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Brien Lundin: Don't expect much from Justice probe of gold market rigging

Section: Daily Dispatches

By Brien Lundin
Gold Newsletter, Metairie, Louisiana
Thursday, February 26, 2015

The good news is that manipulation of the gold market has finally come under investigation by the authorities, with the U.S. Justice Department opening up an investigation into 10 major banks.

The bad news is that the investigation is centering around potential rigging of the daily price fixings for gold, silver, platinum, and palladium. I know that a number of my colleagues in the hard-money industry may disagree, but I don’t think this amounts to a hill of beans in the big picture.

... Dispatch continues below ...


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According to The Wall Street Journal, the Justice probe is centering around the actions of Bank of Nova Scotia, Barclays PLC, Credit Suisse Group, Deutsche Bank, Goldman Sachs Group, J.P. Morgan Chase, Societe Generale, Standard Bank Group, and UBS in the once- or twice-daily setting of the price benchmarks through conference calls
involving representatives of a few banks on the various fix-setting committees.

Precisely because of allegations of collusion or manipulation of the process to benefit trade positions -- often in conflict with a client's best interests -- the long-held processes for setting the daily fixes for precious metals have been completely reformed.

Many believe this to be a very big deal, since everyone in the supply chain from mines to bullion dealers use the fix, and it's the basis for many financial products and investment analysis.

But this issue never concerned me, for a couple of reasons.

First, the magnitude of the manipulation could have never been large -- just a few pennies in either direction -- or the manipulators would have exposed their actions. Plus, they couldn't move the market much in any case, and the natural forces affecting the price would restore the proper order quickly after any rigged price fix.

Second, of course the process was manipulated. Can you imagine setting up an exclusive club of a few traders, allowing them to trade millions based on a price fix, and then putting them onto a conference line to help set that fix ... and have them not move the price to their benefit?

And yet we are supposed to be shocked, shocked! that the price fix isn't completely objective?

No, my greater concern is the level of longer-term price manipulation, being accomplished by either the central banks or deep-pocketed institutions, acting either in concert or simply with the same motivations.

So while you'll see a lot of outrage in the blogosphere over this investigation, unless it turns up documentation of a broader strategy of manipulation, there'll be nothing to see here. Move on.

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