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In his multipart essay 'The Phantom Cartel' [1],
author Mark Taylor, also known as 'Zorro', offers an interpretation of COT
data gathered during the initial days of the suppression in gold prices.
Without attributing a source, he takes up my thesis that systematic pressure
on gold prices began on August 5th, 1993. While ignoring all my statistical
findings supporting a concerted effort to keep prices down, Taylor attempts
to counter the argument by analysing COT data.
In a typical and statistically significant way, the
price of gold often dropped during the New York session. Following this
anomaly, it was possible to pin-point the date when the suppression started
[2]. This finding was confirmed in several instances. For example, during the
last FOMC meeting before the suppression started, FED-Governor Angell said:
'We can hold the price of gold very easily' [3].
The beginning of the suppression on August 5, 1993
was typical for the many that followed. Firstly, it was during New York
trading hours. Secondly, it was done with a sudden, huge sell-off. But who
was selling? Obviously not the central banks directly, but private companies
such as the bullion banks borrowing gold from the central banks. Zorro
however says that 'commercial traders' are also 'accused' of this
manipulation. Thus he suggests a close connection between the suppressors on
one side and the commercials in the COT report on the other.
Every week, large participants are required to state
their position in the futures market. Position sizes of the three main groups
are reported in total; for the 'commercials', e.g. mining companies, for the
'non commercials', e.g. institutional traders (among them many hedge funds),
and for the 'non reportable', e.g. small traders. Zorro's reasoning is that
many contracts must be sold to suppress the price of gold. He thinks those
contracts should appear in the COT report as an increase of the net short
positions of the commercials. However that was not the case; in fact the
number fell. Zorro concludes that there was no price suppression. Does his
conclusion hold? Some thoughts:
- There is no public knowledge of whether, or
alternatively, under which COT category the orders of the suppressing bullion
banks are reported. The 'Phantom Cartel' wants its actions to go unnoticed,
probably because they believe interventions work better if nobody knows about
them, thus they will make an effort to cover their actions.
- But even while adhering to CFTC rules, a
suppression account may be listed in groups other than the commercials, for
instance in the non-commercials. This group includes all large institutional
positions which are only used for standard trading purposes - a cartel member
could fit perfectly into this group. Indeed, the non-commercials increased
their number of net short contracts in the week price suppression started
with 27,231, contrary to the position of the commercials.
- But even if they were reported under the
commercials, other commercial participants could have been buyers. The COT
data does not distinguish between 'Phantom-Cartel' members or others.
- We must also consider, that the suppressors can
cause stop loss selling of members in other groups, and then buy back their
previously sold contracts.
- Generally, the COT data is not exact enough for
the purpose of analysing the start of a suppression
scheme. The report states a decrease of the net short position of 48,686
contracts between August 3rd and August 10th. However, the suppression
started on August 5th, and we do not have COT data for this particular day -
not to mention data for specific trades in order to conduct a detailed
analysis.
- On the other hand, we do have the volume and open
interest data for this day. According to CRB [4], 127,207 contracts were
traded on August 5th, the highest volume until then. So the volume during
just one day was far more than the decrease of the number of net short
positions of the commercials over the entire week (48,686).
- For details' sake, saying that the suppressions
took place mainly during Comex trading hours does
not mean that they were done only through Comex.
There are also other large markets such as Forex,
OTC, options, which are interconnected.
We must consider the above items; the COT data does
not offer a direct measure of the activities of the 'Phantom Cartel' and
therefore does not counter the suppression thesis.
On the other hand, there is an anomaly that gold
prices fall far more often during the New York session than during the
remainder of the day. For instance, the number of days with falling prices in
New York and rising prices during the remainder of the day was, until 2001,
more than twice as high as the opposite [5] . This anomaly however is a
direct outcome of the suppression because any kind of suppression influences
price directly.
Furthermore, the anomaly occurs very often and thus
is of statistical significance. The chart shows an average of intraday gold
price movements of all days over a period of several years and clearly
depicts the occurrence.
Lastly, there are several other findings, many of
them published by Gata [6].
While spuriously thinking the COT data offers proof
against the suppression, Zorro completely ignores all evidence supporting the
suppression. This also includes my own statistical analysis, even if he uses
the resulting beginning day, August 5th 1993. On that day, prices dropped
during the Comex session 'in a matter of seconds at
one point' [7]. Since then, most market observers have seen this happen again
and again. It is not 'normal' market behaviour; it
is the implementation of FED-Governor Angell's idea to 'hold the price of
gold'.
Sources:
[1] www.safehaven.com/archivedetails.cfm?id=85
[2] www.gold-eagle.com/editorials_01/speck022301.html
[3] www.gold-eagle.com/editorials_03/speck020303.html
[4] www.crbtrader.com/infotech.asp
[5] www.gold-eagle.com/editorials_01/speck051001.html
[6] www.gata.org
[7] Daily Telegraph, August 6th, 1993
PS: I have decided not to wait for part three of
Zorro's article with my reply, as he plans to look at dates other than August
5th, 1993.
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