New LME gold and silver Reference Prices: Will anyone notice?

Submitted by Ronan Manly, BullionStar.com

On 29 August, the London Metal Exchange (LME) began publication of a set of daily reference prices for gold and silver. These reference prices aim to capture and reflect paper gold and silver market prices as at 10:30 am, 12:00 midday, and 3:00 pm London time.

Anyone familiar with the former London gold and silver fix auctions, or the successor LBMA Gold Price and LBMA Silver Price auctions, will know that the LBMA gold auction is conducted twice daily at 10:30 am and 3.00 pm London time, while the silver auction is held once daily at midday. These auctions are also for unallocated book entry gold and silver (paper gold and silver) in the London market. ICE Benchmark Administration (IBA) is the auction administrator for both of these LBMA auctions.

Peak Liquidity

As these new reference prices published by the London Metal Exchange are timed to report ‘market’ prices for gold and silver at exactly the same times as the LBMA Gold and LBMA Silver auctions, they add an element of future competition between the LME and ICE in the benchmark price provision business. However, the LME’s prices for both gold and silverare calculated at each of the 3 times of the ICE / LBMA auctions, i.e. at 10:30am (LBMA morning gold auction), 12:00 (LBMA silver auction) and 3:00pm (LBMA afternoon gold auction), periods which the LME describes as having ‘peak liquidity’.

In July 2017, the LME launched a suite of gold and silver futures contracts (LME Gold and LME Silver) for the London market, 2 of which are Spot daily contracts in gold and silver, respectively. Under the hood, these new gold and silver daily reference prices published by the LME are just volume weighted average prices (VWAP) of these LME Gold and LME Silver spot contracts calculated over a 2 minute window at the relevant times each day (i.e. 10:30 am, midday, and 3:00 pm) based on trades on  the LMEselect trading platform. These contracts also represent claims on unallocated book entry paper gold and silver in the London market.

Therefore, the LME reference prices are not based on any auction trades, and merely use prices ‘discovered’ (generated) on the LME’s own trading platform at the time of the LBMA / ICE auctions. Given that these new LME reference prices only began to be published on 29 August, there are only about 50 daily data points so far for each of gold and silver. All prices since 29 August can be seen on the LME website for gold and silver.

Different But Similar

But are these LME prices the same as those generated by the ICE / LBMA daily auctions? No, they are not the same, but they are similar. The reason both sets of prices are not the same is that they are derived differently. The LBMA price resulting from an auction is the price derived in the final round of an auction when the imbalance between the auction’s buy and sell volumes is in tolerance (less than 10,000 ounces). The LME reference prices are average prices calculated (and volume weighted) using trades executed on the LME’s trading platform over a 2 minute interval from the start of an auction until 2 minutes after the start of an auction.

The LBMA auction prices and the LME reference prices are similar in that they are both based on market activity over similar time periods within the wholesale gold and silver markets, and in practice (or at least in theory), arbitrage trading should act to keep prices in the OTC market, and in the LBMA auctions, and in COMEX precious metals futures trading, and in LME gold and silver futures trading in line with each other.

Like their predecessors the London Gold fix and London Silver fix, the LBMA Gold Price and LBMA Silver Price are used every day to value everything from ISDA contracts to  gold-backed ETFs, and the daily auction prices are also referenced widely in the global precious metals industry to execute trades involving miners, refineries, bullion banks, central banks, jewellers and coin shops. In short, these LBMA gold and silver reference prices are the dominant incumbent reference prices, and they also qualify as Regulated Benchmarks regulated by the UK Financial Conduct Authority. But will anyone end up using these new LME precious metals reference prices? Possibly, but it could it a while.

In 2018, the LME intends to offer trading based on its new gold and reference price reference levels. According to a Reuters article from 10 October:

“As of mid-2018 participants will be able to trade at those prices, Chamberlain [LME CEO] said, with technology being developed to match buy and sell orders for execution at the settlement price.

