What sets the Gold Price – Is it the Paper Market or Physical Market?

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Submitted by Ronan Manly, BullionStar.com

The following article is arranged in Question and Answer (Q & A) format. Through the Q & A approach, this article raises some important issues about price discovery in the gold markets and aims to explain the view that the gold price is being set by the paper gold markets.

BullionStar’s CEO Torgny Persson and precious metals analyst Ronan Manly are of the opinion that due to the structure of contemporary gold markets, it is primarily trading activity in the paper gold markets which sets the international price of gold.

Question: The international gold price is constantly quoted in the financial media alongside other major financial indicators. What is this international gold price, and how is it defined?

The international gold price usually refers to the price of gold quoted in US Dollars per troy ounce as traded on the 24-hour global wholesale gold market (XAU/USD). Gold is traded non-stop globally during the entire business week, creating a continuum of international gold price quotes from Sunday evening New York time all the way through to Friday evening New York time. Depending on the context, this international gold price sometimes refers to a spot gold market quote, such as spot gold traded in London, and at other times may refer to the front month of a gold futures contract price as traded on the US Commodity Exchange (COMEX). The front month contract is a nearby month which will usually exhibit the highest trading volume and activity.

The international gold price can also at times be referring to the LBMA Gold Price benchmark price as derived during the London daily gold price auctions (morning and afternoon auctions). LBMA is an abbreviation for London Bullion Market Association.

Therefore, this 'international price' could be referencing a spot gold price, a futures gold price, or a benchmark gold price, but all three would, at a comparable time, be roughly similar in magnitude.

Question: Where does this international gold price come from, where is it derived?

Recent empirical research has determined that gold price discovery is jointly driven by London Over-the-Counter (OTC) spot gold market trading and COMEX gold futures trading, and that the "international gold price" is derived from a combination of London OTC gold prices and COMEX gold futures prices. See “Who sets the price of gold? London or New York (2015)” by Hauptfleisch, Putni?š, and Lucey.

In general, the higher the trading volume and liquidity in a specific asset market, the more that market contributes to discovering prices for that asset. This is also true of the global gold market. Between them, the London OTC and New York trading venues account for the vast majority of global gold trading volume, and in 2015, the London OTC spot market represented approximately 78% of global gold market turnover while COMEX accounted for a further 8% (See Hauptfleisch, Putni?š, and Lucey (2015)).

Based on London gold clearing statistics for 2016, a quick calculation shows that total trading volume in the London OTC gold market is estimated to have been at least the equivalent of 1.5 million tonnes of gold in 2016, while trading volume of the 100 oz COMEX gold futures contract reached 57.5 million contracts during 2016, equivalent to 179,000 tonnes of gold. Gold trading volume on the London OTC gold market in 2016 was therefore about 8.4 times higher than trading volume in the COMEX 100 oz gold futures contract.

LBMA Unallocated Gold Trading, 1.5 million tonnes in 2016

However, COMEX has been found, by the above academic research, to have a larger influence on price discovery than London OTC, despite the lower trading volumes of COMEX. This is most likely due to a combination of factors such as COMEX' accessibility and extended trading hours via use of the GLOBEX platform, the higher transparency of futures trading compared to OTC trading, and the lower transaction costs and ease of leverage in COMEX trading. In contrast, the London OTC gold market has limited trading hours (during London business hours), barriers to wider participation since it's an opaque wholesale market without central clearing, and trading spreads which are dictated by a small number of LBMA bullion bank market-makers and a handful of London-based commodity brokerages.

The bottom line though is that both sets of trading statistics, London OTC and COMEX, are gigantic in comparison to the size of the underlying physical gold markets in London and New York.

Question: So, does the physical gold market or the paper gold market set this international price of gold?

The international gold price is purely set by paper gold markets, in other words it is set by non-physical gold markets. Based on their respective gold market structures, the London OTC gold market and COMEX are both paper gold markets. Supply of and demand for physical gold plays no role in setting the gold price in these markets. Physical gold transactions in all other gold markets just inherit the gold prices that are discovered in these paper gold markets.

The London OTC gold market predominantly involves the trading of synthetic unallocated gold, where trades are cash-settled and not physically delivered (i.e. no delivery of physical gold). These synthetic gold transactions have little connection to any underlying gold holding, hence they are de-facto gold derivative positions. By definition, unallocated gold positions are just a series of claims on bullion banks where the holder is an unsecured creditor of the bank, and the bank has a liability to that claim holder for an amount of gold. The holder, on its side, takes on credit risk towards the bullion bank. The London OTC gold market is therefore merely a venue for trading gold credits.

The London OTC gold market is also one in which the bullion banking participants employ fractional-reserve gold trading to create large amounts of paper gold out of thin air (analogous to commercial lending), where the trading is also leveraged and opaque, and where this paper gold is only fractionally backed by physical gold. This “gold” is essentially synthetic gold. See BullionStar Gold university article "Bullion banking Mechanics" for further details on fractional-reserve gold trading.

Since COMEX only trades exchange-based gold futures contracts, it is, by definition, a derivatives market. Cash-settlement is the norm. Only 1 in 2500 gold futures contracts traded on COMEX is delivered with a transfer of warrants representing metal. The rest of the contracts are cash-settled. This means that 99.96% of COMEX gold futures contracts are cash-settled. See BullionStar US Gold Market Infographic for details.

Given COMEX trading gold futures and London trading synthetic unallocated gold, both the London and COMEX gold markets essentially trade gold derivatives, or paper gold instruments, and by extension, the international gold price is being determined in these paper gold markets.

