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.

Ethereum Goes Mainstream: First Ever Ether ETN Launched On Nasdaq Stockholm

At a time when the SEC is still debating whether to permit bitcoin-based ETFs in the US, Europe has been one step ahead thanks to the Swedish-based XBT Exchange Traded Notes (from provider CoinShares). And today, remaining one step ahead of the US, the same team behind the XBT ETN has launched the first ever ETN for Ether, the native token of the Ethereum platform, which will be listed on the Nasdaq Stockholm.

The two ETNs, COINETH:SS and COINETHE:SS are denominated in SEK and EUR respectively, and similar to the group’s bitcoin ETNs, the ether products are structured to track the price of ether, as determined by an index rate comprising the average of the 3 most liquid ether exchanges, daily. The factsheet for the ETN creator, CoinShares, can be found here.

First-ever Ether ETP out today in Sweden from @xbtprovider as their Bitcoin ETN hits $280m, the one Mark Cuban uses.. pic.twitter.com/LwbMjvOZHa

— Eric Balchunas (@EricBalchunas) October 11, 2017

No longer limited to OTC and/or other potentially "shady" exchanges, investors who want direct exposure to ether can now trade via a broker platform; Notably, the 2 listed trackers are the only route for European investors to add ether to their portfolio via an established exchange. Today"s launch means that the NASDAQ now has 2 crypto-assets listed, Bitcoin and Ether, making it the only established exchange with multiple crypto-investment vehicles.

Unlike direct exchange trading, the ETNs will be traded during normal market hours on Nasdaq in Stockholm, and what is notable is that in some jurisdictions, the note may be eligible for investment via tax-advantaged retirement accounts. Bitcoin and Ethereum-based IRAs, anyone?

According to CoinShares, "The Ether listing is a great example of traditional finance (Nasdaq) working to innovate in collaboration with the emerging world of crypto-finance. This Standing in contrast to recent comments from some high-level traditional finance executives who are apparently more dismissive of crypto-finance."

Predictably, the people behind the ether ETN - XBT Provider by CoinShares - were delighted with getting their product to market first: “The listing of these two Ether ETNs is a major win for European investors who have been requesting these products for over a year now. As of today, if investors want hassle-free exposure to the price movements of ether, they simply call their broker or trade on their normal brokerage platform - that’s truly remarkable. We are thrilled to be able to deliver on investor demand via a safe, familiar route in Nasdaq,” says Laurent Kssis MD of XBT Provider by CoinShares.

“Today is a historical moment for Ethereum and ether as an asset; and for the future of crypto-assets. It was a little over two years ago that the bitcoin ETNs began trading – offering investors exposure to bitcoin via an established exchange for the first time. Today, we are able to bring Ether to the market and mark another major first. It is important to remember how far and how fast the space has matured in the less than 8 years since this revolution began,” says Ryan Radloff, Co-Principal at CoinShares.

“We’ve stated before that as a group, CoinShares is committed to delivering world-class research and professional-grade access to crypto-assets. Today marks a critical step in delivering on that mission. This launch is the result of a tremendous amount of hard-work from the CoinShares team, key partners and our counterparts at Nasdaq. We could not be more proud to bring this latest set of pioneering product to the market,” says Daniel Masters, Co-Principal at CoinShares.

“This is an important moment for investors as they now have access via a safe and familiar route to gain exposure to the price movements of Ether. Nasdaq has consistently proven to be a great partner with respect to bringing these new technologies to market and this latest move is further evidence of their commitment to innovation. This product has been highly requested by investors and we at the CoinShares Group are excited to play a role in bringing it to market,” says Laurent Kssis, MD at XBT Provider, A CoinShares Company.

It remains to be seen whether established traders in the space will pick the ETN over a direct exchange traded method, although considering that as of August, there were at least 55 cryptocurrency funds, making the product increasingly more accessible to retail will probably mean that as the price goes higher, institutional interest in catering to momentum chasers will only grow. Just ask Goldman.

