Freeing Hamstrung Commodities Traders with Blockchain

The trading paradigms that dominate today’s investing landscape have undoubtedly served some of us well. For those who play by the rules, buying options or futures contracts is no strenuous exercise, and there is a huge market open at all hours of the day to serve willing participants. However, no matter how streamlined these practices are, or how fast online platforms become, the commodities trade will remain fragmented from bottom to top unless something changes.

In fact, the rules and major players within this modern industry are themselves keeping free market principles from proliferating. Bureaucratic protocols that purportedly keep us safe still do so, but oftentimes at the expense oftransparency and accessibility. The regulations that keep commodities markets behind the walls of large, centralized exchanges and brokers, not to mention within enforceable geographic borders, have admittedly helped with data security and verification standards. However, they’ve also created an opaque, closed ecosystem where it’s difficult to identify stakeholders, their motives, and their level of control.

Whether barrels of oil or bushels of wheat, it should not be hard to discern which traders (or institutions) are behind the price speculation and manipulations in the futures market for commodities. Individual traders who rely on these commodities markets to hedge their investments or improve their businesses lose in the long run when this status quo exists unchecked. Many people hope that the situation will change for the better soon thanks to the proliferation of blockchain and the emergence of companies employing it to improve the entire value chain for all stakeholders.  Nevertheless, the powerful technology will need to demolish multiple obstacles in the road before making a qualifiable difference.

There’s No Such Thing as Equal Footing

Even before coping with the unfortunate, unpredictable nature of the modern commodities market, traders must first pass muster with the enormous entities that control the industry. A Belgian farmer who wants to defray risk in his home market must connect his bank account with a Belgian broker, who allows him to hedge the value of his crop with domesticfutures and options contracts. However, once this farmer finds customers in the United States, he will also encounter a massive struggle to register with foreign financial entities, become verified, establish new accounts, and then pay hefty fees for the privilege of allocating his own capital.

Besides dealing with physical and digital borders, traders often find themselves without any choice in who they deal with. Giant exchanges like the Chicago Mercantile Exchange and Euronext control commodities and force potential traders to utilize them as a conduit to access the world’s financialized resource markets. Such centralization creates the high-fee structures that we must struggle with, making smaller trades less affordable and edging out many willing market participants. Apart from creating a barrier that enables the biggest institutional players to maintain their iron grip thanks to scale that reduces their overall costs, this two-tiered playing field hurts other value chain stakeholders that are not financial institutions.

Bring On Blockchain

Trade finance is an especially important aspect of the global commodities market, but oftentimes,small and medium-sized firms are underrepresented due to high financing costs and expansive reporting requirements.  One of the reasons these entities are pushed aside is that institutional participants typically like to focus on big deals which are more lucrative in a market that generates relatively high fees thanks to a high degree of opacity.

However, efforts like those undertaken by Singapore to establish itself as a fintech hub for global commodities trading is rapidly changing the stakes for the smaller players.       Singapore has invested heavily in attracting companies dealing with investments and trading to create a better model to help its citizens trade commodities without the massive hurdles that currently exist.

Blockchain is already showing curious financial market participants a glimpse of what the future might look like without these realities. Platforms likeChainTrade, one of the first companies to take on the entrenched interests in the modern commodities market, exhibit extraordinary functionality. By hosting a platform for commodities options and futures on a completely decentralized network, the costs of maintaining a complicated centralized system, namely security anddata reporting, are decimated. The virtual elimination of fees that could once be pinned on these costs is the least of such a system’s benefits.

More impressive is the opportunity to deploy smart contracts in conjunction with the blockchain ledger. Although commodities exchanges are designed for contract standardization, this level of consistency ignores a huge wellspring of opportunity to fold in other commoditized goods and services.  While most of the disruptive fintech models are focused on taking share away from centralized exchanges, ChainTrade has effectively built an architecture that could expand trading beyond the traditional mining and farming emphasis. Soon, traders will be able to easily create custom contracts with their preferred expiry dates, margins, prices and other factors, and find willing parties to sit on the other side of the table.

An Improved Form of Guarantees

One of the best aspects of these new models is how they handle counterparty risk.  Concepts like building risk-reduction features directly into smart contracts, requiring “Insurers” to back up both sides of the contract in case of default further contribute to the intelligence of this system. Smart contracts use the blockchain’s ledger to determine when these custom conditions have been fulfilled, and then autonomously distribute the correct funds to each recipient. In this case, funds take the form ofcryptocurrency to help streamline the process associated with the smart contract ecosystem.

While smart contract functionality also reduces overhead and fees for participants, it has the secondary bonus of eliminating borders for the market. Cryptocurrencies are now very universal, and can be purchased with any currency and traded no matter where the trader or their funds originate. Alongside an irrefutable record of trading activity, blockchain solutions like these eliminate fraud, improve transparency, increase accessibility and expand assurances for participants.

Safety In Decentralization

With trading environments built on blockchain that are both open and freely accessible, yet simultaneously protective of individuals, smaller traders and hedgers typically overlooked by the existing paradigm have something to look forward to. The lucrative stranglehold that institutions keep on the commodities market serve the interests of the few, and not the many, but blockchain is the people’s new champion.

Blockchain gets its power from a combination of limitless accessibility alongside the consensus of those who choose to participate. Traders are now opting for blockchain-based solutions, and it is becoming increasingly clear that markets will be forced to address this choice in some way.

"Dr.Copper"'s Contango Crushes Economic Hype

We warned two weeks ago that China"s "Bronze Swan" was looming as the crackdown on leverage in the system by Chinese authorities may be forcing unwinds of the CCFDs - thus putting upward pressure on Copper futures (unwinding short positions) and selling physical copper (which would mean procuring the physical metal before passing it on). Those effects were exactly what we had been seeing in the market until the end of August.

And now, it appears, as StockBoardAsset.com notes, exhaustion has started to set in across industry metals...

Barclays has also called the copper rally overhyped, while Bank of America Merrill Lynch said it’s the metal most at risk of a reversal,with the optimism of investors in financial futures disconnected from slow conditions in the physical market.

“When you look at the state of the refined copper market, you certainly question why prices have risen so significantly,” Snowdon said by phone from London.

And finally, bear in mind that the lagged response to China"s credit impulse is about to hit base metals... The rise and fall in China"s credit impulse that has been so highly correlated (on a lagged basis) with copper for the last eight years...

And now, as Frik Els of Mining.com explains, Copper futures trading on the Comex market in New York suffered another sharp decline on Wednesday as analysts warn of a likely correction following weeks of speculative buying.

In massive volumes of 2.7 billion pounds in morning trade alone copper for delivery in December slumped to a low of 2.9710 a pound ($6,550 per tonne), down more than 2% from Tuesday’s close to a three-week low.

A week ago copper hit an intra-day high just shy of $3.18 a pound (more than $7,000 a tonne), the highest since September 2014. But disappointment about imports by China,  responsible for some 46% of global consumption of the metal, and receding supply worries saw the rally come to a screeching halt.

The prospect of a weakening renminbi also emerged as factor for the pullback after Chinese policymakers this week relaxed rules to curb speculation against the yuan which had been in place for nearly two years.

A correction on copper markets may also have been overdue as speculative interest have been running ahead of industry fundamentals. Hedge funds built successive record net long positions – bets on rising prices – in recent weeks which according to the latest report totalled the equivalent of more than $9 billion at today’s prices.

Reports at the end of July that China is planning to ban the importation of scrap copper by the end of next year, sparked the rally from copper’s summer lows, but caught many in the industry by surprise.

Investment banks and institutions are now catching up and according to the September survey by FocusEconomics released yesterday eight of the 24 analysts polled upgraded their fourth quarter forecasts compared to projections made the month before.

While no-one downgraded the outlook for copper, consensus forecasts remain well below ruling prices however.

Analysts project that prices will average $5,870 per tonne in Q4 2017 and $5,844 per tonne in Q4 2018. The lowest forecast for Q4 2017 is $4,899 per tonne, while the maximum forecast is $6,674 per tonne. Among the pessimists. Barclays, Deutsche Bank, JP Morgan and Macquarie all saw a prices average more than 15% below today’s price going into 2018.

The price forecasts for Q4 2017 were raised for nine metals and minerals, including aluminium, lead and iron ore. Tin was the only exception with economics lowering their price expectations for the rest of the year.

*  *  *

And finally, as Bloomberg details, here’s some more grist for the doubters who scoffed at copper’s rally to a three-year high earlier this month.

The metal for immediate delivery on the London Metal Exchange cost $40.75 less than benchmark three-month futures on Tuesday, the biggest discount since 2009.

That market structure, known ascontango, shows “there’s no part of the world where copper is really scarce,” said Rene van der Kam, Singapore-based managing director of trader Viant Commodities Pte Ltd. He says to expect more losses after a pullback in prices this week.