Beyond the London OTC gold market and COMEX, all other gold trading venues are predominantly price takers that take in and use the gold prices established by the paper gold markets in London and New York. These other markets include physical gold markets around the world which look to the international gold price as an input into their domestic gold price setting mechanisms and conventions.

Question: Explain a little more about the market structures of these London OTC and COMEX markets?

By definition, futures trading is trading of securities whose value is derived from an underlying asset but whose securities are distinct from those of the underlying asset, i.e. derivatives. COMEX gold futures contracts are derivatives on gold. COMEX registered gold stocks are relatively small, very little physical gold is ever delivered on COMEX, and even less physical gold is withdrawn from COMEX approved gold vaults. COMEX gold trading also employs significant leverage. Hauptfleisch, Putni?š, and Lucey (2015) state that “such trades [on COMEX] contribute disproportionately to price discovery”. Note that the COMEX gold futures market is actually a 24-hour market but its liquidity is highest during US trading hours.

Turning to the London OTC gold market, nearly the entire trading volume of the London OTC gold market represents trading in unallocated gold, which to reiterate, merely represents a claim by a position holder on a bullion bank for a certain amount of gold, a claim which is rarely exercised. London OTC gold trades also predominantly cash-settle. Traders, speculators and investors in unallocated gold positions virtually never take delivery of physical gold.

This is a fact confirmed by a UK HMRC / LBMA Memorandum of Understanding published in 2013 which states that in the London gold market “investors acquire an interest in the metals, although in most situations, physical delivery will not occur and in 95% of trades, trading in unallocated metals will be undertaken.” Additionally, in 2011, the then LBMA CEO Stuart Murray also confirmed that there were ‘very substantial amounts of unallocated gold’ held in London.

2015 legal opinion on unallocated gold drafted by respected global law firm Dentons describes unallocated gold as ‘synthetic’ gold and as a derivatives transaction.

Dentons states that “the reality of unallocated bullion trading is that buyers and sellers rarely intend for physical delivery to ever take place. Unallocated bullion is used as a means to have “synthetic” holdings of gold and so obtain exposure to the price of gold by reference to the London gold fixing.

Although the LBMA does not publish gold trading volumes on a regular basis, it did publish a one-off gold trading survey covering Q1 2011 in which it was revealed that during the first quarter of 2011, 10.9 billion ozs of gold (340,000 tonnes) were traded in the London OTC gold market. During the same period, 1.18 billion ozs of gold (36,700 tonnes) were cleared in the London OTC gold market. This would suggest a trading turnover to clearing turnover ratio of 10:1. In the absence of live trading data from the London OTC gold market, this 10:1 proxy ratio can continue to be applied as a multiplier to the LBMA London Gold Market daily clearing statistics, which are published every month, and which are always phenomenally high.

For example, average daily clearing volumes in the London Gold Market during January 2017 totalled 20.5 million ounces. That’s the equivalent 638 tonnes of gold cleared per day in London.  On a 10:1 trading to clearing multiple, that’s the equivalent of 6,380 tonnes of gold traded per day, or 1.6 million tonnes of gold traded per year.

Since there are only about 6,500 tonnes of gold stored in London, most of which represents static holdings of central banks, ETFs and other holders, the London OTC gold trading activities are totally disconnected from the underlying physical gold holdings. Furthermore, only about 190,000 tonnes of gold have ever been mined throughout history, half of which are estimated to be held in the form of jewellery. Therefore, the trading of nearly 6,500 tonnes of gold per day within the London OTC gold market has nothing to do with the physical gold market, yet perversely, this trading activity drives global gold price discovery and the pricing of physical bullion trades and transactions.

Revealingly, according to the LBMA bullion bankers who established the reporting of London gold clearing statistics, who specifically were the then LMPCL chairman, Peter Fava, and JP Morgan’s Peter Smith, these LBMA gold clearing statistics include trading activities such as “leveraged speculative forward bets on the gold price” and “investment fund spot price exposure via unallocated positions”, activities which are just side-bets on the gold price. See October 2003 article titled “Clearing the Air Discussing Trends and Influences on London Clearing Statistics“, from LBMA Alchemist Issue 32.

In essence, trading activity in the London gold market predominantly represents huge synthetic artificial gold supply, where paper gold trading is deriving the price of gold, not physical gold trading. Synthetic gold is just created out of thin air as a book-keeping entry and is executed as a cashflow transaction between the contracting parties. There is no purchase of physical gold in such a transaction, no marginal demand for gold. Synthetic paper gold therefore absorbs demand that would otherwise have flowed into the limited physical gold supply, and the gold price therefore fails to represent this demand because demand has been channelled away from physical gold transactions into synthetic gold.

Likewise, if an entity dumps gold futures contracts on the COMEX platform representing millions of ounces of gold, that entity does not need to have held any physical gold, but that transaction has an immediate effect on the international gold price. This has real world impact, because many physical gold transactions around the world take this international gold price as the basis of their transactions.

Although gold clearing volumes and the LBMA's market survey provide some useful inputs into calculating London gold trading volumes, there is very little known publicly about how much physical gold actually trades in the London gold market. This is because the LBMA and its member banks choose not to reveal this information. There is no trade reporting in the London OTC gold market, no reporting of physical gold vault positions, no reporting of the unallocated gold liabilities of LBMA member bullion banks, and no reporting of how much physical gold in total these bullion banks retain to back up their fractional-reserve unallocated gold trading system. However, physical gold trading is by definition an extremely minuscule percentage of average daily trading volumes in the London OTC gold market. For details on the workings of the gold market in London, see BullionStar Infographic the "London Gold Market".

While one of the three components that comprise the London gold clearing statistics is stated to be “physical transfers and shipments by LPMCL clearing members”, the LBMA doesn’t even see fit to publish a breakdown of these 3 components. This compounds the secrecy and is another example of where bullion banks and central banks keep the global gold market in the dark about how much gold is being physically transferred and shipped.

