The heavy involvement of investment banks in commodity trading
creates the potential for market manipulation and conflicts of interest in
the gold market, and exchange-traded gold funds may be mechanisms of market
manipulation contrary to the basics of supply and demand, according to the
396-page report published last week by the Permanent Subcommittee on
Investigations of the U.S. Senate's Committee on Homeland Security and
Governmental Affairs.
GATA's friend J.H. points out these findings on Page 38 of the
report:
"Possible conflicts of interest permeate virtually every type of
commodity activity. If the bank's affiliate leases an electrical power plant,
the bank may attempt to use regional pricing conventions to boost its
profits, even at the expense of clients that pay the higher electricity
costs. If the bank's affiliate mines coal while the bank trades coal swaps,
the bank may ask its affiliate to store the coal rather than sell it to help
restrict supplies, and benefit from long swap positions, while causing its
counterparties to incur losses. If the bank's affiliate operates a
commodity-based exchange-traded fund backed by gold, the bank may ask the
affiliate to release some of the gold into the marketplace and lower gold
prices, so that the bank can profit from a short position in gold futures or
swaps, even if some clients hold long positions.
"A fourth problem with mixing banking and commerce is that, in the
context of physical commodities, it invites market manipulation and excessive
speculation in commodity prices. If a bank's affiliate owns or controls a
metals warehouse, oil pipeline, a coal-shipping operation, refinery, grain
elevator, or exchange-traded fund backed by physical
commodities, the bank has the means to affect the marginal supply of a
commodity and can use those means to benefit the bank's physical or financial
commodities trading positions. If a bank's affiliate controls a power plant,
the bank can 'manipulate the availability of energy for advantage' or to
obtain higher profits."
And on Page 368: "At the same time, a commodity-backed ETF can
have a significant impact on the price and volatility of the underlying
commodity, even when a precious metal is involved. For example, gold-related
ETFs first surfaced in 2004, with dozens of similar ETFs springing up over
time. Today, it has become clear that significant movements in the
gold-related ETFs have had direct impacts on the price of physical gold.
"As
one analyst in the field noted: 'You watch the flow of money. ... No matter
what the supply-and-demand fundamentals [for physical gold] may suggest, if
that money’s flowing, those prices are going to move.'
"The
Wall Street Journal cited as a possible explanation for the impact of gold
ETFs on physical gold prices the relatively small size of the gold market,
estimated at $236 billion in annual sales in 2012, and the ETFs' significant
share of those sales."
Starting
on Page 353, the report describes JPMorganChase's acquisition of the copper
market, thanks in large part to an exemption from position limits granted by
the Federal Reserve and Office of the Comptroller of the Currency to banks
trading copper, an exemption previously granted only to banks trading gold
and silver. The implication of the copper exemption is that the U.S.
government decided that manipulating gold and silver prices was not enough if
the major industrial metal was still able to trade freely and broadcast
inflation signals as gold and silver also would do if they were traded
freely.
Interesting
as it is, the Senate report really has done little more than reiterate the
old principle, the first premise of anti-trust law, that if a market
participant is big enough, it can push any market around. Unfortunately that
premise has been pretty much overlooked in the United States since Wall
Street took over both major political parties.
Also
unfortunately, if predictably, the Senate report does not touch on direct but
surreptitious government intervention in the commodity markets, though
sensational documentation of such recently became available, documentation
that central banks and governments are receiviing volume discounts for
surreptitiously trading all major commodity futures contracts in the United
States:
http://www.gata.org/node/14385
http://www.gata.org/node/14411
Apparently
the work of exposing that surreptitious intervention will continue to be left
to outsiders like GATA.
The
Senate report is posted at GATA's Internet site here:
http://www.gata.org/files/SenateReportOnBanks...-11-20-2014.pdf