It appears "Dr.Copper" is about to be relegated to "ignore" status once again.

And why your average joe American should care... the Copper/Gold Ratio is misfiring and more likely to revert back to UST10Y levels. The correlation broke in late August.

Did China's Bronze Swan Just Arrive? Copper Inventories Crash Most In History

Buyers withdrew more copper from the London Metal Exchange’s global warehouse network on Wednesday than at any time since daily records began in 1996, extending a 19-day drop.

As Bloomberg notes, while the net decline in percentage terms was also the biggest since the height of China’s raw-materials boom in 2006, some have warned against reading such moves as an end to a years-long supply glut. A tug of war between financial traders with opposing views of the market has led to sharp swings in metal moving in and out of storage in the past year.

However, stockpiles also slumped 8.2% on the Shanghai Futures Exchange, which is notable because last year we saw the London and Shanghai inventories see-sawing (up in London, down in Shanghai, and vice versa)...

A question that emerged is what China is spending all this newly created money on. One answer emerged overnight when Bloomberg reported that after tumbling in the first half of 2015, copper inventories at the Shanghai Futures Exchange had been steadily rising, and in the most recent week soared by 11% to an all time high of 305,106 tons.

At the same time reserves at the London Metals Exchange declined for 11 days to the lowest level in more than a year, in other words China is shifting idle inventory from Point A to Point B.

But, this most recent withdrawal surge (the largest in history) suggests a sudden failure of the long-running commodity "collateralization" transaction - or CCFD - regime implemented in China years ago, as described in this post and summarized in the chart below...

Copper, as China pundits may know, is the key shadow interest rate arbitrage tool, through the use of financing deals that use commodities with high value-to-density ratios such as gold, copper, nickel, which in turn are used as collateral against which USD-denominated China-domestic Letters of Credit are pleged, in what can often result in a seemingly infinite rehypothecation loop (see explanation below) between related onshore and offshore entities, allowing loop participants to pick up virtually risk-free arbitrage (i.e., profits), which however boosts China"s FX lending and leads to upward pressure on the CNY.

And sure enough, we have seen USDCNY surging in recent months... (even if the RMB basket against global currencies has stabilized)

An example of a typical, simplified, CCFD

In this section we present an example of how a typical Chinese Copper Financing Deal (CCFD) works, and then discuss how the various parties involved are affected if the deals are forced to unwind. Exhibit 3 is a ‘simplified’ example of a CCFD, including specific reference to how the process places upward pressure on the RMB/USD. We believe this is the predominant structure of CCFDs, with other forms of Chinese copper financing deals much less profitable and likely only a small proportion of total deal volumes.

To summarize, Goldman notes that these shadow banking vehicles - CCFDs - involve a long copper physical positions and a short futures position on the LME.

And so, the current crackdown on leverage in the system by Chinese authorities may be forcing unwinds of the CCFDs - thus putting upward pressure on Copper futures (unwinding short positions) and selling physical copper (which would mean procuring the physical metal before passing it on). These are exactly what we are seeing in the market currently.

So is this the bronze swan?

*  *  *

Barclays has also called the copper rally overhyped, while Bank of America Merrill Lynch said it’s the metal most at risk of a reversal, with the optimism of investors in financial futures disconnected from slow conditions in the physical market.

“When you look at the state of the refined copper market, you certainly question why prices have risen so significantly,” Snowdon said by phone from London.

And finally, bear in mind that the lagged response to China"s credit impulse is about to hit base metals...The rise and fall in China"s credit impulse that has been so highly correlated (on a lagged basis) with copper for the last eight years...

However, as one analyst noted,

“Getting short in any base metal is risky right now when you have this broad positive macro theme and increasing investor participation, particularly in China’s onshore market."

“This is probably one to stand back from and wait for Chinese macro sentiment to turn.”

And finally, bringing the narrative back to American shores, DoubleLine"s Jeff Gundlach tweeted recently about the "Copper/Gold ratio soaring to the high of the year!"...

Adding

"Not good news for the "1.50% 10 year" crowd. Neither is 10 year Bund holding above 50 bp."

If China"s legged credit impulse is about to have its peak effect on Copper (as we showed above) then perhaps, just perhaps, the real pain trade (given the surging shorts in T-Bonds), is a 1.50% 10Y yield after all... driven by a plunge in copper prices.

Inside The "Wildest Commodity Trade" Ever... Just Don't Blink

Besides the hilariously fabricated economic data and the whole central planning bit - both of which are now everywhere these days - the one most notable feature about China"s economy and capital markets are the constantly rolling, bursting and resurrecting asset bubbles: from housing, to stocks, to bonds, to commodities, to cryptocurrencies, to pretty much anything that isn"t nailed down and can be traded, and back to housing again, the lifecycle of a Chinese assets is best expressed in terms of its "tulipness": how long before the swarming horde of Chinese bubble-chasers, armed with over $35 trillion in closed-capital account credit, latches on, bids it to the stratosphere, then sends it crashing only to repeat the cycle from scratch. And since these bubbles come ever faster and ever more furious, one has to be lightning fast to get in (and out) before it"s all over.

One such place where "if you blink, you missed it" is China’s Zhengzhou Commodity Exchange, the location of what Bloomberg has called China"s "wildest commodity trade" du jour: the buying, and selling, but mostly buying (for now) of ferrosilicon contracts. Trading in futures of the little known commodity - an alloy used to harden steel - exploded this week, as humans became veritable HFT vacuum tubes, with the average contract on Wednesday held for an estimated 39 minutes, according to Bloomberg calculations, as "investors" scrambled to buy just so they could immediately flip it to another greater fool.

And as the chart below shows, a whole lot of greater fools suddenly emerged at the start of the month.

Incidentally, the tenure of oil contracts on the NYMEX is an ancient 47 hours.

As Bloomberg"s Alfred Cang reports, "Ferrosilicon is just the latest commodity contract pounced on by China’s hordes of speculators with an intensity that makes the world’s most liquid markets look leisurely. In repeated bouts of manic trading over the past year, they’ve piled in and out of everything from cotton to zinc, eventually prompting regulators to step in and calm the frenzy."

Of course, the second regulators "step in" to  burst one bubble, the same hordes of speculators immediately shift to another, similar asset, which then becomes the next bubble du jour, and in recent days the choice has been a "hot potato" between the alloy, rebar, iron ore, siliconmanganese, and various other commodities, all of which are traded not with the intention of actually holding on to the asset, but selling it as soon as possible at a higher price, before the whole house of cards comes crashing down.

“There are large volumes of short-term investment in steel and related products such as rebar, iron ore and ferroalloy futures with investors trading momentum and sentiment,” Wei Lai, an analyst at COFCO Futures in Shanghai, said by phone.

For regular followers of China"s "investing" habits, none of the above should come as a surprise. What is surprising, is that this particular bubble hasn"t burst just yet: trading in ferrosilicon peaked on Wednesday with more than 705,000 contracts changing hands. Prices surged to a record $7,726 yuan a metric ton the previous day, up 25% this month (a move which in all honesty is tame when compared what ethereum and bitcoin have done this year).

What is also surprising, is the viciousness with which the bubble hunters swarmed this particular asset: until August, it was one of the quieter contracts on the exchange, with 22,000 contracts trading daily on average in July. Then China"s trading hordes arrived...

A spokeswoman for the exchange declined to comment to Bloomberg on the market movements: after all what can they possible say - "we keep getting overrun by an army of momo housewives"?

Overall, trading in steel and iron ore is the heaviest on China’s three commodity bourses, with volumes that dwarf contracts such as ferrosilicon. An average 7.9 million steel reinforcement bar futures traded on the Shanghai Commodity Exchange in July. Earlier this month, the bourse hiked fees and margins to calm trade in rebar after prices ran up to the highest in four years on speculation that China’s supply-side reforms are creating a shortage, and to cool the latest bubble mania. It failed.

For those curious how to calculate this particular metric, which for lack of a better phrase, we dub "bubble momentum" and bloomberg calls "commodity churnover", here is the answer:

Analysis of aggregate open interest, volumes and trading hours illustrates the extraordinary pace at which Chinese investors are trading commodities futures.

Dividing the average aggregate open interest at the end of each day by the aggregate volume shows the number of futures traded for every outstanding contract. Multiply that ratio by the number of hours in each trading day and you get an estimate for the average tenure of each contract. While Wednesday’s ferrosilicon contracts were held for less than an hour, the average for the month is 3.6 hours. Futures in Siliconmanganese, another alloy used in steel production, change hands at the fastest pace, with an average tenure in August of 2.7 hours. Iron ore is about 3.8 hours on average and rebar is 4.3 hours.

The best thing about China"s bubble factory: once the locals tire of high-frequency trading ferrosilicon, or whatever is the high speed bubble du jour, they can just move on to the next one and do it all over again.

