"Paper Gold" And Its Effect On The Gold Price

Tyler Durden's picture

Submitted by Bud Conrad via Casey Research,

Gold dropped to new lows of $1,130 per ounce last week. This is surprising because it doesn’t square with the fundamentals. China and India continue to exert strong demand on gold, and interest in bullion coins remains high.

I explained in my October article in The Casey Report that the Comex futures market structure allows a few big banks to supply gold to keep its price contained. I call the gold futures market the “paper gold” market because very little gold actually changes hands. $360 billion of paper gold is traded per month, but only $279 million of physical gold is delivered. That’s a 1,000-to-1 ratio:

Market Statistics for the 100-oz Gold Futures Contract on Comex
  Value ($M)
Monthly volume (Paper Trade) $360,000
Open Interest All Contracts $45,600
Warehouse-Registered Gold (oz) $1,140
Physical Delivery per Month $279
House Account Net Delivery, monthly $41


We know that huge orders for paper gold can move the price by $20 in a second. These orders often exceed the CME stated limit of 6,000 contracts. Here’s a close view from October 31, when the sale of 2,365 contracts caused the gold price to plummet and forced the exchange to close for 20 seconds:


Many argue that the net long-term effect of such orders is neutral, because every position taken must be removed before expiration. But that’s actually not true. The big players can hold hundreds of contracts into expiration and deliver the gold instead of unwinding the trade. Net, big banks can drive down the price by delivering relatively small amounts of gold.

A few large banks dominate the delivery process. I grouped the seven biggest players below to show that all the other sources are very small. Those seven banks have the opportunity to manage the gold price:

After gold’s big drop in October, I analyzed the October delivery numbers. The concentration was even more severe than I expected:

This chart shows that an amazing 98.5% of the gold delivered to the Comex in October came from just three banks: Barclays; Bank of Nova Scotia; and HSBC. They delivered this gold from their in-house trading accounts.

The concentration was even worse on the other side of the trade—the side taking delivery. Barclays took 98% of all deliveries for customers. It could be all one customer, but it’s more likely that several customers used Barclays to clear their trades. Either way, notice that Barclays delivered 455 of those contracts from its house account to its own customers.

The opportunity for distorting the price of gold in an environment with so few players is obvious. Barclays knows 98% of the buyers and is supplying 35% of the gold. That’s highly concentrated, to say the least. And the amounts of gold we’re talking about are small—a bank could tip the supply by 10% by adding just 100 contracts. That amounts to only 10,000 ounces, which is worth a little over $11 million—a rounding error to any of these banks. These numbers are trivial.

Note that the big banks were delivering gold from their house accounts, meaning they were selling their own gold outright. In other words, they were not acting neutrally. These banks accounted for all but 19 of the contracts sold. That’s a position of complete dominance. Actually, it’s beyond dominance. These banks are the market.

My point is that this market is much too easily rigged , and that the warnings about manipulation are valid. At some point, too many customers will demand physical delivery and there will be a big crash. Long contracts will be liquidated with cash payouts because there won’t be enough gold to deliver. I saw a few squeezes in my 20 years trading futures, including gold. In my opinion, the futures market is not safe.

The tougher question is: for how long will big banks’ dominance continue to pressure gold down? Unfortunately, I don’t know the answer. Vigilant regulators would help, but “futures market regulators” is almost an oxymoron. The actions of the CFTC and the Comex, not to mention how MF Global was handled, suggest that there has been little pressure on regulators to fix this obvious problem.

This quote from a recent Financial Times article does give some reason for optimism, however:

UBS is expected to strike a settlement over alleged trader misbehaviour at its precious metals desks with at least one authority as part of a group deal over forex with multiple regulators this week, two people close to the situation said. … The head of UBS’s gold desk in Zurich, André Flotron, has been on leave since January for reasons unspecified by the lender….

The FCA fined Barclays £26m in May after an options trader was found to have manipulated the London gold fix.

Germany’s financial regulator BaFin has launched a formal investigation into the gold market and is probing Deutsche Bank, one of the former members of a tarnished gold fix panel that will soon be replaced by an electronic fixing.

