- Goldman Sachs seeks to bring more “transparency” to the gold market — heh
- Lessons from history: What to expect if gold starts trading more like oil
- 500 “paper ounces” for every ounce of the real thing: Rickards asks an inconvenient question
- Friday financial absurdity: O*y*p*c litigation and distant lodging for Fed protesters
- A halfhearted cheer for single-payer health care… how Ronald Reagan warped your editor’s brain… why we won’t “start a movement”… and more!
If you think gold is manipulated now, just wait till the vampire squid’s grubby tentacles get a better grip on it.
Sit back and grab a cold one on this summertime Friday for a story you sure as heck won’t hear from the mainstream.
First, though, we’re compelled to note gold popped more than 1% this morning the moment that two sickly economic numbers came out. At last check, the bid is $1,352.
Both figures came in way below even the most pessimistic guess among dozens of economists polled by Bloomberg…
- Retail sales: Pancake-flat in July, compared with a consensus guess of a 0.4% increase. Were it not for super-cheap financing continuing to juice auto sales, the number would be even worse. If, as the mainstream keeps telling us, consumer spending is the only thing still propping up the economy, this is a very bad sign indeed
- Wholesale prices: Down 0.4% in July, compared with a consensus guess of a 0.1% increase. Producer prices had shown a bit of strength in recent months, but we wondered how long the trend could be sustained as long as producers held off passing along their rising costs to consumers. Now we know.
The few remaining traders betting on a September Fed rate increase are throwing in the towel. And to think it was only a week ago today that a “robust” job number knocked $20 off the gold price.
Now back to our story…
Goldman Sachs is looking to seize control of London’s $5 trillion-a-year gold trade.
“As recently as 18 months ago,” says this morning’s Financial Times, “the price of gold was still set, or ‘fixed,’ twice a day by a small group of banks conferring by telephone with clients. That century-old method has now been replaced by an electronic system, but the majority of spot gold trading in London is still done directly, privately, ‘over the counter.'”
Some of the big bullion banks like this system just the way it is, starting with J.P. Morgan Chase. But Goldman sees an opportunity to make a play for this lucrative trade, so it’s part of a consortium pushing to move the metals trade onto an exchange early next year.
Gee, Goldman versus JPM. Who to root for in this one? It’s like choosing between syphilis and chlamydia.
We won’t try to handicap this battle. But it’s worth a few moments to tease out what the consequences will be if Goldman gets its way.
Goldman and other supporters of the shift are trying to score points by saying that moving London’s gold trade to an exchange would bring more “transparency” to the market.
Well, they have a point about the current system — accurately described in the salmon-colored rag as “a centuries-old process conducted privately through banks that has been criticized for being opaque.”
But if you’re raising an eyebrow at Goldman arguing for “transparency,” your suspicions are well-founded.
In the second paragraph of its story, the FT glosses over the fact that such a move amounts to “a shift that reflects that of oil in the 1970s.”
There’s nothing about the oil trade since that time that’s “transparent.” Indeed, the market for oil futures has been used to mask a host of manipulations for more than three decades.
The veteran oil industry journalist Jim Norman documented these manipulations extensively in his 2008 book The Oil Card.
Modern oil futures as we know them began trading in New York in 1983 — only months after President Reagan signed National Security Decision Directive 66. Under NSDD-66, Washington began colluding with Saudi Arabia to drive down oil prices. Objective: Make Soviet oil exports dirt-cheap and bankrupt the Evil Empire.
One of the leading global oil traders in the 1970s quickly became one of the biggest players in the nascent oil futures market. Transworld Oil, controlled by John Deuss, accounted for up to 30% of NYMEX oil trade — most of it on the short side, betting prices would fall. Deuss had long-rumored ties to the CIA… and it was CIA chief William Casey who did much to implement NSDD-66.
Crude traded around $30 a barrel at the time NYMEX oil futures began trading in 1983. By the late ’80s, oil was in a range between $12–22. The Berlin Wall came down in 1989.
Made possible in part by cheap oil…
[Photo reproduced by Wikimedia Commons user Lear 21]
More manipulations took place as oil climbed relentlessly during the early 2000s.