Goldman's Commodity Unit Suffers Worst Q1 In A Decade

Authored by Tsvetana Paraskova via OilPrice.com,

The leading commodities trader among global investment banks, Goldman Sachs, is assessing the future direction of its commodities business, following the worst start to a year in more than a decade, Bloomberg reported on Monday, citing people with knowledge of an informal internal review.

The fate of the commodities business was one of the items on the agenda of a recent board meeting in London in late June, Bloomberg’s sources said on the condition of anonymity.

Goldman Sachs has not reached any decision regarding the unit, and may not be overhauling the commodities division. According to one of Bloomberg’s sources, it is a common practice for a bank to review the performance of divisions that are not doing very well.

In its Q1 2017 results release, Goldman Sachs said that

“Net revenues in Fixed Income, Currency and Commodities Client Execution were $1.69 billion for the first quarter of 2017, essentially unchanged compared with the first quarter of 2016, reflecting significantly higher net revenues in mortgages and higher net revenues in interest rate products, offset by significantly lower net revenues in commodities and currencies and lower net revenues in credit products”.

Goldman did not quantify then the “significantly lower net revenues in commodities”, but according to one of the people who talked to Bloomberg, weakness in the commodities business persisted after the first quarter, and the commodities division’s start to the year has been the worst in more than a decade.

“Commodities has been and still is an important business for our clients and we will continue to invest in it to ensure we are best meeting their needs,” bank spokesman Michael DuVally told Bloomberg in an emailed statement.

According to U.S. Senate report “Wall Street Bank Involvement with Physical Commodities” from 2014, Goldman Sachs’s “commodity revenues were generally under $500 million from 1981 until 2000, and then began to climb, producing four years of relatively high revenues, from 2006 until 2009, before they once more began to decline.” The peak in 2009 was at US$3.4 billion, said the Senate report, quoting a Goldman presentation from 2013.

According to one of Bloomberg’s sources, Goldman’s commodities revenue for 2016 was less than US$1.1 billion.

Last Week's Gold "Fatfinger" trade was an Options Expiry Spoof

You Know What to Do

• The Gold Wave Count Still points upwards, but external signs make us nervous


• New info tells us the Flashcrash  last week was most likely an options related price manipulation


• There is a new class  action  lawsuit worth watching as it crosses international  borders.

So far the charts and wave count are all holding. We must admit that the double bottom at $1241 being broken gave us quite a scare. And we stick to the "triple bottoms are made to be broken" axiom. Bullish bias aside, if we dip below $1241 again, we think  $1220  won"t be a problem. Even then, as freaked out as it would seem, the market is still ok for its next run higher by many measures. 

The Bull Case Reiterated

Authored by Soren K. Group for Marketslant

By combining Elliot Wave and traditional Technical Analysis we have been fortunate to be on  the right side of this move  that started  around $1214. But it is getting hairy now. Breaking $1247 took out a leg despite the fact we are back above  it. Taking out $1241 was another area we liked. Being above it again is obviously good. but it would be much better if we saw some people "get short in the hole". Unfortunately we did not see shorts getting in net-net, but longs getting out. So on balance the analysis is still valid, but we are on alert that the  next dip may not be bought at all. In Resistance/ Support Terms it reads like this

• 1550


• 1350


• 1296


• 1280


• 1257-1259


• 1247- 1248


• 1241-1238


• 1217-1214


• 1150

Numbers aggregated from these Posts 

1. MYSTERY SOLVED? GOLD OVER $1214 GIVES $1550 AS TARGET


2. Project $1550 Gold: Buy Dips Above $1248


3. Why Gold is Up and Why $1550 is Still The Target.


4. Wave Count Hints at $1241 Bottom


5. Above $1259 Settlement Gets you $1296 

The Knot in Our Gut Just Got Bigger

One of our colleagues came out of hibernation recently  and quite voluntarily voiced something we  were afraid of in these recent swoops and flash  crashes.  Without giving away his system we will just say that with 30 years trading Gold and managing money for some  of the biggest players in Metals during that time, when  he makes a statement, we take note. Quite simply:

$1214 gets you $1200 and if we break that number a freefall should commence leading to $1150

So it is stuff like that that scares  us. What"s more his opinion is not based on Elliot Wave counts, but he reads them  nonetheless. He just thinks  that the wave count we are following is not going to hold. 

Gold Today is basically unchanged  

 

click pic for updated prices?

Gartman  And Goldman are Bullish Now

Do we have to say anymore? It has been our experience that when Goldman is bullish, the next $20 may be higher, but the next $50 is likely lower. As to Gartman, he has a bad rep in predicting Oil prices. Histrack record isnt so bad in metals. We happen to have a good idea why. Gartman is wired to a couple London Bullion dealers and when he gives info or insight, especially in explaining a move, he is very good.

So we are not as negative on Gartman as a "contrary indicator" as most in the trade are. That said, the power of a Goldman  recco buy combined with a Gartman  long idea is like  crossing the streams in  Ghostbusters ( the good one girls)

Finally, and this is purely observing the context of Gartman"s statements: Talking about Gold and Bitcoin is like saying "I want some publicity so I"ll act like I know my ass  fro m my elbow in  Crypto currencies."

Really, we know a shitload about these products and in some circles are considered experts in the macro concepts governing them.

The only thing we feel we are expert about in Bitcoin and its ilk is in learning everyday we don"t know shit about them and got to keep  learning. So who the F&*k is Gartman to even  have an opinion on Bitcoin? He may as  well be talking about Beanie  Babies.

And that is the final straw or us.

Flat is Where It"s At

Goldman and Gartman are bullish.  Out gut says the downside is vulnerable, and a seasoned professional who rarely makes statements  is now uber bearish. So what is our conclusion?

Project $1550 is still in play, but we would rather now buy strength  than weakness. Flat is where it is at now with a buy stop entry above $1259 and a sell stop exit below $1240. The first upside target if the wave count holds is $1296. That"s our  call. 

And if our bearish colleague is right, sell  the crap out of it below $1241 on a settlement basis.

About the Flash Crash - it was manipulated

We"ve been very vocal  in stating that a fund puked to a commercial last week causing the $18 swoon. What was interesting was the strong bounce. While we still stick to our info  that the most likely scenario was a fund puking to a commercial there was something that bothered  us about the way it bounced. What kind of idiot would buy back  in like that? And then it hit us. There was an option expiration we believe on the LBMA and it is quite possible a commercial wanted to "make his option position right". And that is what one London trader told us. We already knew that the COMEX expiration  was coming due as well. Odds  are overwhelmingthat COMEXoptiosn positions had offsetting LBMA expiring positions. That is just from our experience.

Our London Source:

Someone wanted to make themselves right at an expiration. The bounce came post expiry, after the risk went away. Possibly a cash settled LBMA look alike vs a Comex futures-settled hedge 

Here is some analysis into how influential an option expiration can be. Even bigger than a daily Fix. It is during  option expirys that the tail wags the dog.

 Viking Analytics agrees and puts it rather eloquently:

The COMEX Gold Options Market is Enormous

The flash crash of gold occurred one day before the COMEX gold market had a key expiration date. The COMEX gold options market is enormous, accounting for approximately 45% of the value of the COMEX gold futures market. While many market analysts pay attention to the gold futures market, it is rare to find an analyst that provides commentary on the options market. [Soren K- we  agree and now number Vokingamong the few that "get it"]

The most recent Commitment of Traders ("COT") report can easily demonstrate the influence of the options market. The delta-weighted options on June 20th were approximately 46% of the futures open interest. The "delta-weighted options" essentially means the "equivalent futures contracts."

The main point that we are trying to make here is that the COMEX gold options market is enormous and influential, every bit as influential as the futures market itself.

The Value of Options in the COMEX Gold Market and GLD

Not only is the COMEX options market significant, the options market in the SPDR Gold Trust (GLD) is significant as well.

At Viking Analytics, we have created a (beta version) program to calculate the value of every call and put option at the end of every COMEX trading day. We also calculate the value of certain relevant call and put options for GLD. At the end of the day on June 23rd, the value of all call and put options that expire in June was $66.7 million.

Moreover, the value of the options that expire Tuesday on the COMEX were $28 million and $24.5 million for the calls and puts, respectively as of June 23rd.

Moreover, the change in value of the aggregate calls and puts expiring June 27th might be as much as 50% of the value of the calls and puts themselves.

Therefore, there is a lot of money riding on the closing price Tuesday at COMEX  [Soren K.- and look alike LBMA] options expiration.

This explains much more cleanly why a commercial sold volume and then the market bounced the next day. We have one source saying this was a factor now and have adjusted our opinions accordingly. We will not look for others because it doesn"t really matter does it? it is a market reality that must be traded around. Gold is manipulated and the depth of that manipulation is so large that no court will be able to understand just how much  money is stolen with: spoofs, fat fingers, pinned option expirations, fixes, slams, swoops, and the usual front running. And we have seen this first hand as victims in options in  every commodity traded.

