With the obvious and continuous price manipulation in the paper gold and silver markets, why does anyone use those markets to base the physical price on any more? 

Why doesn’t the physical market make a clean break from the fake paper casino? 

Have two markets: one based on paper for the manipulators to play their games (with no relation to the physical price), and a second that is strictly tied to physical, cash only (no leverage) settlement with only the physical metal?

Thank you for your time

David Schectman’s Answer:

The futures market was originally set up to allow producers (miners) to hedge the price of their “gold in the ground.”  The futures market does serve a purpose.  If a gold mine needs capital for exploration, expansion or for operating expenses, the bullion banks that lend them the funds collateralize the loan with a set price (a futures contract on COMEX) for enough future production to cover the loan.

The problem occurs when non-producers like the six bullion banks (Barclays Bank PLC, ScotiaMocatta, Deutsche Bank AG, and HSBC Bank, JPMorgan Chase Bank & UBS AG) buy and sell contracts with no intention of taking delivery of gold or silver.  That is, for lack of a better word, legalized gambling.  Add to the mix the large momentum hedge funds.  The “paper” gold and silver traded on a daily basis has no relationship to physical metal supply and demand fundamentals.

Recently, there were gold contracts dumped on the COMEX in a matter of a few minutes that were equal to around five times the gold that was available for delivery.  Of course, they were settled with dollars, not with physical gold.

According to Jim Sinclair, there is a move afoot in the Far East to establish gold exchanges that deal only in physicals, and do not allow margin.  Yes, Merril, in the next year you may see the divorce of the paper market and the physical market that you mention.  When that happens, the physical market will set the price of gold and silver, not the paper market.  All of us, who own physical gold and silver and/or sell precious metals, look forward to that day.  It is coming.

Read Ed Steer’s comments in today’s newsletter.  He sheds some light on the manipulation.

Thanks’ for your question

David

I have a question for your Q&A day on Wednesday.

Tell me please how the interest rate, i.e. 10 yr. Treasury Rate effects the derivative market?

Bill Holter’s Answer:

BIG question George and one probably above my pay grade if you want the nuts and bolt internals of the motor.  All derivatives have “interest” rates factored in as a cost to carry or to maturity.  First there are direct derivatives on interest rates themselves, so there is a direct effect.  Next, most all derivatives have a cost to carry or a “spread” if you will that is calculated from the beginning of the contract.  Interest rates are a very big factor particularly in foreign exchange contracts.  If interest rates move in a big fashion during the contract’s life, the original assumptions can be turned upside down and create unforeseen losses (or gains).  If rates move far enough there can be systemic risk if enough losses mount in individual books.  The problem is that everyone does business with everyone else and if there are individual banks or players that are bankrupted then they cannot make good to the “winners” which turn the winners into losers.

This is a very basic primer to a subject that is so complicated that it takes PHD’s in math to create the contracts in the first place.  The problem is that these PHD’s make their calculations with models of “past behavior” i.e. there can never be a hurricane somewhere because it has either never or almost never has happened before.

Of course, interest rates affect far more than just derivatives, everything “financial” in fact up to and including whether or not the U.S. Treasury can make their interest payments.  We may get to see what volatility in interest rates can and will do first hand in the not too distant future?

Hello, for your Wednesday Q&A day:

Would you mind addressing the outrageous statement made by Doug Casey recently that “Gold Manipulation Allegations are Ridiculous”? Link below:

http://www.kitco.com/news/video/show/FreedomFest-2014/722/2014-07-11/Gold-Manipulation-Allegations-Ridiculous—Doug-Casey

I thought Doug Casey was one of the good guys all these days. But is what he saying part of a controlled message: saying the right things most of the times (attacking Federal Reserve, inflation threat) interrupted outrageously? There are many examples of individuals like this, and it becomes a credibility issue for precious metals community. For example:

Jim Rickards – Works for IMF bankers, pushing digital SDR fiat currency for entire planet Jeffrey Christian – Works for World Bank & IMF. What more needs to be said about this fellow?

Bix Weir – Always present on GATA, but claims Alan Greenspan was THE good guy working for gold standard?!

[To be fair, one of Doug Casey’s guys Bud Conrad had gone on record few months ago implicating JPMorgan in massive market riggings for many commodities – not just gold or silver. Video link below:

https://www.youtube.com/watch?v=SSeOVf0D-VQ

Andy Hoffman’s Answer:

This question is dead on.  We are not one to question his motives, but the vehement message of “no manipulation” makes not the slightest bit of sense for someone so intelligent and entrenched in the pro-gold camp.  The same goes for Rickards, who clearly has moved far more toward the side of truth in recent years (my guess is he is no longer a political “insider,” and thus is more inclined to tell it like it is).  As for Christian, no one has told as many blatant “mistruths” than anyone I am aware of in the PM world.  No doubt his motives are not based on truth, and given his background at Goldman Sachs, we are not surprised.  Bix is a unique case, as he is not saying Greenspan is “good”; but rather that he was part of some complex conspiracy that I have trouble understanding.  In the end game, Bix says the system is corrupt and one should own physical silver, so outside the strangeness of his message, he’s got the final recommendation right.

The moral of the story here is that, as I have long espoused, the most important research one can do is to find the handful of “good, smart people” that not only speak the truth, but have your best interests at heart.  They can be very difficult to spot sometimes, as within the financial industry, people have widely varied skill sets and motives.  And yes, given he has so many good people working for him, and presumably should be aware of the single most important and obvious aspect of PM trading.