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Gold Manipulation Conspiracy Theory Revisited

By: Keith Weiner | Wednesday, June 13, 2012

On Friday, June 8, King World News had a blog entry ( http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/6/8_London_Trader_-_Staggering_515_Tons_of_Gold_Sold_in_4_Hours.html) based on an interview with an anonymous London Gold Trader. Eric King quotes said London Gold Trader as saying:

One full hour before Bernanke's testimony [yesterday, June 7], the bullion banks started selling. Over the next 4 hours, the bullion banks sold the equivalent of 515 metric tons of paper gold. This was in just 4 hours, and again, the selling started one hour before Bernanke's testimony.

The selling went on for another 3 hours after the Fed Chairman began to speak, and as I said, over 515 metric tons of paper gold was sold. During this entire takedown, there was zero physical gold available for sale in the market. However, this action did create tremendous supply for the Eastern buyers to lock in the spot price of gold. This will patiently be converted to physical in the coming weeks.

He does not define the term "paper gold" but we can assume he means either London gold Forwards or COMEX gold Futures. This seems to be confirmed by his remark that the anonymous "Eastern buyers" will "patiently convert" their "paper gold" to "physical in the coming weeks." I assume this means that they will stand for delivery of their contracts.

I also assume that he is not referring to naked, leveraged longs that are forced to liquidate as the price falls, due to margin calls. He explicitly said it was "the bullion banks" doing the selling of these 515 metric tons.

Let's look at the numbers. 515 metric tons equals 16,557,634.5 troy ounces. Rounding to the nearest 100-ounce COMEX contract, this adds up to 165,576 contracts. 165,576 new contracts were dumped onto the market on June 7, according to the London Gold Trader.

Open Interest Graph - Gold June 2012 - April 2013

This is a graph of open interest for every active month in gold from June 2012 through April 2013. The graph also shows total open interest. With the exception of a small increase (+2,337 contracts) on June 6, the trend has been that open interest has been decreasing from June 1 (365,323 contracts) through June 7 (350,975, or a net decrease of 14,348).

Even assuming that the bullion banks were selling Forwards, there is arbitrage between Forwards and COMEX Futures. We should see many tens of thousands (or probably close to one hundred thousand) contracts added on June 7. Instead, we see a net decrease of contracts of 10,327 contracts.

In what world does selling new contracts into the market, to push the price down, result in a net decrease in open interest? I don't know the answer to that. There is a children's television show that may provide a clue. I like Eric King, and I think he does the world a great service with his interviews on King World News. But the next time anyone needs an anonymous tipster to give out traders' "secrets", may I suggest "The Snuffleupagus" (http://en.wikipedia.org/wiki/Mr._Snuffleupagus)?

 

Author: Keith Weiner

Keith Weiner
keithweiner.posterous.com/

Keith Weiner

Dr. Keith Weiner (keith at monetary dash metals dot com) is the president of the Gold Standard Institute USA, and CEO of Monetary Metals. Keith is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. Keith is a sought after speaker and regularly writes on economics. He is an Objectivist, and has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona.

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