Bitcoin"s Growing Price Gap Between Exchanges Creates Potential Headaches For Futures Trading

On Thursday, as the Bitcoin price made record high after record high, spiking to somewhere between $16,000-19,500, it was one of the top stories across mainstream media outlets, never mind Reuters, Bloomberg and the FT.

However, what exactly was the all-time high for Bitcoin? Because of Bitcoin"s growing "price gap", it depended where you looked. But a price gap of more than $3,000…really? Actually yes, as Bloomberg explains.

Bitcoin traded above $19,000 on Thursday, but you may have missed it. As it was reaching $19,500 just after 11 a.m. on the GDAX exchange, which is run by the popular bitcoin brokerage firm Coinbase, bitcoin was still stuck in the high $15,000"s on other trading platforms. Similarly, most U.S. traders woke up on Thursday to news that bitcoin was above $15,000, unless they were following it on Bitfinex, where it didn"t cross $15,000 until soon before 10 a.m.

This is nothing new. Bitcoin trades on dozens of exchanges, and the prices get out of whack at times. But as the price of bitcoin rises more rapidly into the tens of thousands, the gap seems to be getting worse. It was particularly bad on Thursday, when for several hours in the morning the difference between the price of bitcoin on the exchanges remained thousands of dollars, more than the total price of bitcoin just a few months ago.

The chart below compares the price of Bitcoin on two separate exchanges, GDAX and BitStamp, from 12.00am to 5.00pm yesterday.

To some extent, this might not seem to matter, Bloomberg suggests. So what if you could sell at a higher price on GDAX, it’s likely that you paid a higher price in the first place. As we discussed yesterday, GDAX is Coinbase’s exchange and the higher price probably reflects  Coinbase being the easiest way for new Bitcoin investors to participate. And…let’s face it, most investors in Bitcoin have been making money. Furthermore, yesterday was an unusual day as the whole world seem to be momentarily gripped by Bitcoin mania. Congestion problems on the Gemini exchange, for example, forced it to suspend redemptions for several hours.

While people might not care about the price divergence right now, they might do in the next few days. As we know only too well, Bitcoin trading is about to change dramatically, with the launch of the CBOE and CME Bitcoin futures contracts. The former starts trading on Sunday after which investors will be able to buy, sell and short the Bitcoin price without having to buy the digital currency itself. Unlike the current Bitcoin exchanges, the futures exchanges are heavily regulated (except when it comes to trading gold and silver, of course).

The intersection of trading on "wild west" Bitcoin exchanges with conventional futures exchanges is a potentially dangerous mix. While the CEO of ICE, which owns the NYSE, has lamented that the CBOE and CME have beaten him in launching Bitcoin products. He also said this week that his organisation wouldn’t be offering futures contracts soon due to the lack of transparency and structural integrity in existing Bitcoin markets. Those cautionary words are looking prescient all of a sudden. As Bloomberg notes.

The price gap creates some structural problems for the futures market. Consider hedging. The Cboe and the CME contracts will reference prices on different exchanges. So if investors are trying to hedge a bitcoin purchase, they will have to make sure they buy bitcoins on an exchange that matches up most closely with a particular contract.

But the bigger problem is that the price gap gives some credence to Sprecher"s argument. Large price spreads indicate liquidity problems and a lack of active professional dealers or traders who would normally arbitrage these differences away rapidly. Less liquidity suggests prices will drop more quickly when they inevitability do, though not everyone agrees.

Paul Puey, the CEO of Airbitz, a bitcoin wallet company, told me on Thursday that bitcoin"s fractured market was a feature, not a bug. If a large trade were to start a tumble in one exchange, the prices would be safe elsewhere, the thinking goes, though I"m not sure I believe that the bitcoin whales wouldn"t rush in to sell on a sustained plunge.

On balance, Bloomberg comes down favourably on the introduction of Bitcoin futures trading, expecting it to reduce volatility. However, any conviction is lacking as Bloomberg Gadfly analyst, Stephen Gandel, acknowledges that he might be wrong and it could have the opposite effect.

And more liquidity by way of the futures market should make bitcoin prices less volatile. But it could go the other way, too. A drop in the price could send futures traders heading for the exits, stoking more fears in the traditional bitcoin exchanges. That could create negative feedback loops, like the ones in mortgage markets during the financial crisis. What"s more, if there is some pent-up demand to short bitcoin, a rush of traders could cause futures to plunge when they start trading, pushing down the price of bitcoins.

Exactly.

As the clock running down to futures trading, we are waiting to see whether big banks and “official” interventionists launch a pre-emptive strike in a desperate effort to cool the Bitcoin bull market. Whether or not that happens, we aren’t convinced that Bitcoin’s volatility, or its price, will be tamed for long.

Banks Issue Last Minute Warning About Risks Of Bitcoin Futures, Ask Regulator For Review

As we countdown to the launch of bitcoin futures trading on the CBOE (10 December) and CME (18 December), the big banks – via the Futures Industry Association - have suddenly got cold feet about the risks. We don"t blame them, somebody"s going to get hurt, the only question is who. The banks are worried it could be them. The FIA’s “primary” members include all of the usual suspects like JPM, Goldman, Citi, Bank of America, Morgan Stanley, etc. The risk they are most concerned about relates to clearing houses which, ultimately, they stand behind. The problem, of course, boils down to Bitcoin’s volatility, something we flagged after the CME announced circuit breakers early last month.

Having taken a gamble on bitcoin futures, which are set to begin trading by the end of the year, the CME is now seeking to avoid the consequences of what has emerged as both the cryptocurrency"s best and worst selling point: its unprecedented volatility…While the CME already uses daily vol limits on most other markets, including crude, gold and market futures, to temporarily halt trading when price swings get out of control, the CME has never before dealt with something like bitcoin

In June, Bloomberg showed how Bitcoin’s 30-day volatility had risen to 100%, which was comparable (at the time) with one of the most volatile financial instruments they (and we) could probably think of - a three-times levered ETF in junior gold miners.

The CME has proposed three trading limits for Bitcoin futures, 7%, 13% or 20% up or down from the previous day’s closing price. The first two thresholds, for 7% and 13% moves, are “soft” limits, which would trigger a two-minute pause in trading of bitcoin futures. The 20% limit would be a hard stop after which trading would be halted. In the first ten months of Bitcoin trading in 2017, Coindesk calculated there had been 69 days in which Bitcoin moved at least 7%, 11 days in which it moved 13% and two days in which it moved 20%. In fact, we had another 20% intra-day move on 29 November 2017.

As the Financial Times reports, the banks – via the Futures Industry Association – is sending a letter to the CFTC which it will publish today.

The world’s largest banks are pushing back on the introduction of bitcoin futures, raising concerns with US regulators that the financial system is ill-prepared for the launch of the contracts as the value of the volatile cryptocurrency has soared. On Wednesday, the price of bitcoin climbed to a fresh record high of more than $14,000. Institutional investors have been keen to trade the asset but only via a regulated market.

However, the planned launch in the next 10 days of futures contracts by the Chicago exchanges CME Group and CBOE Global Markets, given a green light from the Commodity Futures Trading Commission last week, has prompted a backlash among the major brokers who backstop trading across the industry. The Futures Industry Association, the main futures industry lobby group, plans to send a letter to the CFTC that will be published on Thursday.

We could be forgiven for thinking this is all very “last minute”. The CME announced its launch of Bitcoin futures trading back in October and had been canvassing opinion from market participants, including the banks, for months beforehand. The FT confirms that it was seen a draft of the FIA’s letter in which the latter states that the introduction of Bitcoin futures “did not allow for proper public transparency and input”. This is self-evident, resulting from the launch of futures trading contracts being fast-tracked by all parties after Bitcoin’s price rose parabolically this year. As part of this fast track process, the CME and CBOE adopted a “self-certified regime” for the contracts, meaning that the normal regulatory oversight didn’t take place. As the FT notes, the FIA is belatedly calling for a review.

Using it (self-certified regime) for “these novel products does not align with the potential risks that underlie their trading and should be reviewed”, the draft reads. The CFTC warned last week during its approval process that the emerging cryptocurrency markets were largely unregulated and the agency had “limited statutory authority”. “It is also our understanding that not all risk committees of the relevant exchanges were consulted before the certification to launch these products,” the letter added.