‘Benchmarks take a long time to evolve,’ he said. ‘What we can do is put in place the infrastructure, show that we have day after day of robust prices, but ultimately it is for end-users to decide what they want to use."”

Being able to trade at the LME reference prices will add more relevance to the published numbers and could add legitimacy in terms of market data and financial media interest.

Conclusion

Right now the LME gold and silver reference prices are published daily and are “available for market participants to use free of charge.” But real world usage in the sense of being used to value precious metals funds, contracts or transactions looks to be a case of “down the road” rather than today.

Ideally the London gold and silver markets do not need an additional benchmark reflecting fractionally-backed unallocated gold and silver trading, but a benchmark and reference price reflecting the trading of real physical gold and silver. However, as the LME has chosen not to upset the status quo of the London unallocated trading system, a system which remains one of the key determinants of the international gold price, then real physical gold and silver reference prices in the London market will unfortunately remain a pipe dream.

This article originally appeared on the BullionStar.com website under the same title.

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.

A Tale Of Two Gold Markets

Authored by James Rickards via The Daily Reckoning,

In the early morning hours of Monday, June 26, gold fell about 1%, from $1,254 per ounce to $1,242 per ounce, in a matter of seconds.

And that the equivalent of 1.8 million ounces of gold were sold at once. The 1.8 million ounce amount is equivalent to about 59 metric tons of gold. That’s about 2% of the entire gold mining production of the world for a full year. No one sells that amount of physical gold.

Besides, mining output is almost 100% pre-sold these days, meaning that if you wanted to buy that much gold directly from a mine, you couldn’t do it, because it’s already committed to fulfill existing contracts.

Forget about getting gold elsewhere too.

The largest gold mining country in the world, China, produces almost 500 metric tons per year. But China also prohibits the export of gold, so you can forget about sourcing physical gold from China.

Gold refiners won’t sell you any gold either. The largest refiners are working triple shifts around the clock to meet existing demand. Many refiners are having trouble sourcing gold in the form of doré from mines, scrap jewelry or existing bars to keep their refining operations going.

Gold is also leaving the custody of commercial banks and heading to nonbank storage at secure logistics providers such as Loomis and Brinks. These transfers do not change the total supply, but they do diminish the floating supply available to support the leveraged paper gold products offered by London Bullion Market Association dealer banks.

In effect, more and more paper gold is poised on top of on an inverted pyramid with less and less physical gold at the base.

All of this information about acute shortages of physical gold relative to demand is well documented. In addition, I have gathered a large body of firsthand confirmation of these facts.

In the past year I have visited gold vaults in the U.S., U.K., Australia and Switzerland. I have visited gold refineries in Switzerland. I have visited gold mining operations in Canada and the U.S., and I have met with major bank and nonbank gold dealers in the U.S., U.K., Canada and China.

Everywhere the story is the same. Physical gold is scarce, difficult to source and already spoken for when you can find it. Meanwhile, demand for physical gold remains robust.

I met with the heads of gold dealing for two of the largest banks in China, ICBC and UOB. They both told me that demand for physical gold among Chinese retail buyers is strong, despite some reports to the contrary.

Your correspondent standing on the Bund, a waterfront thoroughfare along the Huangpu River in Shanghai, China, during a recent visit. Behind me is the original headquarters building of the Hongkong and Shanghai Banking Corp. (now HSBC), built in 1923. While in Shanghai, I met with the heads of gold trading for two of the largest banks doing business there, ICBC and UOB. Both reported that supplies of physical gold were tight and demand remains high despite some reports to the contrary.

A gold refiner in Switzerland told me, “Jim, if you called to buy gold and I did not know you personally, I would not even return the call. We have none available.”

With that as background to the physical supply-and-demand situation, why is the price of gold not soaring? That’s how markets usually respond to tightness in supply.

A higher gold price would encourage more mining (although new mines take five–seven years to actually produce gold), which would increase supply and equilibrate markets at a new higher price point.

