LBMA Gold Price direct participants may all be being investigated by U.S. DoJ for gold price rigging

A month-old, and very hard hitting, article by Tyler Durden of Zero Hedge, has new relevance given the make-up of the initial six direct participants in the LBMA Gold Price benchmarking system as all of them have been reported as being under investigation by the U.S. Department of Justice for possible gold price rigging.

Lawrie Williams

We make no apologies for re-examining a month-old article from Zero Hedge given the recent selection of the six banks now involved in the new London gold benchmarking process.  Never one to mince his words, Tyler Durden of ZeroHedge really climbed into whether the gold market is rigged, and if so (he reckoned it is beyond doubt that it is), who is doing the rigging.  The answer:  virtually everyone with the financial clout to get involved.

In an article on his website published a month ago entitled: Ten Banks, Including JPM, Goldman, Deutsche, Barclays, SocGen And UBS, Probed For Gold Rigging he pointed the finger at almost every major Western banking name out there – and by implication most of the rest of the Western World’s top banks would also be involved too.  Whether the big Chinese banks are also implicated is not stated – but a cynic might conclude that if they are not, then that is perhaps why they have been excluded as Direct Participants in the new London Gold Fixing process – See: Is the new LBMA Gold Price just another Fix? .

Durden commented in his article: “the rigging in the gold market, rigging which involves every single central bank and High Frequency trading outfit is now a proven fact” and pointed to incidences of major banks already having had to pay fines for gold price rigging – but without admitting guilt – and thus tarred virtually all the others, and also the major central banks, with the same brush.  (Perhaps including all central banks was a step too far, but just those which can have a major impact on the gold price would make the point!)

Durden noted that the U.S. Department of Justice probe into gold price rigging was believed to involve investigation into the activities of the following major banks in this respect: Bank of Nova Scotia*, Barclays*, Credit Suisse Group, Deutsche Bank, Goldman Sachs*, HSBC*, J.P. Morgan Chase, Société Générale*, Standard Bank Group and UBS*.  What must be alarming to an outside observer is that all six banks (designated by a * above) selected to handle the new LBMA Gold Price benchmarking process in London are among those reported to be being investigated for gold market rigging

However, like the similar European investigation into precious metals market rigging, Durden obviously does not really expect the U.S. DoJ to find any wrongdoing – or if so only to give the bankers, or some of them, a financial slap on the wrist which in reality will not make the slightest dent in their earnings.  Why?  Because like the similar European ‘probe’, which was dropped, it could likely implicate virtually all the major banks and reveal a manipulation cartel rivalling, or even exceeding, that exposed in the recent Libor probe. “And once traders at the commercial banks turn sides and squeal for the prosecution, well then it would be the central banks’ turn next. Which is why it was imperative to bring the European investigation to a quiet end” Durden commented.  By implication the U.S. probe will end similarly.

Durden obviously writes from a specific ‘gold price is manipulated’ viewpoint which is dismissed by much of the mainstream analytical community, but he would argue that the naysayers are all part of the global financial establishment and would support the status quo anyway.

There certainly is sufficient evidence already out there that at least ‘some’ banking entities, or their employees, have already been found out in attempting to manipulate the gold price for their own ends.  As to whether they have all been ‘at it’, and in concert, is probably going to be impossible to prove – if indeed the regulators will even try that hard to do so!  If Durden is correct, the manipulation runs so deep that for the regulators to do anything more than come up with a judgement so mired in technicalities that it, in effect, finds no blame accruing to the banks is virtually a foregone conclusion.  To do otherwise and find the banks guilty could unleash such a global financial can of worms that it could shake the foundations of the whole capitalist system.

Of course Durden could just be one of those he refers to in his article as who believe that the gold market (not to be confused with Libor or FX) manipulation only exists in the paranoid delusions of a few tinfoil fringe-blogging lunatics.  But like many others of this brigade he does come up with some worrying facts which would tend to support his viewpoint.  The banking establishment would no doubt argue that these are all taken out of context and there is no evidence of any manipulation at all.  And would point to the European probe, and if Durden is correct any forthcoming findings of the U.S. DoJ probe, as proving their point.

But do have a read of Durden’s article as linked in the first paragraph above and make your own assumptions.  It did, at the time, raise some very interesting questions as to the possible conduct of the global financial establishment. Most recently, as noted above,  it would again call into question the selection of the direct participants in the LBMA Gold Price benchmarking process, although one doubts that, even if he is correct in his views and suppositions, much, if anything, will change in the near future!

 

 

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The New London Gold Fixing

Julian D. W. Phillips of www.GoldForecaster.com and www.SilverForecaster.com gives us his thoughts on what will happen when the London gold ‘fixing’ system is changed on Friday this week

The Heart of the Gold Price – The “Fix”

The London Gold Fixing, the twice daily gold pricing mechanism at which the bulk of physical gold transactions take place is changing dramatically. In the past, five London-based gold bullion banks on a direct telephone link to their clients, established a price at which these transactions took place. This was an efficient way to establish an accurate price for gold deals done outside of the contracts used to supply the bulk of gold deals.

