Deutsche Bank’s metals price rigging evidence

By Clint Siegner*

Some say there is honor among thieves. Perhaps, but apparently not among international  bankers when they are under serious legal and regulatory pressure.

Bank Heist

German behemoth Deutsche Bank agreed last spring to assist plaintiffs and regulators by exposing their co-conspirator banks in a wide ranging scheme to rig prices and cheat clients.

They cut a deal to avoid even larger monetary damages and criminal prosecution. Executives there agreed to pay nearly $100 million to settle their legal troubles and share information. In return the bank gets to deny wrongdoing and keep its license to trade in markets. The other alleged cheaters, including the Bank of Nova Scotia, UBS, Barclays, HSBC, Fortis, Standard Chartered, and Bank of America, may not get off as easy.

More details are now emerging as to exactly what kind of evidence Deutsche provided, and it indeed appears to be damning. Plaintiffs in a class action suit looked it over and just filed an amended complaint with broader allegations of wrongdoing implicating more banks. The revised complaint describes what they found in the Deutsche materials this way:

Plaintiffs incorporate factual allegations based on the more than 350,000 pages of documents and 75 audio tapes that Deutsche Bank produced as part of the cooperation provisions of its Settlement Agreement with Plaintiffs (collectively, the “DB Cooperation Materials”). The DB Cooperation Materials provide direct, “smoking gun” evidence of a conspiracy among the Fixing Members and several other silver market makers, including at least UBS, Barclays, Standard Chartered, Fortis, and Merrill Lynch, to illegally manipulate the price of silver and silver financial instruments at artificial, anti-competitive levels through multiple means.

“Smoking gun” appears to be an apt description. Here is an example of a chat between a trader at Deutsche Bank and one at HSBC:

Deutsche Bank [Trader-Submitter A]: I got the fix in 3 minutes

HSBC [Trader A]: I’m bearish

Deutsche Bank [Trader-Submitter A]: Hahahaha

HSBC [Trader A]: Massively… Really wanna sell sil * * *

HSBC [Trader A]: Let’s go and smash it together

That’s clear evidence of illegal collusion to manipulate prices down. But will this hoard of evidence actually lead to anything meaningful in terms of cleaning up the marketplace? We know banks have been rigging all sorts of markets and sticking it to their own customers for a long, long time with little repercussion. Regulatory capture – the cozy relationship between Wall Street and the bureaucrats who often want nothing more than to land a high-paying job there – is a real problem.

The CFTC, which regulates futures markets, announced they were closing their investigation into silver manipulation in 2013. After spending more than 7,000 enforcement hours, officials there somehow managed to miss what appears to be institutionalized cheating over a period lasting years.

Bart Chilton, who spearheaded the CFTC investigation, left for greener pastures shortly after the investigation wrapped up. He got a much better paying gig at nation’s largest law firm, advising companies on the topic of regulation. Many have all but given up on agencies like the CFTC when it comes to keeping banks honest.

There is, however, reason for investors to hope. This class action lawsuit is the biggest civil litigation pertaining to metals market rigging to ever get past first base. The judge will allow discovery to proceed, based in large part upon the evidence provided by Deutsche Bank. Attorneys will start deposing traders and bank officials and attempting to find out just how deep the corruption goes. And, because it is a civil matter, the case cannot be derailed by inept or compromised regulators.

Deutsche Bank agreed already to fork over nearly $100 million as part of the suit. Other class-action suits are already pending and it is safe to say more victims will look at that jackpot and jump into the game.

The new evidence might even be too compelling for regulators to keep looking the other way. It is at least possible investors will see actual criminal prosecutions and banks losing their privileges to trade in these markets.

Metals market rigging has moved out of the realm of theory and into the realm of fact. Perhaps, for the first time ever, investors in the sector have a real shot at more honest markets and price discovery. Wouldn’t that be nice?