So whether a fund puked or an option expired, there was some manipulation going on. We already know the truth. The problem is in finding facts. By the time investigators see the fire investors have already choked on the smoke.

Some Flash Facts:

1. The contracts traded the minute of 4:01am were MORE contracts traded than any other minute of the trading day Monday. The trading range in the 4:01am EST minute was about $18 per ounce.


2. The second panel in Eric"s chart above shows a dynamic bid-ask "stack" with the at-the-market bids in dark blue, and out-of-market bids in red. The main point here is that the flash sale of 2% of annual mining supply completely removed liquidity from the futures market. The order to sell 1.8 million ounces hit many of the bids that were offered at 4:01am. This is perfectly legal. However, it shows the power of some market participants (who have the capital to do so) to dramatically change market dynamics in a single (illiquid) minute.

The Game is rigged. And even  with the new UK lawsuit gathering steam we do not believe the actual money stolen from  investors numbers can ever be known. But we arepretty sure that whatever is offeredby these  lying settlers, it is 10x that amount. But we gotta keep trying

Click for info

Emerging Markets Are Not All Created Equal

For most investors, targeting foreign countries where there are high expectations for growth is a useful strategy.

After all, in the United States, Canada, and Europe, economies are mostly growing at about 2% or less per year. And while these developed markets are less risky to invest in, finding value can be tricky.

That’s why, as VisualCapitalist"s Jeff Desjardoins notes, for many decades, investors have been allured by the fast growth of far-off economies. In the 1950s and 1960s, Japan’s economy regularly expanded at a 10%+ clip, and who can forget the “Four Asian Tigers” that followed in Japan’s footsteps? In the 2000s, the focus shifted to the BRICS (Brazil, Russia, India, China, South Africa) – and more recently, attention has been on countries like Indonesia, Nigeria, Colombia, and Turkey.

DIFFERENT RISKS IN EMERGING MARKETS

Although emerging markets are similar in that they have high expectations for growth, it’s important to remember that these countries have very unique and different sets of risks.

Today’s visualization comes to us from Charles Schwab, and it provides a simple breakdown of the types of risks faced by the economies of emerging markets:

As an example, Mexico and Chile have considerably different risks, according to the chart.

Aside from currency risk, which they both share, Chile is particularly prone to sensitivity in the world’s commodity markets. That makes sense, because Chile is the world’s largest supplier of copper – and close to 50% of the country’s exports are copper-related, including refined copper (22.6%), copper ore (20.9%), raw copper (3.6%), and copper wire (0.5%).

On the other hand, Mexico is noted as having particular sensitivity to what happens in developed markets such as the United States. This is because 81% of Mexican exports go to the U.S., while the next biggest buyer of Mexican goods is Canada at 3% of exports. If the buying power of the U.S. and Canada is affected, it could have big consequences on what will be bought from Mexico.

Commodity Carnage Crushes Trumpflation Hopes: "Everyone's Nervous The Bottom Is Falling Out"

Another night of ugliness in Asia as the "froth" is blasted out of the exuberant hot-money-chased commodity markets. Chinese steel and iron ore futures tumbled on Wednesday to the lowest prices in months as market sentiment turned bearish on the demand outlook.

As Reuters reports, China"s producer price inflation cooled for the first time in seven months in March, pressured by fears that Chinese steel production is higher than demand, leaving a glut of the metal later this year.

"We"re not seeing much interest on the buy side, everyone is nervous that the bottom is falling out," said a commodities trader in Perth, Australia, who closely monitors activity on China"s Dalian and Shanghai Futures Exchanges for overseas clients.

The most active rebar contract on the Shanghai Futures Exchange settled 3.5 percent down at 2,893 yuan ($420), the lowest since Feb. 2. The sharp decline in steel futures has tamed buying interest in the physical market as well. Iron ore for delivery to China"s Qingdao port has swung into a bear market, with the price sinking more than 20 percent from its 2017 high in February to $74.38 a tonne, according to Metal Bulletin.

It seems the hopes of Trumpflation (and the fading China credit impulse) has erased growth hope...

What sets the Gold Price – Is it the Paper Market or Physical Market?

Submitted by Ronan Manly, BullionStar.com

The following article is arranged in Question and Answer (Q & A) format. Through the Q & A approach, this article raises some important issues about price discovery in the gold markets and aims to explain the view that the gold price is being set by the paper gold markets.

BullionStar’s CEO Torgny Persson and precious metals analyst Ronan Manly are of the opinion that due to the structure of contemporary gold markets, it is primarily trading activity in the paper gold markets which sets the international price of gold.

Question: The international gold price is constantly quoted in the financial media alongside other major financial indicators. What is this international gold price, and how is it defined?

The international gold price usually refers to the price of gold quoted in US Dollars per troy ounce as traded on the 24-hour global wholesale gold market (XAU/USD). Gold is traded non-stop globally during the entire business week, creating a continuum of international gold price quotes from Sunday evening New York time all the way through to Friday evening New York time. Depending on the context, this international gold price sometimes refers to a spot gold market quote, such as spot gold traded in London, and at other times may refer to the front month of a gold futures contract price as traded on the US Commodity Exchange (COMEX). The front month contract is a nearby month which will usually exhibit the highest trading volume and activity.

The international gold price can also at times be referring to the LBMA Gold Price benchmark price as derived during the London daily gold price auctions (morning and afternoon auctions). LBMA is an abbreviation for London Bullion Market Association.

Therefore, this "international price" could be referencing a spot gold price, a futures gold price, or a benchmark gold price, but all three would, at a comparable time, be roughly similar in magnitude.

Question: Where does this international gold price come from, where is it derived?

Recent empirical research has determined that gold price discovery is jointly driven by London Over-the-Counter (OTC) spot gold market trading and COMEX gold futures trading, and that the "international gold price" is derived from a combination of London OTC gold prices and COMEX gold futures prices. See “Who sets the price of gold? London or New York (2015)” by Hauptfleisch, Putni?š, and Lucey.

In general, the higher the trading volume and liquidity in a specific asset market, the more that market contributes to discovering prices for that asset. This is also true of the global gold market. Between them, the London OTC and New York trading venues account for the vast majority of global gold trading volume, and in 2015, the London OTC spot market represented approximately 78% of global gold market turnover while COMEX accounted for a further 8% (See Hauptfleisch, Putni?š, and Lucey (2015)).

Based on London gold clearing statistics for 2016, a quick calculation shows that total trading volume in the London OTC gold market is estimated to have been at least the equivalent of 1.5 million tonnes of gold in 2016, while trading volume of the 100 oz COMEX gold futures contract reached 57.5 million contracts during 2016, equivalent to 179,000 tonnes of gold. Gold trading volume on the London OTC gold market in 2016 was therefore about 8.4 times higher than trading volume in the COMEX 100 oz gold futures contract.

LBMA Unallocated Gold Trading, 1.5 million tonnes in 2016

However, COMEX has been found, by the above academic research, to have a larger influence on price discovery than London OTC, despite the lower trading volumes of COMEX. This is most likely due to a combination of factors such as COMEX" accessibility and extended trading hours via use of the GLOBEX platform, the higher transparency of futures trading compared to OTC trading, and the lower transaction costs and ease of leverage in COMEX trading. In contrast, the London OTC gold market has limited trading hours (during London business hours), barriers to wider participation since it"s an opaque wholesale market without central clearing, and trading spreads which are dictated by a small number of LBMA bullion bank market-makers and a handful of London-based commodity brokerages.

The bottom line though is that both sets of trading statistics, London OTC and COMEX, are gigantic in comparison to the size of the underlying physical gold markets in London and New York.

Question: So, does the physical gold market or the paper gold market set this international price of gold?

The international gold price is purely set by paper gold markets, in other words it is set by non-physical gold markets. Based on their respective gold market structures, the London OTC gold market and COMEX are both paper gold markets. Supply of and demand for physical gold plays no role in setting the gold price in these markets. Physical gold transactions in all other gold markets just inherit the gold prices that are discovered in these paper gold markets.

The London OTC gold market predominantly involves the trading of synthetic unallocated gold, where trades are cash-settled and not physically delivered (i.e. no delivery of physical gold). These synthetic gold transactions have little connection to any underlying gold holding, hence they are de-facto gold derivative positions. By definition, unallocated gold positions are just a series of claims on bullion banks where the holder is an unsecured creditor of the bank, and the bank has a liability to that claim holder for an amount of gold. The holder, on its side, takes on credit risk towards the bullion bank. The London OTC gold market is therefore merely a venue for trading gold credits.

