Harvey Organ: Get Physical Gold & Silver!

My hat is off to Adam and Chris for bringing us such an outstanding contrast of guests. The most important skill for investors to develop is their ability to both listen with an open mind, while at the same time being skeptical and critical. Learning to differentiate between concrete, logical, fact-based arguments and emotionally charged bullsh*t - and correctly identifying each - is a learned skill, and it takes a lot of work to perfect.

Regulars on this site have, in just 7 short days, been treated to both the well-reasoned arguments of a truly accomplished and well-spoken precious metals expert with well researched views supported by facts and evidence (Paul Tustain, featured last week), and have now also been exposed to a completely transparent charlatan, who asserts emotionally charged but factually hollow arguments that categorically lack credibility (Harvey Organ, in this interview).

I suggest readers listen to both podcasts again before reading further. The expose that follows debunking Mr. Organ for the charlatan he truly is will have less value if you just read it. You'll learn a lot more by first listening to both podcasts and keeping score yourself. Listen for assertions of apparent fact, and see which of the claimed "experts" supports his arguments with logic and reason, versus nonsense and emotional innuendo. Develop your own skill at differentiating well reasoned analysis from utter nonsense, then compare your own notes to mine to see whether you picked up on the same things I did.

This interview was particularly compelling because Mr. Organ never once - so far as I was able to tell - ever supported a single thing he said with shred of evidence or objective data. His arguments were persuasive to be sure, but they were emotional statements that lacked the support of evidence. For those who have studied precious metals markets, they were also just plain inaccurate in many cases. I was only willing to listen once, and thought I would note any factual inaccuracies to myself on a Post-It sticky note. By the end of the first half of the interview, I had no less than 7 sticky notes full of notes on the most absurd things Mr. Organ said. I couldn't keep up with all the BS because it was coming faster than I could write, but I'll outline just a few highlights below.

Please forgive the fact that the quote mechanism inserts the word "wrote" after the attributed author. Where you see "Harvey wrote:" below, please read it as "Harvey said:". Please also excuse the fact that I was scribbling notes as fast as I could, and cannot reproduce exact word-for-word quotations. But you'll get the gist of it.

Ok, those are some pretty strong allegations, and they certainly ignite the imagination of anyone whose general disposition is to distrust government. But where's the supporting arguments? Why would the banking cartel want to suppress the price, and how do they achieve that? Contrast to Paul Tustain, who made very clear statements about how the AM/PM London fixes can be and are manipulated by bankers who seek to profit from the general trend of metals movement from west to east.

I think the key here is to understand that charlatans like Mr. Organ and GATA strive to appeal to investors' emotions, rather than positing logical arguments and/or citing verifiable facts. But why do they do this? What comes to my mind is a very impressive and pertinent book, The True Believer, written in 1951 by Eric Hoffer. I cannot recommend this book strongly enough to investors who wish to hone their ability to separate cogent logical argument from irrational appeals to our emotions, which is what people like GATA and Mr. Organ are all about. Here's a summary of Hoffer's perspective from Wikipedia:

My contention is that Hoffer's thesis is exactly what this is all about. GATA, Harvey Organ, Ted Butler, and other charlatans appeal to what Hoffer described as the True Believer. People who are dismayed by the world around them, and who correctly perceive great injustice to exist around them. Their frustration with that bona-fide injustice generates an emotional need for something to believe in - to feel they are part of the in-the-know crowd who is up on the scam, whether it exists or not. Organizations like GATA provide service that emotional need, with a complete and total lack of logical or factual support.

But enough on Hoffer. Let's get back to Mr. Organ's fantasies.

Umm, hello? Open interest refers to the number of outstanding contracts - for each open contract there is exactly one long and one short (it takes two to tango), and by definition, there are always an equal number of longs and shorts. The number of longs standing for delivery is determined only after the contract's deadline for cash settlement. Mr. Organ's statment is so completely far out of touch with reality that one must question what motivated it. Talking about longs standing for delivery triggers unconscious beliefs and fears about whether the system can deliver against those who stand for delivery. And that plays perfectly into Hoffer's theory that this is all about playing to the self-esteem and insecurities of the audience. It has nothing to do with the reality of how precious metals markets function! The definition of "Open Interest" is well known, Commodities 101 level stuff. This kind of statement reveals an agenda to mislead the listener into emotional territory.

Ok, so we have an allegation that bullion banks manipulate the price of the metals. We further have an emphatic allegation that this manipulation is collusive. Is there a single shred of evidence to support these allegations? No. Is there any discussion of the mechanism or technique of manipulation? No. Is there any logical argument whatsoever even explaining what their motive might be? No. But we can't leave it there. We have to add "You can't beat these guys", which appeals to the emotional need of Hoffer's True Believer to feel in-the-know about what the evil banking cartel is up to. Sans evidence or even logical explanation.

Ok, which is it? Are they truly sellers who have no interest in profit, and if so, why is that? And if that is the case, why are they making so much money on these non-profit-motivated trades? Again, we have commentary that is categorically lacking in logic, reason, and common sense. But boy does it feel good to the True Believer to feel they have the inside scoop on the evil cartel's operations!

Wait a minute here. HFTs mostly exploit liquidity inefficiencies, and profit from scalping bid-ask spreads. So how does an HFT algo "take down" a market to do the bidding of an evil bullion bank? If there is a rationale for how this would actually work, why didn't Mr. Organ state that rationale in the interview? Or could it be that this is really about the fact that HFTs have been widely publicized as a major mechanism by which Wall Street rips off retail investors (that part is true by the way), and that appeals to the emotional needs of the True Believer? 