Question: How do local gold markets around the world use the international gold price?

Local gold markets all around the world look to the international gold price, and take in this gold price, usually quoting their local country gold prices in comparison to the international gold price.

In the physical gold market, product pricing of gold coins and bars is based on a combination of the spot gold price plus a premium. The premium is that part of the product price in excess of the value of the precious metal contained in the coin or bar. Given that the physical gold market is a price taker, physical gold market spot prices feed in from where the price is being discovered, i.e. the international gold price.

For example, the 2017 issue of the Royal Canadian Mint 1 troy ounce Gold Maple Leaf bullion coin is quoted on the BullionStar website at a US dollar price which reflects the US dollar spot price of gold plus a premium.

Gold coin and gold bar premiums are based on a number of factors. Part of the premium will reflect natural minting / refining costs such as fabrication, marketing, distribution and insurance costs. If the products have been distributed through a wholesaler, the premium will reflect a wholesaler mark-up.  Another component of a premium is semi-variable and reflects physical market imbalances caused by supply and demand fluctuations. If demand for a gold coin or gold bar is high, its premium will increase. If supply of the product is abundant, the premium would tend to be lower than if in short supply.

In general, premiums on gold coins are higher than those on gold bars, while premiums on large gold coins and gold bars are lower than premiums on smaller gold coins and gold bars.

Question: What contribution does the Shanghai Gold Exchange make to gold price discovery and does the SGE, with its large physical trading, influence the international gold price?

The Shanghai Gold Exchange (SGE) is the world’s largest physical gold exchange and nearly all physical gold bars in China flow through the SGE. Gold trading volumes and gold withdrawal statistics for the SGE are certainly impressive. For the year 2016, total SGE gold trading volumes reached 24,338 tonnes, a 43% increase over the 2015 figure of 17,033 tonnes. SGE trading volumes include physical contracts, deferred contracts, OTC trades settled through the SGE, and also trading volumes on the Shanghai international Gold Exchange (SGEI). In 2016, physical gold withdrawals from the SGE totalled 1,970 tonnes, down 24% from 2015’s withdrawals of 2,596 tonnes, but still huge on an absolute basis because these withdrawals represent actual physical gold taken out of the SGE vaults.

By the end of 2016, the SGEI (International Bourse), which was launched in September 2014, had recorded cumulative trading of nearly 9,000 tonnes of gold. The Shanghai Gold Benchmark Price (a.k.a. Shanghai Gold Fix), which was launched on 19 April 2016, is a gold auction for 1 kilo gold bars of 99.99 purity quoted in RMB. Over the 8 months from launch to end of 2016, the Shanghai Gold Fix had traded 569 tonnes, which equates to over 1.5 tonnes per day on average.

All in all, the SGE has generated impressive physical gold trading volumes (24,338 tonnes for 2016) and withdrawals (1970 tonnes for 2016). For the sake of comparison, compare these annual SGE physical gold trading volumes to the bloated London OTC gold market where trading volumes of approximately the equivalent of 6,500 tonnes of gold per day are the norm. Such a comparison reveals the fractional-reserve nature of the London gold market and the fact that physical transactions can only be a minuscule fraction of the London market.

But does SGE trading affect the international gold price as derived in the London OTC and COMEX markets, or is the SGE a price taker?

The short answer is that the SGE does not influence the international price and the SGE is a price taker. There may be some lagged influence by the SGE on the international price but this would require further study. The Chinese gold market is still a closed gold market with market frictions and distortions. Gold can be imported into China but cannot in general be exported out of China. There is therefore no freedom of movement of gold out of China. Gold imports into China are strictly controlled via import licenses and these licenses are only issued to a small number of Chinese and foreign banks.

But it’s worth looking at SGE premiums to see if changes in SGE premiums ever provide any signalling ability for subsequent changes in the international gold price. SGE premiums arise when the Shanghai gold price trades above the international gold price. SGE premiums are a possible gauge to determine whether SGE trading affects the international gold price. In November and December 2016, SGE premiums rose sharply from less than 0.5% to over 3% which was a period in which gold imports into China surged. However, during that same period, the international gold price fell. So in this case, the expanding SGE premiums had no effect on the international gold price.

That example was just eyeballing, but a recent study by Metals Focus (MF) consultancy, titled "Links Between the Chinese and International Gold Prices" also found that the correlations between changes in the LBMA Gold Price (AM) and SGE premiums are not significant and were in some cases even found to be negative, which in summary means that SGE trading was not affecting the international gold price. MF also calculated some lagged correlations to see if SGE premiums influence subsequent changes in the LBMA Gold Price, due to, for example, "increased shipments of bullion to China over subsequent days". MF claims that "SGE premiums have a modest but positive and statistically significant impact on future gold price [LBMA Gold Price] moves" however, correlation is not causation. Properly functioning financial markets are supposed to instantaneously reflect pricing information in other markets, not take days to reflect it. There are also too many other variables which could also be responsible for explaining why the LBMA Gold Price moved higher after SGE premiums had previously moved higher.

However, unlike the OTC and COMEX, the Shanghai Gold Exchange is structured around physical gold price discovery. The establishment of a gold exchange in Shanghai was first referenced in China's 10th Five Year plan in 2001 as an integral part of the nation's gold liberalisation strategy. Following its launch in 2002, the SGE was quick to promote physical gold ownership and by 2004 was allowing private citizens in China to transact on the Exchange and purchase gold bullion. On the SGE, physical delivery of gold is the norm, not the exception. The SGE has a network of 61 gold vaults in 35 cities across China.