The geopolitical objectives had shifted: High oil prices would act as a brake on Chinese economic growth. And the Commodity Futures Modernization Act of 2000 would help make it happen. The law “would eventually turn the oil futures market from mainly a zero-sum risk-hedging and price-discovery vehicle into a quasi-securities market,” wrote Mr. Norman.
“The price of oil is now less dependent on the actual supply and demand for ‘wet’ barrels than on the huge sums of money pouring into NYMEX futures from the pension and other investment funds, tacitly enabled and encouraged by U.S. regulators. Daily oil volumes on the NYMEX now dwarf global physical oil consumption.”
Indeed, there may be as many as 100 “paper barrels” of oil trading for each barrel of the real thing.
“The volumes are far, far out of whack with any reasonable need to hedge physical supply/demand risk,” Norman told your editor during a 2013 interview. “The amount of funds needed to dramatically influence crude prices would be ‘chump change’ compared with the sums needed in the debt and equity markets.”
The movements can go both ways. In more recent media interviews, Mr. Norman has suggested oil’s tumble from the low $100s starting in summer 2014 served to once again stick it to the Russians… with a side benefit of hurting China’s three state-run oil giants.
Just as there are “paper barrels” of oil, there are “paper ounces” of gold. For a long time, that 100-to-1 ratio also ruled the gold market.
More recently, we’ve documented how that ratio has blown out to 500-to-1 or more. Over the last two years, the Comex in New York sold down scads of its bullion inventory — likely to Asian buyers. What was once several million tons is now less than 1 million.
And now Goldman Sachs wants to turn the London gold trade into a copycat of New York? Zowie.
But manipulations can only work for so long. Eventually, market forces reassert themselves. What then?
“What happens when there’s a panic and everyone demands their gold at once?” interjects our own Jim Rickards. “And how does this end?
“There are a few ways… and none of them good.”
Jim and his team spent $115,000 of Agora Financial’s money to take a professional film crew overseas to pursue an in-depth investigation. It’s called The Great Gold Hoax.
“The answers we found are absolutely shocking,” says Jim. “And it could put your money at serious risk within the next 12 months.”
You can be among the first to watch it right now…
While gold responded meaningfully to the poor economic numbers today, stock traders are yawning.
The Dow industrials, S&P 500 and Nasdaq are all fractionally in the red after all three indexes hit an all-time high yesterday — something that hadn’t happened since Dec. 31, 1999.
Treasuries are catching a bid along with gold, which means yields are tumbling; the yield on a 10-year note is down to 1.48%.
The dollar index is down, but not hugely — about a third of a percent, at 95.5.
The standoff between Russia and Ukraine hasn’t shifted meaningfully since we brought it up 24 hours ago, and thus it’s still having no market impact.
OK, we’ve had enough heavy stuff for one week: Let’s turn to a couple instances of the financially absurd… starting with a dispatch from a distant front in the War on Small Business.
From the Twin Cities comes word of a carpet-cleaning franchisee named Michael Kaplan who wanted to congratulate the “11 amazing Minnesota athletes” on Twitter.
“But when his attorney warned him against it, citing aggressive actions against other small businesses by the U.S. Olympic Committee to protect its trademarks, Kaplan decided to sue in federal court,” says a report at Franchise Times.
“The Olympics is having a chilling effect on small businesses’ free speech,” says Kaplan’s lawyer, Aaron Hall.
Adds Kaplan: “I decided I was frustrated enough with the overreach,” says Kaplan, “and thought we should seek a declaratory judgment to get clarity on the rules.”
He filed the papers eight days ago. Whether he hears anything back before the Games are over is another matter entirely…
And then there are the Federal Reserve protesters whose hotel reservations were “mysteriously” cancelled.
For the last couple of years, a group called Fed Up has protested at the Fed’s annual gathering in Jackson Hole, Wyoming. This year’s event is two weeks from now.
“Despite paying in advance for spots at the 385-room Jackson Lake Lodge, the Grand Teton Lodge Co. told the campaign July 26 that their reservations would not be honored, citing a ‘computer glitch,'” writes David Dayen at The Intercept. “Grand Teton operates the lodge, a publicly owned facility, under a contract with the National Park Service.”