Getting into the “nitty gritty”, even though the banks have been discussing the specification of the contracts for about six months (according to the CME), as the moment of truth approaches, they’ve “zeroed in” on the fragility of clearing houses. With so much Bitcoin trading occurs on other exchanges and outside the hours of CME/CBOE (even if they trade Sundays), the banks have realised their vulnerability.

Futures brokers are worried they will bear the brunt of the risk associated with bitcoin futures, because the margin that backstops the contract is placed in a clearing house. Clearing houses stand between two parties in a trade, managing the risk to the rest of the market if one side should default. They are mutually funded in part by banks to guard against the failure of their largest members. Several brokers among the top 10 largest providers have privately confirmed to the Financial Times that they will not clear the products immediately.

One clearing broker said that it would be open-minded about cryptocurrencies, as they were US dollar products, but only if they were “properly controlled and regulated”. However he added: “We’d still be on the hook in a worst-case scenario as we are exposed as members of the clearing house.”

Sometimes “old heads” are useful in these circumstances. Speaking on Bloomberg TV, Royal Bank of Scotland Chairman, Howard Davies, said he would advise the CME and CBOE against launching Bitcoin futures.

"I’m not quite sure that they know enough about what the underlying is, about the nature of the supply and demand of the underlying. I think it would be a very risky move for them in reputation terms. This is irrational exuberance. This is a very, very unusual market, that shows we’re not in a normal two- way trading market. Blockchain is much more interesting. The idea of a distributed ledger, which makes transactions and payment systems much cheaper and faster in real time is a good one. Blockchain, I think, has got life in it.”

Thomas Peterrfy, the founder, Chairman and CEO of Interactive Brokers (the one who fronts the company’s slightly irritating TV ads) is one of the “giants” of electronic trading in US financial markets. The FT noted Interactive Brokers" stance.

”Thomas Peterffy, a pioneer of electronic trading and head of Interactive Brokers, has warned that the introduction of bitcoin futures into a clearing house could increase systemic risk. On Wednesday Interactive said its clients would be unable to short the bitcoin futures market because of the extreme volatility of bitcoin.

It looks like the banks have realised Peterffy might be right in limiting trading of Bitcoin futures.

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.

28 Reasons to Buy Physical Gold

Submitted by BullionStar.com

Throughout human history, gold has constantly emerged as an unparalleled form of savings, investment and wealth preservation. Due to its unique characteristics and features, gold has inherent value and cannot be debased. When holding physical gold, there is no counterparty risk or default risk. Wealth in the form of gold can also be held and stored anonymously.

From its ability to retain its purchasing power over time, to its safe haven status in times of financial turmoil, to gold"s ability to diversify investment risk, there are many and varied reasons to own physical gold in the form of investment grade gold bars and gold coins.

1. Tangible with Inherent Value

Physical gold is real and tangible. It is indestructible, impossible to create artificially, and difficult to counterfeit. Mining physical gold is arduous and costly. Physical gold therefore has inherent value and worth. In contrast, paper money doesn"t have any inherent value.

2. No Counterparty Risk

Physical gold has no counterparty risk. When you hold and own gold bars and gold coins outright, there is no counterparty. In contrast, paper gold (gold futures, gold certificates, gold-backed ETFs) all involve counterparty risk.

3. Scarcity

Gold deposits are relatively scarce across the world and difficult to mine and extract. New supply of physical gold is therefore limited and explains why gold is a precious metal. Gold"s scarcity reinforces it"s inherent value.

4. Cannot be Debased

Because of its physical characteristics and features, gold cannot be debased, and gold supply is immune to political meddling. Compare this to fiat money supplies which are constantly being debased and destroyed via deficit government spending, central bank quantitative easing and financial system bailouts. On a survivorship scale, gold has far outlived all fiat currencies by thousands of years.

5. Store of Value

Gold is a preeminent store of value. Physical gold, in the form of gold bars or gold coins, retains its purchasing power over long periods of time despite general increases in the price of goods and services.

In contrast, fiat currencies such as the US Dollar are not stores of value and their purchasing power consistently becomes eroded by inflation or the general increase in the price level. Fiat currencies have a long history of either becoming totally worthless and going out of circulation, or else becoming completely debased, such as the US dollar, while remaining in circulation.

Since the creation of the US Federal Reserve in 1913, the US dollar has lost over 98% of its value relative to gold, i.e. the US dollar has lost over 98% of its purchasing power relative to gold.

Since 1913, the US Dollar has lost more than 98% of its value, while gold has retained its value.

6. Long- Term Inflation Hedge

Physical gold’s ability to retain its purchasing power over time is sometimes referred to as the “Golden Constant”. This reflects the fact that gold’s purchasing power is constant over long periods of time. This ‘constant’ exists because the gold price adjusts to changes in inflation and future inflation expectations. Therefore, physical gold is a long-term hedge against inflation.

7. A 6000 Year History

Gold has played a central role in society for thousands of years from the early civilizations of ancient Egypt, right up to the contemporary era. Gold has facilitated international trade throughout history, has been directly responsible for the economic expansion and prosperity of numerous civilizations throughout history, and has even been, due to gold exploration and mining, the direct catalyst for the growth of some of today’s best-known cities such as San Francisco, Johannesburg, and Sydney.

8. A 2500 Year Track Record as Money

Because of its ability to retain value and act as a store of value, physical gold has been used as money for over 2500 years. Gold coins were first issued in the Lydian civilization in what is now modern Turkey. Subsequently gold was used as a stable form of money in Persia, ancient Greece, ancient Rome, the Spanish and Portuguese Empires, the British Empire, and right through to the various international gold standards of the 20th century.

It was only in August 1971 that the US famously suspended the convertibility of the US dollar into gold, a move which triggered the debt fueled expansion that is still having repercussions within today’s monetary system.

To put gold’s monetary importance into perspective, for 97% of the last 2500 years, gold has been chosen by numerous sophisticated civilizations as the form of money par excellence and an anchor of stability, precisely because of its ability to retain its value.

9. Safe Haven

Physical gold acts as a safe haven asset in times of conflict, war and geopolitical turmoil. During the financial market stresses and heightened uncertainties caused by wars, conflicts and turmoil, the counterparty risk of most financial assets spikes. But since physical gold does not have any counterparty risk, investors rush to gold during these periods so as to preserve their wealth. This is analogous to sheltering in a safe harbor. Gold can thus be seen as a form of financial insurance against catastrophe.

10. Portable Anonymous Wealth

Gold bars and gold coins combine high value with high portability. In times of conflict and war, gold bars and gold coins are ideal for transporting wealth and savings across borders and within conflict zones in an anonymous fashion.

11. Universal Acceptance

Gold is universally accepted as money across the world, with the highly liquid global market always providing ample sales opportunities for gold bars and gold coins. This means that whichever city you are in across the world, you can always sell or trade your gold bars and gold coins.

12. Emergency Money

Military personnel are often issued with gold coins that they carry with them in conflicts zones as a form of emergency universal money. For example, the British Ministry of Defense often issues RAF pilots and SAS soldiers with Gold Sovereign coins to carry on their persons during combat missions and activities, such as in the Middle East.

Worthless paper Currencies vs the Inherent Value of Owning Physical Gold

13. Outside the Banking System

In the current era of global financial repression, physical gold is one of the few assets outside the financial system. Gold is not issued by any monetary authority or central bank or government. Because its not issued by any government or central bank, gold is independent of the banking system. Fully owned physical gold, if stored in a non-bank vault or held in one’s possession, is outside the banking system.

14. No Default Risk

Unlike a government bond, there is also no default risk with gold because it is not issued by any authority that could default. Gold bars and gold coins are no one else’s liability. Physical gold cannot go bankrupt or become insolvent. Therefore, there is no need to have to trust any other party when holding physical gold.

15. Portfolio Diversification

Adding an investment in gold to an existing portfolio of other investment assets such as stocks and bonds, reduces the volatility (risk) of the investment portfolio and can increase portfolio returns. This is because the gold price has a low to negative correlation with the prices of most other financial assets, because gold is less influenced by business cycles and macro-economic cycles than most other assets.