The London OTC gold market is also one in which the bullion banking participants employ fractional-reserve gold trading to create large amounts of paper gold out of thin air (analogous to commercial lending), where the trading is also leveraged and opaque, and where this paper gold is only fractionally backed by physical gold. This “gold” is essentially synthetic gold. See BullionStar Gold university article "Bullion banking Mechanics" for further details on fractional-reserve gold trading.

Since COMEX only trades exchange-based gold futures contracts, it is, by definition, a derivatives market. Cash-settlement is the norm. Only 1 in 2500 gold futures contracts traded on COMEX is delivered with a transfer of warrants representing metal. The rest of the contracts are cash-settled. This means that 99.96% of COMEX gold futures contracts are cash-settled. See BullionStar US Gold Market Infographic for details.

Given COMEX trading gold futures and London trading synthetic unallocated gold, both the London and COMEX gold markets essentially trade gold derivatives, or paper gold instruments, and by extension, the international gold price is being determined in these paper gold markets.

Beyond the London OTC gold market and COMEX, all other gold trading venues are predominantly price takers that take in and use the gold prices established by the paper gold markets in London and New York. These other markets include physical gold markets around the world which look to the international gold price as an input into their domestic gold price setting mechanisms and conventions.

Question: Explain a little more about the market structures of these London OTC and COMEX markets?

By definition, futures trading is trading of securities whose value is derived from an underlying asset but whose securities are distinct from those of the underlying asset, i.e. derivatives. COMEX gold futures contracts are derivatives on gold. COMEX registered gold stocks are relatively small, very little physical gold is ever delivered on COMEX, and even less physical gold is withdrawn from COMEX approved gold vaults. COMEX gold trading also employs significant leverage. Hauptfleisch, Putni?š, and Lucey (2015) state that “such trades [on COMEX] contribute disproportionately to price discovery”. Note that the COMEX gold futures market is actually a 24-hour market but its liquidity is highest during US trading hours.

Turning to the London OTC gold market, nearly the entire trading volume of the London OTC gold market represents trading in unallocated gold, which to reiterate, merely represents a claim by a position holder on a bullion bank for a certain amount of gold, a claim which is rarely exercised. London OTC gold trades also predominantly cash-settle. Traders, speculators and investors in unallocated gold positions virtually never take delivery of physical gold.

This is a fact confirmed by a UK HMRC / LBMA Memorandum of Understanding published in 2013 which states that in the London gold market “investors acquire an interest in the metals, although in most situations, physical delivery will not occur and in 95% of trades, trading in unallocated metals will be undertaken.” Additionally, in 2011, the then LBMA CEO Stuart Murray also confirmed that there were ‘very substantial amounts of unallocated gold’ held in London.

A 2015 legal opinion on unallocated gold drafted by respected global law firm Dentons describes unallocated gold as ‘synthetic’ gold and as a derivatives transaction.

Dentons states that “the reality of unallocated bullion trading is that buyers and sellers rarely intend for physical delivery to ever take place. Unallocated bullion is used as a means to have “synthetic” holdings of gold and so obtain exposure to the price of gold by reference to the London gold fixing.”

Although the LBMA does not publish gold trading volumes on a regular basis, it did publish a one-off gold trading survey covering Q1 2011 in which it was revealed that during the first quarter of 2011, 10.9 billion ozs of gold (340,000 tonnes) were traded in the London OTC gold market. During the same period, 1.18 billion ozs of gold (36,700 tonnes) were cleared in the London OTC gold market. This would suggest a trading turnover to clearing turnover ratio of 10:1. In the absence of live trading data from the London OTC gold market, this 10:1 proxy ratio can continue to be applied as a multiplier to the LBMA London Gold Market daily clearing statistics, which are published every month, and which are always phenomenally high.

For example, average daily clearing volumes in the London Gold Market during January 2017 totalled 20.5 million ounces. That’s the equivalent 638 tonnes of gold cleared per day in London.  On a 10:1 trading to clearing multiple, that’s the equivalent of 6,380 tonnes of gold traded per day, or 1.6 million tonnes of gold traded per year.

Since there are only about 6,500 tonnes of gold stored in London, most of which represents static holdings of central banks, ETFs and other holders, the London OTC gold trading activities are totally disconnected from the underlying physical gold holdings. Furthermore, only about 190,000 tonnes of gold have ever been mined throughout history, half of which are estimated to be held in the form of jewellery. Therefore, the trading of nearly 6,500 tonnes of gold per day within the London OTC gold market has nothing to do with the physical gold market, yet perversely, this trading activity drives global gold price discovery and the pricing of physical bullion trades and transactions.

Revealingly, according to the LBMA bullion bankers who established the reporting of London gold clearing statistics, who specifically were the then LMPCL chairman, Peter Fava, and JP Morgan’s Peter Smith, these LBMA gold clearing statistics include trading activities such as “leveraged speculative forward bets on the gold price” and “investment fund spot price exposure via unallocated positions”, activities which are just side-bets on the gold price. See October 2003 article titled “Clearing the Air Discussing Trends and Influences on London Clearing Statistics“, from LBMA Alchemist Issue 32.

In essence, trading activity in the London gold market predominantly represents huge synthetic artificial gold supply, where paper gold trading is deriving the price of gold, not physical gold trading. Synthetic gold is just created out of thin air as a book-keeping entry and is executed as a cashflow transaction between the contracting parties. There is no purchase of physical gold in such a transaction, no marginal demand for gold. Synthetic paper gold therefore absorbs demand that would otherwise have flowed into the limited physical gold supply, and the gold price therefore fails to represent this demand because demand has been channelled away from physical gold transactions into synthetic gold.

Likewise, if an entity dumps gold futures contracts on the COMEX platform representing millions of ounces of gold, that entity does not need to have held any physical gold, but that transaction has an immediate effect on the international gold price. This has real world impact, because many physical gold transactions around the world take this international gold price as the basis of their transactions.

Although gold clearing volumes and the LBMA"s market survey provide some useful inputs into calculating London gold trading volumes, there is very little known publicly about how much physical gold actually trades in the London gold market. This is because the LBMA and its member banks choose not to reveal this information. There is no trade reporting in the London OTC gold market, no reporting of physical gold vault positions, no reporting of the unallocated gold liabilities of LBMA member bullion banks, and no reporting of how much physical gold in total these bullion banks retain to back up their fractional-reserve unallocated gold trading system. However, physical gold trading is by definition an extremely minuscule percentage of average daily trading volumes in the London OTC gold market. For details on the workings of the gold market in London, see BullionStar Infographic the "London Gold Market".

While one of the three components that comprise the London gold clearing statistics is stated to be “physical transfers and shipments by LPMCL clearing members”, the LBMA doesn’t even see fit to publish a breakdown of these 3 components. This compounds the secrecy and is another example of where bullion banks and central banks keep the global gold market in the dark about how much gold is being physically transferred and shipped.

Question: How do local gold markets around the world use the international gold price?

Local gold markets all around the world look to the international gold price, and take in this gold price, usually quoting their local country gold prices in comparison to the international gold price.

In the physical gold market, product pricing of gold coins and bars is based on a combination of the spot gold price plus a premium. The premium is that part of the product price in excess of the value of the precious metal contained in the coin or bar. Given that the physical gold market is a price taker, physical gold market spot prices feed in from where the price is being discovered, i.e. the international gold price.

For example, the 2017 issue of the Royal Canadian Mint 1 troy ounce Gold Maple Leaf bullion coin is quoted on the BullionStar website at a US dollar price which reflects the US dollar spot price of gold plus a premium.

Gold coin and gold bar premiums are based on a number of factors. Part of the premium will reflect natural minting / refining costs such as fabrication, marketing, distribution and insurance costs. If the products have been distributed through a wholesaler, the premium will reflect a wholesaler mark-up.  Another component of a premium is semi-variable and reflects physical market imbalances caused by supply and demand fluctuations. If demand for a gold coin or gold bar is high, its premium will increase. If supply of the product is abundant, the premium would tend to be lower than if in short supply.

In general, premiums on gold coins are higher than those on gold bars, while premiums on large gold coins and gold bars are lower than premiums on smaller gold coins and gold bars.

Question: What contribution does the Shanghai Gold Exchange make to gold price discovery and does the SGE, with its large physical trading, influence the international gold price?

The Shanghai Gold Exchange (SGE) is the world’s largest physical gold exchange and nearly all physical gold bars in China flow through the SGE. Gold trading volumes and gold withdrawal statistics for the SGE are certainly impressive. For the year 2016, total SGE gold trading volumes reached 24,338 tonnes, a 43% increase over the 2015 figure of 17,033 tonnes. SGE trading volumes include physical contracts, deferred contracts, OTC trades settled through the SGE, and also trading volumes on the Shanghai international Gold Exchange (SGEI). In 2016, physical gold withdrawals from the SGE totalled 1,970 tonnes, down 24% from 2015’s withdrawals of 2,596 tonnes, but still huge on an absolute basis because these withdrawals represent actual physical gold taken out of the SGE vaults.