Grand Teton says it overbooked the place by 18 rooms and that it’s sorry. But now the protesters will have to stay up to a half-hour’s drive away, “separate from symposium guests and the press,” writes Mr. Dayen.
Here at The 5 we smell a rat and thus will stick up for the protesters, even if they seem a little confused. They’re worried the Fed might raise interest rates and hurt the working poor.
Rising rates? Hell, that’s the least of their problems caused by the Fed…
“You apparently missed the No. 1 issue on health care spending and longevity,” writes a reader who claims a Ph.D. and “25 years of health care experience in hospitals and a medical school.”
“All of the countries you mentioned have national health care and very little reliance on stockholding insurance companies that soak the first part of every dollar spent and then allocate some to their stockholders.
“It is an uncomfortable fact that continuously is overlooked by financial writers focused on the misleading syndrome of a ‘free’ market and our politicians who can not bring themselves to face the facts of how the U.S. is the only developed country in the world that does not have national health care.
“Write about this!”
The 5: We have. Here‘s one of our better efforts, from a year ago. It’s an update on work we did with our fearless leader Addison Wiggin in 2012. Where’ve you been?
We daresay the present system is so completely fouled up that single-payer would be an improvement. But a truly free market would be far, far better and even less costly. A woman could deliver a baby in a private room for $500 — which is the inflation-adjusted cost of maternity services at California’s Santa Monica Hospital in 1952.
“We’re doomed!” says a reader after we noted on Wednesday that outstanding credit card debt in the U.S. totals $730 trillion.
“According to my math,” says another, “that’s about $2.2 million for every man, woman and child in the U.S.”
Yeah, your editor typed a “t” when he intended a “b.”
I place the blame squarely on the politicians in Washington for depreciating the dollar and driving up the debt such that the notion of “trillions” entered the lexicon during a formative stage of my life when Ronald Reagan bequeathed us the first $1 trillion national debt. Heh…
“It seems to me that many, many things wrong with our government could be drastically improved by eliminating (or severely limiting) lobbyists,” writes our final correspondent.
“I realize Congress would not be in favor of anything like this (money), but if the media would start documenting stories of what they cost the taxpayer and the excess spending involved, perhaps they could be persuaded. There would be a never-ending list of stories. It could start with you and maybe spread to other news outlets. You could start a movement.
“Thanks for the opportunity to vent.”
The 5: Thanks for expressing confidence in our ability to effect that sort of change. But the economists from the “public choice” school demonstrated decades ago why it’s a lost cause.
Wikipedia has a not-bad summary of what those guys are all about. “While good government tends to be a pure public good for the mass of voters, there may be many advocacy groups that have strong incentives for lobbying the government to implement specific policies that would benefit them, potentially at the expense of the general public. For example, lobbying by the sugar manufacturers might result in an inefficient subsidy for the production of sugar, either direct or by protectionist measures.
“The costs of such inefficient policies are dispersed over all citizens, and therefore unnoticeable to each individual. On the other hand, the benefits are shared by a small special-interest group with a strong incentive to perpetuate the policy by further lobbying.”
Sure, we could inveigh against sugar subsidies one day, and the health care cartel the next day, and bank bailouts the day after that. But even assuming we could rouse the masses to action, it’d be a game of whack-a-mole. Fix one problem, another pops up.
It’s the whole system that’s rotten to the core — hence the Trump and Sanders phenomena this year, not that they’re capable of fixing anything, either.
No, we’ll stick to practical solutions that help you avoid the harm wrought by politicians and central bankers and other elites. But thanks again for thinking we could “start a movement”!
Have a great weekend,
The 5 Min. Forecast
P.S. As we go to virtual press, we see gold got slammed down right around lunchtime. It fell as precipitously as it rose 3½ hours earlier. Now it’s back to $1,337.
An organic movement? Or a quick-and-dirty manipulation?
We have no idea. And in the big scheme of things, it doesn’t matter — not in light of what Jim Rickards calls The Great Gold Hoax. We drew your attention to his exposé earlier in this episode of The 5, but if you haven’t watched yet, you owe it to yourself. The health of your portfolio hangs on Jim’s revelations. Check it out right away.