Numerous empirical studies by financial academics, as well as industry bodies, such as the World Gold Council, have validated gold’s role as a strategic portfolio diversifier. Optimal allocations to gold in multi-asset portfolios have found to be in the 5% to 10% range.

16. Currency Hedge

There is generally an inverse relationship between the gold price and the US dollar, in that the gold price generally moves in opposite directions to the US dollar. Therefore, holding gold can act as a currency hedge of the US dollar, and help manage the currency risk of portfolios denominated in US dollars.

17. Gold"s Metallic Properties

Gold has many and varied metallic properties. These properties provide gold with many technological and commercial applications and uses, which in turn contribute as additional demand drivers in addition to the investment and monetary demand for gold.

Gold is highly ductile (can be drawn into very thin wire). It is also highly malleable (can be hammered and flattened into very thin film). Gold is a very good conductor of electricity and heat. Gold does not corrode or tarnish. It is chemically unreactive and non-toxic to the human body. Gold has a high luster and shine, and an attractive yellow glow.

These properties explain gold’s use in electrical and electronic wiring and circuits (e.g. computers and internet switches), its use in the medical and dental fields, gold’s use in solar panels, space travel, and gold’s traditional uses in jewelry, decoration, and ornamentation. With new technological uses being found for gold all the time, gold"s demand pattern is diversified and underpinned by its commercial importance.

18. Physical gold - A tiny fraction of Paper Gold

The London wholesale gold market and the US-based COMEX gold futures market generate huge trading volumes of paper gold that dwarf the size of the physical gold market. However, these markets only trade derivatives on gold (futures and unallocated positions), representing fractionally-backed and unbacked claims on gold that could never be convertible into physical gold by claim holders.

In a scenario under which these paper gold markets became unsustainable, the prices of paper gold and physical gold would diverge, with the paper gold markets ceasing to trade and collapsing, and only physical gold retaining any real value. Physical gold is therefore an insurance against the collapse of the world"s vast paper gold markets.

19. By Definition - Not an ETF

Physical gold Provides all the benefits that gold-backed Exchange Traded Funds (ETFs) do not. ETFs provide exposure to the gold price, not to gold. Holding physical gold is by definition direct exposure to gold. With most gold-backed ETFs, you cannot convert the units into gold and take delivery of the gold, and in many cases, the locations of the vaults are not even known. If holding physical allocated gold bars or gold coins in a vault, such as with BullionStar in Singapore, you can always take delivery.

Gold ETFs have many counterparty risks since there are many moving parts in an ETF such as a trustee, a custodian, and a sponsor / issuer. Physical gold has no counterparty risks. When you hold a gold-backed ETF, the quantity of gold backing the ETF declines over time due to management fees being offset against the gold holdings. When you hold physical gold, you always remain with 100% of the actual gold you first purchased. There is no erosion of holdings.

20. Anonymous Storage

Gold can be stored anonymously, either in your possession within your house or property, or in a vault in a jurisdiction, such as Singapore, that has no reporting requirements. Since gold has a high value to weight ratio, storing gold does not take up much space.

21. Independent of Internet

Owning physical gold is not reliant on having internet access and access to electronic wallets and cryptocurrency exchanges. Furthermore, gold cannot be stolen by hacking an electronic address or by transferring or deleting a number in a computer.

Owning Gold Coins and Gold Bars Provides Many and Varied Benefits

22. Real Gold is Measured by Weight

Physical gold is measured in weight, not through a number set by a politician or central banker. When you buy a 1 Kilo gold bar, or a 10 Tola gold bar, or a 1 troy ounce gold coin, or a 5 Tael gold bar, you will always have that gold bar or gold coin, irrespective of the fluctuations of fiat currencies.

While thinking of the value of physical gold in terms of a fiat currency might be convenient, a better way is to think of a gold holding in terms of weight.

23. Coins and Bars - Build a Collection

Buying investment gold bars and bullion gold coins allows you to build a diverse collection of bars and coins that are at the same time a fascinating pastime and a form of investment and saving.

Bullion gold coins from the world’s major mints are beautifully illustrated and often have a connection to history. Investment gold bars from the world"s major gold refineries are distinctively different from each other and you can vary a collection by cast or minted bars, and a selection of weights.

24. Physical Gold Feels like Real Wealth

Physical gold feels like real wealth. When you hold ten 1 ounce gold coins in your hand, you intrinsically know that you are holding real wealth, gold that is scarce and that has been costly to produce.

25. Gold as Loan Collateral

Gold can be used as loan collateral. Since gold is highly liquid and valuable, it can be lent and used as a form of financing, and as a way of generating interest. The wholesale gold lending market between central banks and bullion banks is highly active. Likewise, retail gold holders can also in various ways lend their gold to receive financing or interest, with new innovations to do this arising all the time.

26. Central Banks hold Gold

Although the world’s central banks like to downplay the importance of gold because it competes with their fiat currencies, most central banks continue to hold substantial amounts of physical gold bars and gold coins in vaults around the world. They hold this gold as a reserve asset on their balance sheets, and they value this gold at market prices.

Like private gold investors, central banks hold physical gold because it is highly liquid, it lacks counterparty risk, and because gold is a safe haven or ‘war chest’ asset that acts as a financial insurance in times of crisis. Central banks also hold gold for the unpublished reason that if and when gold re-emerges at the centre of a new monetary system, these very same central banks will not be caught out having no gold.

27. Gold for Gifting

Gold coins and small gold bars make great gifts and presents, and gold is a traditional form of gifting in many societies around the world. Gifting a gold coin or small gold bar to mark a birth, or anniversary, or a wedding or other special occasion, is an ideal present that will be highly appreciated by the recipient.

28. Gold for Inheritance

Gold bars and gold coins are a great form of inheritance for your children and family members. Because gold is real, tangible, valuable, and has a highly liquid trading market, it is an ideal asset for inter-generational wealth transfers. Because physical gold is fabricated in convenient weight denominations, such as troy ounces and kilograms, it can be distributed equitably among recipients, and specified equitably in wills and trusts.

This article originally appeared on the BullionStar.com website under the same title "28 Reasons to Buy Physical Gold".

As Oil Heads For Down-Week, Crude Stakes Are Huge

After five straight weeks higher - read by many as confirmation of how awesome the global coordinated recovery must be - WTI and Brent dropped this week as inventories rose, demand outlooks dimmed, and OPEC hope faded.

As Alhambra Investment Partners" Jeffrey Snider notes, there is a titanic struggle going on right now in the oil market.

On the one side of the futures market are the usual pace setters, the money managers. Last week, the latest COT data available, they went the most net long since March. If it continues, it will close in on the most positive futures position since the record long they established back in February.

Normally that would be insanely bullish for oil prices. But just as in February/March another part of the futures market has intervened on the other side. Back then it was the oil producers who rising inventory forced into a larger and larger offsetting net short (hedge).

This time, however, it is the swap dealers who are short for reasons that aren’t really clear. The weekly COT report for the last week in October showed a record net short for dealers, just beating their most extreme position from the middle of 2013 at -424k contracts. In the first week and November, they blew away that record at -470k.

It clearly matters because in 2017 the oil market has changed. It may be the inventory story, or it may be the exit of producers from hedging that inventory and other products. Whatever the case, money managers just aren’t setting the price like they used to. And it could be that managers have changed their market activities, too, where other parts of the futures market are now cueing off (shorting) this possible difference. I honestly don’t know what it is, but I can safely point out where it is.

Now with swap dealers apparently showing very, very strong conviction on the short side, oil prices can’t gain any traction beyond the $57 established by in all likelihood geopolitical risk.

The fundamentals of oil continue to favor the dealers over the managers, with oil inventories remaining at the same crisis “rising dollar” levels. Being slightly better than 2016 is not a real achievement toward clearing the leftover physical imbalance, not when oil inventories are instead still consistent with late 2014. With 2017 nearly over, there should have been much more progress toward 2013 levels of stock long before now if there was ever going to be a realistic chance to balance the oil market next year (at the most optimistic).