Harvey, ever heard of fundamentals? The whole reason Gold has performed so well over the last few years is central bank money printing. Feb. 29th was a day when FOMC minutes were released revealing that much-anticipated QE3 wasn't going to happen when everyone thought. The big sell-off makes perfect sense, and is supported by fundamentals. But a logical, rational, and coherent explanation based on reality doesn't appeal to the emotional needs of Hoffer's True Believer. Harvey's comments do.

This is a long-standing Ted Butler argument, and so far as I can tell, it derives from a basic lack of understanding of economic terminology. I believe what Mr. Organ means here is that he believes (as does Mr. Butler) that the futures market is not supposed to set the price of precious metals, and that by law it is prohibited from doing so. Rather (according to Butler), the futures market is only supposed to discover the price. This sounds good to a person who is unfamilliar with the phrase price discovery, and it definitely appeals to Hoffer's True Believer, who wants to feel he knows the inside scoop on some sort of dastardly injustice.

But returning to reality, the price of gold and silver is in fact set by trading in the futures market. The way the price is determined is through a free-market bid and ask system, where a stack of bids are matched by computers against a stack of offers, and trades clear immediately when buyers and sellers have compatible prices. The market "clears" when the outstanding bids are all lower than the outstanding offers. The result is that a price is determined - the bid is the price a seller can get immediately, and the ask is the price a buyer can get immediately. In Economics, this function of setting the price by clearing bids and offers is known as price discovery. Here's the Wikipedia entry:

So what's going on here? Both Butler and Organ are going way out of their way to make a big deal about the travesty of justice (in their eyes) that the futures market is never (according to them) supposed to set the price - it's only supposed to discover the price. Butler went so far as to claim in a CM.com podcast that this was "illegal, according to commodity law". Of course he didn't cite a reference to the law he was referring to. Yet the definition of "price discovery" that is well known and accepted in economics is that price discovery is the process by which a price is set!

Are Butler and Organ intentionally and maliciously trying to appeal to the True Believer by trying to make a distinction that makes absolutely no sense? I suppose that's possible, but I don't think so. My guess is that these two men are just so profoundly ignorant as not to comprehend the meaning of the terminology they use so frequently and so authoritatively. But that's only a guess. In any case, the argument is specious and without merit.

This says a lot to me. At this point we're well in to the interview, and Mr. Organ has yet to back a single argument with a single fact or logical or ratioal argument. Now he wants us to trust him. Why would we trust him? Answer: Because he's a master when it comes to appealing to the emotional needs of theTrue Believer. Should we trust him? Of course not - he's a complete charlatan.

Now that's a hell of an allegation! You'd think someone making it would at least have a rationale to assert - even if a bogus one. But no, there was no discussion of reason, cause, or evidence. Just a statement that implied that the government is evil and up to no good. Calling all True Believers...

I probably got the exact wording wrong - I had literally run out of Post-it notes! But this is a recycled argument that was originally put forth by Andrew Maguire, another precious metals charlatan. They are trying to imply (or say directly in Maguire's case) that the physical metal in London is somehow serving as collateral to back the cash-settled forwards market, which is pure and unadulterated nonsense. When an ounce of gold leaves London for the East, there are good reasons to be concerned - the East is getting all the real wealth! But the business about this de-collateralizing cash-settled forwards markets is plain nonsense, and everyone who understands how these markets function (that rules out GATA and Butler immediately) knows that.

Summary:

Ok, that's as far as I got before exhausting my Post-It pad. The bottom line here is that there was not one shred of credible, knowledgable commentary on precious metals in this interview. Not one bit. This was nothing more than yet another charlatan appealing to the emotional sensitivities of Hoffer's True Believer.

I'm certain I'll be flamed relentlessly for this post by the many true believers on this site. That's ok. I hope to offer those few who are here to actually learn about how markets truly function some insight, and I hope this post has helped at least a few people differentiate between the cogent and well-reasoned arguments of Mr. Tustain and the nonsensical ramblings of Mr. Organ. That's what investing is all about - learning that both the real players and the charlatans can talk a good story, and learning to tell the difference.

All the best,

Erik

p.s. To Adam and Chris, I openly challenge Mr. Organ, Mr. Butler, or both to a debate on these topics in a future podcast on this site.

[Moderator's note: All readers please be sure to read Erik's post here, clarifying his use of the word "charlatan."  Left by itself, that word implies intentional deception for personal profit, and we have no reason to think that Mr. Organ is anything but honest in his intentions.]

Whooee! Them thars fighting words, Partner.

I think that your Believers book would be a precurser to Iain McGilchrist's "The Master and his Emmisary." It is a Left brain Thing. The silly thing makes up a model of how the world works and then holds onto it as though it's existance depends on the model being true. With fatal results in Hitler's case.

I am going to take a chance on Brillouin Energy. I shall convert my silver into shares. Huge Risk, Huge reward.

I haven't listened yet, but always find Jim Rickards worth the time:

http://jessescrossroadscafe.blogspot.com/2012/04/jim-rickards-is-intervi...

Part 1 is focused on Gold manipulation and why gold plays such an important role in the world, even if conventional wisdom doesn't believe so, gold is not only being watched by central bankers, as Mr. Rickards put, "the gold price is being managed."

Another podcast/post about gold manipulation, and to think that gold is just in consolidation period. I can't imagine the whining and rationalizations when there is a significant decline in gold.