This makes the SGE a nature candidate to take the lead in pricing real physical gold and acting as a physical gold price discovery centre if and when the physical gold markets detach from the paper gold markets, and physical gold demand and supply becomes the natural determinant of the international gold price.

LBMA Gold Price auction

Question: What is the significance of the LBMA Gold Price?

The LBMA Gold Price is a twice daily auction for unallocated gold controlled by the LBMA. The final output of the auction is a benchmark gold price. The auction is conducted in US Dollars, however the derived price is also published in 11 other currencies. This auction is the successor to the London Gold Fixing and the benchmark is now a ‘Regulated Benchmark’ under UK financial regulations and is administered by ICE benchmark Administration (IBA), part of the ICE exchange group. But the new auction mechanics are fundamentally similar to the older London Gold Fixing mechanics. The auction opening prices are based on COMEX and London OTC price quotations as well as trading prices at auction opening times, i.e. at 10:30 am and 3:00 pm respectively.

Structurally, the LBMA Gold Price auction has very narrow direct participation, with only a handful of LBMA member bullion banks being authorised by the LBMA to take part. These are the same bullion banks which are the market makers and largest traders in both London OTC gold market trading and in COMEX futures gold trading. The LBMA Gold Price auctions therefore lack broad market participation and is not representative of the broader gold market. The LBMA and ICE Benchmark Administration also refuse to reveal the identities of the auction chairpersons, a refusal which suggests that those now involved have connections to the former scandal tainted London Gold Fixing auction. They also refuse to reveal how the chairperson chooses the opening price for the auctions. See "Six months on ICE – The LBMA Gold Price" for more details.

Not surprisingly, the LBMA gold auctions also settle in unallocated gold, so trading and settlement in the auction is also detached from physical gold markets. Trading volumes in the daily gold auctions usually only reach the equivalent of 1-2 tonnes of unallocated gold transfers, and rarely exceed 3 tonnes. So not only do the LBMA gold auctions not offer wide participation to the thousands of gold trading entities around the world, the volumes traded in the auctions are not representative of the global gold market and the benchmark is therefore not a reliable representation of the global gold market.

Perversely however, the LBMA Gold Price benchmark price is very influential in the gold world in that it is a widely-used valuation source for gold-backed Exchange Traded Funds (ETFs) such as the SPDR Gold Trust and the iShares Gold Trust. Furthermore, it is often used ad a transaction reference price by physical bullion dealers when purchasing physical gold from refineries and suppliers. The LBMA Gold Price is also widely used as a benchmark for valuing financial products such as ISDA gold interest rate swaps, gold options and other gold derivatives, and is even used by other futures exchanges as a reference point on their gold futures contracts, for example the gold futures contract (FGLD) of the Malaysia Derivatives Exchange.

Therefore, this reference price and auction, which is controlled by a handful of bullion banks under the banner of the LBMA, is based on trading synthetic gold, but is referenced widely around the world in countless gold contracts and in countless physical gold markets and retail gold outlets.

Even very large central bank physical gold transactions take this gold fixing reference price derived in London and then use it as a price with which to execute their own independent bi-lateral transactions. For example, when the Swiss National Bank used the Bank for International Settlements (BIS) gold trading desk as its agent to sell hundreds of tonnes of physical gold in the early 2000s, the transaction prices used for the transfers were based on taking the London Gold Fixing price as a reference price. As another example, in 2010, the IMF’s so-called ‘on-market’ gold sales were conducted by a selling agent who also based the sales transfer prices on the London Gold Fixing price. This is the same London Gold Fixing that is currently under investigation in an ongoing New York court class action suit.

Of concern here is that a benchmark that was controlled by a cartel of London-based bullion banks, that was opaque in its operation, and that is currently the subject of a gold price manipulation class action suit, was being used to value very large physical gold transactions. The question must be asked, was this benchmark fit for purpose and to what extent was it representative of the underlying worldwide physical gold market?

Question: So what about outside London and US / NY trading hours. Do other markets contribute more during these other times, for example TOCOM in Japan and MCX in India?

In general, higher trading volumes mean more liquidity to drive price discovery. But since financial markets are integrated, price information rapidly flows between markets due to simultaneously and overlapping trading. Futures markets such as TOCOM in Japan and MCX in India do contribute to gold price discovery, especially at times when the larger markets are not trading, but because these other venues are less liquid, COMEX tends to lead in the lead-lag analysis of futures prices. This finding is according to a study by financial academics from Bangkok University led by Rapeesorn Fuangkasem.

Question: How does gold lending affect the gold price?

The Gold Lending Market is centred in London at the Bank of England. It is here that central banks and commercial bullion banks interact in the execution of ultra-secretive gold lending and gold swaps transactions that increase the available supply of gold. Bullion banks euphemistically refer to this as liquidity provision but these transactions act as a supply overhang on the gold market. Few if any transactional details about the gold lending market are ever made public. If gold lending trade details were market-wide knowledge, their impact would be immediately reflected in the gold price. But they are not. Secrecy about central bank gold lending transactions therefore makes this market informationally inefficient. And when a market is informationally inefficient, the prices in that market do not necessarily reflect the non-public information in that market.

Likewise gold lending and gold swaps are not reported distinct from central bank gold holdings. In the perverse world of central bank accounting policies, gold held and gold lend/swapped is merely reported as one line item of 'Gold and Gold Receivables' on central banks' balance sheets. Therefore, the real state of central bank gold holdings is obscured for any central bank engaged in gold lending or gold swaps.

Gold Lending also provides borrowed physical gold for bullion banks to engage in leveraged fractional-reserve bullion banking and trading, mostly in London where the international spot gold price is predominantly determined. Therefore, gold lending, the leveraged and fractional-reserve nature of gold trading, and the lack of reporting of real central bank gold holdings, all align to have a potentially depressing effect on the gold price as discovered in the London Gold Market.