It is in this market that physical gold traders and speculators [we view the COMEX market as a financial market as only around 5% of its deals involve the movement of physical gold] also participated. By trading the marginal supplies of gold [outside of contracted sales of the bulk of gold supplies] a much smaller total, the influence of traders and speculators has had a disproportionate impact on the moment-to-moment gold prices. While the developed world received 80% of global cash flow [up to the year 2000] it also held power over the global gold market.

London – the Heart of the Gold Market

For centuries London has been the global hub of the gold market particularly during the Gold Standard, when London was importing South Africa’s over 1,000 tonnes of newly mined gold a year. London has been able to maintain its position as the world’s leading financial market and in particular its gold market. The high standards of gold and people involved in that market allow it to still dominate the physical gold market,

In the last few years there have been charges that the “Gold Fixing” system was outdated and the gold price manipulated by the gold bullion banks, often with government influence.  While this had an element of truth in it, it was not true of the overall London gold market’s individual professional operators.

The main gold price manipulation in the past came from 1933 [when the dollar was devalued against gold] and after 1985, when central banks encouraged the acceleration of gold production to swamp the gold market, while implying that they were willing to sell off their over 30,000 tonnes of gold into the gold market. Such manipulation came to a halt in 2009.  Since then individual traders have manipulated prices not only in the gold market but interest rate markets and remain under investigation for other incidents of manipulation in financial markets. But the perception has been that the gold market has been operated by professional, capable men and women, in general.

The main bullion banks that operated the gold markets have also been responsible for shipping gold bought there, to the global markets. As we have seen in the recent past, the banks can enjoy larger incomes from the inefficiencies of the distribution chains, which invite the establishment of premiums in markets such as Shanghai and India. These premiums accrued to the banks, so they did not encourage an improvement in the distribution system or the lowering of such premiums.

The rise of the Emerging World

By 2020, at the latest the emerging world will enjoy 65% of global cash flow and the developed world 35% of it. The shift of wealth and power eastwards has led to a very different global gold market. In the developed world the dollar-based currency system has sought to wean the developed world off gold and onto national currencies and has succeeded to date. The gold market appears to therefore have less relevance to financial life than it has had throughout history. With the development of markets trading in gold shares or other gold derivatives [futures and options] the bulk of the demand for actual gold has shrunk to very low levels in the west. This has made it far easier to influence gold prices more directly as new supplies have hit the ceiling they have now.

The result has been that the dominance of the major western banks over the gold markets and participants is almost complete. The sheer power of the volumes of money they can wield over all financial markets has allowed them and their traders to ‘make’ prices.

But as emerging markets have risen in wealth and power and gold production, the ability to ‘make’ prices should have moved away from the developed world eastwards reflecting the percentage of global gold demand China and India represent, alongside the Middle East, if markets had been efficient. But they haven’t as the institutions that operated the gold markets retained their power over distribution and markets.

Add demand from the Middle East to China and India and their demand represents around 75% of global gold demand. On top of that China at an annual production level or around 450 tonnes is now the largest gold producer on the planet. So why doesn’t the gold market reflect the fundamental changes in supply and demand?

It’s all about presence in the global gold market and the products on offer and the ease that they move across the different markets. China’s gold market is still developing on the pricing front. It has developed strongly in terms of gold used in its financial system and continues to expand its distribution system westwards in China, but has a long way to go to reach all corners of China. More importantly, its absence from the London gold market, in terms of participating directly in it, has prevented its gold market presence being felt. The same applies in India, where western banks continue to dominate distribution to the country.

It is apparent that China is no longer content to use London’s banks as its only source of foreign supplied gold. To that end it welcomes the redesign of the London Gold Fixing process and wants to join in. On March 20th the London Gold Fix changes to a new mechanism, the LBMA Gold Price,  involving global banks as well as the London Bullion Market banks that operate the Gold Fixing now. It is hoped that the new electronic mechanism will operate more efficiently and smooth out global prices as well as lower the influence of the current London banks on the gold price.

At the moment there is a $5 premium over and above the London gold price in Chinese gold markets. With the following Chinese banks; Bank of China Ltd, China Construction Bank Corp and ICBC now expected to join in the London Fixing, the pricing power of the Chinese gold market will hopefully, directly impact the gold price thereafter.

If we see the premium over the gold price, in China, disappear, this will have happened.  Bear in mind that Industrial and Commercial Bank of China has become the world’s largest gold retail bank already and will bring to bear its significant number of clients in China. Not only do we expect these banks to operate in a way that they will try to remove the gold price premium in China [which at the moment increases the profitability of the selling [mainly foreign] banks] but make the gold market more globally efficient.

With the Chinese gold market being a one-way street  [no legals export of gold is permitted] we expect the Chinese banks to create a ‘pool of liquidity’ where selling orders from China can take place in London without Chinese gold leaving China. Nevertheless, that ‘pool’ of gold liquidity in London that we expect to see, will facilitate arbitrage operations that smooth out global prices and make the Chinese gold market the two-way street it needs to be to reflect global demand and supply. In turn we will see a 24-hour gold market.