Am I the only one who recognizes the hypocrisy in all this? A person buys physical gold to get out of the manipulated markets, but then they spend all their energy complaining about gold being manipulated. 

This psychological pattern is guaranteed to end with empty pockets....

Erik,

   Tell me, have you read Jim Rickards' book,  "Currency Wars"? If so, what are your thoughts about what he says? If not, you might want to consider it.

Erik,

  I have amended my point of view on the topic you wrote about many, many  times over the years, as more pieces of the puzzle come my way. I am still amending it, almost every day. Certitude makes for a compelling argument in a debate, and will win many uncritical people over while barely trying, but I prefer being open to new possibilities, even when I think I've got the picture already, and even when it appears to others that I don't have any answers. I prefer a bit more agnosticism demonstrated in folks who are trying to persuade me of something. (Incidentally, my book recommendation was not made as an illustration of "what I believe" - simply another perspective on the topic. )

  To me, if a person wants to go about "debunking" concepts and philosophies on the Internet, and also cares whether people take their arguments seriously, it might be better to for them to check their approach to doing so, to truly investigate all corners, even if they think they already know what will be said. I am neither agreeing nor disagreeing with your arguments right now, because I can easily decide for myself what I think about those. Nor am I trying to convince you of anyone's particular stance on the topic. But your easy dismissal of something that you haven't read is telling. It makes me think that you have simply arrived at a point where you think you have it "all" figured out, stopped there, and dug in. What troubles me, and casts a shadow over your words for me, is your attitude toward others out there who are seeing the situation differently than you. While you may "know" that you are right, a loud, accusing condemnation of people who are clearly on the same path of discovery that you are on, makes it difficult for an observer to hear your argument. Half of your argument appears to be: "these people are crazy/greedy/nefarious and just want to fool you guys out there." But attacking messengers won't help the fact that some people will think critically, and others will not, no matter who is speaking.

  Peace, and thanks.

Wow. I just can't seem to win today.

So let me see if I got this straight... You asked me what I thought of Rickards' book, and I took the time to reply telling you that I hadn't found time to read it yet because many of the arguments he makes in interviews are familliar territory, but that expected it would be a good read because I think Rickards is a smart guy.

Based on that, you perceive me as "dismissing" Rickards work? Maybe this Organ guy is contagious or something!

I wish you all the best, Sir.

Erik

CPTWaffle,

I'll try to address your most salient points. I'll summarize much of what you said as "But hey, isn't there still good reason to be concerned about monkey business in markets, even if some of what Harvey said is BS?" The answer is a resounding yes. But unfortunately, the people who have self-appointed themselves "expert pundits" on these markets like Harvey, Ted, GATA, etc. haven't the foggiest clue what they are talking about. That doesn't mean there isn't any market manipulation. It just means the amateurs "reporting" on it don't know what they are talking about.

On LBMA vs. COMEX, I will take a stab at your question, but frankly the best possible way to address it would be if Chris were inspired to interview someone like Jeff Christian. As much as he's been vilified by the PM conspiracy crowd, he's actually one of the smartest guys I know, and his knowledge of the metals market is remarkable.

LBMA is for the big boys. It's where the physical metal gets traded (worldwide center for that), and also where the biggest forwards market exists. I am pretty sure LBMA forwards are much larger on an annual clearing basis than COMEX, but I could be wrong - I don't deal directly with the big players who operate in LBMA, so I have no first-hand knowledge. Only research I've done for articles debunking the GATA types. Again, Jeff would know the exact numbers off the top of his head.

Briefly, LBMA is about moving the metal. Technically, these are OTC contracts which means any two parties could set any terms and conditions they want. But most contracts are boilerplate, and roughly approximate the terms of a COMEX futures contract - the contract can be cash-settled up until a specified date, and if not closed by then the parties must deliver (or accept) physical. Even that is not always true - a "delivery fail" is - from what I understand - not really treated like a contract breach where people sue each other. Rather, the contract specifies delivery fail penalties, which are steep. I have the impression that traders view the option to fail and pay the price as a routine matter of business, but it's a big enough penalty that the incentive to avoid it is very strong.

My understanding is that there is no particular price discovery mechanism on LBMA. The price is determined by the almost-24 hr worldwide futures market - COMEX, GLOBEX, etc. Then there is the London AM/PM fix which Paul Tustain discussed. My understanding is the parties can agree to any price they want, but that the AM or PM fix on a specified date is most often chosen. Again, I am on the edge of my knowledge here, and could be wrong.

The point of LBMA is that the whole "good delivery" system, bonded warehouse network, etc. is behind it. LBMA is not about setting or negotiating the price so much as it's about making the deal to deliver once the price is agreed. Once two parties have agreed on a price, time of delivery, etc, LBMA provides the whole infrastructure to deliver the metal from one bonded warehouse to the next, etc.

My image of how this works is that trader A calls trader B on the phone, and says "Ok, Gold is at 1652 on the front month contract. Let's do a deal for XXX ounces at $YYYY, you game?" The other guy agrees, and they ink an OTC contract that gets settled through the LBMA infrastructure.

I'm not comfortable saying any more because frankly the details of physical transactions on the London market are beyond my knowledge and experience. I'm going to reach out to Jeff Christian and see if he's willing to comment in this thread. I doubt he will - he's a busy guy and gets fed up with conspiracy theory nonsense easily. But I'll give it a shot. He could tell you in excruciating detail how it all works.

All the best,

Erik

I've exchanged e-mails with Jeff. He said he'd try to find time to reply here, but could make no promises. He's a very busy guy, so we'll see.

