There is probably no other topic in the gold and silver markets which
incites heated debate more than the subject of precious metals price
manipulation.
That prices in the precious metals markets are manipulated is not
speculation, it is fact, a fact made clear again recently by the Commodity
Futures and Trading Commission´s (CFTC) ruling against investment bank
Merrill Lynch Commodities Inc (MLCI) for spoofing pricing of gold and
silver futures contracts on the COMEX exchange.
The number of investigations, legal cases, class actions and financial
headlines involving precious metals manipulation are now so pervasive that
it’s hard to keep track of which cases are in motion and which investment
banks are under scrutiny at any given time.
But beyond the profit and greed driven bullion bank manipulations gold and
silver prices, there is also the issue of central bank policy interventions
to suppress the gold price by outright gold sales or using the opaque and
secretive gold leasing and lending market. This is a less talked about
manipulation given the secrecy of everything to do with central banks and
gold, as well as a reluctance of the financial media to broach the subject
and a reluctance of regulators to ´go there´ by even looking at central bank
gold market activities.
That central bank operations in the gold market have existed is also fact,
with such operations covering price smoothing and price stabilization, price
pegging, and coordinated gold pools. See BullionStar articles “New
Gold Pool at the BIS Basle, Switzerland: Part 1” and “New
Gold Pool at the BIS Basle: Part 2 – Pool vs Gold for Oil” and “The
Bank of England and the London Gold Fixings in the 1980s” for more
background. There is also ample evidence about central bank manipulation
documented in various places including on the GATA website. The motivations for such central
bank interventions include protecting the existing financial system,
engineering low real long term interest rates, and preventing gold acting as
a barometer of inflation.
But beyond even commercial bank manipulation of gold and silver metals
prices and central bank policy manipulation of gold, there is arguably
another form of manipulation in the precious metals markets which is far
more influential in subduing price discovery and which takes the form of
the very structure of how these markets trade vast quantities of futures
contracts and synthetic and paper gold and silver positions that are
completely unconnected with any underlying physical metal. The home of this
trading is of course on the US
COMEX exchange and the unallocated gold and silver markets in London.
Both venues of which are ruled by the LBMA
bullion banks.
Merrill ´Spoofing´ Lynch
Turning first to the recent Merrill Lynch case, in late June this year the
CFTC announced
that it had fined Merrill Lynch Commodities Inc (MLCI)
$25 million for manipulating gold and silver futures contracts on the COMEX exchange
between 2008 and 2014. This was done ‘thousands of times’ according to
the CFTC, by MLCI traders ‘spoofing’, or placing and then cancelling orders
before they were executed. By creating artificial demand or supply and thus
false prices, this interfered with the (already broken) precious metals price
discovery that would have otherwise occurred.
Interestingly though not surprisingly, much of the direct evidence
the CFTC used in its verdict was from the myriad log files of trader chat
apps which were used to coordinate the spoofing. For example, in one 2010
chat, a trader was quoted as saying “guys the algos are really geared up
in here. [I]f you spoof this it really moves . . .”.
While a lot of money for most people, a $25 million fine is a paltry amount
for a global investment bank such as Merrill Lynch and is just a cost of
doing business on bank-ruled Wall Street. However, the ruling at least
demonstrates that what many always thought about precious metals futures
price discovery as being rigged and manipulated is in fact correct. As well
as the $25 million fine, Merrill entered into a non-persecution agreement
with the US Department of Justice (DoJ), agreed to cooperate with the DoJ
investigation into criminal violations, paid a $11.5 million civil monetary
penalty to the CFTC, and had indictments against two of its former MLCI
precious metals traders, Edward
Bases and John Pacilio.
The Usual Suspects – UBS, HSBC and Deutsche
But the recent case against Merrill is not an isolated event. It follows
similar moves
by the CFTC in early 2018 where the CFTC charged
investment banks UBS,
Deutsche Bank and HSBC and a number of their traders for spoofing
precious metals futures from as early as 2008, while fining the banks a
combined $46.6 million (of which $30 million was levied against Deutsche, and
$15 million against HSBC). In those cases, the CFTC worked with the US
Department of Justice and the FBI to bring the charges.
Moving forward to this year, in February 2019, the U.S. District Court for
the District of Connecticut fined ex UBS
precious metals trader Andre Flotron $100,000 for price spoofing and price
manipulation in violation of the Commodity Exchange Act (CEA) and CFTC
Regulations. In that action, the CFTC found that Flotron had spoofed large
orders in the precious metals markets between “at least August 2008
through at least November 2013, while employed at UBS”. This followed
the CFTC reopening
the case against Flotron in December 2018.
