November 05, 2019
Last week, we wrote about the pending price correction in COMEX gold and silver due to the extreme level of futures contracts issued by the market-making Banks. With price getting smashed thus far this week, it's time to explain again the dynamics of this tried-and-tested price manipulation technique.
First of all, understand that the alchemy of " gold price exposure" was created in 1974 for the express purpose of managing price in lieu of physical metal supply. The London Gold Pool had collapsed in 1968, and Nixon had suspended the dollar's convertibility into gold in 1971. Absent new physical sources to control price, investment products were soon created as vehicles for the purpose of siphoning off physical investment demand. See this link: https://wikileaks.org/plusd/cables/1974LONDON16154...
Of course, it's not just futures/derivatives contracts that serve as gold price exposure. The decades that followed led to even more synthetic gold creation through "investments" such as unallocated accounts and ETFs. However, it is the trading of the derivative (futures) contracts that are still utilized to determine price. The Bullion Banks use their monopolistic dominance of these "markets" to control price and selfishly profit at the same time.
So it's imperative that you, as a precious metals investor and enthusiast, understand the dynamics of this fraudulent and illegitimate pricing scheme. The price you pay for physical gold and silver is NOT determined by an exchange of cash for metal. Instead, it's determined by the trading of futures contracts— the supply of which is controlled by the market-making Banks —with these contracts somehow accepted as a proxy for the physical price.
Why do we always use the term "FRAUDULENT" when discussing this price discovery scheme? Let's look at both sides of the trade:
• The futures contracts are issued by Banks, which have little to zero access and ability to deliver physical metal if forced to do so. COMEX contract settlement is just an implied ability to physically settle contracts in delivery...this even though the market-making Banks own very little actual gold.
• The futures contracts are demanded and purchased by Speculators, who acquire the contracts via loaned funds (margin) and then never seek to actually take delivery of physical metal.
So, if Banks sell contracts with no metal backing, and these contracts are purchased by speculators with no end demand for physical, then what does the trading of these contracts have to do with the actual value of real, physical metal? The answer: NOTHING.
And here's the rub...
Since The Bullion Banks have infinitely deep pockets and the full protection of the central banks (due to their "Too Big To Fail" stature), there are no limits to the amount of derivative contracts that they can create during a period of Speculator demand for gold exposure. Therefore:
• As price rises, the total supply of COMEX gold futures contracts expands. The Banks issue new contracts in order to meet Spec demand. Price rises, but not as much as it would if the supply of contracts had been regulated to remain constant and tethered to some sort of physical backing.
• Then, as price inevitably falls due to buying/momentum exhaustion, Speculators sell their gold exposure. The Banks use this Spec selling to buy back and cover their fraudulently issued short/delivery obligations, and total contract open interest declines.
In 2017, we wrote a detailed, yet simplified, report on HOW and WHY The Banks engage in this process. If you've never read it, you should do so now: https://www.tfmetalsreport.com/blog/8252/econ-101-...
Turning back to the present, why is this so important again today? As we wrote last week, total contract open interest for COMEX gold has surged again to new ALL-TIME highs. And, what do you know, price is now falling!
As of Monday this week, The Banks have driven total COMEX interest to 688,722 contracts. Again, consider the scam and fraud of this scheme. At an alleged 100 ounces per contract, the total open interest on the COMEX represents 68,872,200 ounces of gold. This while the entire COMEX vaulting structure only holds 8,378,798 ounces.
System Apologists will attempt to claim that the derivative pricing scheme is legitimate because it serves as a vehicle for gold and silver producer hedging, and that all of the contracts created are only for those forward-selling purposes. However, just this week, the World Gold Council revealed that the current global hedge book for gold was contracting in Q3—not expanding—and that it currently stands at 265.8 metric tonnes: https://www.gold.org/goldhub/research/gold-demand-...
But even if all of that hedging were done through COMEX— WHICH IT'S NOT—it would only require about 85,500 contracts of short-selling and future delivery promises. The math on that? Well, 265.8 metric tonnes is about 8,550,000 troy ounces, and again, at 100 ounces per COMEX contract, you can therefore hedge the entire amount with just 85,500 contracts.
So why the heck is total COMEX contract open interest at an all-time high of 688,000 contracts? What's the need for the 600,000 contracts above and beyond the producer hedging? Oh sure, of course there are other holders of gold that might like some hedging...but 600,000 contracts worth? That's 60,000,000 ounces, or about 1,900 metric tonnes!
Thus we end where we began. The Bullion Banks maintain monopolistic control of an obviously fraudulent pricing scheme, and they are currently attempting to blunt and reverse the 2019 price rally by issuing endless amounts of futures contracts. They'll no doubt continue to have some success, and price will likely fall to the levels we forecast last week:
But in the end, this is all just frustration and noise for those of us who are forced to track the digital derivative price on a daily basis. What are the implications for you, the long-term precious metals investor?
Understand that the current digital derivative and fractional reserve pricing scheme is rooted in fraud. It's also defined by the illusion that gold and silver are plentiful, when they are not. What IS plentiful is all of the "exposure" that The Banks have alchemized over the past four decades. What is NOT plentiful is the actual physical metal that underpins this system. Therefore, WHEN the system implodes upon itself, physical metal will be scarce and the price of it will be many multiples higher in all currencies. If you don't currently own physical precious metal, be sure to do so before this fraudulent pricing scheme finally collapses.
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