A little background - Jeff is actually one of the most generous people I've ever met in terms of being willing to give his time to help educate anyone who is interested in learning about PM markets. But he's also been vilified by the GATA crowd so badly that as soon as his name is mentioned, some people (who generally have no idea what they're talking about) come out of the woodwork hurling personal insults and baseless allegations. So if you put yourself in his shoes, it's easy to see why participating in open Internet forums is not always fun for him.

Given the very strict moderation policies on this site dealing with civility toward others, my hope is to persuade Jeff that this is a place where he can share information without being personally attacked by the people who have been brainwashed by GATA. I hope others here will help make him feel welcome if I can persude him to take some time to post a contribution to this thread.

Jeff also said he would be happy to do an extensive interview with Chris on a future podcast. Just to keep everyone's expectations set, however, I happen to also know that Adam has the podcast schedule booked for months. So don't expect a podcast interview overnight... Also, it's up to Chris and Adam to decide what fits their editorial agenda, so it's really up to them to decide whether to invite Jeff to do an interview.

All the best,

Erik

*shrug* That sure looks dismissive to me, and I was surprised by your answer, as it appears you have already made up your mind about something you haven't read. I think it was a fair point to make.

Jeff, not sure if you're reading further replies here, but I just wanted to say thanks for taking the time to post and share some of the content of your Gold Yearbook with us.

Best,

Erik

I have not yet had time to listen to either podcast yet, so forgive me if the question is misguided.

In your first post is your contention solely to debate the fact that Mr. Organ is making claims purely based on emotional opinion while offering no facts to back anything? Or are you against the entire notion of the precious metals market being manipulated.

For the very detailed reply... I will reread and digest.  My point about Harvey is that, when you spend so much time analyzing vault movements, COT reports, delivery reports, etc... you get an intuitive feel for that which you are observiing.  A simple example is the fact that Harvey knows that Good delivery bars have exact weights... that are not fixed.. they vary... so when he sees a transfer of 6500 oz (just to make up an example)... then he observes that is probably some kind of paper transfer.. vs. real bars moving. 

Further, on the book by Rickards. I give him a lot of credit for getting the role of gold in the monetary system across to a huge audience and for pointing out the achilles heel of the dollar. I also have some criticism about his idea to return to a gold standard (i.e. an institutionalized undervaluation of gold). This won't work, and it is the Europeans who have made sure the U.S. cannot do this. Perhaps you are interested in the argument:

http://victorthecleaner.wordpress.com/2012/02/22/currency-wars-why-the-u...

Sincerey,

Victor

Erik T,

yes, that sounds arrogant as hell indeed. As for electronic trading, this FT Alphaville article

http://ftalphaville.ft.com/blog/2011/08/10/649746/theres-a-new-gofo-tabl...

has a screenshot of how GOFO (the gold forward offered rate) looks on a Reuters screen. I guess when you want to trade with them OTC, your company should be a member of the ISDA. I remember some individual investors wanted to short mortgage bonds in 2006-2008, and this usually failed because they didn't have enough capital and not the lawyers to get all the paperwork done. But as far as I remember, there was a real estate guy in California who managed to trade OTC as a private investor. But then, at that time, Wall Street didn't care about counterparties at all.

Sincerely,

Victor

PS: Not a professional.

CPTWaffle,

You wonder how a market which doesn't have a real-time auction process or exchange can set prices. Let me answer by saying it is the same way the price of cheese or second-hand car prices are "set". The funny thing is, with all this talk of manipulation, the operation of the over-the-counter (OTC) spot physical market is one which is very much free market and unregulated and thus close to the capitalistic ideal.

Note I prefer to use OTC rather than LBMA, which are often used interchangabily. References to LBMA are better understood as "OTC trades which will be settled in London via http://www.lpmcl.com/". OTC is wider and refers generally to trades negotiated and settled counterparty to counterparty instead of on an exchange. The majority OTC gold trades are settled in London but OTC trading can occur outside the LBMA/LPMCL system.

The best way I can explain it is by discussing how we "trade" gold at the Perth Mint, as that's what I have first hand experience with. Before I start, I'd just like to clarify that the Perth Mint has never traded on any futures market, nor GLOBEX or any other exchange. We refine around 10% of the world's new mine and scrap supply. That is about 7 tonnes, or $370 million, a week of physical we sell/supply. So this is not a theoretical exposition below.

Because there is no LBMA real-time electronic quotation system/trading platform for spot unallocated or spot physical prices, professional bullion market counterparties need an indicator of where the market is. We use Reuters, others Bloomberg. However the price displayed on these information services is just an indicator. It is updated by the bullion desks of the big banks and is in effect, a bulletin board or forum where banks can publish their prices in the hope other dealers will call them up to do a trade. Sort of like an advertisement. Unlike a stock market, it is not a commitment to deal at those prices, but most times you can. However there are many times, especially when the market is moving quickly, when the dealers don’t have time to update their quotes on Reuters and so when you ring them up, they say "Sorry, Reuters off the market, my current price is $5 below the screen".

Many trades are done over the phone, but some bullion banks also have trading platforms for use by their clients which provide price quotes - often used for small trades (a few thousand ounces or less).

How does a bullion bank set their prices on Reuters or their trading platform? Well consider a bank's bullion desk as a little stock exchange except they are the only ones quoting a bid and ask price. They get a constant stream of calls from buyers (eg jewellers) or sellers (eg mines). If they are lucky, the buying and selling will match but this is unlikely, so if they find they are selling more than they are buying from their clients, they will have to go and find another counterparty to buy from. This other counterparty is often another bullion bank, but could also be another market like COMEX.