Instead, it indicates yet again a demand problem, as in lack of materializing upside demand due to, as always, economic constraints that in the mainstream aren’t ever considered real (like when the oil crash was called repeatedly a “supply glut”). Pushing the expected rebalancing date into 2019 or even (more realistically) 2020 creates greater downside not upside risks.

That may be why dealers have jumped all over the shorts; if it is geopolitical risks driving oil prices higher, and maybe what managers are betting on now, then if or when they fade the negative fundamentals of oil will be re-imposed on the price. That seems to be what the futures curve is saying, too.

Backwardation indicates expected balance, but at a very low price rather than a rebounding one. In the latest oil pullback since last week, the curve has moved lower in unison, with the same almost identical indicated backwardation rather than toward any serious rewind toward contango.

One additional factor to consider is those record and near-record opposite futures positions. What happens if the oil price starts to move in either direction? There may need to be a whole lot of covering by whichever side ends up on the losing end, perhaps turbocharging the price as it begins to move whatever way it decides to go.

There is right now a lot at stake in the crude market, and it’s not just about oil.

Crypto Chaos Explained - Bitcoin Crashes As "Cash" Tops Ether For First Time

Bitcoin collapsed overnight, trading as low as $5555 - down 30% from its highs - before bouncing back above $6000, as Bitcoin Cash soared to as high as $2450 (4 times its price on Friday), overtaking Ethereum briefly as the second largest market cap cryptocurrency.

image courtesy of CoinTelegraph

Bitcoin has lost around $30 billion in market cap, but found buying interest as it ripped below $6000 and has stabilized this morning

Bitcoin Cash exploded in thje last two days - quadrupling in price at one point to over $2400 as Bitcoin crashed.

 

As Coin Telegraph reports, the sharp rise in Bitcoin Cash"s price has come at the expense of Bitcoin. Bitcoin’s price has been on a steady downtrend ever since the Segwit2X fork was cancelled. A lot of people had bought Bitcoins in the expectation that they would get free Segwit2x coins after the fork. While market observers had expected some of this hot money to flow into altcoins once the Segwit2X fork happened/got cancelled, Bitcoin Cash seems to have been the main, but not only, beneficiary. The combined price of Bitcoin and Bitcoin Cash is over $8,000, which is not very different from the price on Friday.

That surge in Bitcoin Cash pushed its market cap above Ethereum for a brief time...

 

All of this chaos has left many wondering what is going on. Arjun Balaji provides some much-needed context for what is occurring in the crypto space...

1/August, Bitcoin forks, spawning off a fork that"s supported by a minority of miners. It"s self sustaining though the rate at which Bitcoin blocks are mined is variable and the price tanks. It was initially trading on the futures market prior to the fork between 0.05 and 0.07BTC. The motivations for the initial minority fork are complicated and nuanced, but they were largely driven by the incentives of trading on the futures market prior to the fork between 0.05 and 0.07BTC. The motivations for the initial minority fork are complicated and nuanced, but they were largely driven by the incentives of Chinese mining and Bitcoin businesses whose operation depended on the low transaction fees in the network (given Bitcoin txn fees were approaching $10).

 

2/ When Bitcoin Cash (BCH) tokens were finally accessible, there was a rush to go liquidate the tokens on an exchange. With really thin orderbooks, price shot up to 0.26 on the BTC:BCH pair, but had a slow decline over the next 2 months, bottoming out around 0.05ish. This is all the while Bitcoin continued it"s meteoric rise to $8k+.

 

3/ However, "Segwit2X" (B2X), another long schemed fork was still planned. This fork had even less popularity, reflected on the futures market, but had a lot of support from many mainstream Bitcoin businesses. It had ideological overlap with Bitcoin Cash: increase the block size to lower transaction costs on the Bitcoin network. Many users of Bitcoin who were worried about the merits of the technical block size increase were vocal about avoiding these forks and still maintain conviction that lowering transaction costs through the Bitcoin network is possible through some recent upgrades.

 

4/ As the date for B2X fork grew closer, Bitcoin Cash eventually bottomed out. The market"s assumption here was that there is no need for 2 forks with ideological overlap to exist.

 

4a/ However, in a sudden move, there was a cancellation of the fork on November 8th, with much of the support of the 2X crowd going into Bitcoin Cash. This started a fantastic price spike--in USD, from $400-500 up to $2800 (as of last night) and in Bitcoin, even higher, with orders executing between 0.4-0.5BTC. As of now, it seems to be stable at low volume —0.3BTC.

 

5/ Many long-time holders and significant Bitcoin "whales" noted online how they are planning on selling BTC and buying BCH. Most notably, Roger Ver moved long-time cold storage Bitcoin holdings totaling over $250M to Bitfinex. Not sure if this has been executed upon or not, but the presumption is that he is either buying BCH or selling BTC for USD. The goal of this (IMO) is to generate momentum and the reflexivity needed to create a "flip" between BTC and BCH.

 

6a/ It seems like 1) miners incentives are aligned with BCH for now but it"s unclear if it"s just because of the volatile difficulty or if it is permanent;

 

 

6b/ 2) money is dumping out of BTC into BCH. When/if BCH becomes more profitable, miners will follow -- at that point, do businesses like Coinbase recognize Bitcoin Cash as the canonical Bitcoin? No idea, but it"ll be interesting to see play out.

 

7/ Bitcoin Cash has a planned hard fork on Nov 13th to adjust the volatile difficulty of mining. It remains to be seen whether (at a stable price), post-fork, miner incentives will remain as strong as before. If they are anticipating a large increase in price or have spent the last couple of months accumulating BCH at a low price like many have hypothesized, that could play a role as well.

Arjun concludes, net-net, this is a mess for most mainstream users (e.g. my dad), who have no idea what"s happening and potentially don"t own Bitcoin Cash.

The end of Bitcoin (BTC) and rise of Bitcoin Cash could hurt these users, who potentially bought Bitcoin on Coinbase in August and don"t know about these risks. This puts the emerging futures and ETFs in an interesting picture.

*  *  *

The various factions within the crypto space are increasing their rhetoric... (as CoinDesk reports)

When asked about the move Jiang Zhuoer, founder of bitcoin mining pool BTC.Top, said simply that "2x fans" are moving both funds and mining hardware to bitcoin cash.

 

"BTC is going to die," Zhuoer said. Hapio Yang, CEO of mining pool operator ViaBTC, responded similarly, indicating he believes that businesses and investors are now migrating funds to bitcoin cash.

 

"I think more and more bitcoin holders are starting to understand what is the real bitcoin," he said via WeChat.

 

"I think a positive feedback loop has been created. This is waking people up to the shaky foundations BTC is built on," he said.

However, as CoinDesk notes, there remains a great deal of skepticism over cash...

Jack Liao, the CEO of Hong Kong-based mining firm LightningASIC, for instance, sought to frame the idea that the bitcoin cash price increase represented any real uptick in interest in the project as "total bullshit."

 

For those following the scaling debate, Bitmain"s conduct has been one of the larger contentious narrative points, and Liao (like others) believes the explosion seen in the bitcoin cash market value is nothing more than an orchestrated bid by the firm (and its supporters) to prop up the market.

 

"Many, many investors just see the change in hash rate," he said. "But they cannot support such a big bitcoin cash price."

 

Beijing-based over-the-counter Zhao Dong reported a similar sentiment in some circles, crediting the price to manipulation by miners and investors who have supported Segwit2x and bitcoin cash in the past. Bitmain and Ver were both signatories of the agreement that sparked the 2x software.

 

"They have money, they have hash power, they have everything need to pump the bitcoin cash price," he said.

Finally, to clarify, Willy Woo, recently named one of CoinDesk"s Top 5 Token Analysts of 2017, sees the price move as perhaps one to watch. In contrast to other alternative cryptocurrencies that he said may lack value propositions, he went so far as to color bitcoin cash as a more nuanced option.

"It"s backed by a lot of money from China controlling its price and supporting its network. If you buy bitcoin cash, you are betting that China wants it to dominate. That"s a strategic and geopolitical bet," he told CoinDesk.

ScotiaMocatta Put For Sale After Multibillion Money-Laundering Scandal

The world"s oldest gold trader is for sale after a massive money laundering scandal may have terminally crippled one of the most iconic names in the business.

