On Friday, June 8, King World News had a blog entry 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 [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.
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”?
The London gold trader is a shoe shine boy?
Hmmmm. Why are you saying that ‘paper gold’ referred to forwards or futures? Usually, this means (unallocated) bullion accounts. Never seen these before? Here is spot unallocated for muppets:
http://www.interactivebrokers.com/en/software/pdfhighlights/PDF-Metals.php?ib_entity=llc
and spot unallocated for big boys:
http://www.lbma.org.uk/pages/index.cfm?page_id=19&title=bullion_accounts
Finally some statistics on how much ‘paper gold’ is traded (take a look at page 9):
http://www.lbma.org.uk/assets/Alchemist63_Web.pdf
Has little to do with COMEX. Converting paper into physical is known as ‘allocation’. Never heard this before either? Hmmm. Then why claim the ‘London Trader’ was lying. (In fact, you are probably right that the ‘London Trader’ is a fraud, but not for the reason you are claiming).
Regards,
Victor
Victor: I explained why I assumed that “paper” meant forwards or futures. In addition, in case you haven’t been following the controversy over the years, it is often alleged that the bullion banks sell futures naked in order to suppress the price. It isn’t my fault that the specifics of the conspiracy allegations constantly shift to avoid data like what I published in this article.
Let’s please keep a respectful tone, and not set out to prove someone is incompetent or worse just because we disagree, OK?
The gold markets are connected, even if the advocates of conspiracy theories don’t understand how. Let’s assume that the bullion banks could go to their clients and dump 515 tons of “unallocated paper gold” onto the (rapidly falling) bid. I do not for one minute believe that this kind of simple straightforward criminal fraud is how they operate. But let’s assume it is. They literally print up paper gold and sell it.
OK, fine. Then there is one flaw which is immediately obvious. There is no way for the buyer to “convert” this counterfeit pile of paper to gold. It was printed for the sole purpose of committing a colossal fraud, and having served that purpose, it’s over with. Right? Well, aside from the lawsuits and the international incident(s) that would be spawned over this if the buyer was truly China or its well-connected businesses. I predict that there will be no such dispute…
But let’s ignore that. Let’s look only at the mechanics of this from an arbitrage perspective. 515 tons, or 16.5M troy announces are dumped onto the bid in the London paper market. This presses the bid down about $50. Let’s ignore that if this was fraud, the real holders of “real” London paper gold would not drop their offer and the market makers would not narrow the spread either. The bid-ask spread in London paper gold would widen massively. I mean massively! It is normally a few tens of cents. But under a massive onslaught of fraud, it would widen to a few tens of dollars! People would be screaming bloody murder at every gold trading desk from Vienna to Virginia Beach, from Scottsdale to Shanghai!
This did not happen.
Anyways, ignoring that little problem, the price in London is plummeting relative to COMEX futures, and you acknowledged that there was no impact on COMEX futures. What does someone do if the market offers him a risk-free profit? He takes it!
Buy London, sell COMEX. If London is crashing, this will offer a risk-free profit to the arbitrageur! The two markets are connected by anyone who has a brokerage account capable of trading like this. I’ve written many times about the gold basis (buy spot, sell a future) and cobasis (sell spot, buy a future). This buy London, sell NY trade would work in the same way.
The open interest on COMEX would have risen.
In this reply, which I had intended to be brief, I did not even address the gold basis. Suffice to say that it would have been deeply affected by this also. There was, in fact, no such change in the basis.
Thanks, Victor, for the links.
Looks like, per page nine of ‘Alchemist’, that 174 million ounces of gold change hands each day in London? Wow!
So, yes, a sale of 17 million ounces, as alleged by ‘London Gold Trader’ would be felt, but is well within the realm of possibility.
Concerning COMEX, yes, I think it is very plausible that the “naked short position by JPM and HSBC” about which the goldbugs get so excited, is merely the arbitrage by which the OTC market pushes COMEX around. Agreed.
Victor
The bullion banks cover their shorts before the end of the day after enough stop have been blown out. That’s why it doesn’t affect open interest. Maybe you should apologize?