So a bullion desk keeps an eye on what prices are being quoted on Reuters, on COMEX etc and what sort of deal flow they are getting (how many ounces and whether it is net buying or selling) and, since Reuters is just an indicator, what actual prices previous deals have been executed at in the past to set their price and bid/ask spread.

So while none of these bullion banks or their systems are interlinked computer wise to a central exchange, they are interlinked informationally. Consider the case of the Mint where we call a bullion bank and ask for a price. We'll compare it to say the price on Deutsche's Autoban trading platform and Retures before deciding if we'll take it. Say the Autoban price was better and the bullion bank's dealer wasn't willing to match it. Well they have just got information on where the "real" physical spot market is from our refusal to deal with them. If they are consistently over quoting compared to their competitors they won't get business.

It is this interaction between bullion banks and bullion banks and their clients that is the spot price. Dealers are in constant contact with each other, doing deals, talking and exchanging information on what they are seeing in the market, watching the Reuter’s and COMEX price movements. They use all this information to set their prices.

The OTC market is therefore best thought of like a network of free agents. But as described, because of no central exchange, you can't put your finger on exactly what the spot price was at any point in time.

But then you can't put your finger on exactly what the price of cheese is either at any point in time because supermarkets and independent grocers and farmers markets all quote different cheese prices and do physical cheese deals at these various prices and don't report them on any central exchange nor settle them through centralised clearing houses.

Yet you don't see anyone worrying about the lack of a reference spot cheese price and what the premium of physical cheese is to the cheese spot. It is a case of the shopkeeper saying "you don't like my cheese price, then buy from someone else". Somehow this system works. I think it is called a free market (which doesn't imply it isn't manipulated, BTW). Precious metals works the same in the OTC market.

Erik,

I somehow have doubts that your overbearing words will be the "best investment advice I will ever receive." You need to understand, the problem I have with your words has nothing to do with your argument, and has everything to do with your delivery. You claim to desire an "intelligent and level-headed conversation" and yet you are the only person I see calling names: "self-appointed pundit" (aren't you, too?),"wanker...mouthing off," "charlatans," etc., and generally ascribing various nefarious motivations to others. Makes it difficult to hear your argument Erik, when you spend so much time denigrating those you disagree with. We little peons here at CM may be "falling for crap" as you say, but your tone doesn't help anyone understand the facts as you present them. And generally slamming people for ignorance doesn't encourage anyone listening to you, to learn.

An obsession with being "right" isn't always the best way to teach.

Erik,

I have read your commentary and agree with you in some respects and respectfully disagree in others.  I have some questions/observations that I am hopeful that you can address for me.

1. Bart Chilton - Commissioner with the CFTC says that the silver market is manipulated frequently (paraphrased) and that the perpetrators (unnamed) should be prosecuted under existing commodity laws. The assumption I draw is that he is in a position to know.
2. One of Ted Butler's core themes is the level of concentration in the silver shorts - i.e. that a small group of entities holds a very high percentage of the overall shorts in silver.  He posits that it is inherently manipulative for this to occur and that in its absence that the price of silver would be far higher (of course it would be impossible to provide a specific $$ amount of how much higher).
3. You have Blythe Masters recently appearing on CNBC essentially stating that JPM doesnt have any naked shorts - they are all "hedges" put on for their "clients".  Considering the size of those "hedges" it stands to reason that their "clients" could easily hedge their own positions (they dont need JPM to be the intermediary) and secondly - if their clients are hedging their own positions - JPM doesnt have any risk anyways since they are simply acting as the agent.  Finally - if the client has physical positions (stored by JPM) and are hedging (courtesy of JPM) and if JPM wanted to hedge that - wouldnt JPM be long as a hedge against the short instituted on behalf of their "cleints"?
4. There have been numerous statements by various central banking folks over the years about how gold can and will be leased (in increasing quantities - if needed) in order to control the price of gold.  Volcker admitted that their failure to do so during the 70's was a mistake.
5. You had the Gordon Brown sell 1/2 of Englands gold reserves - he even announced this intention in advance which practically guarantees the price will be less - something that anyone trying to sell for "best value" would be an complete moron to do - unless the motive was something other than "best value".
6. There are frequently MASSIVE sales of gold/silver in very, very short timeframes (dumping of contracts - hitting all bids) which is something that someone selling for profit would be stupid for doing.
7. You have the cap on gold typicall at 1% but RARELY (if at all) in excess of 2% in a day.  No other commodity has this upside limitation in price movement.  This has been consistent over the entire duration of this gold bull market.

Now - I am not providing references or a bibliography with this post so I am hopeful that you wont put me in the same category as Harvey Organ, Andrew MacGuire, GATA, et al... I trust that you are sufficiently cognizent of the "goings on" in this market that what I am referencing is factual and without hyperbole.

I would be interested in your analysis/conclusions based on the above data points and any speculation/theories you have that fit the facts as described above.

Very Respectfully,

Steve

Excellent questions, Steve. I'll take a stab at them below.

I have to confess to a bit of dismay on this one myself. To be frank, Chilton strikes me as a bit of a quack in the interviews I've heard. He has clearly bought into the GATA argument. I concur that he's in a senior position where he should know better, but he doesn't seem to. I don't know anything more than that.