Canada’s Bank of Nova Scotia is exploring options for its gold business ScotiaMocatta, the Financial Times reported, which include a possible sale of Canada"s most popular precious metals trader. Scotiabank made a decision to sell ScotiaMocatta following a massive money laundering scandal centered on a U.S. refinery that involved smuggled gold from South America. The ScotiaMocatta business, a mainstay in PM trading, is one of London’s main gold trading banks and is being sold by JPMorgan.

According to the FT sources, ScotiaMocatta’s future had been underway for several months, with ScotiaBank allegedly seeking a buyer for up to a year and was likely to shrink the business if a sale is not completed, although according to the article Chinese buyers - the world"s dumbest money these days - are rumoured to be the key targets of the sale.

While gold trading has been in a cyclical decline in recent years, the “straw that broke the camel’s back” in prompting the sale was Scotiabank’s lending to Elemetal, a precious metals refinery in Dallas. Scotiabank was one of its biggest lenders, they said. The problem emerged in March, when US prosecutors accused workers at a subsidiary of Elemetal, NTR Metals in Florida, of a money laundering scheme using “billions of dollars of criminally derived gold” mostly from Peru.

Here the story take a turn into a slightly surreal detour:

NTR imported more than $3.6bn of gold from Latin America between 2012 and 2015, the court documents allege. Two of the accused, Samer Barrage and Juan Granda, pleaded guilty last month to a charge of money laundering in plea deals.

 

After the story came to light in March, Elemetal was kicked off the London Bullion Market Association’s “Good Delivery List” of gold refiners;

This was an almost instant death sentence for the company as buyers will usually only buy gold from a refiner on the list. Indeed, in the same month, New York’s Comex futures exchange said it was no longer taking gold from Elemetal for delivery against futures contracts in the world’s biggest gold futures market.

And this is where the scourge of gold rehypothecation emerged, as in the scandal surrounding Elemetal, it became impossible for holders of Elemetal gold to sell the gold bars on, leaving them sitting in bank vaults, according to traders quoted by the FT. Buyers are reluctant to take the gold, given the investigations.

This means that hundreds of millions in loans made to Elemetal by ScotiaMocatta are suddenly stuck in limbo. It also means that one of five bullion banks that settle gold trades in the London market, the world’s largest, has effectively been blackballed. It was built on the 1997 purchase by Scotiabank of Mocatta Bullion, which traces its roots back to 1671. And with Mocatta crippled, Scotiabank, which has the biggest foreign presence of any Canadian bank, is focusing its international strategy on the Pacific Alliance, a Latin American trade bloc comprising Mexico, Peru, Chile and Colombia. It will also hope to find a willing Chinese buyer for the gold trading operation.

Mocatta"s exit will be good news for HSBC and JPMorgan, which dominate the London market; their large balance sheets enable them to provide credit to clients and refiners around the world. Additionally, and unlike Scotiabank, they also have vaults in London. Gold trading in London is estimated to be worth more than $5tn a year, although as the FT notes, there are no precise figures on how much gold is traded there every day.

The Single Biggest Bullish Catalyst For Oil

Authored by Nick Cunningham via OilPrice.com,

One of the key objectives for OPEC is to bring down inventories, a goal that has been elusive this year. But if the oil futures curve is anything to go by, the oil market is showing signs of tightening.

Brent futures have recently begun to exhibit a state of backwardation, which is when near-term oil futures trade at a premium to contracts dated further off into the future. This is the first time in years that backwardation has occurred, and most analysts are taking it as a sign that the oil market finally could be getting closer to rebalancing. In the past, backwardations have accompanied a rebound in the oil market after a bust, while a contango (the opposite of backwardation) tends to occur when the market crashes because of a supply glut.

There are several reasons why backwardation is bullish, which has been discussed in previous articles. A declining futures curve makes it uneconomical to store oil, so backwardation could accelerate the drawdown in inventories. It also complicates the hedging strategies of shale producers, which could hold back expansion plans. It also is a symptom of tightening near-term supplies, although, to be sure, the flip side of that argument is that it could merely be a reflection of expectations that the supply glut will reemerge at some point in the future.    

Still, backwardation is occurring at a time when there are other bullish indicators starting to crop up. The U.S. has seen a sharp drawdown in inventories in recent months, down more than 60 million barrels since March. The IEA and OPEC both recently upgraded their oil demand estimates. "World economic growth has gained momentum," OPEC said. "With the ongoing growth momentum and an expected continued dynamic in second-half 2017, there is still some room to the upside."

The view of Wall Street is also becoming more bullish. Hedge funds and other money managers have amassed a large number of long positions on recent weeks. For the week ending on August 8, investors stepped up their bullish bets on Brent by the equivalent of 58 million barrels, according to the FT, which was the largest weekly increase towards net length since December.

“It’s hard to be aggressively negative if every week you’re getting stronger numbers,” Paul Horsnell, global head of commodities research at Standard Chartered, told the FT, although he added that “there is still resistance. The market is not willing to push prices too far up.”

Indeed, there is little prospect of oil prices moving much beyond $50 per barrel. Not everyone is even sold on the notion that the market is tightening. OPEC production is at its highest point so far in 2017, U.S. shale continues to rise, and some long-planned projects are coming online later this year in Canada and Brazil, for example. “There is no way this oil can be accommodated into the market so prices are going to have to give at some point,” Mr Dei-Michei of JBC Energy told the FT. “This bullish sentiment cannot last.”

In fact, swings in sentiment, like a pendulum, are typical. More than once this year, the bullish positions have built up too far, only to be undone when sentiment shifted, causing a steep selloff in oil prices. Following the price crash in June, the profoundly bearish positioning amongst hedge funds and other money managers also went too far, causing shorts to be liquidated and bullish bets to remerge – which, again, accompanied a rebound in prices.

All of that is to say that the most recent shift towards long bets on oil futures probably can’t carry oil prices all that far. The underlying fundamentals simply don’t justify significant price gains…at least for now. “They’re going to have to dig in for the long haul,” Neil Atkinson, head of the IEA’s oil markets and industry division, said on Bloomberg TV, referring to the OPEC cuts. “Re-balancing is a stubborn process.”

In short, the shift into backwardation in the futures market suggests that the supply balance is heading in the right direction, and it probably puts a floor beneath prices for the time being. But it doesn’t necessarily mean that oil be heading much higher than $50 per barrel anytime soon.

With LIBOR Dead, $400 Trillion In Assets Are Stuck In Limbo

In an unexpected announcement, earlier this week the U.K."s top regulator, the Financial Conduct Authority which is tasked with overseeing Libor, announced that the world"s most important, and manipulated, benchmark rate will be phased out by 2021, catching countless FX, credit, derivative, and other traders by surprise because while much attention had been given to possible LIBOR alternatives across the globe (in a time when the credibility of the Libor was non-existent) this was the first time an end date had been suggested for the global benchmark, which as we explained on Thursday, had died from disuse over the past 5 years.

Commenting on the decision, NatWest Markets" Blake Gwinn told Bloomberg that the decision was largely inevitable: “There had never been an answer as to how you get market participants to adopt a new benchmark. It was clear at some point authorities were going to force them. The FCA can compel people to participate in Libor. What can ICE do if they’ve lost the ability to get banks to submit Libor rates?”

And while the rationale for replacing Libor is well understood (for those unfamiliar, read David Enrich"s comprehensive account of Libor rigging "The Spider Network"), there are still no clear alternatives. Ultimately, as Bank of America calculates, "moving an existing $9.6 trillion retail mortgage market, $3.5 trillion commercial real estate market, $3.4 trillion loan market and a $350 trillion derivatives market is a herculean task." A partial breakdown of the roughly $400 trillion in global Libor-referencing assets is shown in the table below.

And with nearly half a quadrillion dollar in securities referncing a benchmark that is set to expire in under 5 years, the biggest problem is one of continuity: as Bloomberg calculated last week, in addition to the hundreds of trillion in referencing securities,  there is also currently an open interest of 170,000 eurodollar futures contracts expiring in 2022 and beyond - contracts that settle into a benchmark that will no longer exist. "What are existing contract holders and market makers supposed to do?"