By the end of 2016, the SGEI (International Bourse), which was launched in September 2014, had recorded cumulative trading of nearly 9,000 tonnes of gold. The Shanghai Gold Benchmark Price (a.k.a. Shanghai Gold Fix), which was launched on 19 April 2016, is a gold auction for 1 kilo gold bars of 99.99 purity quoted in RMB. Over the 8 months from launch to end of 2016, the Shanghai Gold Fix had traded 569 tonnes, which equates to over 1.5 tonnes per day on average.

All in all, the SGE has generated impressive physical gold trading volumes (24,338 tonnes for 2016) and withdrawals (1970 tonnes for 2016). For the sake of comparison, compare these annual SGE physical gold trading volumes to the bloated London OTC gold market where trading volumes of approximately the equivalent of 6,500 tonnes of gold per day are the norm. Such a comparison reveals the fractional-reserve nature of the London gold market and the fact that physical transactions can only be a minuscule fraction of the London market.

But does SGE trading affect the international gold price as derived in the London OTC and COMEX markets, or is the SGE a price taker?

The short answer is that the SGE does not influence the international price and the SGE is a price taker. There may be some lagged influence by the SGE on the international price but this would require further study. The Chinese gold market is still a closed gold market with market frictions and distortions. Gold can be imported into China but cannot in general be exported out of China. There is therefore no freedom of movement of gold out of China. Gold imports into China are strictly controlled via import licenses and these licenses are only issued to a small number of Chinese and foreign banks.

But it’s worth looking at SGE premiums to see if changes in SGE premiums ever provide any signalling ability for subsequent changes in the international gold price. SGE premiums arise when the Shanghai gold price trades above the international gold price. SGE premiums are a possible gauge to determine whether SGE trading affects the international gold price. In November and December 2016, SGE premiums rose sharply from less than 0.5% to over 3% which was a period in which gold imports into China surged. However, during that same period, the international gold price fell. So in this case, the expanding SGE premiums had no effect on the international gold price.

That example was just eyeballing, but a recent study by Metals Focus (MF) consultancy, titled "Links Between the Chinese and International Gold Prices" also found that the correlations between changes in the LBMA Gold Price (AM) and SGE premiums are not significant and were in some cases even found to be negative, which in summary means that SGE trading was not affecting the international gold price. MF also calculated some lagged correlations to see if SGE premiums influence subsequent changes in the LBMA Gold Price, due to, for example, "increased shipments of bullion to China over subsequent days". MF claims that "SGE premiums have a modest but positive and statistically significant impact on future gold price [LBMA Gold Price] moves" however, correlation is not causation. Properly functioning financial markets are supposed to instantaneously reflect pricing information in other markets, not take days to reflect it. There are also too many other variables which could also be responsible for explaining why the LBMA Gold Price moved higher after SGE premiums had previously moved higher.

However, unlike the OTC and COMEX, the Shanghai Gold Exchange is structured around physical gold price discovery. The establishment of a gold exchange in Shanghai was first referenced in China"s 10th Five Year plan in 2001 as an integral part of the nation"s gold liberalisation strategy. Following its launch in 2002, the SGE was quick to promote physical gold ownership and by 2004 was allowing private citizens in China to transact on the Exchange and purchase gold bullion. On the SGE, physical delivery of gold is the norm, not the exception. The SGE has a network of 61 gold vaults in 35 cities across China.

This makes the SGE a nature candidate to take the lead in pricing real physical gold and acting as a physical gold price discovery centre if and when the physical gold markets detach from the paper gold markets, and physical gold demand and supply becomes the natural determinant of the international gold price.

LBMA Gold Price auction

Question: What is the significance of the LBMA Gold Price?

The LBMA Gold Price is a twice daily auction for unallocated gold controlled by the LBMA. The final output of the auction is a benchmark gold price. The auction is conducted in US Dollars, however the derived price is also published in 11 other currencies. This auction is the successor to the London Gold Fixing and the benchmark is now a ‘Regulated Benchmark’ under UK financial regulations and is administered by ICE benchmark Administration (IBA), part of the ICE exchange group. But the new auction mechanics are fundamentally similar to the older London Gold Fixing mechanics. The auction opening prices are based on COMEX and London OTC price quotations as well as trading prices at auction opening times, i.e. at 10:30 am and 3:00 pm respectively.

Structurally, the LBMA Gold Price auction has very narrow direct participation, with only a handful of LBMA member bullion banks being authorised by the LBMA to take part. These are the same bullion banks which are the market makers and largest traders in both London OTC gold market trading and in COMEX futures gold trading. The LBMA Gold Price auctions therefore lack broad market participation and is not representative of the broader gold market. The LBMA and ICE Benchmark Administration also refuse to reveal the identities of the auction chairpersons, a refusal which suggests that those now involved have connections to the former scandal tainted London Gold Fixing auction. They also refuse to reveal how the chairperson chooses the opening price for the auctions. See "Six months on ICE – The LBMA Gold Price" for more details.

Not surprisingly, the LBMA gold auctions also settle in unallocated gold, so trading and settlement in the auction is also detached from physical gold markets. Trading volumes in the daily gold auctions usually only reach the equivalent of 1-2 tonnes of unallocated gold transfers, and rarely exceed 3 tonnes. So not only do the LBMA gold auctions not offer wide participation to the thousands of gold trading entities around the world, the volumes traded in the auctions are not representative of the global gold market and the benchmark is therefore not a reliable representation of the global gold market.

Perversely however, the LBMA Gold Price benchmark price is very influential in the gold world in that it is a widely-used valuation source for gold-backed Exchange Traded Funds (ETFs) such as the SPDR Gold Trust and the iShares Gold Trust. Furthermore, it is often used ad a transaction reference price by physical bullion dealers when purchasing physical gold from refineries and suppliers. The LBMA Gold Price is also widely used as a benchmark for valuing financial products such as ISDA gold interest rate swaps, gold options and other gold derivatives, and is even used by other futures exchanges as a reference point on their gold futures contracts, for example the gold futures contract (FGLD) of the Malaysia Derivatives Exchange.

Therefore, this reference price and auction, which is controlled by a handful of bullion banks under the banner of the LBMA, is based on trading synthetic gold, but is referenced widely around the world in countless gold contracts and in countless physical gold markets and retail gold outlets.

Even very large central bank physical gold transactions take this gold fixing reference price derived in London and then use it as a price with which to execute their own independent bi-lateral transactions. For example, when the Swiss National Bank used the Bank for International Settlements (BIS) gold trading desk as its agent to sell hundreds of tonnes of physical gold in the early 2000s, the transaction prices used for the transfers were based on taking the London Gold Fixing price as a reference price. As another example, in 2010, the IMF’s so-called ‘on-market’ gold sales were conducted by a selling agent who also based the sales transfer prices on the London Gold Fixing price. This is the same London Gold Fixing that is currently under investigation in an ongoing New York court class action suit.

Of concern here is that a benchmark that was controlled by a cartel of London-based bullion banks, that was opaque in its operation, and that is currently the subject of a gold price manipulation class action suit, was being used to value very large physical gold transactions. The question must be asked, was this benchmark fit for purpose and to what extent was it representative of the underlying worldwide physical gold market?

Question: So what about outside London and US / NY trading hours. Do other markets contribute more during these other times, for example TOCOM in Japan and MCX in India?

In general, higher trading volumes mean more liquidity to drive price discovery. But since financial markets are integrated, price information rapidly flows between markets due to simultaneously and overlapping trading. Futures markets such as TOCOM in Japan and MCX in India do contribute to gold price discovery, especially at times when the larger markets are not trading, but because these other venues are less liquid, COMEX tends to lead in the lead-lag analysis of futures prices. This finding is according to a study by financial academics from Bangkok University led by Rapeesorn Fuangkasem.

Question: How does gold lending affect the gold price?

The Gold Lending Market is centred in London at the Bank of England. It is here that central banks and commercial bullion banks interact in the execution of ultra-secretive gold lending and gold swaps transactions that increase the available supply of gold. Bullion banks euphemistically refer to this as liquidity provision but these transactions act as a supply overhang on the gold market. Few if any transactional details about the gold lending market are ever made public. If gold lending trade details were market-wide knowledge, their impact would be immediately reflected in the gold price. But they are not. Secrecy about central bank gold lending transactions therefore makes this market informationally inefficient. And when a market is informationally inefficient, the prices in that market do not necessarily reflect the non-public information in that market.

Likewise gold lending and gold swaps are not reported distinct from central bank gold holdings. In the perverse world of central bank accounting policies, gold held and gold lend/swapped is merely reported as one line item of "Gold and Gold Receivables" on central banks" balance sheets. Therefore, the real state of central bank gold holdings is obscured for any central bank engaged in gold lending or gold swaps.