This is always Ted's central argument, but he NEVER offers any explanation as to WHY he thinks the PRESENCE of a large short interest would hold the price down, or why this is "inherently manipulative". It's certainly true that one very large player can corner a thinly traded market, because that player is in a position to BUY or SELL in size to bump the price back where they want it, without changing their own holding's size on a percentage basis nearly as much as a small player would have to. But just keeping a constant large short position open without doing any more selling does nothing to suppress the price. In short, Ted has never fleshed his argument out to a logical conclusion so far as I am aware, and as he states it (i.e. just the existence of a large position is inherently manipulative) the argument lacks merit so far as I'm concerned.

No, that doesn't stand to reason. That's what the bullion banking business is - big banks making a big markup to provide their "skill" to do something you could have done yourself, but might not have known how to. Remember that mining companies' management are not finance gurus. Hedging forward and rolling positions every month is not totally obvious - you have to understand end-of-month effects on price as contracts near expiry, etc. The banks sell their clients on the idea that this is such special work that they should trust the bank to do it. My understanding is that a big part of Jeff Christian's business at CPM Group is teaching mining companies exactly what you said - that they don't need the big bullion bank middlemen and their fees, and can learn to do this themselves, with his help. To your last point, no, if clients have physical in JPM's vault (a long), and are hedging that position forward with JPM, the client is short the hedge, and JPM is long, as the counterparty. To neutralize that long exposure, JPM goes short in the open futures market to delta hedge their long against their client's short.

Good points, and the reason why I never say manipulation fears are completely misplaced. I'm simply pointing out that people like Ted and Harvey don't know what they are talking about. There is still good reason to be concerned about the actions of central banks, and not just the more obvious ones like these examples!

Not necessarily. First, one possible explanation is an actual short-term manipulative "stop clearing run" intended to fleece the weak hands out of their positions. This kind of short-term manipulation happens all the time in all thinly traded markets, not just PMs. Another possibility is that a natural move in the market (no manipulation) triggers a big cluster of stops during thin liquidity hours. But your statement that someone selling for profit would "be stupid doing" this is not correct. If someone wants to sell a lot but has no reason to expect others to be selling a lot, it's in their interest to slowly and carefully make their sales with little fanfare, to avoid moving the market. But if a big seller has reason (as was the case on Feb 29) to expect OTHER big sellers to also be selling in size, the whole move in reaction to news can happen in seconds, because it becomes a race for the door scenario.

I'm not clear on whether you are referring to an actual cap (i.e. daily price limits in futures trading), or observed max moves over time (not really a cap). In any case, I'm not clear what point you are arguing here. I would think extreme manipulations would yield higher volatility, not lower. In short, I don't understand your point.

Of course I don't put you in the category of Maguire, Organ et al. You are asking intelligent questions based on logical deduction, and seeking explanations for things that don't add up, using logic and reason to form your views. Contrast with someone like Ted who is constantly posing idiotic rhetorical questions like "If a small number of banks have most of the short interest, how can it be anything other than a manipulation?"

@shudock

Sir, if you really can't see the tongue-in-cheek humor intended when I crack a joke about my own post as being "arrogant and pompous", and you still feel inclined to interpret my endorsement of Rickards work despite not yet having had time to read his book  as "dismissive", then I'm afraid I can't help you. I do admit that my tone becomes quite intense when I discuss this subject, because I find the perponderance of charlatans to be so overwhelming, and frankly the harm they do to retail investors financial wellbeing makes me angry. If you find my comments so offensive, there's always the "Ignore User" button to save you from ever seeing them again.

Best,

Erik

Steve,

please see the link I included above.

I think the "big short position" is grossly misunderstood by Ted Butler & Co. The issue with gold and silver is that the banks and bullion dealers trade them as currencies over the counter, i.e. with cash (=allocated), credit money (=unaloocated), swaps and forwards. This market is about 8-10 times bigger than COMEX. So you would expect that the OTC market is where the price discovery happens, and then this is transmitted to the COMEX by arbitrage. So the large short positions that Ted Butler and friends complain about is one side of the arbitrage position. The other half is invisible to the public because it happens in the OTC market.

When GATA & Co talk about  "the central banks", I also think they get the teams wrong as well as the timing. Right now, all those central banks who can only use the OTC market in order to accumulate gold (BRICs, developing countries), must be interested in a low price because then they get more physical for their dollars. On the other hand, the U.S. may hate an uncontrolled rise of the gold price, but eventually they may want to take the paper price higher because this provides life support for the bullion banking system that might lose too much physical reserve if the price is too low. Finally, there are those central banks such as the ECB (and several oil states) who already own a huge amount of gold and who would love its price to rise. All this was different ten years ago before the introduction of the Euro. You have to be very careful when you take these Greenspan quotes out of their context.

Victor

Ah, guys, what a pleasure to finally understand more about OTC trading, the existence of electronic quotes and prices being transmitted via arbitrage. Thank you.

Things make more sense to me now.

This is one of the most informative comment threads I've read in quite some time, especially after reading some of the links in various posts.

I am repeating myself a bit, but I still have questions and I am very suspicious of the many fishy events that occur, for example counterintuitive waterfall price drops before major CB announcements of more printing and/or devaluations. I do wonder whether central banks are entering the markets and trying to use the gold price as a signal at times like those. Comments from central bankers like the one that Volker made about his mistake in not containing gold during the 70's are not reassuring, plus other comments that have been made by important figures at various times. And one reads of other anecdotes such as Morgan Stanley (I think) having been sued, successfully, for charging customers storage fees on bullion that wasn't even in the custody of Morgan Stanley, if I remember correctly. It's the sum total of many little details like those that give people their doubts about the integrity of what goes in the gold and silver markets.