The answer is that there really is no true market for gold, just a rigged game consisting of physical gold and paper gold trading side by side as if they were one and the same. They’re not.

The June 26 flash crash in gold is a good case in point. If I sold 59 tons of physical gold short and had to make good delivery, I couldn’t do it, nor could a bullion bank or dealer. Given the situation I described, you’d be lucky to source 5 tons in 30 days; even that would be difficult for anyone other than JPMorgan or HSBC. I would ultimately default on the contract and face a lawsuit for contractual damages and possible fraud charges.

But in the paper gold world, it’s not a problem.

You just pick up the phone, put the order in to your broker, post a relatively small margin amount (maybe $100 million on a $2 billion short sale, or 5% of the notional contract value) and you’re done. You’ve just destroyed the price of gold with no actual gold involved.

Futures markets exist ostensibly for hedging purposes, but it’s difficult to see why any commercial player would need to hedge 56 tons all at once. (By the way, orders of that size are usually “worked” over days or weeks. That avoids exactly the kind of market impact seen in this case, which hurts the hedging party because they get a lower price.)

Futures markets also allow speculation, which is considered to add liquidity and enable legitimate price discovery. But there’s a fine line between legitimate speculation and outright manipulation, which is fraudulent.

The difference between legitimate speculation and fraudulent manipulation is often difficult to prove, because it requires some finding of “intent” in the mind of the manipulator. That can be elusive unless there is a smoking gun email or other written evidence.

In some ways, this doesn’t matter, because regulators have shown no appetite to enforce the law. The message to manipulators is that this is a big boy’s market and players can do whatever they want as long as it’s not too blatant.

There is a lot of speculation about the actual motive of the flash crash paper gold short seller. Was this a so-called “fat finger” trade where the trader made a mistake by entering the wrong quantity or pushing the wrong button? That’s possible, but a more nefarious explanation comes to mind.

Paper gold trades not only as futures and bank forwards, but also as options on futures. The flash crash happened the day before an important expiration date in the options market.

Was a seller of call options at, say, $1,245 per ounce trying to sink the price the day before expiration in order to avoid a $10 per contract loss? That’s entirely possible, even plausible. We’ll probably never know, because enforcement in this area is almost nonexistent.

One of the most frequently asked questions by gold investors is, “Why should I invest in gold if the price is just going to get slammed by paper gold sellers with no actual gold? What’s the point?”

More broadly, where does the price of gold go from here?

The most important signal is that gold’s uptrend, which began on Dec. 15, 2016, remains intact. Even after the flash crash, gold remains just a bit below the previous low of $1,210 per ounce on May 10, 2017. That means gold is set for a rally above $1,300 per ounce, which would exceed the prior high of $1,293 per ounce on June 6.

The next powerful indication is the marked slowing of the U.S. economy in reaction to rate tightening by the Fed. This is showing up in auto sales, retail sales, disinflation, lower labor force participation and many other indicators.

The result of this slowing will be that the Fed will have to reverse course and use “forward guidance” to signal that they will not hike rates in September. That’s a form of ease that will lower the dollar index and raise the dollar price of gold.

Finally, investors can take comfort from the fact that all manipulations fail in the long run. Whether it’s the “gold corner” of 1869, the “gold pool” of 1968, Kissinger’s secret “gold dump” of the late 1970s, or “Brown’s bottom” (when the U.K. sold most of its gold at 30-year low prices) of 1999, or the more recent gold games on the Comex, all manipulations fail. Gold prices always find their way higher, because paper currencies always lose value over time.

The key response functions to manipulation are patience, confidence in the long-run path of gold and nimbleness in stepping up to buy gold at interim lows when manipulation gets out of hand, as it just did.

The gold rally that began on Dec. 15, 2016, is poised to continue despite the trauma of the flash crash. The crash represents a gift to investors. We now have a better entry point for what will still be much higher gold prices later this year.

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