Bitcoin Surges Above $4400 As World Realizes Jamie Dimon & China Don't Matter

Bitcoin just topped $4400 for the first time since in over 3 weeks and has now erased all of the plunge losses from Jamie Dimon"s "it"s a fraud" and China"s shuttering of all local exchanges.

It didn"t take long for the world of crypto-currencies to shrug off Jamie Dimon"s self-tighteous denigration of the decentralized currency that could directly "disrupt" his cash cow businesses; and furthermore, as The South China Morning Post reports, China"s bitcoin market alive and well as traders defy crackdown.

As SCMP reports, weeks after Beijing banned fundraising through token launches and ordered some bitcoin exchanges to shut, casting a chill over the cryptocurrency industry, traders say that the market is far from dead.

While several exchanges have announced that they will close by the end of this month, traders have now moved to buy and sell bitcoin directly with each other on peer-to-peer marketplaces and messenger apps.

Although the crackdown has dissuaded large swathes of less-experienced investors from participating in the trade, market participants point to the limits Chinese regulators ultimately face in controlling the industry, where many users are anonymous and difficult to track.

In the short-run, the crackdown has also created an arbitrage opportunity for investors, with the price of bitcoin in China now trading at a discount to overseas exchanges.

“They can’t set rules to stop me from investing in what I want to invest in. They say you are protecting me, but as long as I think this is good, they have no way to intervene,” said a Chinese bitcoin investor named Victor, who declined to give his full name citing current sensitivities.

“I can do over-the-counter trades or I’ll go offshore ... My wallet is my wallet. I’ve never registered my identification card.”

Over 15 exchanges, including the three largest players OkCoin, Huobi and BTCChina, have since announced that they will close their mainland businesses by the end of September.

Trading has spiked generally on peer-to-peer marketplaces, according to data website Coindance. On OTC platform LocalBitcoins, China trading volumes more than doubled in the week starting September 16 from the previous week to 74 million yuan.

It hit an all-time-high in the week starting September 23, reaching 115 million yuan in trades.

“The fact that bitcoin is still being traded is an indication that China isn’t looking to eliminate them, but reposition things in a way to have better control over them,” said Marshall Swatt, the founder of New York-based Coinsetter, a bitcoin exchange acquired by larger peer San Francisco-based Kraken in 2016.

Mysterious Trader With "Nearly Unlimited Bankroll" Said To Manipulate, Dominate Price Of Bitcoin

It was over three years ago, back in May 2014, when we wrote "How Bots Manipulated The Price Of Bitcoin Through "Massive Fraudulent Trading Activity" At MtGox" in which we first demonstrated one of the more striking observed "bot-driven" bitcoin manipulation schemes, in this case related to the infamous collapse of the now defunct Mt.Gox bitcoin exchnage.

As we wrote at the time, a number of traders began noticing suspicious behavior on Mt. Gox. Basically, a random number between 10 and 20 bitcoin would be bought every 5-10 minutes, non-stop, for at least a month on end until the end of January, by what appeared to be two algos, named later as "Willy" and "Markis." Each time, (1) an account was created, (2) the account spent some very exact amount of USD to market-buy coins ($2.5mm was most common), (3) a new account was created very shortly after. Repeat. In total, a staggering ~$112 million was spent to buy close to 270,000 BTC – the bulk of which was bought in November.

"So if you were wondering how Bitcoin suddenly appreciated in value by a factor of 10 within the span of one month, well, this is why. Not Chinese investors, not the Silkroad bust – these events may have contributed, but they certainly were not the main reason. But who did it? and why?"

Of course, in the end this alleged manipulation did not help Mt.Gox which eventually collapsed in what has been the biggest case of cryptocoin fraud in history.

We bring up this particular blast from the past, because in the latest case of bitcoin market abuse - with Bitcoin trading at all time highs above $3,000 - Cointelegraph reports of rumors swirling about a trader "with nearly unlimited funds who is manipulating the Bitcoin markets." This trader, nicknamed "Spoofy," received his "nom de guerre" because of his efforts to “spoof” the market, primarily on Bitfinex.