For excellent insights into how these UBS and other investment bank
traders operated their spoofing, see the articles by Allan Flynn from April
2018 titled “US
Gold and Silver Futures Markets – ‘Easy Targets’” and “UBS
and Deutsche Bank gold and silver traders, April 2018”. For example, in
evidence at the Flotron trial, Mike Chan, a UBS junior trader to Flotron
while they worked in Singapore stated to the court that “during training,
I’d seen him spoof and – enough that I replicated it immediately to do
the same thing. And as my career progressed at UBS, the more traders I
interact with, the more people I’ve seen spoof.”
The Fix is In – Manipulating the Gold and Silver Benchmarks
Beyond the gold and silver futures markets, but interfacing with the
futures, a similar group of bullion bank traders are, not surprisingly, also
involved in antitrust court cases alleging that these banks manipulated the
London gold and silver fixing benchmark auction prices. While these cases
are still winding their way through New York courts, and have not yet been
fully ruled on, the chat room transcripts on manipulative price collusion can
only be described as shocking, chat transcripts which anyone who bothered to
think about it knew
they existed from at least 2004.
The cases in question have been brought by groups of precious metals
investors against the cartelesque London Gold Fixing
and London
Silver Fixing companies with allegations that Bank of Nova Scotia and
HSBC manipulated silver fixing prices from 2007 to 2013, and that ScotiaBank,
HSBC, Barclays and Societe Generale manipulated fixing prices from 2004 to
2013. Noticeably absent is Deutsche Bank which settled its way out of both
cases, and UBS which successfully dismissed itself from both cases using
cooperation and expensive lawyers.
Again we turn to an article by Allan Flynn from December 2016 titled “How
to Trigger a Silver Avalanche by a Pebble: ‘Smash(ed) it Good’ which
has a host of excellent quotes from chat room transcripts on how traders
allegedly manipulated the silver market, for example:
UBS Trader A: “gonna bend this silver lower”; “i will bend it
lower told u”; ”hah cool its gonna get ugly”; “use the
blade on silver rg tnow it’ll hold it up”, “gona blade silver
now.”
Deutsche Bank Trader B instructing Barclays trader A: “today u smash,”
UBS Trader A: “an avalanche can be triggered by a pebble if you
get the timing right” and “silver still here, u can easily
manipulate silver”
With the cases against the London Gold and Silver Fixing companies still
in discovery in the New York courts, expect further revelations later this
year, but given the leniency of the system, not a lot of penalties.
For those readers alert to the way trading of precious metals futures
contracts and trading around the London gold and silver fixes works, you will
see that the pushing around of prices occurs in both ‘venues’, on COMEX and
in the London gold and silver market, especially in the lead up to and during
the fixes.
The same investment bank precious metals traders trade gold and silver
futures contracts and London OTC contracts, and they trade these in the
London and COMEX ‘venues’ at the same time. Price movements in one location
instantly are reflected in the other. This is all explained in the
BullionStar article “Spoofing
Futures and Banging Fixes: Same Banks, Same Trading Desks” from April
2018. At the time I said the following, which is even more apt now given the
CFTC’s recent prosecution of Merrill Lynch Commodities Inc (MLCI):
“Prosecuting banks and traders for price manipulation on COMEX futures
while ignoring the far larger London market and its gold and silver fixings
looks like a job half done. Trading desks and their traders are agnostic to
trading venues and with interlinked markets, the COMEX and the London Fixings
are two sides of the same coin.”
Conclusion – The Greatest Trick ever Pulled
Manipulating gold and silver prices by spoofing futures trades and
cancelling them is one thing. Central bank intervention into physical gold markets
to dampen the gold price is another. But perhaps the most far reaching yet
unappreciated method of manipulation is sitting there in plain sight, and
that is the very structure of the contemporary ‘gold’ and ‘silver’ markets
where prices
are established by trading in vast quantities of fractionally-backed
synthetic gold and silver credit, be it in the form of vast quantities of unallocated
positions that are ‘gold’ or ‘silver’ in name only, or in the form
of gold and silver futures which haven’t the slightest connection with CME
approved precious metals vaults and warehouses.
By siphoning off demand for real gold and silver and channeling it into
unbacked or fractionally-backed credits and futures, the central banks and
their bullion bank counterparts have done an amazing job in creating an
entire market structure of futures and synthetics trading that is unconnected
to the physical gold and silver markets. This structure siphons off demand
away from the physical precious metals markets, and in doing so, creates a
system of price discovery which is nothing to do with physical gold and
silver supply and demand.
Apart from fractional-reserve banking, precious metals market structure is
perhaps one of the biggest cons on the planet. So next time you think of
precious metals manipulation, remember that in addition to spoofing and
secretive central bank gold loans, the entire structure of the precious
metals markets is unfortunately one big manipulation hiding in plain sight.