes the stops go off for the tech funds - leveraged longs immediately forced to sell at any price. Thats how te bullion banks close out the shorts. And as for exceeding position-limits, don't make me laugh the CME has its blind eye firmly fixed to the keyhole
If the bullion banks sell large numbers of futures contracts at illiquid times to collapse the bid offer stack, the price is wherever they stop selling. They then buy back their contracts upto "target" price? With no significant liquidity, most can be bought back to reduce the size of the roll to manageable proportions. What am I not understanding?
Finally some sense Jan, a good explantaion.
A lot of the 'noise' from those that think gold is suppressed is that they do not understand why the bullion banks have short futures positions.
Gold leasing books are now (mostly) funded by balance sheet (cash) as central bank lending reduced significantly in recent years as the yield crashed so the risk/reward was no longer there.
To fund gold leasing where the bullion banks lend metal to customers, which add up to significant volumes, they buy OTC gold (loco London for instance) and cover this position by selling futures. The banks are square, they have no significant short (or long for that matter) as is constantly claimed by some. As this short position reaches expiry they need to roll it as they remain long the OTC for the leasing book. Clean and simple.
This was evidenced last year when the pandemic lockdowns initially hit the EFP market where the difference between the London OTC market and the COMEX futures widened to levels never thought imaginable. This was because whilst the banks were long the London effectively, they were short the COMEX, and the global stoppage in transportation put those shorts in position whereby, even if they wanted to, they could not deliver metal to New York. Market participants knew this and offers dried up faster than a puddle in the Sahara. Mark to Market 'losses' on the books for some bullion banks that first week as a result were quite daunting with some closing them out. Others knew this would be temporary and held on to see this 'loss' evaporate. The less educated in the market initially claimed this was a flight to quality (of the COMEX gold) but failed to understand that it was a lack of liquidity that caused this as those that could offer knew they could just sit back potentially and cash in as those that capitulated realized their losses.
The problem we have is that there are too many experts, and that is a loose use of that term, that seem to only see the COMEX gold contract as the price of gold alone, and not understand the whole eco-system of gold. The price of gold is interlinked between the Comex, the OTC market and all the other places like the Indian physical market, the Shanghai gold exchange and central banks activity for it to be manipulated by just one of the cogs in that wheel.
Tin-foil hats off, reality googles on for some I think.
I would be most grateful if you could answer GATA's points below:
That is, the data does not show whether governments and central banks are selling gold contracts through brokers on the exchange.
If governments and central banks are selling gold futures, then gold price suppression is indeed government policy -- and there is much evidence that they are. For example:
1) At a hearing in U.S. District Court in Boston in November 2001 on GATA consultant Reg Howe's gold price manipulation lawsuit against the U.S. Treasury Department, Federal Reserve, Bank for International Settlements, and bullion banks that trade gold on the Comex, an assistant U.S. attorney declared that the U.S. government has the authority, under the Gold Reserve Act of 1934 and related statutes, to act on the gold price exactly as Howe's lawsuit complained:
https://www.gata.org/node/4211
2) Through its Central Bank Incentive Program, the operator of the New York Commodities Exchange, CME Group, gives governments and central banks special volume discounts for trading all futures contracts sold on the exchange, including gold contracts:
https://www.gata.org/node/18925
Such trading must be conducted through brokers approved by the exchange, which would provide camouflage for official interventions.
Would CME Group offer the discount program if it was never being used by governments and central banks?
3) The U.S. Commodity Futures Trading Commission, which regulates the New York Commodities Exchange, repeatedly has refused to say, even for a member of Congress, whether the commission has jurisdiction over manipulative futures trading undertaken by or at the behest of the U.S. government:
https://www.gata.org/node/20089
The commission's refusal to answer such a simple question about its jurisdiction is effectively confirmation that the U.S. government indeed is meddling in the gold futures market to defend the dollar and U.S. interest rates.