Of course, spoofing is what Navinder Sarao pled guilty of last year, when regulators inexplicably changed their story, and instead of blaming a Waddell and Reed sell order for the May 2010 flash crash, decided to scapegoat the young trader who allegedly crashed the market due to his relentless spoofing of E-mini futures (and also making $40 million in the process of spoofing stock futures for over five years).

It now appears that a spoofer has once again emerged, only this time in Bitcoin.

For those unfamiliar, spoofing is simple: it is the illegal practice of placing a large buy order just below other buy orders, or a large sell order just above other sell orders, then cancelling if it appears that the order is about to be hit or lifted. The idea is to make traders think that somebody with deep pockets is getting ready to buy or sell, in hopes of moving the market. If traders see a sell order of 2000 Bitcoin they may rush to panic sell before the whale crashes the price. And vice versa on the bid-side.

As an example of Spoofy"s trading pattern, here is a breakdown of a typical "trade" by the mysterious entity as noted by BitCrypto"ed who first spotted the irregular activity: Spoofy is a regular trader (or a group of traders) who engages in the following practices:

• Places large bids ($2 million and up) for Bitcoin, usually just under a smaller bid order, only to remove them once someone starts to sell. These orders usually have a lifetime of minutes, or sometimes as short as 5–10 seconds to manipulate the price up (more common)


• Places large asks ($2 million and up), for Bitcoin when he wants the price to go down, or stop going up (less common)


• Occasionally ‘Spoofy’ will allow orders deep in the orderbooks to remain for a few hours, usually $50–$100 below the current price. For example, during the recovery above $2,000, he had roughly 4,000 BTC of false orders in the $1,900 range that were unlikely to execute, and ultimately were never executed.

As noted above, spoofing is actually illegal - as ultimately the trader has no intention of ever executing the publicized trade - but as Bitcoin markets are largely unregulated, it’s a very common practice.

What is unusual in this case is the nearly unlimited bankroll that Spoofy has at his disposal: He regularly places orders approaching $60 million.

Even more unusual is that, as cointelegraph reports, most of Spoofy’s activity occurs on a single exchange: Bitfinex. This exchange came under fire earlier this spring when Wells Fargo cut off their banking ties. As a result, it’s virtually impossible to deposit fiat on Bitfinex without going through intermediaries.

Yet unlike most Bitfinex traders, Spoofy appears to have special privileges, and has massive sums of both fiat and Bitcoin at his disposal on that exchange, likely one of the only traders who does.

* * *

In addition to spoofing, "Spoofy" also engages in wash trading, or effectively trading with himself. As BitCrypto’ed points out in a recent blog post:

“Spoofy makes the price go up when he wants it to go up, and Spoofy makes the price go down when he wants it to go down, and he’s got the coin… both USD, and Bitcoin, of course, to pull it off, and with impunity on Bitfinex.”

The BitCrypto’ed blog also describes Spoofy’s wash trades, when he trades with himself by either selling into his own buy orders or vice versa. Wash trading at high volumes can induce a frenzy of buying or selling, as other traders respond to the high trading volume. Spoofy can execute wash trades at very low cost, about $1,000 per million dollars of volume.

A single entity (entity could be a trader, or a group of traders), single handedly wash traded 24,000 Bitcoins in shorts. In order to do this, you would need to have at least 24,000 BTC on Bitfinex and the USD to buy them with.

When Bitfinex announced its plan to distribute Bitcoin Cash, it initially planned to distribute Bitcoin Cash to holders of short positions. Immediately following that announcement, a single trader short sold tens of thousands of Bitcoin all at once. It’s likely this trader was Spoofy himself, hoping to acquire as much Bitcoin Cash as possible.

The large number of shorts on Bitfinex also led many to believe that an epic short squeeze was coming, and many Bitcoin traders purchase coins in expectation of this. Suddenly, he “claimed” all of his own shorts, closing them using his own Bitcoin. The number of shorts dropped drastically, yet without affecting the price at all.

Bifinex itself admitted the manipulation on August 2, one day after the fork:

“After the methodology announcement on July 27th, several accounts began large-scale manipulation tactics in an attempt to obtain BCH tokens at the expense of exchange longs and lenders on the platform, causing the distribution coefficient to artificially plummet.