The latter two banks are involved with the Comex.

Eventually, the physical gold market could overwhelm the smaller but more closely watched US futures delivery market. Traders are already moving to other markets like Shanghai, which could accelerate that process. You might recall that I wrote about JP Morgan (JPM) exiting the commodities business, which I thought might help bring some normalcy back to the gold futures markets. Unfortunately, other banks moved right in to pick up JPM’s slack.

Banks can’t suppress gold forever. They need physical gold bullion to continue the scheme, and there’s just not as much gold around as there used to be. Some big sources, like the Fed’s stash and the London Bullion Market, are not available. The GLD inventory is declining.

If a big player like a central bank started to use the Comex to expand its gold holdings, it could overwhelm the Comex’s relatively small inventories. Warehouse stocks registered for delivery on the Comex exchange have declined to only 870,000 ounces (8,700 contracts). Almost that much can be demanded in one month: 6,281 contracts were delivered in August.

The big banks aren’t stupid. They will see these problems coming and can probably induce some holders to add to the supplies, so I’m not predicting a crisis from too many speculators taking delivery. But a short squeeze could definitely lead to huge price spikes. It could even lead to a collapse in the confidence in the futures system, which would drive gold much higher.

Signs of high physical demand from China, India, and small investors buying coins from the mint indicate that gold prices should be rising. The GOFO rate (London Gold Forward Offered rate) went negative, indicating tightness in the gold market. Concerns about China’s central bank wanting to de-dollarize its holdings should be adding to the interest in gold.

In other words, it doesn’t add up. I fully expect currency debasement to drive gold higher, and I continue to own gold. I’m very confident that the fundamentals will drive gold much higher in the long term. But for now, I don’t know when big banks will lose their ability to manage the futures market.

Oddities in the gold market have been alleged by many for quite some time, but few know where to start looking, and even fewer have the patience to dig out the meaningful bits from the mountain of market data available.

*  *  *

Casey Research Chief Economist Bud Conrad is one of those few—and he turns his keen eye to every sector in order to find the smart way to play it. This is the kind of analysis that’s especially important in this period of uncertainty and volatility… and you can put Bud’s expertise—along with the other skilled analysts’ talents—to work for you by taking a risk-free test-drive of The Casey Report right now.

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Pinto Currency's picture

This is COMEX data where the Rule Book explicitly makes provision for paper settlement.

The major price distortion is at the LBMA which trades 180 million oz. of paper gold a day on what is supposed to be a physical exchange.  That is 85% of daily global gold trading and it is levered 100:1 paper to physical gold.

And the LBMA fraud is coordinated by the BofE and BIS along with the bullion banks.

nope-1004's picture

Math that "adds up" doesn't exist in a ponzi.  It's pure fraud and forgery.  That's what paper gold is today.


kliguy38's picture

of course its fraud so why worry about it and just shove it right back up their asses......BUY the cheap physical and just smile

KnuckleDragger-X's picture

No questionable practices here, no sirree bob, its all fairy dust and unicorn pee for everybody....

Son of Loki's picture

I read the article about the former Assistant Treasury Secretary who said gold and silver should be much higher if it were not for the Fed's Bullion Banks shorting the heck out of the metals. He called it 'naked shorts' and said it was illgeal or impl;ied that. Problem is no one is taking legal action against them.

TheHound73's picture

Gold markets need moar government oversee-ers pleeze.

Bay of Pigs's picture

Yes, the DOJ, FBI, SEC and CFTC have done such a fabulous job so far.

Syrin's picture

So why haven't the physical and paper markets split off from one another? Tired of watching my physical drop in value over time because it's tied to paper.

agent default's picture

Because the physical market is tiny and miners sign futures contracts with large bullion banks in order to hedge themselves against price fluctuation.  This is how UBS screwed the miners back in 2004 by getting them to deliver below market price at the time.

ljag's picture

So if paper gold prices shot up to $3000 oz., would you then "feel"better about trading in your phys for said paper? Just axing.