Advertisements

With gold little is as it seems

 

A lightly edited rerun of another of my sharpspixley.com articles – well I do need to supplement my pension by writing for SP.  In it I endeavour to point to  various aspects of gold pricing and analysis  which set the yellow metal apart form other metals (except perhaps silver which tends to hang onto gold’s coattails.)  Gold is unique in being neither a true commodity – nor a wholly monetary metal although it falls far closer to the latter than the former.  So here goes:

The longer I have been associated with the gold mining sector – over 50 years since I worked as a junior mining engineer on what was then one of the world’s oldest and largest major gold mines – the more I recognise that the gold price itself frequently defies all logic.  Back then gold mining economics were easier to predict in many respects, although perhaps not for the miners which were feeling the squeeze from rising technical costs and a gold price which had been fixed at US$35 an ounce for around 30 years.

According to official U.S. inflation statistics, although these almost certainly understate the true position, $35 back then would be worth just under $300 today – not a level at which most, if any, gold miners could be profitable, but it should also be recognised in most gold producer domestic currencies the inflation rate will have been many times higher and the relative value of mined gold to the economics of gold mining will have changed drastically.  (Other estimates based on the fall in the purchasing power of the dollar suggest that $35 in 1960 is actually the equivalent of around $1,150  today – interestingly about where the gold price is now!)  Gold was thus probably underpriced 60 years ago and thus still is in today’s money.

Of course mining and mineral extraction technology has made huge advances since 1960 and global gold production has more than doubled, but calculations of gold supply and demand are fraught with argument, with some key analysts disputing the estimates from the major analytical consultancies, particularly in respect of Asian demand (See: Gold, GFMS, China Demand – Koos speaks out).  Global new mined gold output does seem to have peaked and looks likely to start reducing further in the years ahead.

Koos Jansen has also published some other analysis which goes much further than what was basically a critique of the way GFMS calculates Chinese gold demand in the face of some substantial – some would say irrefutable – evidence that published figures for gold flows  into China are more than double the GFMS figures for Chinese gold consumption, in part because of what GFMS defines as consumption.  And GFMS is not the only consultancy accused of publishing misleading statistics – its main competitors, Metals Focus and CPM Group also stand so accused.

In an earlier article Jansen goes further and pointed to major anomalies not only in gold demand statistics for China, but for the consultancies’ worldwide estimates too.  He sees the biggest anomalies arising because they tend to treat gold as a commodity and effectively ignore its parallel monetary role – See: The Great Physical Gold Supply & Demand Illusion.

Jansen comments as follows: “In reality gold is everlasting and cannot be consumed (used up), all that has ever been mined is still above ground carefully preserved in the form of bars, coins, jewelry, artifacts and industrial products. Partly because of this property the free market has chosen gold to be money thousands of years ago, and as money the majority of gold trade is conducted in above ground reserves.  Indisputably, total gold supply and demand is far in excess of mine production and retail demand.”

Jansen’s assertion certainly makes some of the seemingly strange goings on in terms of gold pricing perhaps a little more understandable, although not any more transparent –  indeed probably less so.

Meanwhile Deutsche Bank’s settlement of price rigging allegations (without actually admitting guilt) in the silver market, together with an apparent assertion that some other major global financial institutions have been doing likewise, is raising  a host of other questions regarding precious metals pricing.  Some commentators  have been suggesting that if manipulation of the silver market was rife then it is highly likely that the gold market has been similary rigged too which will hardly be a surprise to followers of these markets and justifies some of the accusations that GATA has been making for years.  What remains uncertain in the case of gold in particular is that if it indeed has been happening, which seems highly likely, whether the price rigging has just been conducted by the major financial institutions acting on their own, or whether with the support of government institutions and central banks (which is the GATA position).

What this all means, of course, is that the gold price moves in mysterious ways unfathomable to the person in the street.  With likely regulatory complicity we don’t see this situation ending in the near future unless stimulated by an equity market crash which overwhelms the power of the financial establishment to rein it back.  But then this latter is seen as being increasingly likely by many astute financial observers who see it as not a case of ‘if’, but ‘when’.