The Essence of Central Bank Gold Lending to Bullion Banks

Question: Given that paper gold markets determine the gold price, then when or how could physical markets begin determining the gold price?"

There are two sets of gold markets –  on the one side, the COMEX gold futures and London OTC unallocated gold spot markets which are both ultra leveraged and which both create gold supply out of thin air, and on the other side, the physical gold markets which inherit the gold prices derived in these paper gold markets. Currently the physical gold markets have no effect on the international gold price.

Any shift away from the dominance of gold price discovery in the paper markets to a dominance of gold price discovery in the physical gold markets could only occur via a disconnect between physical gold prices and paper gold prices. The conditions for such a disconnect to occur would only be possible in an environment in which trading behaviour in the paper markets changed and/or the supply-demand balance in the physical gold market became acutely stressed and out of balance.

A shift in trading behaviour in the paper gold markets refers to an increased preference for converting paper gold claims (unallocated positions or gold futures positions) into physical holdings either directly by exercising conversion rights, or indirectly by selling paper gold and then using the proceeds to buy physical gold. Many of these paper claims are held by institutional and wholesale market clients. An increase at the margin in paper gold holders demanding direct conversion of their paper claims into physical gold would probably make such conversion impossible as cash-settlement of futures and unallocated positions would be introduced and made obligatory by regulators and exchange / marketplace providers.

The indirect option would be to sell paper gold and then buy physical bullion on the physical gold market from bullion dealers such as BullionStar. This move into physical gold would raise physical gold demand to such an extent that it could overwhelm available gold supply. At the same time the international gold price would fall because of selling pressure in the paper gold markets, thereby creating a disconnect between the price of paper gold and the price of physical gold, and would make the continued holding of paper gold claims ever riskier.

One trigger that could prompt a shift in sentiment from paper gold to physical gold would be a realization by a critical mass of paper gold holders that physical gold stocks are finite, while paper gold claims are at best fractionally-backed. The acceptance of this reality would be a self-fulfilling prophesy, prompting more and more paper gold claim holders to attempt to rotate into physical gold.

The contemporary physical gold markets have already witnessed sustained flows of physical gold from West to East over the last number of years driven by huge physical gold demand emanating from China, India and much of the rest of Asia. While physical gold flows are dynamic and while gold flows can and sometimes do reverse out of normal recipient destinations such as Hong Kong, Turkey, Dubai and Thailand, this is not true of China and to a large extent is not true of India either, where gold that gets imported does not come back out again. India has imported over 11,000 tonnes of gold since 2001. China has imported 7,200 tonnes of gold since 2001.

As more and more gold goes into destinations such as China and India in quantities which exceed annual gold mine supply, there is less gold available in above ground stockpiles to meet supply deficits. This is akin to a slow bank run on gold. There is also very little gold stored in the London gold market that is not already accounted for by central bank gold holdings or ETF gold holdings. Coupled with this, if in the future the paper gold holders shift to a preference for converting their paper claims into physical gold, this could also be a catalyst for tipping the physical gold market even further into a situation of excess demand and acute supply stress.

In a scenario of a destructing paper gold market, ownership of physical allocated and segregated gold is paramount. This means physical gold that is unencumbered, free from competing claims and titles, and that cannot be lent out or swapped. The paper gold market is already a gigantic bubble which has expanded to an unsustainable size and whose huge fractionally-backed claims are supported by very small physical gold foundations. The unsustainable nature of such a bubble dictates that it's a matter of when and not if the paper gold bubble bursts. In such a scenario, physical gold ownership is the only thing that can protect against a systemic collapse of the financial system and protect against the destruction of the fractionally-reserved gold banking system.


BullionStar's ideological belief promotes freedom of speech and liberty. Likewise, we believe that open debate produces improved analysis and research. Indeed, the BullionStar blog platform encourages varied opinions and well-researched ideas. Debate is particularly important when applied to the gold market, a market which is often opaque and deliberately shrouded in secrecy by its influential bullion bank and central bank participants.

BullionStar’s precious metals analyst Koos Jansen has a different view and believes that while paper markets might have some short-term impact on price, the physical gold market is more dominant in gold price formation over the long-term. Due to having taken some time off recently for health reasons, Koos did not contribute to the following article. But he recently summarized his view as follows:

"Due to my research in recent years my opinion has shifted from 'the gold price is purely set in the paper markets' to 'the physical market is more dominant in the long-term whereas the paper market has more impact in the short term'. That's where I stand now. If central banks suppress the price over years/decades they need to supply physical gold or the paper and physical price would diverge. Potentially there is a combination of paper and physical schemes at work."

Koos Jansen will, at a later point in time, present his view by answering and publishing the same or similar questions on the BullionStar website.

This article first appeared as "What sets the Gold Price – Is it the Paper Market or Physical Market?" on the BullionStar website.

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Maestro Maestro's picture


Bank A and Bank B agree to collude to manipulate the price of gold and silver lower.  To accomplish this, they sell precious metals futures contracts to each other at ever lower prices, never closing their mutual positions nor standing for delivery of physical metal, nor offering nor selling said pm contracts to a third party at higher prices.  Persuade a few other large banks or monied interests to join in the club (or gold pool) and feat accomplished.

Until the serfs rebel for no (perceived) good reason.


Your ever eternal problem is that you're not God nor is anybody else.

Maestro Maestro's picture

Worse than the bankers rigging gold and silver prices and not having the gold that they sold you (or selling gold that they don't have, via fraudulent COMEX Futures contracts) is the fact that we don't even have MONEY today.  Therefore all financial transactions and economic numbers predicated on the existence of money are FRAUD and FORGERIES presently.