Then there is the question of succession: with over $300 trillion in derivative trades, and countless billions in floating debt contracts, referening Libor, the pressing question is what will replace it, and how will the transition be implemented seamlessly?

According to Bank of America, one possible option to achieve the transition could be to move to a "fixed-spread" Libor benchmark. In this scenario, regulators and market participants could agree for Libor to be hardcoded as a fixed spread over the underlying benchmark of their choice (BTFR-broad Treasury financing rate in the US, SONIA in UK etc). This could help to ensure that contracts that rely on Libor could continue to have a reference rate while the rate itself would move based on the regulator"s preferred benchmark.

The option obviously would raise some concerns around what spread to be chosen, the term structure of the fixed spread (for 1m vs. 3m libor for example) - but these, BofA believes, would be easier challenges to address than renegotiating and re-hedging existing contracts.

There is a third problem: while the above scenario could be one option for a short term solution, the longer term concern continues to be the lack of a clear alternative for new contracts. Acccoring to BofA"s Mark Cabana, the FCA announcement likely increases activity in the OIS market (both receive and pay flows) - but ultimately, the OIS market (overnight indexed swaps) is based on a fed funds rate whose own future is unclear in a system of non-zero excess reserves dwindling underlying volumes (chart below).

Another option is the BTFR rate (broad Treasury financing rate) which was selected by the Alternative Reference Rates Committee or ARCC (which is having its inaugural meeting on August 1) - but the market has gone down this route before with little success in the GC futures market given declining GCF volumes.

In the end, BofA warns that the most likely emerging scenario is one "involving a fractured derivatives market with multiple underlying benchmarks across different countries developing."Worse, note that the FCA suggests that the IBA and panel banks could continue to produce Libor but the FCA would no longer persuade panel banks to stay.

Finally, what makes the above especially problematic, is that 2021 is when the Fed"s balance sheet shrinkage is expected to conclude (according to NY Fed estimates), and when short term rates are to be at their tightening peaks according to sellside estimates. That this will come at a time when there is no effective way to trade, or hedge, unsecured short-term rates - which will by then be roughly 2% higher than where they are now according to the Fed"s dot plot...

... will make the Fed"s normalization, from a market standpoint, especially "interesting", if not impossible.

Is the COMEX Rigged?

Submitted by Ronan Manly, BullionStar.com

The COMEX gold futures market and the London OTC gold market have a joint monopoly on setting the international gold price. This is because these two markets generate the largest ‘gold’ trading volumes and have the highest ‘liquidity’. However, this price setting dominance is despite either of these two markets actually trading physical gold bars. Both markets merely trade different forms of derivatives of gold bars.

Overall, the COMEX (which is owned by the CME Group) is even more dominant that the London market in setting the international price of gold. This is a feat which financial academics ascribe to COMEX being a centralized electronic platform offering low transaction costs, ease of leverage, and “the ability to avoid dealing with the underlying asset” (i.e. COMEX allows its participants to avoid dealing with gold bars). Because of these traits, say the academics, COMEX has a ‘disproportionately large role in [gold] price discovery”.

Over 95% of COMEX gold futures trading is now conducted on CME’s electronic trading platform Globex, with most of the remainder done on CME’s electronic Clearport, where futures trades executed in the OTC market can be settled by CME. Next to nothing in gold futures is traded any more via pit-based open outcry.

Open Outcry: A distant memory for gold futures trading on COMEX

The existence of gold price manipulation in the London and COMEX gold markets is well documented, it is hard to refute, and it has presented itself in many forms over the recent past. Examples include:

• Bullion bank gold traders in the late 2000s colluding in chat rooms to manipulate the gold price as documented in current consolidated class action law suits going through New York courts

• Barclays Bank manipulating the London Gold Fixing price in 2012 so as to prevent triggering option related pay-outs to Barclays clients

• Recent CFTC (US Commodities regulator) prosecutions of futures traders on the CME for ‘spoofing’ gold futures orders

• Flash crashes in gold futures prices which have no underlying explanation to, or connection to, events and developments in any physical gold markets

This last point, ‘flash crashes’ in gold futures prices, is particularly relevant for COMEX. Many readers will recall reading about one or more of these COMEX gold futures price ‘flash crashes‘ during which large quantities of gold futures are shorted in a concentrated interval of time (e.g. within 10 or 20 seconds) which causes the gold price to completely collapse in free fall fashion over that very short period of time.

For example, on 26 June this year, the COMEX gold price free fell by nearly 1.5% within a 15 second interval, amid a huge spike in trading volume to more than 18,000 August gold futures (56 tonnes of gold) during the 1-minute period around the crash event.

On January 6, 2014, the COMEX gold price fell by over $30 in a few seconds, from $1245 to $1215 on huge volume, forcing the CME to introduce a temporary trading halt.

On April 12, 2013, aggressive selling of gold futures contracts representing over 13.4 million ounces (more than 400 tonnes of gold) hit COMEX gold futures in two waves during the London morning trading session sending the gold futures price down by more than 5%. The following Monday, April 15, 2013 the COMEX gold price rapidly fell by another 10%.

Whether these flash crashes are the result of trading errors, futures market illiquidity, computerized trading patterns or deliberately engineered moves is open to debate. Engineered price takedowns, where an entity initiates an order with the intention of moving the futures gold price in a downward direction, are distinctly possible.

However, concentrated gold futures shorting over tiny time intervals doesn’t have to be in the form of one large trade or a series of relatively large trades. All a shorting tactic of this type has to do is to either trigger the price to move down through certain thresholds which then triggers stop-loss orders, or to trigger and induce trading reactions from trading algorithms that monitor gold futures prices. Once sentiment is damaged through rapid downward price movements, the result can affect gold futures trading sentiment for the rest of the day and indeed over subsequent days.

But beyond the possible or probable individual acts of price manipulation on the COMEX, it is important to realize that the very structure and mechanics of the COMEX create a system in which gold futures trades can be executed in large volumes in a virtual vacuum which has no connection to the physical gold bullion market, no connection to gold bar and gold coin wholesalers and retailers, and which doesn’t even have any connection to the vaulted gold residing within the COMEX approved vaulting  facilities (aka COMEX warehouses aka COMEX vaults).

These underlying mechanics of COMEX, which are discussed below, allow the generation of massive gold futures trading volumes and open interest, huge leverage and large non-spot month position limits, a high concentration of speculative trading by a small number of banks, and a lack of transparency into the gold ‘delivery’ process. And at the foundation of the system, there are very small physical gold holdings in the COMEX approved vaults.

COMEX 100 oz gold futures, USD Price, Volume, and Open Interest: 8 months-to-date. Source: www.GoldChartsRUs.com

The Mechanics

COMEX gold futures contracts are derivatives on gold. Importantly, a COMEX gold futures contract comes into existence any time two parties agree to create that contract. This means that COMEX gold futures contracts can continue to be created as long for as there are interested buyers (longs) and sellers (shorts) willing to bring these gold futures contracts into existence.

Therefore, there is no hard upper bound or supply limit on the amount of gold futures contracts that can be created on COMEX. This is very similar to the unit of trading of gold in the London market, i.e. unallocated gold, which is also a derivative that can be created in unlimited quantities. In both cases there is no direct connection to real physical allocated and segregated gold bars.

Technically, the value of any futures contract is derived from the value of its underlying asset, and in this case the underlying asset, nominally anyway, is physical gold. But perversely in the global gold market, the value of the gold futures is not being derived from the value of the underlying asset (physical gold). Instead, the value of the world’s physical gold is now being consistently and continually derived via this out-of-control and unhinged gold futures trading.

Contractually, COMEX 100 ounce gold futures contracts (COMEX code GC) are futures contracts that offer a physically deliverable option, i.e. to deliver/receive 100 ounces of minimum 995 fine gold (in either 100-ounce gold bars or 1 kilo gold bars format) on a specific future date.

However, the vast majority of COMEX 100 ounce gold futures are never delivered, they are offset (closed out) and cash-settled, or else they are rolled over. Only a tiny fraction of these gold futures contracts are ever ‘delivered’. Again, this is similar to unallocated gold in the London market, which is a cash-settled gold derivative.