Syrin's picture

Nope, because my physical would be worth $6000+.   It would still be undervalued as long as it's tied to paper.  C'mon now, you should know better,

Hamm Jamm's picture

wheres the NWO ????   follow the physical gold

hah that wasan easy one

r00t61's picture

Doug Casey says that allegations of gold price manipulation are "ridiculous" and "counter-factual" (http://www.kitco.com/news/video/show/FreedomFest-2014/722/2014-07-11/Gol...), so I don't understand then how his research service can come out with this article describing some of the mechanics of the manipulation.


holdbuysell's picture

Someone needs to send him (and Martin Armstrong) this:

Another "Conspiracy Theory" Bites The Dust: UBS Settles Over Gold Rigging, Many More Banks To Follow


philipat's picture

Casey Research is some strange Organisation. Ed Steer, another Casey staffer, writes a very good (almost) daily commentary which, without fail refers to Gold manipulation.

Obviously they play a "Good cop, bad cop" game with Casey himself playing to the establishment whilst his minions speak to other communities so that they can rake in fees from all. Not the kind of Organisation that I would do business with.

holdbuysell's picture

They come across similar to Porter Stansberry's organization.

loveyajimbo's picture

I DID send him that... and one on the dumping of 40 tons of gold in off hours one day to slam the price.  He put my email in his blog... but the craven coward removed the links to the articles... said it was typical hate mail and I would be jumping out a window like the '29 guys... Armstrong is one pure asshole... a puppet, as well as a lunatic and a fraud.  He also apparantly uses Drano as a face cream.

Bay of Pigs's picture

Plenty of idiots still pumping Armstrong around here too. Fucking pathetic.

Glasgow Gary's picture

How do you know gold is in a bear market? Answer: you have to suffer through all the bullshit explanations that were present in the last gold bear market. Paper gold, manipulation, central banks, and on and on until you puke.

You know what's even better than a gold bull market? The reprieve from all the bullshit explanations that splattered the walls of the internet during the bear market.



Ness.'s picture

Investors invest.   Traders trade.  Big difference.  

Dame Ednas Possum's picture

Sounds ike you've consumed too many fried Mars Bars Gazza...they've gone to your head.

DirkDiggler11's picture

Where the fuck has "Bud" been that last 20 years, asleep ?

Such a far behind the curve article does not bode well for "Casey Research". Next up, Casey Research warns that housing prices may be over-inflated .....

Creepy A. Cracker's picture

"It doesn't add up..." Exactly.  What I just said related to another article:

Based on the laws of econimics - supply and demand - why isn't physical gold skyrocketing?  Demand is high and supply is low but the price is falling.

Fuku Ben's picture

It does if the criminals running the scheme have almost everyone accepting they live in another reality


IridiumRebel's picture

Cannot wait til' this BS separates......

Dame Ednas Possum's picture

Just keep stacking the phyzz...

ebworthen's picture

"Paper Gold" - an oxymoron if I ever heard one.

CaptOveur's picture

All that is not gold also might not glitter?

Dame Ednas Possum's picture

All tht is not phyzz gold will go down the shitter...

Irishcyclist's picture

Paper gold is the debasement of physical gold.

Try using the paper (gold) variety to lay claim to the physical (gold) variety upon which it is issued.

How many pieces of paper gold have been issued for the same piece of physical gold? Yikes.

Dame Ednas Possum's picture

The explanation is Yids..not Yikes.

delivered's picture

Naked shorts to control/collar PM prices, backed by the world's largest CBs. If deliveries overwhelm the system, just settle in paper currency which the contracts have a legal right to do. And where does the paper currency come from, but of course an endless supply thanks to the CBs. The point made in this article is correct in that these big banks would appear to have some serious firepower available to continue this scheme for quite some time. But of course the problem with a lower price is it actually creates more physical demand (read recent ZH articles on silver coin demand) while surpressing supply (as mining comapnies begin to fail, curtail production, etc.). On the physical side of life, supply and demand creates even more price pressure which in-turn requires even more price "management" by the big banks. Notice I used the term management and not manipulation as our trusted leaders have always reassured us that PM prices are not manipulated.

