thored by Paul Craig Roberts and Dave Kranzler,
This article establishes that the price of gold and silver in the
futures markets in which cash is the predominant means of settlement is
inconsistent with the conditions of supply and demand in the actual physical or current market
where physical bullion is bought and sold as opposed to transactions in
uncovered paper claims to bullion in the futures markets. The supply of
bullion in the futures markets is increased by printing uncovered
contracts representing claims to gold.
This artificial, indeed
fraudulent, increase in the supply of paper bullion contracts drives
down the price in the futures market despite high demand for bullion in
the physical market and constrained supply.
We will demonstrate with economic analysis and empirical evidence that the bear market in bullion is an artificial creation.
The law of supply and demand is the basis of economics.
Yet the price of gold and silver in the Comex futures market, where
paper contracts representing 100 troy ounces of gold or 5,000 ounces of
silver are traded, is inconsistent with the actual supply and demand
conditions in the physical market for bullion. For four years the price
of bullion has been falling in the futures market despite rising demand
for possession of the physical metal and supply constraints.
We begin with a review of basics. The
vertical axis measures price. The horizontal axis measures quantity.
Demand curves slope down to the right, the quantity demanded increasing
as price falls. Supply curves slope upward to the right, the quantity
supplied rising with price. The intersection of supply with demand
determines price. (Graph 1)
A change in
quantity demanded or in the
quantity supplied
refers to a movement along a given curve. A change in demand or a
change in supply refers to a shift in the curves. For example, an
increase in demand (a shift to the right of the demand curve) causes a
movement along the supply curve (an increase in the quantity supplied).
Changes in income and changes in tastes or preferences toward an item
can cause the demand curve to shift. For example, if people expect that
their fiat currency is going to lose value, the demand for gold and
silver would increase (a shift to the right).
Changes in technology and resources can cause the supply curve to
shift. New gold discoveries and improvements in gold mining technology
would cause the supply curve to shift to the right. Exhaustion of
existing mines would cause a reduction in supply (a shift to the left).
What can cause the price of gold to fall? Two things:
The demand for gold can fall,
that is, the demand curve could shift to the left, intersecting the
supply curve at a lower price. The fall in demand results in a reduction
in the quantity supplied. A fall in demand means that people want less
gold at every price. (Graph 2)
Alternatively, supply could increase, that is, the
supply curve could shift to the right, intersecting the demand curve at a
lower price. The increase in supply results in an increase in the
quantity demanded. An increase in supply means that more gold is
available at every price. (Graph 3)
To summarize: a decline in the price of gold can be caused
by a decline in the demand for gold or by an increase in the supply of
gold.
A decline in demand or an increase in supply is not what we are
observing in the gold and silver physical markets. The price of bullion
in the futures market has been falling as demand for physical bullion
increases and supply experiences constraints.
What we are
seeing in the physical market indicates a rising price. Yet in the
futures market in which almost all contracts are settled in cash and not
with bullion deliveries, the price is falling.
For example, on July 7, 2015, the U.S. Mint said that due to a
“significant” increase in demand, it had sold out of Silver Eagles (one
ounce silver coin) and was suspending sales until some time in August.
The premiums on the coins (the price of the coin above the price of the
silver) rose, but the spot price of silver fell 7 percent to its lowest
level of the year (as of July 7).
This is the second time in 9 months that the U.S. Mint could not keep up with market demand and had to suspend sales.
During the first 5 months of 2015, the U.S. Mint had to ration sales of
Silver Eagles. According to Reuters, since 2013 the U.S. Mint has had
to ration silver coin sales for 18 months. In 2013 the Royal Canadian
Mint announced the rationing of its Silver Maple Leaf coins: “We are
carefully managing supply in the face of very high demand. . . . Coming
off strong sales volumes in December 2012, demand to date remains very
strong for our Silver Maple Leaf and Gold Maple Leaf bullion coins.”
During this entire period when mints could not keep up with demand for
coins, the price of silver consistently fell on the Comex futures
market. On July 24, 2015 the price of gold in the futures market fell to
its lowest level in 5 years despite an increase in the demand for gold
in the physical market. On that day U.S. Mint sales of Gold Eagles (one
ounce gold coin) were the highest in more than two years, yet the price
of gold fell in the futures market.
How can this be explained? The financial press says
that the drop in precious metals prices unleashed a surge in global
demand for coins. This explanation is nonsensical to an economist. Price
is not a determinant of demand but of quantity demanded. A lower price
does not shift the demand curve. Moreover, if demand increases, price
goes up, not down.
Perhaps what the financial press means is that the lower price
resulted in an increase in the quantity demanded. If so, what caused the
lower price? In economic analysis, the answer would have to be an
increase in supply, either new supplies from new discoveries and new
mines or mining technology advances that lower the cost of producing
bullion.
There are no reports of any such supply increasing developments. To
the contrary, the lower prices of bullion have been causing reductions
in mining output as falling prices make existing operations
unprofitable.
There are abundant other signs of high demand for bullion, yet the prices continue their four-year decline on the Comex.