COMEX is also a speculative market, where leverage (due to the use of trading margin) is used to create outsized trading volumes, and where initial position limits for individual traders are far larger than the quantity of underlying gold being stored in the COMEX approved vaults.

These factors combine to create what is in effect a Las Vegas type casino. This casino encourages vast speculative trading of futures which will never be delivered, and vast shorting (selling) claims on large quantities of gold which a) the shorter does not possess, b) are not even stored in the COMEX system, and c) are many multiples of annual gold supply). Conversely, the buyers are going long on claims on gold which will a) will never be delivered and b) which nearly none of the trading counterparties even wants to have delivered. The players in this casino have no interest in secure gold storage or allocated gold bars or bar brands or bar serial numbers. After all, as the academics put it, the COMEX provides “the ability to avoid dealing with the underlying asset”.

Even when COMEX gold futures for used for hedging purposes, much of this hedging is by bullion bank traders so as to hedge unallocated London gold using COMEX futures, i.e. hedging cash-settled paper bets with cash-settled paper bets. And both sets of instruments structurally have nothing to do with the real physical gold market.

Even back in December 1974, when COMEX gold futures were about to be launched (and which coincided with a lifting of the ban on US private ownership of gold), a group of major gold dealers in London including 3 of the 5 primary London gold dealers, i.e. Samuel Montagu & Co, Mocatta & Goldsmid, and Sharps Pixley & Co, told the US State department that they believed that this new gold COMEX futures market would dwarf the physical gold market i.e. “would be of significant proportion, and physical trading would be miniscule by comparison“.

These dealers expected that “large volume futures dealing would create …. a highly volatile market” whose “volatile price movements would diminish the initial demand for physical gold” that the US Government feared from the lifting of the gold ownership ban.

In hindsight, it was perceptive and prophetic that these major participants of the then fully allocated gold market in London in 1974 saw that the introduction of gold futures would create what we are seeing now, i.e. huge trading volumes, high price volatility, and a market (COMEX) which has an adverse effect on pricing in the physical gold market.

Trading Volume Metrics

Two revealing trading metrics for COMEX gold futures are trading volumes and the “Open Interest” on gold futures contracts. “Open Interest” simply means the number of gold futures contracts that are outstanding at any given time that have not been closed or delivered.

For 2016, COMEX gold futures trading generated a trading volume of 57.5 million contracts, representing 178,850 tonnesof gold. This is nearly as much gold as has ever been mined in the history of the world, i.e. which is estimated to be 190,000 tonnes. This COMEX trading volume in 2016 was also a whopping 37% higher than in 2015. In 2016, while 57.5 million gold futures contracts traded, only 71,380 COMEX gold contracts were ‘delivered’. This means that only 0.12% of COMEX gold contracts that traded in 2016 were ‘delivered’.

Delivered in this context means that the delivery option on the contract was exercised and a warrant representing 100 oz of gold on that contract changed hands, i.e. title documents to gold were shunted around a COMEX/vault recording system, mostly between bank holders. Delivered does not mean gold was withdrawn from a COMEX approved vault and delivered to an external location. The concept of gold vault withdrawal numbers, which is a bread and butter metric for the physical Shanghai Gold Exchange (SGE), is totally alien to the COMEX and its trading participants.

Number of gold ounces delivered on COMEX in 2017: 1.23 million ounces = 38 tonnes. Source: www.GoldChartsRUs.com

For the first six months of 2017, trading volumes in the main COMEX gold futures contract (GC) reached 32.7 million contracts, representing 101,710 tonnes of gold. This was 12% up on the same period in 2016. When annualized, this suggests than in 2017, COMEX is on course to trade more than 200,000 tonnes of gold, which will be more than all the gold ever mined throughout history.

In the first half of 2017, only 12,320 gold futures contracts (representing 38 tonnes) were delivered on COMEX. This means that from January to June 2017, only 0.037% of the COMEX gold contracts traded in that six month period were ‘delivered’, or just 1 in every 2650 contracts traded.

Open Interest

Beyond the trends and snapshots that trading volumes provide, COMEX Open Interest shows how much real physical gold would be needed if all longs who hold gold futures contracts decided to exercise every contract into the 100 ounces of physical gold that each contract supposedly allows for.

For example, currently there are 480,000 GC gold futures contracts outstanding on the COMEX, each of which represents 100 ounces of gold. This means that buyers of the contracts are long 480,000 contracts, and sellers of those same contracts are short 480,000 contracts. With each contract worth 100 ounces of gold, this is an open interest of 48 million ounces (1500 tonnes) of gold, which is about half a year’s global gold mining output.

Currently 46% of this open interest is in the front-month August 2017 contract (nearly 750 tonnes), with another 40% in the December 2017 contract. Together the August and December contracts represent over 85% of the current open interest. During 2017, open interest has fluctuated roughly between 400,000 and 500,000 contracts at any given time.

Registered Gold Inventory and Eligible

However, there are only currently 22 tonnes of ‘Registered gold’ in the COMEX approved vaults in New York, which is equivalent to about 700,000 ounces. What this means is that there are only 22 tonnes of gold currently in the vaults that the vault operators previously attached warrants to as part of the COMEX futures delivery process. This 22 tonnes of gold, if it was held in Good Delivery gold bar format, would only occupy one small corner of one of the COMEX’s 8 approved gold vaults when stacked 6 pallets high across 3 stacks, and another 4 pallets in an additional stack. That’s how small the COMEX registered gold inventories are.

The amount of Registered gold backing COMEX futures gold trading is also at a 1-year low. For example, in August 2016 there were 75 tonnes of Registered gold in the COMEX vaults. Now there’s only 30% of that amount.

COMEX Registered gold inventories: 700,000 ounces = 22 tonnes. Source www.GoldChartsRUs.com

There is also no independent auditing of the gold that the COMEX reports on its registered and eligible gold inventory reports. So there is no way of knowing if the COMEX report is accurate. For example, HSBC claims to have 165 tonnes of eligible gold and a measly 1.5 tonnes of registered gold stored at its COMEX approved vault. This vault is located in the lower levels of 1 West 39th Street in Manhattan (the old Republic National Bank of New York vault). However, I heard from a former New York Fed senior executive that HSBC don’t keep a lot of gold in this Manhattan vault since they moved a lot of it to Delaware after 9/11 for security reasons. If this is true, then the question becomes, on the COMEX report, does the total for HSBC represent the amount they have in the midtown Manhattan location, or the total in midtown and Delaware (assuming they have gold stored in Delaware).

COMEX approved vaults also report another category of gold known as ‘Eligible’ gold. This ‘Eligible’ gold is unrelated to COMEX gold futures trading and could be owned by anyone, for example owned by mints, refineries, jewellery companies, investment funds, banks or individuals, who would just happen to be storing this gold in the New York vaults that the COMEX also uses, such as the Brinks vaults.

In other words, this ‘eligible’ gold is merely innocent bystander gold that just happens to be stored in the COMEX approved vaults in the form of 100-ounce gold bars or 1 kilo gold bars. At the moment, there are 243 tonnes of this eligible gold in the vaults. But this gold is not involved in COMEX gold futures trading. Some of this gold is probably owned by banks that engage in COMEX gold futures trading because there are sometimes movements of gold from the eligible category to the registered category, but still, as long as it’s in the eligible category, this gold does not have any COMEX related warrants attached to it.

With an Open Interest of 1500 tonnes of gold on COMEX, and with registered gold in the New York vaults totalling only 22 tonnes, this means that there are currently 68 “Owners per Ounce” of registered gold. The holders of allocated gold bars stored in a secure vault, such as BullionStar’s secure vault in Singapore no not face this 68 owners per ounce problem, as each gold bar is owned by one person and one person only.

Since the beginning of 2017, this COMEX “owners per ounce of registered gold” metric has risen sharply, more than doubling from under 30 owners per ounce to the current ratio of 68 owners per ounce. This is because registered gold inventories have fallen sharply over this time.

Even adding into the equation all the eligible gold in the New York vaults, which is a calculation that doesn’t really mean much given the independent nature of eligible gold, there are still 5.7 “owners per ounce” of the combined COMEX “eligible and registered gold” total.

