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Gold Newsletter's Brien Lundin: Manipulations and machinations

Section: Daily Dispatches

11:55a ET Saturday, April 30, 2016

Dear Friend of GATA and Gold:

For many years Gold Newsletter has been essential to your secretary/treasurer's interest in the gold market generally and in gold, silver, and resource companies particularly. Indeed, your secretary/treasurer's interest was sparked entirely in 1998 by a trial subscription to the newsletter when it was under the editorship of its founder, James U. Blanchard III --

-- whose extraordinary efforts restored in 1974, through federal legislation, the legal right of Americans to own monetary gold.

Since Blanchard's death in March 1999 Gold Newsletter has been edited by Brien Lundin, proprietor of the New Orleans Investment Conference, and both the newsletter and the conference have generously given voice to GATA and recognition to the issue of gold market manipulation without fear of the resulting controversy.

... Dispatch continues below ...


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Lundin's letter this week included a detailed commentary on the issue, which he kindly has approved our sharing with you, so it is appended. Your secretary/treasurer finds it hard to imagine doing without Gold Newsletter, so if you're inclined to check it out, subscription information is posted at the newsletter's Internet site here:

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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Manipulations and Machinations

By Brien Lundin
Gold Newsletter, Metairie, Louisiana
Thursday, April 28, 2016

There's a lot to talk about this subject. In past issues, we've covered the massive bear attacks on gold, the greatest example being April 2013, when traders colluded in obvious illegal fashion to dump gold contracts nominally worth billions in only a few minutes.

In this first major attack, the bears were able to drive gold down a couple of hundred dollars in two trading sessions. Since then, we've noted more such attacks, more recently undertaken by high-frequency traders and as tracked by Eric Hunsader of Nanex.

We've also covered the longer-term manipulations caused by central banks leasing out their gold through the bullion banks, as first exposed in the late 1990s by Frank Veneroso in the pages of Gold Newsletter and our Gold Book Annual.

The efforts of the Gold Anti-Trust Action Committee (GATA), which were largely born out of the results of Veneroso's research, have also been well chronicled in these pages.

From a philosophical viewpoint, I've differed from some of GATA's beliefs in that I don't think governments have either the ability or interest to manipulate the gold market on a daily if not minute-by-minute basis.

But I do firmly believe that the burden of proof is on those who claim that the gold market is not manipulated. What is so special about gold that it would be the only asset class wherein governments did not exert some level of control?

The Federal Reserve fine-tunes the price of money (interest rates) to boost the stock and bond markets, thereby generating a “wealth effect” for the public. Agricultural commodities? Ever hear of ethanol and price supports? And there's an entire Department of Energy, for goodness sake, whose only job is to manipulate the price of various forms of energy to meet political goals.

So why would gold -- the ultimate gauge of the government's success or failure in managing the currency -- be somehow excluded from official attentions?

The answer is that it isn't. To some degree, the price of gold is manipulated today, and has been for decades.

And just as we saw with the London Gold Pool of the 1960s and the U.S. Treasury gold auctions of the 1970s, the current efforts will fail in spectacular fashion.

But getting back to the primary subject, today I am more concerned not with short-term or long-term manipulations in gold but with the intermediate-term attempts by the large commercials to move the gold market according to their whims,

Again, the most important factor not facing gold right now is the massive net short position in "paper gold" accumulated by the large commercials. We can argue over who is included in this category of traders, and we can dither about their motives. But it cannot be argued that this sector has not exhibited firm control over the direction of gold prices.

Now with that said, the cynics and conspiracy-minded among gold investors claim that the large commercials intentionally set up those who are traditionally on the opposite side of the seesaw: the large speculators. According to the theory, the large commercials build up short positions as the price rises, selling gold that the large speculators eagerly take up as they follow the trend higher. At some crucial point the commercials dump enough gold onto the market to send the price plummeting through the speculators' sell-stops, exacerbating the downtrend.
Once the selling is inevitably exhausted, the commercials cash in their shorts, even adding long positions to profit from the next turn in the cycle.

It's easy to assign malevolent motives to the exercise, since the commercials almost always end up being correct, and seem able to force the market to their bidding. But commercials, being in the trade and needing to hedge their transactions, are naturally shorting the market to lock in their costs and minimize their exposure. The question of manipulation turns on whether there are other actors within the commercial category who are taking advantage of the natural tendencies of the market.

I tend to believe that there are some hijinks involved, if for no other reason than the reliability and amplitude of the cycles. Somebody's making a lot of money, on a regular basis ... and this makes me think that none of it is accidental.