We have determined that this kind of manipulation?—?including wash trading and self-funding shorts?—?is in violation of Bitfinex’s terms of service. Those who intended to take unfair advantage of the circumstances surrounding the BCH distribution at the expense of other users have been sanctioned accordingly.”

Interestingly, BitCrypto"ed claims that Spoofy isn’t limited to just Bitcoin, and that shortly after this ‘trader’ was ‘sanctioned’ by Bitfinex, another interesting thing happened: ETCBTC shorts immediately disappeared on August 1.

Here we can see how the ETCBTC shorts simply vanished, from 60,000 ETC short, to a low of 93 ETC. But let’s not just look at ETCBTC, what about ETCUSD?

 

A giant middle finger. Notice the dramatic increase and decrease in longs with no effect on price.

I"m not sure what to make of these, but it calls into question the legitimacy of this data. The point I’m trying to make by showing the ETCBTC/ETCUSD margin pairs also engaging in very funny business at the same exact time, how are we supposed to know that the BTCUSD longs on Bitfinex are not also subject to this manipulation?

ETCBTC Shorts = Clear evidence of manipulation
ETCUSD Longs =Clear evidence of manipulation
BTCUSD Shorts = Clear evidence of manipulation (and admitted by Bitfinex)
BTCUSD Longs = BTCUSD Longs in terms of USD, has never been higher in Bitfinex’s history. See the green line.

It"s not just Bitfinex: Spoofy’s activity also drives crypto prices on other exchanges, as arbitrage takes place. Because BItcoin is so thinly traded, a single large “whale” can potentially move the entire market.

Just like in US stock markets where HFTs find instant price arbitrage opportunities, with the help of extensive spoofing, the same takes place in bitcoin exchange.

People underestimate how much exchanges follow each other. Manipulation on one exchange will affect prices on other exchanges. You have traders that watch all of the exchanges and if one exchange starts to pull ahead, they too buy on cheaper exchanges.

You don’t just have people, but you also have bots that will do the same thing, so price reactions can be immediate.

Just like equities. And while Spoofy is certainly exercising outsized control over the Bitcoin price, it is uncertain how much of an affect this is having across all the markets. The price is currently rising, having finally surmounted the $3,000 barrier. The only problem? Nobody knows how much of this increase is organic and sustainable, and how much is due to the market manipulation of Spoofy and others.

Finally, nobody knows who he is:  The identity of Spoofy remains a mystery. He may be i) a single trader, ii) a large OTC trading firm or group of colluding traders, iii) or even the Bitfinex management themselves. He sometimes seeks to drop Bitcoin price, and sometimes acts to increase it. One thing is certain: one single trader seems to have a "central bank"-like impact on the entire crypto market.

Bitcoin ETF-Approval Odds "Are Way Up", Analyst Says

One of Wall Street’s first bitcoin analysts believes the chances that the SEC will approve the first bitcoin exchange-trade fund by the end of 2018 have improved substantially since the agency rejected two proposed funds back in March.

“Things have changed. My odds of Bitcoin ETF approval within 18 months are WAY up,” said the analyst, Spencer Bogart, formerly of investment bank Needham & Co., in a tweet.

Things have changed. My odds of Bitcoin ETF approval within 18 months are WAY up.

— Spencer Bogart (@bitcom21) August 2, 2017

Bogart believes the probability that an ETF will be approved during this time frame has climbed above 75%.

While Bogart didn’t elaborate on his reasoning, or provide concrete odds, the SEC and other US regulators appear to have warmed to bitcoin in recent months. Last week, the SEC ruled that coins produced by initial coin offerings are securities and should be registered and regulated as such.

In June, The CFTC issue a license to LedgerX allowing it to create the first swap-execution facility for the clearing and settlement of bitcoin options, a decision that will likely attract more traditional hedge funds and CTAs to trade crypto.

Grayscale, the sponsor of the Greyscale Bitcoin Investment Trust, an open-ended grantor trust that trades OTC, is seeking permission to list GBTC on the NYSE’s Arca platform, which would effectively transform it into the first bitcoin ETF (and we note that its NAV premium has actually normalized very modestly in recent weeks since we brought attention to it...)