The physical gold foundations to the entire COMEX gold futures trading process are therefore very tiny in comparison to COMEX trading volumes and open interest. And all the while, gold futures trading volumes continue to rise, owners per registered ounce of gold continues to rise, and the amount of physical gold backing these contracts on COMEX continues to shrink.

The Dominant Players

The latest Commitment of Traders (COT) report produced by the US Commodity Futures Trading Commission (CFTC), for 11 July, includes market concentration data for the percentage of contracts held by the largest holders. This COT report currently shows that “4 or Less Traders” are short 35% of the COMEX GC gold futures open interest, while “8 or Less Traders” are short a combined 51% of the open interest. Note that the “4 or Less Traders” are a subset of the “8 or Less Traders”.

The CFTC also publishes a Bank Participation Report (BPR) showing metrics for banks involved in gold futures trading. The latest BPR for 11 July shows that 5 US banks are short 78063 contracts (16.4% of the total open interest), and 29 non-US banks are short another 67,373 contracts (14.2% of open interest). In total, these 34 banks were short 145,000 contracts or 30% of the open interest. The same banks were long 40,688 contracts, so were net short 105,000 contracts.

CFTC Bank Participation Report (BPR) of COMEX (and ICE) gold futures positions. Source www.GoldChartsRUs.com

Neither the COT report nor the BPR report reveal the identity of the ‘traders’ or the ‘banks’ that hold these concentrated large positions because the bank friendly CFTC choses not to do so, but even without their identities being revealed, it’s clear that a small number of entities are dominating trading of the COMEX gold futures contracts.

When is a Delivery not a Delivery?

The COMEX delivery report is known as the “Issues and Stops Report”. This report ostensibly shows the number of contracts that were ‘delivered’ on the COMEX each month, but in reality just shows a series of numbers representing the quantity of title warrants (to gold bars) that were shunted around each month between a small handful of players.

The COMEX does not publish any gold bar weight lists of registered or eligible gold inventories held in the COMEX approved vaults. It is therefore impossible to check to what extent the same gold bars or some of the same gold bars are moving back and forth between a few parties over time. On an annual basis, each COMEX approved vault must conduct a precious metal inventory audit on behalf of the COMEX and file this audit with the COMEX within 30 days of completing it. However again, the CME Group does not publish these inventory audits, which only adds to the existing opacity of the system. Is the registered gold in the COMEX vaults even specifically insured? Who knows, because the COMEX does not divulge such details.

Some of the bank institutions which are prominent on the COMEX gold delivery reports are also some of the same institutions which operate the COMEX approved vaults, e.g. HSBC, JP Morgan and Scotia, and these same names are undoubtedly some of the names underlying the CFTC’s Bank Participation Report given that they are always prominent on the COMEX delivery reports. By the way, these same banks essentially run the LBMA in London and run the unallocated gold clearing system, LPMCL, in the London Gold Market.

As regards, the COMEX’s assignment of delivery for gold futures contracts, this is also out of the hands of a contract holder looking for delivery. When a contract is presented for delivery, it is the Exchange (COMEX) which assigns the delivery to a specific warehouse. Not the contract holder. The contract holder (long) has no say in choosing which New York warehouse that contract will be assigned to, no choice of which bar brand he/she will receive, and no choice even of whether the assigned gold will be in the form of a 10 ounce bar of three 1 kilogram gold bars. But even to the long holder seeking delivery, delivery just means gaining an electronic warehouse warrant issued in the long holder’s name or broker’s name (title to the warrant).

To take real delivery of gold bars (withdrawing gold from one of the New York vaults) that would arise from a COMEX ‘delivery’ is a laborious and discouraging extra step. Armed with a copy of an electronic receipt, the procedure involves the receipt holder directly contacting the warehouse in question and telling them you want physical delivery. How they would react to such as phone call is not clear. My guess is that it would be like visiting the mailroom in a large company, the reaction being ‘Who are you? No one ever comes down here‘.

After navigating the withdrawal negotiations with the vault in question,  the pickup and transport of the gold bars is then organized using one of the list of secure transport alternatives that approved warehouse will allow.

COMEX – Not Designed for Physical Bullion

The COMmodity EXchange (COMEX) is a derivatives exchange that is not designed for buying physical gold, storing or delivering that gold, or even selling physical gold. The COMEX primarily facilitates speculation and hedging, with the delivery option just existing as a little -used side option.

Flash crashes continue to occur but neither the CME nor the CFTC ever publishes explanations for the causes of these flash crashes.

It looks certain that in 2017, COMEX will again smash its gold futures trade gold futures representing more gold than has ever been mined in human history, i.e. more than 200,000 tonnes equivalent.

So far in 2017, only 1 in every 2650 gold futures contracts traded on the COMEX has resulted in delivery i.e. less than 0.038% of the contracts go to delivery. The rest, 99.962% of contracts are cash-settled and closed-out / rolled.

The open interest in COMEX gold futures is currently 1500 tonnes, yet there are only 22 tonnes of Registered gold in the COMEX vault inventories. This means that there are 68 owners per ounce of registered gold.

There is continually a high concentration of short futures positions held by a small number of banks on COMEX. The CFTC doesn’t name these banks. When contract deliveries occur on COMEX, it is not a delivery in the sense of a gold bar movement but is merely a transfer in title of a warrant attached to a bar.

Withdrawal of a gold bar or bars out of the COMEX vaulting network to be really delivered to another location is not straightforward.

Physical Bullion

With the London Gold Market trading unlimited quantities of unallocated gold which the bullion banks create out of thin air, and with COMEX trading gold futures which are also created out of thin air, the disconnect between the world of unlimited paper gold and the world of limited physical gold is becoming ever more stark.

On one side lies paper claims on gold which come into and out of existence through cash-settled market mechanisms. On the other is real physical gold that is segregated, allocated and unencumbered, with full title held by the gold holder. Paper gold ownership is fleeting, speculative and prone to counterparty and conversion risks. Real gold is tangible, has inherent value, has no counterparty risk, and can be securely stored.

When real gold is ‘delivered’ to a gold buyer, it actually is delivered to the buyer to wherever they want it delivered, unlike COMEX deliveries where an electronic warrant is merely updated. When real gold is held in a secure vault, such as BullionStar’s vault in Singapore, the gold is fully-insured and the gold holder has full audit and control.

Unlike the COMEX and the London OTC gold market, the traditional gold buying markets of Asia and the Middle East are markets know the real value of physical gold as a form of money and a form of saving. In the physical gold market, especially in Asia, gold buyers demand high purity gold (9999s purity) in convenient bar sizes such as 1 kilogram and 100 grams, and not the 100 ounce bar size traditionally made for COMEX delivery.

Physical gold buyers want gold bars from trusted and well-known sources, and also want choice and variety for example a cast bar from the German Heraeus refinery, or a highly designed minted bar from the Swiss refinery PAMP. Kilobars and 100 gram gold bars also have the lowest premiums of any bars on the retail market since many refineries compete to supply this segment and the demand is widespread and international. Most kilobars and 100 gram bars have their own unique serial numbers which facilitates tracking and auditing.

As COMEX pursues its record-breaking attempt  in 2017 to trade gold futures representing more than 200,000 tonnes of gold, the disconnect between COMEX and the real world is becoming all too clear. COMEX flash crashes will continue as long as the CME and CFTC let them continue. And many people will continue to believe that these flash crashes were deliberately orchestrated. But at the heart of the contradiction between paper gold and real gold is not whether such and such a flash crash was deliberate. The heart of the contradiction is that the very structure of the COMEX system is detached from the reality of physical gold and such a structure can easily allow flash crashes to happen, some or all of which may be deliberate attempts to rig the gold price.

BullionStar will be exhibiting at the FreedomFest event in Las Vegas, which this year runs from July 19 to 22 at the Paris resort in Las Vegas. For those attending FreedomFest please drop by our stand and say hello (Booth number 321). BullionStar CEO Torgny Persson will also be speaking at FreedomFest at 2:30pm on Friday July 21, on why today’s gold price is not reflecting what’s happening in the world and not reflecting what’s happening in the physical gold market. 

This article originally appeared on the BullionStar website under the same title "Is the COMEX Rigged?"