And in truth, it really doesn't matter to what degree the paper gold market is manipulated or whatever the precipitating factors may be -- because the results are obvious and irrefutable. As you can see from the accompanying chart via Nick Laird's ShareLynx service, the peaks and troughs in the large commercial short position precisely correspond with the peaks and troughs in the gold price over the long term.

Importantly, the current level of net shorts for the commercials is historically extreme, and argues for a sharp and deep correction at any time.

Now as I've noted many times over the years, while the commercials are almost always correct, they aren't always so. And when they are wrong, they are wrong in spectacular fashion. You see, on rare occasions the commercials are hoist by their own petard. In these instances gold refuses to halt its rise despite the ever-mounting short positioning of the commercials. Eventually, the commercials are forced to cover their shorts, buying gold in a desperate fashion that only throws gasoline onto the fire and accelerates the gains. They're not able to catch up to the market, and their efforts to constrain the rise only serve to boost it higher.

This last occurred in the 2004-2006 time frame. Consider the results:

-- 2004: From the spring low to the end of the year peak, gold gained 21 percent. The Gold Bugs Index of gold stocks soared 50%.

-- 2005: From the spring low to the year-end peak, gold rose 29 percent. The Gold Bugs Index leaped 70 percent in response.

-- 2006: Gold was topsy turvy this year, jumping 36 percent in price from March to May, then losing 10 percent from May to December. The metal ended up gaining 21 percent from the spring low to the year-end peak. The Gold Bugs Index gained 30 percent over that time frame.

I haven't researched the statistics, but rest assured that a 30-50 percent gain in the staid Gold Bugs Index translated into a much greater gain in the junior gold stock indices. And for the biggest winners that we were able to pinpoint in Gold Newsletter, we're talking about multi-bagger gains.

So that's the scope of the potential we're looking at ... if the commercials are trounced and gold takes off from here.

Will the commercials finally break the market? Or will some other factor emerge to prompt even more buying by the speculators -- enough to send the commercials running for the exits? If it's the latter, there are some interesting candidates for the factor that lights the fuse for the next big run.

China is both the world's largest consumer and producer of gold, so it's only natural that they've felt like second-class citizens in a market where the price of the metal is set by Western “paper gold” traders. So it was no surprise when China announced months ago that they would launch a twice-daily gold fix based on the physically-settled Shanghai Gold Exchange, and denominated in yuan instead of dollars. That long-anticipated price fix was finally launched on April 19. And the gold price soared higher immediately.

Coincidence? Actually, yes, as nearly the entire commodity complex was higher that day thanks to a bout of dollar weakness.

But certainly the new yuan gold fix didn't hurt gold's case that day, and it will continue to help support the metal over the long term. That's because the yuan price fix will be rooted in the supply/demand fundamentals at play in a market where investors and savers are buying gold hand over fist.

Thus it is likely that the Chinese price fix will have an upward bias compared with London and New York trading, and these Western markets will have to recognize this trend over time. The bottom line is that I expect the new yuan price fix to provide a mild but consistent upward pressure on gold from now on.

There's another issue that could be provide much more dramatic impetus for the metal.

As you have probably heard, Deutsche Bank is attempting to settle a U.S.-based lawsuit that accused it and other defendant banks of manipulating the London gold and silver price fixes. Moreover, Deutsche Bank is offering to squeal on its co-conspirators, apparently in exchange for some leniency.

While the lawsuit was filed a bit over two years ago, I never gave it much credit. I figured everyone knew the London a.m. and p.m. price fixes were, eh, “fixed” to some extent. How could you lock up representatives of five banks in a room, twice daily over some 90 years, to set a somewhat arbitrary price upon which fortunes turned, and not expect them to figure out some way to profit from the exercise?

It never really bothered me because the fix couldn't vary too much from the trading trend in place before and after the price setting, and any small differences that did exist would be quickly overwhelmed by the larger trends.

But here's what I didn't count on: Deutsche Bank snitching on its cronies. This development now has lawyers around the globe salivating.

Already a group of law firms in Canada is proposing a C$1 billion class-action suit that mirrors the U.S. litigation. And rest assured there'll be more to come -- there's blood in the water and the sharks are gathering.

If the discovery process turns up more wide-ranging manipulation of the sort we and many other gold bugs have been talking about for years, then the potential damages are mind-blowing.

Consider that anyone who has ever invested in not only the metals but any gold or silver stock would have suffered injury. That's the kind of potential payout that will have lawyers searching every nook and cranny. Even proof that the banks manipulated “just” the gold and silver price fixes could be sufficient to justify wider-scale damage claims, since the fixes are used in so many ways to determine the value of contracts and metals purchases.

This could get very interesting.

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