Gold Lending also provides borrowed physical gold for bullion banks to engage in leveraged fractional-reserve bullion banking and trading, mostly in London where the international spot gold price is predominantly determined. Therefore, gold lending, the leveraged and fractional-reserve nature of gold trading, and the lack of reporting of real central bank gold holdings, all align to have a potentially depressing effect on the gold price as discovered in the London Gold Market.

The Essence of Central Bank Gold Lending to Bullion Banks

Question: Given that paper gold markets determine the gold price, then when or how could physical markets begin determining the gold price?"

There are two sets of gold markets –  on the one side, the COMEX gold futures and London OTC unallocated gold spot markets which are both ultra leveraged and which both create gold supply out of thin air, and on the other side, the physical gold markets which inherit the gold prices derived in these paper gold markets. Currently the physical gold markets have no effect on the international gold price.

Any shift away from the dominance of gold price discovery in the paper markets to a dominance of gold price discovery in the physical gold markets could only occur via a disconnect between physical gold prices and paper gold prices. The conditions for such a disconnect to occur would only be possible in an environment in which trading behaviour in the paper markets changed and/or the supply-demand balance in the physical gold market became acutely stressed and out of balance.

A shift in trading behaviour in the paper gold markets refers to an increased preference for converting paper gold claims (unallocated positions or gold futures positions) into physical holdings either directly by exercising conversion rights, or indirectly by selling paper gold and then using the proceeds to buy physical gold. Many of these paper claims are held by institutional and wholesale market clients. An increase at the margin in paper gold holders demanding direct conversion of their paper claims into physical gold would probably make such conversion impossible as cash-settlement of futures and unallocated positions would be introduced and made obligatory by regulators and exchange / marketplace providers.

The indirect option would be to sell paper gold and then buy physical bullion on the physical gold market from bullion dealers such as BullionStar. This move into physical gold would raise physical gold demand to such an extent that it could overwhelm available gold supply. At the same time the international gold price would fall because of selling pressure in the paper gold markets, thereby creating a disconnect between the price of paper gold and the price of physical gold, and would make the continued holding of paper gold claims ever riskier.

One trigger that could prompt a shift in sentiment from paper gold to physical gold would be a realization by a critical mass of paper gold holders that physical gold stocks are finite, while paper gold claims are at best fractionally-backed. The acceptance of this reality would be a self-fulfilling prophesy, prompting more and more paper gold claim holders to attempt to rotate into physical gold.

The contemporary physical gold markets have already witnessed sustained flows of physical gold from West to East over the last number of years driven by huge physical gold demand emanating from China, India and much of the rest of Asia. While physical gold flows are dynamic and while gold flows can and sometimes do reverse out of normal recipient destinations such as Hong Kong, Turkey, Dubai and Thailand, this is not true of China and to a large extent is not true of India either, where gold that gets imported does not come back out again. India has imported over 11,000 tonnes of gold since 2001. China has imported 7,200 tonnes of gold since 2001.

As more and more gold goes into destinations such as China and India in quantities which exceed annual gold mine supply, there is less gold available in above ground stockpiles to meet supply deficits. This is akin to a slow bank run on gold. There is also very little gold stored in the London gold market that is not already accounted for by central bank gold holdings or ETF gold holdings. Coupled with this, if in the future the paper gold holders shift to a preference for converting their paper claims into physical gold, this could also be a catalyst for tipping the physical gold market even further into a situation of excess demand and acute supply stress.

In a scenario of a destructing paper gold market, ownership of physical allocated and segregated gold is paramount. This means physical gold that is unencumbered, free from competing claims and titles, and that cannot be lent out or swapped. The paper gold market is already a gigantic bubble which has expanded to an unsustainable size and whose huge fractionally-backed claims are supported by very small physical gold foundations. The unsustainable nature of such a bubble dictates that it"s a matter of when and not if the paper gold bubble bursts. In such a scenario, physical gold ownership is the only thing that can protect against a systemic collapse of the financial system and protect against the destruction of the fractionally-reserved gold banking system.

Footnote:

BullionStar"s ideological belief promotes freedom of speech and liberty. Likewise, we believe that open debate produces improved analysis and research. Indeed, the BullionStar blog platform encourages varied opinions and well-researched ideas. Debate is particularly important when applied to the gold market, a market which is often opaque and deliberately shrouded in secrecy by its influential bullion bank and central bank participants.

BullionStar’s precious metals analyst Koos Jansen has a different view and believes that while paper markets might have some short-term impact on price, the physical gold market is more dominant in gold price formation over the long-term. Due to having taken some time off recently for health reasons, Koos did not contribute to the following article. But he recently summarized his view as follows:

"Due to my research in recent years my opinion has shifted from "the gold price is purely set in the paper markets" to "the physical market is more dominant in the long-term whereas the paper market has more impact in the short term". That"s where I stand now. If central banks suppress the price over years/decades they need to supply physical gold or the paper and physical price would diverge. Potentially there is a combination of paper and physical schemes at work."

Koos Jansen will, at a later point in time, present his view by answering and publishing the same or similar questions on the BullionStar website.

This article first appeared as "What sets the Gold Price – Is it the Paper Market or Physical Market?" on the BullionStar website.

Meet The Singapore Futures Trader Who Has Bought 3,000 Swimming Pools Worth Of Sugar

There is a new powerhouse dominating the U.S. futures market for raw sugar contracts and it"s creating a bit of confusion among the the more established trading houses of the world"s most volatile commodity markets.  The firm is Wilmar International, a Singapore-based agribusiness whose major shareholders include the family of Malaysian billionaire Robert Kuok and Chicago-based Archer Daniels Midland.  Founded 26 years ago, Wilmar is one of the world"s largest palm-oil producers but was essentially non-existent in the sugar market until just a couple of years ago.

Now, in just two short years, Wilmar has scooped up more than 6 million tons of raw sugar, enough to fill roughly 3,000 Olympic-size swimming pools at a cost of some $2.3 billion, by physically settling tens of thousands of futures contracts and collecting the commodity from ports across South America and elsewhere.  

The timing and size of the purchases have raised some concerns among other futures traders that Wilmar may be looking to manipulate global sugar prices.  As the Wall Street Journal points out, purchases made by Wilmar in 2015 were large enough soak up the entire global supply glut that pushed sugar prices to multi-year lows. 

The effects of Wilmar"s moves have been the subject of debate among traders. At one point in 2015, when sugar prices were at multiyear lows because of a world-wide glut, Wilmar bought so much that traders say the company in effect mopped up that year"s global oversupply. In the rally that followed, sugar prices more than doubled.

Then, as prices peaked in September last year, Wilmar changed course and delivered excess sugar it owned to other traders on the exchange. Sugar prices fell 24% in the ensuing months.

The company"s size and scale, however, are sowing concerns among some traders that it could control a large amount of the world"s tradable sugar and influence prices.

"They are a market mover," Nick Gentile, head trader of New York commodities trading firm Nickjen Capital, said of Wilmar. Around two-thirds of the world"s sugar production is consumed in the countries that produce it, and the rest is traded internationally.

Of course, Wilmar denies the importance of their massive trades in determining global sugar prices saying they represent just a small component of a very fragmented commodity market.

Jean-Luc Bohbot, the 48-year-old Frenchman who runs Wilmar"s sugar business, said there is no evidence that the company"s trades affect market prices. That is "very much an incorrect view," he said in a recent interview. "Sugar is an extremely fragmented commodity, with a very large number of players around the globe."

While Wilmar"s sugar purchases and sales appear in some cases to have preceded rising and falling prices, Mr. Bohbot said, "There is no clear correlation" between the two. Over the past few decades, sugar prices have gone in both directions when there were large physical deliveries, he added.

But perhaps even more rare than Wilmar"s quick rise to become one of the world"s largest sugar traders, is their propensity to take physical delivery of the sweet stuff and ship it to refineries in Asia and the Middle East, often at a loss. 

Physical settlements of futures trades, however, are rare. Exchange operator Intercontinental Exchange Inc. estimates that fewer than 0.5% of trades result in the actual delivery of commodities. The vast majority of futures contracts are unwound by traders before they expire because most firms want to avoid the hassle of transporting commodities to or from inconvenient locations. With sugar futures, buyers don"t know where in the world they will have to pick up the sweetener until after the contracts expire.

That hasn"t deterred Wilmar. Mr. Bohbot said the company has found it economical to purchase sugar in bulk using futures contracts, because the exchange"s rules require sellers to deliver the sugar on board buyers" ships, which facilitates international trading. In other commodity markets, such as grains or metals, the handover usually happens inside warehouses in locations that often might not be easily accessible.