The swing to 1 kg bars from the 400 ounce ‘good delivery’ bars in London we are now seeing from the vast tonnages of gold being re-refined in Switzerland and elsewhere, will hopefully increase the fluidity of market products, globally. The presence of Chinese banks in London may well speed that process up.

Yuan Gold Fix this Year

The Chinese have announced that they will set up their own Gold Fix in the Yuan in Shanghai, later this year. We believe that, alongside the developments we described above, such a Fix will be taken to heart by the global gold market both in the developed emerging and developed world. The fact that the price will only be in Yuan, will ensure that the gold world will get used to the Chinese currency and be in a position to trade in the Yuan without having to go through the Dollar, the Euro and the Pound Sterling, which carry separate risks.

With the Chinese government encouraging the international use of the Yuan in global trade and financing, it will be a small step for foreign entities, including central banks, to hold Yuan in their reserves in the future. But this will not affect the gold market, simply the global currency markets. After all, gold is considered an alternative to all currencies.

The new London Gold ‘Fix’ being implemented with undue haste?

The announcement that the new LBMA Gold Price benchmarking system will commence in March this year may bring this in sooner than might be considered ideal.  Is the LBMA worried about potential competition from Asia in the setting of a new global gold benchmarking system?  Check out full article on http://www.mineweb.com/news/gold/new-london-gold-fix-undue-haste/

Lawrence Williams

Some additional details have now been announced regarding the replacement for the London Gold Fix.  The new electronic system which is to replace the Fix is to be named The LBMA Gold Price (although one suspects that the media may continue to call it the London Gold Fix) and the new system is due to be implemented at a so far unspecified date in March this year.

An announcement from the company selected to handle the new London benchmark pricing process, Intercontinental Exchange (ICE), and from the London Bullion Market Association (LBMA), which made the decision to appoint ICE to manage the pricing mechanism to replace the nearly century old Gold Fixing process which had come under considerable criticism as being too opaque and potentially subject to manipulation, was released Monday.  Among other things it noted that ICE Benchmark Administration (IBA), as the administrator for what will now be known as the LBMA Gold Price, will transition to a physically settled, electronic and tradeable auction, with the ability to participate in three currencies: USD, EUR and GBP. Within the process, aggregated gold bids and offers will be updated in real-time with the imbalance calculated and the price updated every 30 seconds. IBA will use ICE’s widely distributed front-end, WebICE, as the technology platform which will allow direct participants, as well as sponsored clients, to manage their orders in the auction in real time via their desktops……

To read the full article on Mineweb click on the link in the intro above or here

$1230 next resistance level for gold

Julian Phillips’ latest market analysis for gold and silver

New York closed Friday at $1,220.50 up $13.2 as the euro strengthened slightly. In Asia the gold price rose to $1,226.40 with the euro at $1.1851 ahead of London’s opening today at which the gold price tackled $1,230, the next overhead resistance, before retreating to $1,222 just before the Fix. The Fix saw the gold price set at $1,222.00 up $11.75 and in the euro, at €1,035.77 up €10.677 while the euro slightly weaker at $1.1798. Ahead of New York’s opening gold was trading in London at $1,222.30 and in the euro at €1,035.

The silver price closed Friday at $16.46 up 15 cents. Ahead of New York’s opening today it was trading at $16.55.

There were purchases of 2.988 tonnes into the SPDR gold ETF but no change in the Gold Trust yesterday. The holdings of the SPDR gold ETF are at 707.821 and at 162.29 tonnes in the Gold Trust.  With sales seen last week as well as purchases, the activity resembles a changing of the tide in U.S views on gold. What we take from this are two important factors, firstly gold is not being pulled down by the euro [if anything it is being lifted because of this] and secondly, the state of the U.S. economy is becoming stronger, which is not pulling gold down either. Gold is reflecting net global demand and not local conditions.

The gold price is reflecting local conditions in all local gold markets but only in China are these sufficient to impact the overall global market. In other words U.S. demand or supply is too small to change the global price by itself, but today is adding to demand elsewhere. Elsewhere, now includes the Eurozone, Russia, the Middle East, India and China as well as the rest of Asia. It is the net total demand that is overcoming the local influence in New York and London over time.

2015 has, so far, shown us that Asian demand remains robust but only accepting market prices offered and lifting them a little at a time. Today it was $5 over New York’s close before London pulled back prices. The Chinese market sees dollar prices and then translates them into Yuan prices. Euro prices are of no concern to them. New York will be aware of the $1,230 level as being the next resistance level. The gold price made its first attempt at breaching this today.

However, what will affect both European and U.S. attitudes to gold will be news from the E.U. on quantitative easing in the E.U. soon.

Meanwhile, the silver price is cautiously rising. If we see prices convincingly over $1,230 we could see silver start to run.

Julian D.W. Phillips for the Gold & Silver Forecasters – www.goldforecaster.com and www.silverforecaster.com