Electronic digits and paper fiat currencies in use today are NOT money, according to the law of the country that issues the reserve currency of the world, the US Dollar (Article 1, Section 10 of the US Constitution); or by the tenets of the science of Economics (i.e., fiat currencies are not money because they are not a store of value nor a unit of account due to the fact that NOT ONE fiat currency's value is actually determined or stipulated in concrete legal terms).  Dollars and Euros and Yens are not even lawfully DEFINED as to what they all are exactly; what their economic worth and transactional value is. Hence, fiat currencies simply cannot constitute the legal foundation of any lawful contract!

(Also, there cannot be either inflation nor deflation in the ABSENCE of money.  Both inflation and deflation are monetary events which cannot take place where there literally is no money.)

What we have today is massive GLOBAL FRAUD mascarading as a monetary system based on the (fraudulent) US dollar because all fiat currencies are basically only a derivative of the US dollar, including the Euro, the Yen, the Yuan, the Rouble, the Shekel and the Riyal.


Why do a few people get the right to print fake fiat money out of nothing and buy your goods and services with it whereas you have to WORK to obtain the same worthless money created out of nothing?

THAT is the question at the heart of the matter.  That the bankers manipulate interest rates or the price of gold via fraudulent Futures trading (by selling gold that they don't have) with fiat money is a moot point.

To put it differently: why do the bankers get to have anything that they want without working for it and you, you don't?

All this talk about market rigging, monetary theory and fraudulent (paper) gold trading is a cover-up for INJUSTICE.

The US Constitution FORBIDS the use of debt as money; the US Constitution proscribes (debt) notes which is what the US dollar is presently.  Think, all other currencies are just another name for the US Dollar.

What passes for money today is a CRIME, no more no less.


You are all aiding and abetting this crime every time you buy, sell, pay or get paid.

And then you ask, Why our leaders, the politicians, the bankers, and our military men and women are EVIL?

The answer is, because they are just like YOU. They are your sons and daughters.

MrBoompi's picture

Most of us have known for a long time the paper price sets the physical price, and the paper price is set by the masters of the commodities markets.  I suppose there are a few people who come of age every day, in that they may have not known these things.  I suppose it is good they finally get a glimpse into manipulated markets.  For the rest of us, we might as well be told the sun sets in the west.

Honest Sam's picture

About ten of the world's Central Bankers set the price.  They are in turn led by one monopolist with half a Quadrillion dollars (scheckels, pelf) by the name of Baron Fuckoff de Rothschild, a jew from London, but no nation really.  


NoPension's picture

What does it "cost" the average miner to produce an ounce of gold or silver?

Seasmoke's picture

No one seems to ever have a good answer for me of how did Gold ever get to $1900USD if all the comments below are true. And not only $1900 but I think we can all agree the global economy is much much worse than 2011 and the lies told by TPTB are bigger and bolder than ever.

political_proxy's picture

The world gold price, just as the peoples of the world, are controlled, crushed into a confined space; a fixed existance.


BobEore's picture

Operation 'China Smack' was not properly set up and operating until late 2012.

You need a network of people in banks & brokerages from Japan, Hong Kong, Singapore, and points west to make the kind of impact on derivatives markets which creates the depressed prices of the past 6 years. The perma-smack below $1600 was pretty much the opening bell. Now it runs like clockwork, day in day out. As China accumulates, rest of world withers on the vine. When they are ready, $1900 will be a distant point on the horizon behind.

Not that it will do most anyone much good.

Latitude25's picture

Please explain that last sentence.

BobEore's picture

Full Spectrum Dominance Phase.

Chinese owned African miners sending dore to Swiss refiners, resultant LBMA bars heading directly into London Vaults. Resulting paperwork used by gnomes for accounting  shows another China shipment, based upon ownership...

bill o lading shows the real story. Huge liquidity build up in London prior to a frontal assault by cuddly panda bankers.

Latitude25's picture

Very interesting inside information.  What's the cuddly panda banker motive?  Defending the dollar?

Seasmoke's picture

I think it's so they can "steal" the physical for as cheap as possible.

OCnStiggs's picture

Seasmoke is correct.

With manipulation to lower prices while physical metal hoarding is underway, the motive is self evident. Once the majority of physical is safely locked away, and the fiats collaspe, the value of physical metals will skyrocket. Paper metals owners will get crushed along with the majority of folks who cannot afford any metals. Thode holding physical metals will reign supreme and they will assume the position of World Reserve Currency.

Like it or not, its all by design by the evil money changers.

Get ready or get hammered.

Latitude25's picture

The stealing is when infinite fiat money is created out of thin air.  What does it matter to the chinese what the fiat money price of gold is if not to defend some fiat currency somewhere?

BobEore's picture

Ladies & hermaphrodites...


We have a winner. Prizes tba.

BobEore's picture


one thing it tells me is that the LondonTowne vault which ICBC[Industrial and Commercial Bank of China] recently secured - capable of holding EIGHTY BILLION $ of shiny - at currently depressed prices[!]...

is likely to put paid to the silly notion Rohan has that Stateside action outweighs that of the Bullion Blokes of ol Blighty! Gold flowing east to west... the new normal in a world already sufficiently upside down to make mincemeat of every meme the metals media mafiya ever spun! London = Shanghai West.


Latitude25's picture

Hmm.  Yeah it was east to west for a while.  I heard it switched back again a few months ago to west to east.

Latitude25's picture

Asians love discount prices on physical gold.  That factor must be considered in a 99.96% paper market manipulation scheme run by Central banks.