The problem with PMs in today's economy is that when prices are dropping, the investors that own the PMs are not willing to sell and quite honestly, don't need to sell. In fact, the opposite occurs and phyiscal buying increases. Why, well investors understand the state of the global economy and financial structure and the role PMs play as a hedge/insurance against the mother of all fiat parties. Or another way of thinking about it is this. From my standpoint, if the CBs want to increase the supply of currency and this ends up flowing to me, let's say with added earnings in some capacity or selling my house at an inflated price, not only do I receive additonal currency but now I get to use far less of this currency to buy PMs. Hard to see how this trade is going to fail in the long run but here is the key question. How long can this go on? My guess is at least another 2 to 4 years but eventually the forces of the market and the reinforcing down-ward spiral of price to phyiscal will create an infliction point that provides for a brief moment of real price discovery. 

So if they want to continue to push PM prices down with whatever smoke and mirrors available, then I say let them have their cake (but please let the wise eat it). There's no question that exchanges like the one in Shanghai, CB buying by emerging markets, accumulation by investors, rising consumption by the world's new middle class throughout Asia/India, are going to place more and more pressure on the paper versus physical price differences.

In the meantime, by all means allow MSM and TPTB to paint the darkest and most bearish case for PMs as we need everyone on part to the downside to accelerate this process. And as this progresses, I continue to buy on the dips and when my extra funds provided by the Fed allow.

Quaderratic Probing's picture

Paper traders pushed gold to $1900, they are leaving with other paper traders money to invest in other things. 

If you buy physical someone else has to sell theirs. Because the price is going down more people are pushing their PM up for sale.


seek's picture

"Because the price is going down more people are pushing their PM up for sale."

That's 180 degrees from everything I'm seeing and hearing, and everything the US mint and India's imports are saying. End markets are sucking suppliers willing to sell at these prices dry, and it doesn't appear that people in general are selling their PMs due to low prices, but buying. It's just mints and miners that are selling at insane low prices.

Quaderratic Probing's picture

Mint makes record sales you have seen the news.

That is a big somebody Selling real PM and selling at progessivly lower prices

That is exactly what I said

Quaderratic Probing's picture

Mint makes record sales you have seen the news.

That is a big somebody Selling real PM and selling at progessivly lower prices

That is exactly what I said

http://finviz.com/quote.ashx?t=abx look at Barick gold they mine real gold not paper and lost 3 billion this year doing it. But still they push more gold out the door. This is not paper it IS PM

The store you buy from is not hording gold they have it for sale.



NoWayJose's picture

We will find out who has been selling physical soon enough - when there is no more.

seek's picture

The other mystery is you have CBs buying literally tonnes of gold -- just today ZH reported Russia buying 55T -- and it seems pretty clear these transactions aren't hitting exchanges at all. I wonder what the real prices paid by Russia, China, et al are, and where it's all coming from. I'm sure they're sucking up indigenous mining output and then some, and it's just getting progressively more difficult to believe western CBs are so insane as to be handing the physical over to them.

SoDamnMad's picture


I think Russia and China consume (meaning their CBs) all the gold that come out of their mines.  I don't know what Russia pays their mines for the gold but a central system can route cyanide and energy to mines and provide infrastructure to support mining operations at less than the cost to raise capital from an investor or bank.

Colonel Klink's picture

I thought the law was there is supposed to be a physical ounce of metal behind every paper one traded?


Colonel Klink's picture

Because I thought it was the regs.  Am I incorrect?  Besides the bankers doing whatever they want anyways.

Al Huxley's picture

Bankers and Regulations don't mix.  Bankers are above the law (but not above nailgun retribution by their own).

Moe Howard's picture

The contracts say they can settle in fiat if they have no gold.

Dakota Kid's picture

Colonel Klink: "the law" doesn't mean anything unless you are peon like we are, then it is enforced. Remember justice means "just us" when it comes to laws.

Colonel Klink's picture

Precisely, if they law doesn't apply equally then the only way to fight it is at the end of a gun.  Just like government does to us?

yogibear's picture

Paper gold = Fractional Reserve gold.

Colonel Klink's picture

Precisely what it is.  Make more of something (even fake) and it's worth less.  Wonder what the real value of the physical is in truth.