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February 26, 2006

The Phantom Cartel
by Mark Taylor

The suppression of gold prices began when? I read one story that it began in August 1993 with an anomalous occurrence in prices. Another article claims the price suppression began in early 1996 in response to prices rising above $400. To advance this theory there must be an identified perpetrator. Central Banks, Bullion Banks, and various Commercial Traders operating out of the COMEX gold market are accused of this alleged manipulation and suppression. I say operating out of COMEX because every time gold suffers an intraday loss of $5-10, the conspiracy theorists yell "the Commercials are at it again". I don't know how many times I've read how blatant their operations have been in the COMEX market over the past few years.

Fortunately the CFTC keeps a very in-depth record of all traders in the futures markets and categorizes them. The categories are as follows; Non-Commercial, Commercial, and Non-Reportable. The two that most heavily influence the market are the Non- Commercial and Commercial participants. However as this study moves forward, we will see that the Non-Reportable Traders play a significant role in price movements as well. The CTFC has documented the positions held by all market participants since the beginning of 1986. The complete record can be found at the following website Historical Commitments of Traders Reports by Year and can be easily downloaded. These records, and a long term gold chart (this type of chart works best because of the price scrolling feature) Barchart.com - Charts - GCY0 GOLD Cash COMEX will be needed to verify many of the comments I make in this study.

To view the chart with the scrolling price feature, follow this link.

We will begin with the claim that the price suppression began in 1993. The particular study that I refer to proposes that price anomalies occurred on 5/1-5/3 in 2004. Simply stated, the selling occurred at the same time each day and that was the reason to suspect manipulation. It was then proposed (by using a given set of intraday prices) that the price suppression could be pin pointed to an exact day of commencement, August 5, 1993. It was also concluded that the price suppression was, and continues to be concentrated in the COMEX market.

As mentioned earlier, it is without question (among all conspiracy theorists) that this manipulation of prices is being conducted from within the group of market participants known as the Commercials. With this in mind, we will go back in time ourselves and see what really happened in 1993 and what group or groups of traders caused it.

We will need to look at the COT data from 3/19/93- 10/19/93 and a long term chart of gold. Before beginning, I would suggest that the historical COT data be viewed in Excel as it is easier to read. It is important that the data we look at is separated properly so I will lead you to the statistics in question. In Excel format, vertical line H = Total Open Interest, I=Non-Commercial long positions, J=Non-Commercial short positions, K=Non- Commercial spreading, L=Commercial long positions, M=Commercial short positions, N=Total Reportable (Non-Commercial and Commercial combined) Short positions, O=Total Reportable long positions, P=Non-Reportable (Small traders) long positions, and finally, Q=Non-Reportable short positions.

The reason we want to look at data from March 1993-October 1993 is because that is when the rise in prices from a trough low began, a peak in prices occurred, and another trough low was found. Before we look at the data in question, let's see what was going on prior to this time. Looking at the Non-Commercial positions, it is clear during the 27 weeks leading up to the March '93 low, Non-Commercial traders were net short sellers of gold. On the other hand, the Commercials were net long buyers of gold. Suddenly during the COT reporting period of 3/16/93 (which coincides with the rise in prices) the Non- Commercials began to go long and buy gold, by the end of the next week they were net long buyers. They continued to be buyers until the 8/3/93 reporting period when they had added an astounding 77,066 long contracts their previous low of just 5,010 long contracts in March. The Small Traders were doing the same thing; they had added an incredible 50,171 long contracts. That is the anomaly, two separate groups in a market adding 127,237 long contracts to what was a net short position just 21 weeks earlier. It was this move from being net short to becoming record breaking long buyers that drove the price up from $326 to $409. The peak in prices did occur at the same time the Non- Commercial and Small traders had stopped buying. All the while, the Commercials were simply accommodating the buying by offering to sell physical gold. They moved from being net long purchasers of gold to being massive sellers. The old buy low and sell high trick? How dare they?

Now we have reached the pinnacle in buying and the coinciding price appreciation of the reporting period 8/3/93. During the next COT reporting period (8/10/93) prices began to fall sharply and it is in this reporting period, which the supposed suppression of prices began. The Commercials were to have caused this price decline, but how could they have? In order for them to change the trend, they would have had to do just the opposite of what they had been doing. Since they were massive sellers of gold for 21 weeks, the opposite play would to become massive buyers. This however would have driven prices even higher. With their massive short positions, the only thing they could have possibly done was to begin covering those positions, but this move results in what is called a short squeeze, which also causes prices to rise. The Commercials are running out of options here but there is a couple left. One is to continue adding to their short positions and sell more gold; the other is to convince the small segment of Commercial longs to sell out of their positions. The COT data from 8/10/93 argues conclusively that neither was the case. The fact is, in less than 5 days, the Commercials decreased their short positions by 34,132 contracts and increased their long positions by 14,554 contracts. Hey wait a minute; they increased their long positions by 14,554 contracts? We'll get back to this a little later. Ok, we'll have to look elsewhere to find the culprits behind the price decrease that occurred. Since there are only two other groups in the market this won't take long at all. The COT data is incontrovertible; the reversal of price trend was caused by a massive move to sell out of long positions held by both the Non-Commercial and Small traders. During the reporting period of 8/10/93 the Non-Commercial traders dumped 26,351 long contracts while the Small Traders ran from 18,915 of their long contracts. That is 45,266 long positions liquidated in less than five days. The COT data from 8/10/93-10/5/93 also reveals that it was the same two groups of traders that continued to liquidate long positions. By the time these traders were finished selling, (nine weeks later) they had liquidated 88, 322 long positions.

It can only be concluded that the entire price move from $326 to $409 was a direct result of massive speculative buying on the part two groups of traders. The quick fall in prices from $409 to $341 was just as well, a result of these traders' actions in that they reversed their operations to the sell side in a historically rapid manner.

We are not quite finished here; remember when the Commercials were supposed to make their move in an effort to crash the price of gold? If that were their intent, why did they start buying into long positions the very week that the price began to fall. As a matter of record, they did a lot of buying when they should have been selling if they wanted lower prices. While the price of gold fell for six weeks, the Commercials added 43,016 long contracts while trimming 52,157 short contracts. I don't know about you, but if it were my intent to cause gold prices to fall, I sure wouldn't go into the market and buy 4,301,600 ounces of gold while the price is falling. I also would not have accumulated such a large short position in the first place knowing that a short squeeze would cause the price to rise even higher.

So why do the Commercials take on such massive short positions knowing that an exit from those positions will either cause higher prices or help to put a floor under a falling price? The answer will be found in part 2 of The Phantom Cartel.

Zorro

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Mark Taylor aka Zorro
dowtheoryproject.com

Copyright © 2004-2006 Mark Taylor

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