BobEore's picture

addendum to above...

in a 99.96% paper market manipulation scheme run by Central banks, including certain "Asian" ones.

"Asians" luv pullin the wool over gullible gweilos with more $ than brains. Call it "revenge of the opium smokers!"

Latitude25's picture

Sure.  Since the Chinese own JPMs gold vault in NY and JPM is one of the biggest central bank agents of manipulation, what does that tell you?

Montana Cowboy's picture

First, I am a stacker. I believe in metals. But I refuse to join the Church of Gold and Silver. Somebody needs to play devil's advocate. Think critically. Don't be a believer. If you want to neg this post, please make your argument.

Somebody needs to explain something to me. In the paper markets, there must be a long paired with every short. And every short must buy a long to close out his position and vice versa. Its true that paper shorts have no gold to deliver. But its also true that the paper longs have no cash to take delivery. Both parties are equally absent the ability to perform. This might be too kind to the longs because the shorts are mostly bullion banks with the ability to actually deliver. The longs post an $8,000 margin and commit to a $125,000 obligation they could never complete. This looks much more like the markets are being up-rigged than down-rigged.

So, if the markets are rigged, how do we know if they are being rigged up or rigged down? Of course, the widely accepted theory promoted by miners and coin dealers is that metals have been rigged down to fire-sale discount prices for over a decade. What does their opposition say? Well, the Church of Gold and Silver has no opposition because nobody has any financial interest in promoting the other side of the story.

Is it really possible to down-rig metal in the paper markets to fire-sale prices for decades without depleting the physical supply? And if the physical supply can't get depleted at down-rigged prices, how will it ever endure price escalations? I have asked these questions to all the big promoters and I have yet to receive an answer because they know that the absence of delivery defaults for this long has made liars out of these priests. Rob Kirby went for broke with a theory the silver longs were being secretly paid off under the table to take cash settlements and that large physical gold sales were actually occurring at 200% of Comex (Greg Hunter interviews). Total Bullshit! But Kirby knows that these events must happen for down-rigging theories to be true for decades. So, in desperation, he throws the kitchen sink and goes unopposed by the interviewer, Greg Hunter.

Stackers must remember they are not consumers. They are just remote Comex warehouses. When the mint sells Eagles, the mint just moves metal from one warehouse to another (you). Nothing is consumed. David Morgan recently admitted it - The available above-ground supply of both gold and silver have increased every year since 2006 - while we were being told to expect delivery defaults any day.  

If the price of metals had to be determined exclusively in the physical markets, this growing glut for over a decade suggests the price must decline. This is true of any other glutted commodity. Metals don't get an exemption to supply/demand market dynamics just because they are shiny. If there is a glut of Federal Reserve Notes, stackers call it inflation. How do metals get an exemption?

Now we know that 50% of American households are incapable of producing $500 in an emergency. So who is going to buy this physical metal glut? Of the other 50%, most are too indebted to be involved with metals. They eventually barf up their metals to pay interest and hang on to their house and car.


Maestro Maestro's picture


Bank A and Bank B agree to collude to manipulate the price of gold and silver lower.  To accomplish this, they sell precious metals futures contracts to each other at ever lower prices, never closing their mutual positions nor standing for delivery of physical metal, nor offering nor selling said pm contracts to a third party at higher prices.  Persuade a few other large banks or monied interests to join in the club (or gold pool) and feat accomplished.

Until the serfs rebel for no (perceived) good reason.


Your ever eternal problem is that you're not God nor is anybody else.

Montana Cowboy's picture

So you are saying that an artifically down-rigged price can cause a physical glut? So how does this physical glut get consumed if it doesn't happen when metal is on sale?

political_proxy's picture

Smoke and mirrors.


Akin to fractional reserve banking.


A simple yet elaborate scam.

Montana Cowboy's picture

Better go study real history. When gold was money, the banksters cornered the gold by using fractional reserve lending. Then they wanted silver demonetized because there was too much of it. You don't need fiat paper to deploy fractional reserve scams. Movies like Its a Wonderful Life told these stories to the people. The banks know very well how to do it with gold. In case you didn't know, that is the real story being told by The Wizard of Oz. The Emerald City. The poppy fields. The yellow brick road. The Tin Man (industrial worker), The Scarecrow (farmer), The Lion (William Jennings Bryant, a lawyer at the time trying to inform the public). Dorothy's silver slippers on the gold road (which were changed to red at the last minute because of Technicolor). Bill Still did a documentary on the story. Go watch The Secrets of Oz.

northern vigor's picture

" ...So who is going to buy this physical metal glut?"

I've often wondered as I looked around the neighborhood  at friends and family, who could buy my pms?  The average schmoe couldn't even afford a few oz now, let alone if the shtf. 

But your sentence..." glut of federal reserve notes" gives the answer. There is far more fed notes printed than pms. When the shtf, it won't be the neighbor with the $500,000 mortgage buying your silver...your pm will be used to get hospital treatment for your family, to pay the taxes so cops and your municipality protect your property. You may even buy the neighbor's mortgage ot from the bank with a few gold coins. PMs could be the base for an entire new world currency, or if nothing else it could be sold to the bankers in the new currency, to get your family back into the same class it is now.

If it never happens, at least we can quietly slip the pms to our heirs tax free. 

Montana Cowboy's picture

But there is far more demand for FRNs than for gold. The quantity doesn't matter. What matters is the supply demand imbalances. There is an over-supply of metal relative to the demand. There is a global shortage of FRNs.

And if the USD hyper-inflates, everyone can pay off their home and cars for the price of a loaf of bread. In Wiemar Germany, every bum sleeping under a park bench was a billionaire.

political_proxy's picture

MLK had a dream too.