Even as massive uncovered shorts (sales of gold contracts that are not
covered by physical bullion) on the bullion futures market are driving
down price, strong demand for physical bullion has been depleting the
holdings of GLD, the largest exchange traded gold fund. Since February
27, 2015, the authorized bullion banks (principally JPMorganChase, HSBC,
and Scotia) have removed 10 percent of GLD’s gold holdings. Similarly,
strong demand in China and India has resulted in a 19% increase of
purchases from the Shanghai Gold Exchange, a physical bullion market,
during the first quarter of 2015. Through the week ending July 10, 2015,
purchases from the Shanghai Gold Exchange alone are occurring at an
annualized rate approximately equal to the annual supply of global
mining output.
India’s silver imports for the first four months of 2015 are 30%
higher than 2014. In the first quarter of 2015 Canadian Silver Maple
Leaf sales increased 8.5% compared to sales for the same period of 2014.
Sales of Gold Eagles in June, 2015, were more than triple the sales for
May. During the first 10 days of July, Gold Eagles sales were 2.5 times
greater than during the first 10 days of June.
Clearly the demand for physical metal is very high,
and the ability to meet this demand is constrained. Yet, the prices of
bullion in the futures market have consistently fallen during this
entire period. The only possible explanation is manipulation.
Precious metal prices are determined in the futures market,
where paper contracts representing bullion are settled in cash, not in
markets where the actual metals are bought and sold. As the
Comex is predominantly a cash settlement market, there is little risk in
uncovered contracts (an uncovered contract is a promise to deliver gold
that the seller of the contract does not possess). This means that
it
is easy to increase the supply of gold in the futures market where
price is established simply by printing uncovered (naked) contracts.
Selling naked shorts is a way to artificially increase the supply of
bullion in the futures market where price is determined. The supply of
paper contracts representing gold increases, but not the supply of
physical bullion.
As we have documented on a number of occasions, the
prices
of bullion are being systematically driven down by the sudden
appearance and sale during thinly traded times of day and night of
uncovered future contracts representing massive amounts of bullion.
In the space of a few minutes or less massive amounts of gold and
silver shorts are dumped into the Comex market, dramatically increasing
the supply of paper claims to bullion.
If purchasers of these shorts stood for delivery, the Comex would fail. Comex
bullion futures are used for speculation and by hedge funds to manage
the risk/return characteristics of metrics like the Sharpe Ratio. The
hedge funds are concerned with indexing the price of gold and silver and
not with the rate of return performance of their bullion contracts.
A rational speculator faced with strong demand for bullion and constrained supply would not short the market.
Moreover, no rational actor who wished to unwind a large gold position
would dump the entirety of his position on the market all at once. What
then explains the massive naked shorts that are hurled into the market
during thinly traded times?
The bullion banks are the primary market-makers in
bullion futures. They are also clearing members of the Comex, which
gives them access to data such as the positions of the hedge funds and
the prices at which stop-loss orders are triggered. They time their
sales of uncovered shorts to trigger stop-loss sales and then cover
their short sales by purchasing contracts at the price that they have
forced down, pocketing the profits from the manipulation
The manipulation is obvious. The question is why do the authorities tolerate it?
Perhaps the answer is that a free gold market serves both to
protect against the loss of a fiat currency’s purchasing power from
exchange rate decline and inflation and as a warning that destabilizing
systemic events are on the horizon. The current round of
on-going massive short sales compressed into a few minutes during thinly
traded periods began after gold hit $1,900 per ounce in response to the
build-up of troubled debt and the Federal Reserve’s policy of
Quantitative Easing.
Washington’s power is heavily dependent on the role of the dollar as world reserve currency.
The rising dollar price of gold indicated rising discomfort with the
dollar. Whereas the dollar’s exchange value is carefully managed with
help from the Japanese and European central banks, the supply of such
help is not unlimited.
If gold kept moving up, exchange rate
weakness was likely to show up in the dollar, thus forcing the Fed off
its policy of using QE to rescue the “banks too big to fail.”
The bullion banks’ attack on gold is being augmented with a
spate of stories in the financial media denying any usefulness of gold. On
July 17 the Wall Street Journal declared that honesty about gold
requires recognition that gold is nothing but a pet rock. Other
commentators declare gold to be in a bear market despite the strong
demand for physical metal and supply constraints, and some influential
party is determined that gold not be regarded as money.
Why a sudden spate of claims that gold is not money? Gold
is considered a part of the United States’ official monetary reserves,
which is also the case for central banks and the IMF. The IMF accepts
gold as repayment for credit extended. The US Treasury’s Office of the
Comptroller of the Currency classifies gold as a currency, as can be
seen in the OCC’s latest quarterly report on bank derivatives activities
in which the OCC places gold futures in the foreign exchange
derivatives classification.
The manipulation of the gold price by injecting large
quantities of freshly printed uncovered contracts into the Comex market
is an empirical fact. The sudden debunking of gold in the financial
press is circumstantial evidence that a full-scale attack on gold’s
function as a systemic warning signal is underway.
It is unlikely that regulatory authorities are unaware of
the fraudulent manipulation of bullion prices. The fact that nothing is
done about it is an indication of the lawlessness that prevails in US
financial markets.
