pulling the curtain back...

Good morning and welcome to a Wonderful Wednesday! The Youngbloods greet me this morning with their 1967 hit, “Get Together.” After I hear it in my head, I pull it up on YouTube and link it for you to enjoy. I hope you do.

The Precious Metals Market – DAY 2

Picking up where we left off yesterday, I was explaining the original purpose of the bullion banks which was to vault precious metals for the banks clients that held Allocated Gold Accounts. The next step in the evolution of bullion banking occurred when smaller clients wanted to invest in gold, and thus the Unallocated Gold Accounts were conceived. This is where the bullion bank (or another institution) owns the gold and leases it to a 3rd party, thus creating “paper gold.” Initially, all of the clients paper gold equaled the “unallocated” gold in the vault, but as time went on, the bullion banks began to see that they could “lease” that gold bar many times over as long as the gold was not convertible (available for exchange). So what had begun as a 1:1 correlation grew to a 241:1 relationship by 2013 and over 500:1 by 2015. And because the bullion banks were making the rules, no laws were broken.

So that each of these banks could complete transactions with their clients and other bullion banks two “middlemen” were created to secure the trade. In London it is the London Bullion Market Association or LBMA and in New York it is the US Commodity Exchange or COMEX. These institutions oversee all commodity transactions and set the international price which can be represented by the spot price, a futures price, or a benchmark price. Confusing isn’t it?

So what began with each bullion bank having allocated and unallocated accounts now grew to other investment companies each trading unallocated accounts. This has grown to 15,000:1 in annual unallocated gold trades. Let that sink in! For every ounce of physical gold traded on the exchanges last year, fifteen-thousand “paper gold” transactions took place. Simply based on that, which type (paper or physical) gold do you think controls the spot price?

Obviously, a few clever individuals at the bullion banks saw this, believed it was good, and decided to pervert the system even further. They opened the market to betting on future contracts which would, based on the bet, either increase or decrease the future prices. In other words, if they needed the price of gold to drop, all they had to do is bet against the future gold price with enough short contracts to overcome any long contracts and voila! The price drops. A very handy tool to have in your toolbox when you want to control the spot price!

As Joe Pesci says in Lethal Weapon… "Okay, Okay, Okay!" Tomorrow we’ll conclude this with a look at the weekly Commodity Futures Trading Commission (CFTC) and their Commitment Of Traders (COT) report.

Well, that’s it for today. Go out there and make a difference! See ya’ll later!