A final ruling from the SEC is expected during the fall.

Bogart, who is now the head of research at Blockchain Capital, correctly anticipated the SEC’s previous rejections in a widely distributed research paper published when he was still at Needham. Back in February, Bogart said that the fund could attract $300 million in capital during its first weeks, which would likely cause the bitcoin price to surge.  

And finally, with approvals for options/futures, we suspect a Bitcoin Futures ETF may actually occur before a Bitcoin ETF.

Paper Vs. Physical: The Amazing Amount Of Leverage In The Silver Market

Authored by Steve St.Angelo via SRSroccoReport.com,

While many precious metals investors realize the massive amount of paper trading leverage taking place in the gold market, they should see what is going on in the silver market.  In a previous article, I provided data showing that an amazing $9.8 trillion of notional gold paper trading took place on the world’s exchanges in 2016 versus $42 billion in actual physical gold investment.  This was a paper to physical ratio of 233 to 1.

However, the amount of paper trading leverage in the silver market is much higher than that.

But, before I get into the specifics of the paper silver market trading leverage, let’s take a look at the pathetic amount of physical silver investment versus Central Bank asset purchases.  According to the data in the recently released 2017 World Silver Survey, total physical silver investment for 2016 came in at a whopping $4.4 billion:

That’s correct.  When we add up all the global silver investment demand last year, it adds up to a measly $4.4 billion.  It was nearly ten times less than all physical gold investment in 2016.  The analysts who wrote 2017 World Silver Survey, arrived at the $4.4 billion figure by using the following data:

Global Silver Investment 2016 (in million oz – Moz):

Physical Bar Investment = 83.6 Moz

Official Coins & Medals = 123.2 Moz

ETP (ETF) Inventory Build = 47 Moz

Grand Total Silver Investment = 253.8 Moz

By adding up total Physical Bar investment of 83.6 Moz, Official Coins & Medals of 123.2 Moz and ETP (ETF) Inventory Build of 47 Moz and then multiplying it by the average silver spot price of $17.14, it totaled $4.4 billion.

Even when the silver price reached a high of $49 in 2011, total global silver investment was only $6.6 billion.  Looking over the market in the past six years, the total $32 billion of silver investment from 2011 to 2016 is nothing when we compare it to the staggering amount of Central Bank asset purchases.  According to a recent Zerohedge article, Why “Nothing Matters”: Central Banks Have Bought A Record $1 Trillion In Assets In 2017:

A quick, if familiar, observation to start the day courtesy of Bank of America which in the latest overnight note from Michael Hartnett notes that central banks (ECB & BoJ) have bought $1 trillion of financial assets just in the first four months of 2017, which amounts to $3.6 trillion annualized, “the largest CB buying on record.”

Now, if we look at the chart above, Central Banks purchased $7 trillion (that was made public, could be higher) from 2011 to 2016.  If the Central Banks purchased $1 trillion in just the first foru months of 2017 versus the $7 trillion from 2011-2016, something seriously wrong must be going on in the markets.

Regardless, $7 trillion is a lot of money when we compare it to the pathetic $32 billion invested in silver over the same period.  If we just took $100 billion of that $7 trillion and placed it in silver, it would have quadrupled the amount of global silver investment from $32 billion to $132 during that 2011-2016 time period.  A quadrupling of silver investment demand, would have pushed the price of silver, WAY ABOVE the peak $50 price.

By the Central Banks propping up the STOCK, BOND and REAL ESTATE markets, the value of silver (or gold) is being severely depressed.  And of course, to keep investors from finding out about SILVER’S HIGH QUALITY STORE OF VALUE, the price continues to be capped by the massive amount of paper trading leverage.

So, how much paper trading leverage is in the Silver Market?  Let’s look at the following chart:

Again, according to the data put out by the 2017 World Silver Survey, total paper trading silver volume on the world’s exchanges was 159,000 Moz, or 159 billion oz in 2016.    Thus, the exchanges traded 180 times more paper silver in 2016 than the global mine supply of 886 Moz.