Analysis of futures market trading data doesn't tell much unless you also know the identities of the parties behind that trading. If governments and central banks are doing a big part of the selling in gold futures via intermediary brokers, the trading data alone won't reveal it. So Nieuwenhuijs' analysis here really doesn't address the price suppression issue. He's looking in the wrong place.
I think you misunderstand the driving forces around future expiry. It’s true: at expiry both long and short positions need to be rolled.
The price effect depends on who has a stronger need to roll. Banks know that most speculators have an absolute need to roll as they are not equipped to take (or give) delivery.
Banks are advantage of this situation: when they are long and the shorts need to roll prices go up. When they are short prices go down.
You can’t derive from this whether the banks established their position with the intent to suppress prices or not.
I enjoyed this piece, Jan. Thanks for writing it. One obvious counterpoint to the gold suppression theory is this: if it were really a goal of CBs to suppress the gold price, they did a lousy job of it between 2001 and 2011. On the other hand, the work of Dimitry Speck, specifically his empirical work on intraday gold price movements, is instructive and points in the opposite direction. Look at chapters 6 and 7 in his Book, "The Gold Cartel." (Palgrave/Macmillan, 2013). He demonstrates, statistically, that over a 5-year period intraday prices during Comex trading hours were almost certainly affected negatively by ongoing intervention. He also pinpoints a precise date when that behavior commenced: August 5, 1993. I'd be curious to hear your (or anyone's) refutation of his data and conclusions.
BTW - I have a real question for you. Look at something like this: https://www.nber.org/system/files/working_papers/w19892/w19892.pdf. There are many others like that. Basically over the last decade investing in commodity futures by index investors has increased a lot but this has not affected prices.
How could that be true? Think about it: if the short side actually took the commodity off the market to hedge their exposure then certainly prices would have had to increase, right?
Here's how I explain it for myself: since investors are systematically long via index investments someone else (e.g. banks) needs to take the other side. What these players have figured out is that only very few market participants ever take delivery. So as soon as the price rises by more than they have established as fundamentally justified these market participants are happy to sell exposure without hedging themselves on the spot market, earning "storage costs" for free. That way commodities only rise in price via fundamentals on the spot market, not by specs piling in.
I think it might be similar with gold - whenever bullion banks sense that price exceeds what's implied by longer term spot demand/supply they are happy to write contracts since they know specs don't have staying power. And sometimes they help the spec exit process along a bit by pulling bids.
My personal experience is that specs have to pay for the roll while commercials make the money rolling their contracts. Essentially specs have to roll while commercials are fine either way. Palladium for example is currently very spec short. You get a positive roll yield on the long side. Basically the front contract will get more expensive relative to the next contract during the yield period. And its opposite for the normal situation where commercials are short.
From that perspective commercials could still be short - and just roll using the their normal strategy knowing that specs won't take delivery.
Long term shorting doesn't make a whole lot of sense since the trend is up and long term shorts would pay up. But short term shorting is a different matter and in my view quite apparent in the intraday price action. Big traders just know that when everybody is in and excited but no more money is coming in you can club it down and people will sell on the way down.
I don't know any other asset which is as easy to short intraday as gold is. You won't get retraces or similar complications. When the time is ripe you'll just get a clean waterfall down for 1.5-2%.
"The futures markets are not manipulated; the futures markets are the manipulation." - Peter Warburton, Economist, author
When the bullion banks suddenly come in with hundreds of tonnes of unbacked short contracts at illiquid times, the falling price makes the stops go off for the tech funds - leveraged longs immediately forced to sell at any price. Thats how te bullion banks close out the shorts. And as for exceeding position-limits, don't make me laugh the CME has its blind eye firmly fixed to the keyhole
If the bullion banks sell large numbers of futures contracts at illiquid times to collapse the bid offer stack, the price is wherever they stop selling. They then buy back their contracts upto "target" price? With no significant liquidity, most can be bought back to reduce the size of the roll to manageable proportions. What am I not understanding?