I have to say, one of "gut feel" problems with the idea of central banks relentlessly leasing more and more gold and shorting gold via intermediaries on exchanges to supress the price or JPM mercilessly dumping silver is that if you are going to short something to overwhelm the market with the intention of buying back your shorts at lower prices, why haven't enough futures market participants cottoned on to this? I don't believe markets are totally efficient, but surely they should be efficient enough that people would try to antipate these moves, making it more difficult for JPM to get away with it? That mechanism, which I think Ted Butler has written about, relies on the theory that longs, in the aggregate, get "flushed" out repeatedly and without learning from their mistakes and always eventually buy back at higher levels than they sold, does it not? I'm not a futures trader, but it just seems odd to me that they would be able to continually get away with this activity year after year. Also, it means the HFT algorithms are never improved upon. Maybe lots of traders are that stupid though, what do I know.

If JPM does have an advantage would it not stem largely from the fact that they bird's eye view of the OTC markets and the COMEX, and know exactly how much is really hedged, how much physical bullion is being delivered, what levels speculative interest are at, etc. etc, i.e. they have an asymetrical information advantage and are in a unique position to profit from it? Whether they are going long or short? I dunno. Maybe they would say that's unethical and they don't engage in that but who trusts what Wall Street bankers say these days. 

PS Victor, correct me if I am wrong, but gold and silver are the only futures traded commodities whose price is determined by arbitrage on the OTC market, and is dependent on what happens in the OTC market, then doesn't this make the COMEX gold and silver COT reports totally meaningless? So what if speculators are flushed out of COMEX, and so what if "commercials" are going increasingly net short or not? Without knowing what is happening in the (bigger) OTC market, it's totally impossible for us puny mortals to see the bigger picture, right? I guess all that the COT can tell you are things like the general level of speculative hedge fund interest in precious metals?

Erik, please send thanks to Jeff Christian for taking the time to give an explanation. And thanks for your excellent set of replies.

Hey, I'm a small investor (really, really small) and I'm trying to learn as best as I can.

CPTWaffle,

just to make sure there is no misunderstanding. The banks trade gold and silver as currencies. In addition, by some coincidence, the CME also has some futures contracts on gold and silver similar to those contracts on commodities. Since the metals are the same, of course, the two markets are linked by arbitrage. Now it turns out that the OTC market is about 8-10 times bigger (both in terms of paper volume and in terms of physical volume), and so I find it very plausible that the major action is in the OTC market and then this is transmitted by arbitrage to the COMEX.

So, yes, the COT reports tell you a lot about COMEX (10% of the market) and nothing about OTC (90% of the market). Does this mean they are useless? Perhaps not enirely. Firstly, they do tell you the position of the arbitrageurs. Secondly, it sounds plausible that many leveraged speculators at the COMEX and OTC behave in a similar way.

Let me add another warning. I have a rough estimate (measuring the velocity at the COMEX, i.e. daily volume per open interest and then extrapolating this to the OTC market), that suggests that about 95% of all gold trading is paper and about 5% is physical. So it is plausible to think that the paper gold investors are leveraged and trade on margin, and so if there is a liquidity crisis and the prime brokers cut the credit lines of the hedge funds, then the price of gold would drop because the leveraged longs have to liquidate. Of course, physical gold is the ultimate hedge against systemic issues in the financial system, but the price action may be dominated by the leveraged longs rather than by the physical buyers. This is basically what happened in 2008. Everyone was scared and this is why they dropped paper gold. That a smaller number of other people bought physical gold is also true, but did not prevent the gold price from crashing.

I would always keep this in mind. Physical gold is the hedge. But the paper price can behave in a counter-intuitive fashion in the short run. In fact, this makes the gold market highly unstable because there are some who are trying to change their dollars for gold, and if the price drops, they take away more physical gold and drain reserves from the banks. So the gold market may well blow up because of a low price rather than because of a high price.

I wonder whether the U.S. would buy paper gold in this situation, just in order to stabilize the market.

I know that GATA and friends always tell you that "the central banks" want to suppress gold. I know that the U.S. have a serious difficulty with a high gold price because it undermines the role of the dollar as an international reserve, but many foreign central banks (the ECB for example) have no problem at all with a high gold price. In fact, the rest of the world has done a lot of planning in order to smoothly replace the dying dollar with gold as the major international reserve.

Sincerely,

Victor

Cute metaphor, but physical cheese won't be called upon to perform its hedging role in extremis. ... Even though unallocated holders have no claim on physical, do fiduciaries believe their holding hedges them against a government money crisis? If they do, then fractionally-reserved bullion banking is effectively diluting real physical demand, and GATA's argument rings true.

50sQuiff, Victor makes the point about physical gold being the only real hedge and this is correct. However I find it hard to believe that the holders of unallocated accounts with bullion banks do not know exactly what they hold. An unallocated account with a bullion bank is not available to "retail" investors and is only held by large corporate or what many jursidictions call "sophisticated investors". The contractual terms of a metals account agreement with a bullion bank are very clear as to the status of unallocated and it is my view that the holders of these accounts are smart enough to read the fine print and know:

1. Unallocated is a mere liability of the bank
2. Bullion banks do not maintain 100% physical reserves
3. Bullion banks thus lend or use some faction of the unallocated
4. They (the client) is thus taking a credit exposure to the bullion bank
5. Conversion to allocated is normally possible but the bullion bank is not contractually obligated to do so

I would suggest therefore that many of the holders of bullion bank unallocated accounts are just interested in cash gains/losses. They are like the futures holders Erik mentioned - paper shorts AND paper longs. They are playing a paper game and they know this.