If we look at the ratio of global notional paper silver traded last year compared to actual silver investment, it was more than double that of gold:

By multiplying the 159 billion ounces of paper silver traded in 2016 by the average spot price of $17.14, we arrive at a staggering $2.27 trillion of notional paper silver traded versus $4.4 billion actual silver investment.  Thus, the paper notional silver trading ratio to physical silver investment was a whopping 517 to 1… double the 233/1 for gold.

Now, this 517/1 notional paper trading ratio to physical silver investment in 2016 does not take into account any of the huge OTC market where a lot of silver is traded and there are no quantifiable statistics to the amount or degree.

Currently, the crypto-currencies are experiencing huge gains over the past several months.  It doesn’t matter if an individual agrees with owning Bitcoin or one of the many crypto-currencies, the important thing to understand is that the tremendous price increases in many crypto-currencies are likely due to concern to the massive amount of Central Bank $1 trillion in asset purchases in the first four months of the year.

Furthermore, crypto-currencies are a likely a GOOD INDICATOR of what will take place in the gold and silver market when investors realize most STOCKS, BONDS and REAL ESTATE values will continue to implode as the U.S. and Global Oil Industries disintegrate.

The gold and silver prices are being capped because paper contracts can be added as more funds move in.  However, crpyto-currencies do not have this problem because the amount of Bitcoins, as an example, are limited.

Will Japan's Declaration of Bitcoin as Legal Tender Accelerate Cryptocurrency Mainstream Adoption?

It’s being reported by Sputnik News and other sources that Japan has declared Bitcoin to be legal tender. Unfortunately, I have not been able to quickly confirm this through Japanese sources. The use of BTC as legal tender in one of the world’s leading economies is a big plus for Bitcoin, and likely to lead to a much more rapid pace of adoption. Volume is strong on increasing price.

Be aware that volume on exchanges doesn’t necessarily equate to gross transactions. There are OTC transactions and P2P transfers via the blockchain (see http://Veritaseum.com). There is one thing that is apparent, though. JPY is the new Bitcoin darling, replacing CNY in terms of BTC trade volume on exchanges.

In full disclosure, the blockchain doesn’t show this difference this morning, although it is very clear that CNY not only lost the 90% volume title, but is no more than 25% of US volume after the PBOC clamped down on KYC/AML and margin lending in Chinese bitcoin exchanges

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Silver Smoking Gun to Stop Dishonest Dealing

By Bron Suchecki

Last week ZeroHedge reported on the amended London Silver Fixing Antitrust Litigation which included damaging chat logs provided by Deutsche Bank that reveal collusion between bullion bank traders to “shade”, “blade”, “muscle”, “job”, “spoof” and “snipe” the silver market.

While the amended complaint only provides selected examples from the 350,000 pages of documents and 75 audio tapes that the plaintiffs received as part of the settlement with Deutsche Bank, what has been provided shows cliques of traders who worked together against the interests of their clients.

Below is a network map of these cliques, which shows every trader mentioned in the complaint with the lines indicating who chatted with whom (view the map online here).

 

The key ringleader is DB Trader-Submitter A (submitter refers to their role submitting orders into the London Fix) and this sort of hub and spoke model is common in social networks. The two persons with a slash and two banks in their name indicate that they moved banks during the period of the complaint. This is not uncommon in bullion banking since it is a small industry and would increase the risk of collusion between former workmates, something the management of the banks should have been alert to.

The lack of connection between these groups is likely due to them being in different timezones. The group of four in the top left corner are most likely in Singapore, given the use of Singlish terms like “lah” in the chats. The larger group is based mostly in London with one in New York, based on references in the complaint. The group of three at the bottom may be in Dubai, although that is speculation.

The chats have a jovial feel with traders calling each other “bro”, “dude” and “mates” and show no care for clients on the other end of their schemes: for example, Deutsche Bank Trader B talks about “wanna ramp it up like really just buy at mmkt and fk everyone so bad”. No doubt these chats will now be a lot more stilted as traders realise that collusive behaviour brings with it personal consequences like jail terms, as it did with LIBOR.