Record Q1 gold demand tempered by roll-over threat. The Holmes Gold SWOT

Frank Holmes, CEO and Chief Investment Officer of U.S. Global Investors  gives us his weekly analysis of last week’s reported Strengths, Weaknesses, Opportunities and Threats for gold and gold stock investment

Strengths

  • The best performing precious metal this week was silver, down 1.82 percent.
  • According to data from the Commerce Department on Thursday, orders for U.S. capital goods declined unexpectedly in April for a third straight month, reports Bloomberg. With American manufacturers continuing to pull back, this could indicate a lesser chance for the Federal Reserve to raise rates in June.
  • This week the World Gold Council reported that in the first quarter of 2016 global demand for gold was 1,290 tons – the highest ever for a first quarter – as investors seek safe haven investments in a time of economic fragility and uncertainty caused by negative interest rates, reports China Daily. The article continues by pointing out that buying U.S. Treasuries or other sovereign debt from Western countries has also become a “less attractive option for central banks because of their low yields.”
  • The global manufacturing purchasing managers’ index (PMI) is on track to decline in May, reports Cornerstone Macro. The research group believes this is a likely outcome given declines in the May Japanese and eurozone manufacturing PMIs, as well as a probable decline in the U.S. manufacturing PMI. Cornerstone points out a handful of important global tailwinds in its report including low interest rates and healthy U.S. growth, but says there are even more headwinds that include a China slowdown, excess emerging market debt and a Brexit risk, to name a few

Weaknesses

  • The worst performing precious metal for the week was platinum, down 4.40 percent.
  • Gold traders are bearish for a second week – the first successive week since mid-April – as bets increase on an interest rate move from the Fed, reports Bloomberg. The Fed Funds futures show the odds of a rate increase by July seen at 52 percent, up from 48 percent at the end of last week.
  • Following a pause in the dollar’s rally this week, Bloomberg reports that gold snapped six days of losses, rebounding from the lowest level in seven weeks. The article continues, stating that gold is still headed for the biggest monthly drop since November on speculation the U.S. Federal Reserve will increase U.S. borrowing costs as early as next month, denting demand for bullion.
  • As Venezuela’s economic crisis deepens and the government faces concerns that it could struggle to honor bond payments, the country held the biggest gold sale by a central bank in eight years, reports Bloomberg. According to data from the International Monetary Fund, Venezuela cut its gold reserves by 16 percent in the first quarter, following a 24 percent reduction in 2015.

Opportunities

  • The Fed may be bluffing on a rate hike, according to Mark Matthews, Head of Investment Research at Julius Baer Group. In an interview with the Economic Times, Matthews discusses the Fed’s history of contradicting itself, most recently on its stance back in February and March. “I think they did not like the fact that the market was not pricing in any rate hikes this year,” Matthews said. “They wanted to have some implicit threat of a rate hike in the market and they have largely achieved that now.”
  • Analysts at RBC Economics have come out stating that despite the “surprisingly hawkish” minutes from the Fed, raising rates in June is “nearly impossible.” In a report released Tuesday by RBC, the group stated “We think a lot of things have to align in order for the Fed to justify a lift at the July confab. September is still complicated by Money Market reform, and November falls right on top of the U.S. presidential election.”
  • Deutsche Bank, in a recent note, says that by preparing markets for future interest rate hikes, the Federal Reserve potentially hampers its ability to actually carry out those hikes in the future, reports Business Insider. The article continues by stating, that said in another way, “The Fed appears stuck in a negative feedback loop wherein suggestions that higher rates are coming create the unsettled conditions that ultimately force the Fed to keep rates right where they are.

Threats

  • UBS believes that gold is set to “roll over,” reports Bloomberg, forecasting bullion to drop back to $1,150 an ounce. The yellow metal could tumble as the U.S. dollar “erodes demand with the Federal Reserve opting for not one, but two rate increases before the year-end,” according to UBS Group AG’s wealth-management unit. Not everyone sees a retreat in gold however. Citigroup raised its year-end target by $100 to $1,250 an ounce, reports Bloomberg.

GLD-Will-Gold-Roll-Over-On-Dollar-Strength-05272016-LG

  • In an interview with CNBC this week, Dennis Gartman cautioned investors on when he believes they should come off the sidelines for gold. He says the time to be bullish on gold is not until after the first interest rate hike of the year. Assuming that a rate increase will happen in 2016, he thinks investors should avoid the precious metal in the near term, as he expects an active market to remain after the central bank acts, reports CNBC.
  • Retailers in Hong Kong are forecast to see the worst downturn in gold sales in at least 15 years, reports Bloomberg. Fewer mainland shoppers are spending less money on jewelry, the article continues, and China’s economic slowdown and anti-corruption campaigns have hurt luxury retailers in Hong Kong with visits by Chinese tourists.