Mr. Bohbot said Wilmar ships and sells most of the raw sugar it buys to refineries in Asia and the Middle East, where consumption is growing. This sort of trading, however, is often barely profitable when shipping and other costs are factored in, he said, noting, "There is very little margin, and sometimes no margin."

And while their strategy may be confusing to other large trading houses, it certainly seems to be working as the company"s sugar division posted a 33% year-over-year increase in revenue in 2016 on the back of substantially higher sugar prices...which we"re sure has nothing to do with their massive trading volume but rather was just the result of a little bit of "luck".

Building a financial defense line strategically

This important topic we cover in our book Splitting Pennies is possibly THE MOST importact topic in teaching personal finance, and probably the most misleading concept peddled by Wall St. 

Let"s face it - Wall St. has a reason to mislead investors, especially retail investors - because they"re on the other side of the trade!  That"s right.  When you lose - they win.  And due to hedging, they can"t actually lose.  

The secret world of hedging - Wall St. doesn"t want you to know about because like the insurance industry, it allows investors to protect themselves.  "Options" are thought of as "Risky" which is a highly potent meme that is reinforced by the regulators:

THE RISK OF LOSS IN TRADING COMMODITY INTERESTS CAN BE SUBSTANTIAL. YOU SHOULD

THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF

YOUR FINANCIAL CONDITION. IN CONSIDERING WHETHER TO TRADE OR TO AUTHORIZE

SOMEONE ELSE TO TRADE FOR YOU, YOU SHOULD BE AWARE OF THE FOLLOWING:

IF YOU PURCHASE A COMMODITY OPTION YOU MAY SUSTAIN A TOTAL LOSS OF THE PREMIUM

AND OF ALL TRANSACTION COSTS.

IF YOU PURCHASE OR SELL A COMMODITY FUTURES CONTRACT OR SELL A COMMODITY OPTION

OR ENGAGE IN OFF-EXCHANGE FOREIGN CURRENCY TRADING YOU MAY SUSTAIN A TOTAL LOSS

OF THE INITIAL MARGIN FUNDS OR SECURITY DEPOSIT AND ANY ADDITIONAL FUNDS THAT

YOU DEPOSIT WITH YOUR BROKER TO ESTABLISH OR MAINTAIN YOUR POSITION. IF THE

MARKET MOVES AGAINST YOUR POSITION, YOU MAY BE CALLED UPON BY YOUR BROKER TO

DEPOSIT A SUBSTANTIAL AMOUNT OF ADDITIONAL MARGIN FUNDS, ON SHORT NOTICE, IN

ORDER TO MAINTAIN YOUR POSITION. IF YOU DO NOT PROVIDE THE REQUESTED FUNDS

WITHIN THE PRESCRIBED TIME, YOUR POSITION MAY BE LIQUIDATED AT A LOSS, AND YOU WILL

BE LIABLE FOR ANY RESULTING DEFICIT IN YOUR ACCOUNT.

UNDER CERTAIN MARKET CONDITIONS, YOU MAY FIND IT DIFFICULT OR IMPOSSIBLE TO

LIQUIDATE A POSITION. THIS CAN OCCUR, FOR EXAMPLE, WHEN THE MARKET MAKES A “LIMIT

MOVE.”

THE PLACEMENT OF CONTINGENT ORDERS BY YOU OR YOUR TRADING ADVISOR, SUCH AS A

“STOP-LOSS” OR “STOP-LIMIT” ORDER, WILL NOT NECESSARILY LIMIT YOUR LOSSES TO THE

INTENDED AMOUNTS, SINCE MARKET CONDITIONS MAY MAKE IT IMPOSSIBLE TO EXECUTE

SUCH ORDERS.

A “SPREAD” POSITION MAY NOT BE LESS RISKY THAN A SIMPLE “LONG” OR “SHORT” POSITION.

THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY INTEREST

TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO

LARGE LOSSES AS WELL AS GAINS.

IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO SUBSTANTIAL CHARGES

FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE NECESSARY FOR THOSE ACCOUNTS THAT

ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID

DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A

COMPLETE DESCRIPTION OF EACH FEE TO BE CHARGED TO YOUR ACCOUNT BY THE

COMMODITY TRADING ADVISOR.

THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER SIGNIFICANT ASPECTS

OF THE COMMODITY INTEREST MARKETS. YOU SHOULD THEREFORE CAREFULLY STUDY THIS

DISCLOSURE DOCUMENT AND COMMODITY INTEREST TRADING BEFORE YOU TRADE,

INCLUDING THE DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT.

THIS COMMODITY TRADING ADVISOR IS PROHIBITED BY LAW FROM ACCEPTING FUNDS IN THE

TRADING ADVISOR’S NAME FROM A CLIENT FOR TRADING COMMODITY INTERESTS. YOU MUST

PLACE ALL FUNDS FOR TRADING IN THIS TRADING PROGRAM DIRECTLY WITH A FUTURES

COMMISSION MERCHANT OR RETAIL FOREIGN EXCHANGE DEALER, AS APPLICABLE.

Whoa- where do I sign?  This is an example of how regulators manipulate the presentation of options in order to mislead investors away from something which can protect them from disaster.

Financial tools like options are like any tools, they can be used like insurance, or they can be used as weapons.  Take simple construction tools.  A hammer can be used to build furniture, or destroy furniture.  A hammer can break a window, kill someone - but also it can be used for decades to build fine woodwork (if you are a craftsman).  

Building a financial defense line

This is the personal finance equivalent of hedging.  Hedging with options for example - should be used like an insurance policy.  It"s better to have it and not need it than need it and not have it.  

Your financial defense line can be a property that"s paid for cash that you can live on for the rest of your life, it could be if you are in the car business an inventory of valuable used cars, it could be a pile of gold bars.  Preppers are one group that understands this concept well - it"s the underlying ethos of prepping.  

But the majority of Americans are one paycheck away from disaster.  They "spend money on things they don"t need, with money they don"t have - to impress people they don"t know"

And of course, the problem with writing such an article is the paradox of education.  Those who understand this concept, are already doing it, and those who don"t understand - they don"t believe that they need to know it - they have another opinion!  Such thinking is never without punishment in the markets.  

Hedging is all about paying for something you do not need, but may need one day, should an unexpected event happen.  It"s a form of insurance.  

There"s one kind of insurance that takes this concept too far - life insurance.  But that"s a topic for another article.  Common insurance like homeowners insurance, professional insurances like directors" liability insurance, and others; are a type of financial defense line.  For example, did you know in large class action cases where big corporations are involved in fraud - shareholders are settled financially primarily through insurance claims made by plaintiffs attorneys?  Commonly it"s thought that companies pay out these big settlements but actually, it"s mostly insurance companies.  Wall St. is a huge user of insurance, and hedging - which is why at companies like AIG, the lines between derivatives trading, opaque contracts, and insurance - was widely blurred.

But you don"t need a Wall St. bank in order to create a financial defense line, it can be as simple as investing in something for cash that you may need one day "just in case" but don"t need right now, like a property, a container full of canned food - whatever it is to you.

When you HAVE the financial defense line IN PLACE - THEN and ONLY THEN can you go out into the risky market and take risks.  There"s a phenomenon that"s difficult to quantify, but the fact that you have the defense line, it seems that those investors usually don"t lose on the risks they take in the market.  The only analogy that can explain this is a Sierra Club study about bears and men carrying guns; it seems that men who hike in the mountains who carry loaded guns are almost never attacked by bears - but also they never shot any bears, which means the men must emit a pheromone that the bears can sniff.  

Practically, it"s better not to enter the market and take risks if you don"t have a defense line.  Another example is "investing money you can afford to lose" - many advisors recommend investing only a percentage of a portfolio (like 5% or 10%) that if the investment is wiped out, the portfolio will remain intact.  There"s a few demographics that understand this other than preppers - Texas Oil Investors and Silicon Valley VCs.

In Oil Investing, 9 out of 10 wells may be dry, or just barely break even.  But 1 out of 10 can be a gusher - 1,000% returns, which make up for the dry and average wells.  

Average investors, even if you don"t have any retirement or pension, can build a financial defense line - it can mean getting an extra job, doing something for extra income (like selling stuff online) or applying for a research grant you always dreamt of.  It"s a myth that you need money to invest.  In fact, most startups are started with 99% persperation and 1% inspiration.  Without money though, you"ll have to put MAJOR WORK into your project to really build equity.  In a simple example of a housing project, that means doing the labor yourself which can be 60% - 70% of the costs.  In a business, it means you"ll have to do 10 jobs, instead of hiring an accountant, a webmaster, and other things.

Fortress Capital provides hedging, alternative investments, and portfolio consulting - visit www.fortresscapitalinc.com to learn more.

Or checkout Fortress Capital Trading Academy to learn how to build a defense line, specifically.

Hey - it"s better than sticking a crayon up your nose.  Extended warranty?  How can I lose?