If this is correct, then fractionally-reserved bullion banking is not diluting real physical demand.

Regarding point 2, the 100:1 ratio that is often mentioned (and I don't know where that 300:1 came from), this is misunderstood as the physical fractional reserve ratio for unallocated accounts. As discussed in this personal blog post, the 100:1 comment by Mr Christian was a reference to the volume of trading of paper gold versus how much is physical delivery versus cash settled. In that post I have sourced references where Mr Christian reveals that the bullion banks operate at around 10:1.

My view is that a 100:1 physical fractional is ridiculous considering the crucial role London plays in the physical market. London unallocated simply could not function on a 100:1 ratio in my view. Those who accept this number do not appreciate to amount of physical delivery made ex-unallocated accounts by the trade.

Bron,

I concede that you know the PM market far better than I do, but I have to strongly disagree with you here, particularly on the points emphasized in bold. As you know, unallocated bullion accounts are available to both corporate accounts and accredited investors. But in the Private Banking biz, those accredited investors are more often referred to as easy targets than "sophisticated". I have personally met several HNWIs whose investment goal is to hedge systemic financial collapse risk, and who are proud of themselves for having negotiated zero storage fees in what are actually unallocated accounts. When I have tried to explain to them that they do not own bullion and are actually unsecured creditors in a fractionally reserved system, they not only refuse to believe me, but in some cases have been insulted and become indignant.

I have also been to professional-only conferences, and met licensed wealth management professionals who are completely confused about how allocated and unallocated metals accounts work. I concur with your view that it is their job to read the fine print and know what they are talking about, but that doesn't mean they do.

I've also had an HSBC Private Banker try to sell me an unallocated account, swearing up and down that the no-fee thing was a "courtesy", to the bank's "most valued" customers, but that the bullion was definitely mine, titled in my name, and free of any credit risk! When I told him he had a deal as soon as he provided me with the bar serial numbers I would be buying, somebody on his metals desk finally explained to him what I already knew. And he was the guy selling this service! FWIW, the guy in question was probably not sleazy but just plain stupid, which is usually the case with "Wealth Management Professionals", more commonly known by their clientele as predatory morons.

When I had to put up a sizable investment in Hong Kong to qualify for an investor resident visa, I told them to put it all in the HSI Tracker ETF (2800.HK). The same guy told me that was a big mistake and I needed to diversify the investment. I told him I didn't need to diversify because I intended to delta-hedge to flat net notional in my futures account anyway. Put your seatbelt on for his response... He said that was a poor strategy because Airline stocks are not a good hedge for a broader index like the HSI! When I used the phrase "Delta-Hedge", the guy actually assumed I meant I was going to short Delta Airlines stock to hedge the exposure! This was an HSBC Private Banking "Relationship Executive", a/k/a Predatory Moron.

That's a representative sample of the "professionals" of whom you speak, Bron. When you say these are big boys who are supposed to read the fine print and know their game, you're absolutely right. But that doesn't mean they do. They're mostly financially clueless salesmen who know how to wine and dine their clients, and little else. I know you and your team in Perth are top notch, but you're the exception, not the norm.

All the best,

Erik

Bron and Erik,

I agree with Bron that many holders of unallocated gold are probably the same sort of people who would buy a futures contract on margin. This is why I said that once there is a liquidity crunch, it is understandable that a lot of (paper) gold is sold. This explains the price drop in 2008 without invoking the manipulation meme. In fact, in spring 2008, a fashionable trade was long commodities, gold, oil and short financial sector stocks. When short sales were forbidden later that year and when the prime brokers cut credit lines, the speculators had to sell their (paper) gold.

But I have further comments, too.

Even if, as Bron says, the unallocated does not divert physical demand, it does influence the price. This works as in every currency. If the banking system creates credit, more of this credit can bid for other stuff and thereby causes inflation if the other stuff is mesured in the currency in which we create credit. In our case, the currency is gold, and if you create credit (=unallocated), this credit can bid for other stuff (dollars) as well as physical gold can. This reduces the gold price in dollars.

It seems most people understand the following analogy best. If everyone has to pay cash for their house, the house prices are low. Now the banks create credit. Suddenly, some people who were not able to buy a house with cash, can take out a loan and join the bidding. The result is that house prices go up. In our case, the mortgage is unallocated gold and the house is a dollar.

Apart from the presence of unallocated gold which has an effect on the gold price, the unallocated contracts were used politically in the late 1980s and in the 1990s. Firstly, some oil countries were offered to buy unallocated gold (on the other side was a forward sale by a mining company) so that they were able to purchase gold in size without running the price. At the same time, many wealthy investors were talked out of holding physical gold and were talked into holding gold-like contracts.

There were a few estimates that around 1999-2001, there were more than 10000 tons of gold that had been leased or forward-sold, and so I would expect that a corresponding amount of holders of unallocated were in unallocated for political reasons, i.e. were not speculators. We have no idea how long it took to work this off - perhaps the last bit of these positions is still open.

BTW, I don't think any country will go back to a gold standard in the sense that their currency unit is backed by a weight of gold. Since the Euro zone is a major trade hub and since the ECB values gold at its market price, nobody would be able to fix the gold price in the long run. Whenever this results in an undervaluation of gold in that currency, this would basically just drain gold to Europe.

Sincerely,

Victor