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Reader Matt writes ...
Hello Mish,Supply and Demand in the Gold and Silver Futures Markets
I love your blog. I read it every day. You are my non-conspiratorial viewpoint on the economy. Your work keeping an eye on and analysis of Greece lately has been very helpful to me in understanding the way of the world.
One thing I seem to recall with your previous posts is that in general you don't think gold is manipulated like all the conspiracy advocates say it is. I was recently reading this article that makes me question your viewpoint on that. Perhaps you could comment on this article.
Thanks for your time and for your blog. I appreciate it.
Matt writes in regards to Supply and Demand in the Gold and Silver Futures Markets by Paul Craig Roberts and Dave Kranzler and in general about the theory of physical gold demand vs. paper gold.
This article establishes that the price of gold and silver in the futures markets in which cash is the predominant means of settlement is inconsistent with the conditions of supply and demand in the actual physical or current market where physical bullion is bought and sold as opposed to transactions in uncovered paper claims to bullion in the futures markets. The supply of bullion in the futures markets is increased by printing uncovered contracts representing claims to gold. This artificial, indeed fraudulent, increase in the supply of paper bullion contracts drives down the price in the futures market despite high demand for bullion in the physical market and constrained supply. We will demonstrate with economic analysis and empirical evidence that the bear market in bullion is an artificial creation.My Reply
Any time you see articles promoting the difference between physical gold and paper gold you are most likely reading a pile of crap.
I have debunked such theories many times. In fact, one can easily prove such talk is complete nonsense.
In spite of claims of shortages and price discrepancies, one can get physical gold near spot rather easily.
- GoldMoney is a means.
- BitGold is a new means.
One can use BitGold to accumulate "physical gold" in small amounts at 1% over spot price, up to $50,000 worth. One can use GoldMoney to acquire larger amounts at far less markup.
So, please don't tell me there is a difference in price between physical gold and paper gold. Right now, there isn't any.
Rather, there is a shortage of coins and other small denomination forms of precious metals. There is also a huge number of suppliers that depend on hype to make a living.
Here's my Reader Q&A On Bitgold.
Claims that physical gold sells for huge percentage markups over "paper gold" are purposeful lies or blatant ignorance. There are no other options.
Such statements don't imply there is no manipulation. In fact, manipulation is everywhere in my opinion, just not in all the ways the conspiracy nutcases proclaim.
For example, there is no reason to believe the Fed is directly manipulating gold. Indirectly, however, the Fed certainly is. By suppressing interest rates and supporting the stock market, the Fed has indeed changed sentiment towards gold.
In regards to dumping futures, the Fed is certainly not directly behind that process either. But what about the market makers?
They could be, but I still suggest they do not care one way or another which way something goes as long as they make a profit. With that thinking, it would not surprise me one bit if the MMs manipulated gold to its previous high with the GATA advocates screaming all the way that the MMs were holding the price down.
It's tiring to hear the exact same manipulation charges no matter what gold is doing. And such screaming has gone on for years, even though gold has quadrupled since 2000 (certainly far more than the major stock market indices).
That said, someone sure benefits from these the middle of the night plunges at illiquid times.
So put me in the group wondering who that is, and what if any laws were violated in doing so. And if laws were violated, let's have an accounting, as well as a look at the laws.
I pinged my thoughts off Pater Tenebrarium at the Acting Man blog. He is one of my teachers on Austrian economics. He responded ...
"I agree completely. It is a waste of time to chase after the conspiracy theories. The overnight market dumps of futures definitely represent short term manipulation, but I don't believe it's illegal."
To that, let me ask, if it's illegal, should it be illegal?
To answer that, we need to know who did it and why. If it was a hedge fund seeking profits the answer may be different than if it was a mutual fund betting against the interests of those for whom it has a fiduciary conflict of interest.
We Waz Robbed
What isn't manipulated?
If the manipulation is illegal, let's see the case. And if there is a case, we then need to discuss if such actions should be illegal.
Purposely betting against clients you are supposed to be representing would cross the line.
Even though I was on the right side of the inflation/deflation debate, with hyperinflationists and death-to-the-dollar advocates looking extremely foolish along the way, I failed to see what "QE manipulation" would mean for gold.
And let's not pull punches: QE is blatant manipulation. To get rid of that kind of manipulation, one would need to get rid of the Fed.
Questions of the Day
Did anyone blaming "manipulation" fail to know the Fed existed? That the Fed supports the markets with QE? With talk? With suppressed interest rates?
The "we waz robbed" claim primarily comes from people who simply do not want to admit they analyzed the market poorly over the past two years.
I prefer to admit that I failed to see the complete implications of QE rather than make self-serving conspiratorial claims or plow into assets that I know are ridiculously overpriced.
Mike "Mish" Shedlock