Nick Laird at goldchartsrus.com has collated all the chats in chronological order here with a chart of the silver price underneath to help put the chats in context of market price action at the time. In general, the chat logs show collusion to tactically/short-term manipulate the London Silver Fix and spot market (curiously, there is no mention of Comex futures, but the plaintiffs are only giving us a sample in this complaint).

With the Deutsche Bank chat logs showing a collusive network across banks, it would seem unlikely that the defendants will be able to refute the antitrust claim by the plaintiffs. The next question is that of damages. As it stands, the tactical nature of the manipulations means that the defendants are likely to argue that the members of the class action can only claim damages if they traded at the same time as the chat evidence shows market manipulation.

To cover the entire class and increase the damages, the plaintiffs need to show that the traders’ actions resulted in ongoing suppression of the silver price.

In the chats the traders do not explicitly indicate any plans to suppress the price on an ongoing, multi-day/month/year basis or reference having to manage a large naked futures short position (which many have said is necessary for ongoing price suppression to exist). Monetary Metals have written on the naked short theory in the past, noting that it is not supported by observation of prices as contracts approach first notice day. To implement such an ongoing suppression using futures, the bullion banks would need to roll their oversized short position by purchasing the expiring contract and shorting the next contract. Such massive buying of an expiring contract would cause the basis to rise, yet the opposite occurs - see here for more details.

Absent such explicit proof of suppression, the complaint masses a number of different econometric analyses to show that the London Silver Fix impacts other silver prices in the wider market.

The analysis does not start off well where, on page 40, the plaintiffs fall for the “correlation proves causation” fallacy claiming that “the prices of COMEX silver futures contracts are directly impacted by changes in the Fix price, which determines the value of the physical silver underlying each COMEX silver futures contract” on the basis of a regression analysis between futures closing prices and the Silver Fix of 99.85%. The defendants will be able to rebut such claims by referring to papers like London or New York: where and when does the gold price originate? which show that neither London (spot) nor New York (futures) are dominant in terms of price and that the dominant market switches from time to time.

We feel the plaintiffs are on stronger footing when comparing spot and futures price movements around the fix (see page 71 onwards, figures 24 to 28). The plaintiffs’ show a few charts demonstrating a spot to futures linkage but we would suggest that to win the case the analysis would benefit from looking the spread between spot and futures markets, or the basis, which we report on each week. For an example of the application of basis to forensic price analysis, see our November 13 report where we show that the drop of $30 in the gold price around the London Fix on November 11 was driven by selling of futures as the gold basis began to fall before the price did (see below).

The final challenge for the plaintiffs is to prove that the impact of the banks’ manipulative actions persisted “well beyond the end of the Fixing Member’s daily conference call” (see pages 81-83). While the plaintiffs claim that this is proven because the mean of the cumulative unadjusted returns “on Down Days does not recover fully from the price drop that occurs at the start of the Silver Fix”, the very wide confidence interval implies that on a number of days it did recover. It will be interesting to see how the defendants response to this crucial claim.

The Deutsche Bank chat logs have enabled the plaintiffs to get over the first huge hurdle of showing antitrust behaviour. The focus of media reports to-date on the colorful chats gives the impression this is a closed case but the lack of explicit chats discussing management of a large naked futures short position and/or plans to supress the price over months is unusual. One would expect that managing such a large ongoing supression would be the main focus of discussions between traders. It is possible that the plaintiffs may have withheld this evidence for strategic purposes but if not, this case may end up turning into a battle of the bookworms with academics arguing econometrics and questioning what does the “mean of the cumulative unadjusted returns” really mean.

Whichever way the case develops, bullion banks now have increased costs of supervising and managing the risks that precious metals trading desk “bros” might be looking to "fk" their clients. Combined with the potential that the “cost of doing business will jump – perhaps by 300% on one estimate” due to Basel 3 rules, some may decide to do a Deutsche Bank and pull out of the market. The result may be further consolidation in bullion banking and give regulators more justification to push those that remain out of "dark" OTC trading and on to "lit" exchanges.