Insata martial law. The Gov wont 'buy' anything, they will take. If you don't give it up, theys hoot you.

political_proxy's picture

MLK had a dream too.



Insata martial law. The Gov wont 'buy' anything, they will take. If you don't give it up, theys hoot you.

MaxThrust's picture

I agree with your reasoning here. The banks keep making more debt available and the general population keeps adding to their dept pile and therefore dont have the spare cash to buy phyisical. This is probaly why the physical delivery market is priced about the same as the Gold derivatives marktet.

Debt demands interest whereby owning physical does not so one could expect a debt meltdown in the future which in turn make everyone with debt very poor as they loose their houses and cars etc. It will not make gold stackers any richer [as there will be even less money "by value" to be spent on gold] but gold stackers will have money to spend non the less.

BobEore's picture

 I believe in metals.///Ditto/// But I refuse to join the Church of Gold and Silver.///Ditto

Somebody needs to play devil's advocate. Actually, it's the CG&S cultists who ARE the Devil's Advocates. Only those who were willing to sacrifice truth, at the altar of their own avarice, butcher fact-based narratives to placate their own guilt in having sold their metal-holding brethren down the river of deceit... and abort the birth of true, unbiased media representation of the real nature of metals manipulation can be deemed the true perpetrators of EVIL, for necessitating these long years of wandering in a wilderness of mirrors.

Worshippers of a Black Mass of lies, distortions, phony storylines and ever-changing memes, these stooges of the moneypower will, in retrospect will be looked back upon with scorn for the role they played in supporting the shell games of the shillers. Ironically, a great proportion of them masquearade as "Christians," bringing into modern day meaning the term 'wolf in sheep's clothing!'

"Part of my aim in creating this series has been to counteract the appalling lack of informed analysis in the precious metals sector – where simple cheerleading and insular American chart pornucopia substitute for reasoned interpretation of these much more significant outside events that are having and will have such great effect on gold and silver holders. Because of this communication gap, the western investor is held hostage to facile and misleading second hand stories peddled by persons with little direct knowledge of topics of key importance." https://storify.com/SuaveBel/the-golden-elephant-in-the-room

badewann's picture

Interesting theory! Thnak You! But how do those untimely rediculous sell-offs with no apparent cause and reason other than

pulling stops fit in? 

Montana Cowboy's picture

What is a sell-off? There must be a long contract paired to every short contract. Granted, the shorts are concentrated and clustered. But there are not more short contracts than longs. In the Church of Gold and Silver, this equates to market rigging. But in the world of bullion banks that know of the true gluts, this just means its time to take the money from the believers. All you need to know is the physical supply has grown every year since 2006 when it should have been depleted after a decade of alleged down-rigged fire-sale prices. Don't forget it. This one fact is the fly in the ointment. It reveals everything.

Common_Cents22's picture

we've heard that paper gold will go bust at any time....for multiple years now.   what gives???

ebworthen's picture

I don't care.

I know that every physical purchase hurts the Paper Ponzi Ponies.

Go on and prop the paper markets; when time to deliver comes physical holders will rule the roost.

Goldennutz's picture

The short version--


99.96% of COMEX gold futures contracts are total bullshit.

Grandad Grumps's picture

Bankers set the price to wherever they can make the most money. There is no market.

DavidC's picture


This (rather long) article can be summed up as follows;
The futures market is supposed to reflect the cost (and other charges) of storing and insuring gold. However the futures are NOT physical delivered, they can be settled in cash (not so Shanghai's contracts). Hence it is effectively a paper only market and can be thrown around whichever way those with most money to drive the market want it to go.

Or, even more succinctly;
The tail wags the dog.

I own physical, they can NEVER play around with that.


Dragon HAwk's picture

There is only one price, the Delivered Price.

as in Ding Dong, delivery guy is here.

BobEore's picture

In the opaque and mysterious world o gold, Sir Ronan sits high above those barons of b.s. whose castles of distorted facts and failed storylines litter the landscape of Goldistan in states of great decay. His castle has traditionally been almost impregnable to these forces of entropy - given his dedication to fact-based presentation and avoidance of hyperbole.

So it's disappointing in the extreme to see the castle keep of the mighty Marquess of meritorious media fall prey to those same forces here. His usually impeccable presentation of the way things work ... behind scenes... is marred by the presence of consensus trace mantras like

this is not true of China and to a large extent is not true of India either, where gold that gets imported does not come back out again.

sell paper gold and then buy physical bullion on the physical gold market from bullion dealers such as BullionStar. This move into physical gold would raise physical gold demand to such an extent that it could overwhelm available gold supply.

The Shanghai Gold Exchange (SGE) is the world’s largest physical gold exchange

one of which is mere fairy tale designed to keep golden holders from being naughy enough to ever think for themselves, the other (two) being sentences either loaded with caveats which work to make a technically correct statement malleable to a distorted interpretation... or the use of  italics in a manner equally imposing of mistaken meaning.

We can take each of these quoted remarks up in turn, provoking a lively & creative CONVERSATION of the kind which mutually benefits all involved... most particularly readers interested in information which helps them in coming to their own INFORMED conclusions...

but as we've learned from LONG experience on this board and others of it's kind...

first we must pause for the obligatory outpourings of angst, anger, and serial disinfo designed to divert any and all such discussions from ever reaching the point of critical mass... which might 'overwhelm available' supply of hot air and venom!

Stay tuned.... we'll be back! Right after these words from our deceivers...



Stevie.... Philly... Joey...???

hey you guys - cmon... this is your cue... Let's Roll!



Pinto Currency's picture

In this presentation, you can see the impact of the introduction of the paper gold LBMA in 1987 - both on price and on interest rates:


Paper gold dominates the price.