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August 8 (King World News) - By Grant Williams

Warning - Paper Claims For Gold & Silver Hit All-Time Highs

Until July 2012, the London Interbank Offered rate (LIBOR) was the biggest little number that nobody outside finance understood, and yet it touched the lives of virtually everybody.

LIBOR is an interest rate that gets calculated for ten currencies and fifteen borrowing periods that range from overnight to one year.  It is published every day in London after submissions from a group of major banks.  Currently, eighteen banks contribute to the fixing of US dollar Libor, for example.  The LIBOR rate is calculated by taking estimates from each of the banks, throwing out the highest and lowest four indications and averaging the remaining ten.

The resulting number itself is measured in mere basis points (hundredths of one percentage point), but it underpins a staggering $350 TRILLION in derivatives and is a vital component in setting the price on hundreds of thousands of OTC transactions around the globe every day. The wonder of leverage at work....

Continue reading the Grant Williams piece below...


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The daily benchmark rate, once set, is known, appropriately enough as it turns out, as a 'fix'.

As far back as 2008, reports were swirling in the media about possible foul play and manipulation of the LIBOR market with a Wall Street Journal article suggesting that rates had been understated during the depths of the 2008 crisis. Naturally, the British Bankers Association denied there was any wrongdoing and the Bank for International Settlements backed them to the hilt, stating that “available data do not support the hypothesis that contributor banks manipulated their quotes to profit from positions based on fixings.”

Suggestions of collusion and manipulation in an attempt to suppress the LIBOR fixings were dismissed out of hand as being completely ridiculous - after all, how could EIGHTEEN banks collaborate in such a vast market without it leaking?

Fast forward four years and the Libor Scandal has a Wikipedia page all of its own, full-blown investigations are taking place in some ten countries (including a criminal investigation by the Serious Fraud Office in the UK) and the total fines levied to date at the offending banks are measured in the billions of dollars.

Now, the CFTC has been handed evidence of possible manipulation of something called the ISDAFIX, which is the benchmark for interest rate swaps, amongst a group of 15 banks.  Once again, this is a rate that affects hundreds of trillions of dollars of interest-rate derivatives - an enormous amount of which have pension funds as a direct counterparty.

CFTC Commissioner Bart Chilton is quoted as saying that:  “Given the clubby manipulation efforts we saw in Libor benchmarks, I assume other benchmarks – many other benchmarks – are legit areas of inquiry.”

But ... and here's where I have a problem ... mention possible manipulation and price suppression in the gold market amongst the so-called Bullion Banks - a far smaller and more tightly-knit group of six household names - and you instantly have a label slapped on you and are neatly filed away into a folder marked ‘Gold bug’ - a term as pejorative as any I've come across.

But indulge me - a card-carrying ‘Gold bug’ - for a moment, if you will:

The gold market also has a series of daily ‘fixes’ both on the COMEX in New York and the LBMA in London and, though the scale of the leverage involved pales into insignificance against the vast derivatives markets layered atop LIBOR and ISDAFIX, there are still currently 42 outstanding claims on every ounce of gold remaining in the fast-dwindling COMEX warehouse stocks thanks to the availability of paper gold in the form of futures contracts (see chart below courtesy of Nick Laird at which is by far an all-time high.



King World News Note:  Before reading the rest of the Grant Williams piece, take a closer look at the registered gold stocks at the COMEX, and the open interest (or paper claims) vs COMEX registered gold stocks:

The chart above is the type of setup that would precede a further run on available gold inventory, or a “run on the gold bank,” which would then create a default.

Grant Williams continues:  “When you throw into the mix the fact that, in little more than a few months since the LIBOR story blew wide open, regulators have investigated, charged and punished malfeasance amongst the price fixers (and by that, of course, I mean the banks that fix the price) and, in the process collected billions of dollars in fines, it becomes ever harder to understand why the CFTC investigation into alleged manipulation of the silver market prepares to enter a sixth year with no progress report from regulators whatsoever. 

The closest we have come thus far to any signs of activity has been a recent report in the Wall Street Journal which began:  “The Commodity Futures Trading Commission is discussing internally whether the daily setting of gold and silver prices in London is open to manipulation, according to people familiar with the situation.”

That's not much to show for five years of investigation, but if that weren't enough the article continues:

“No formal investigation has been opened, the people said.  The CFTC is examining various aspects of the so-called price fixings, including whether they are sufficiently transparent, they said.”

A much smaller market than LIBOR with far fewer participants and full transparency of far lower trading volume seems to be proving far harder to get to grips with for the regulators for some bizarre reason.  Of course, in this particular case, the interests of the major market participants and the government that empowers the regulatory overseers are somewhat aligned in that lower gold prices suit both parties, but let's leave that aside for the time being.

Now, before I get to the point of this article and the question I want to restate, there are two more charts I want to include (again, courtesy of Nick Laird) that demonstrate the kind of anomaly that simply screams the 'M-word'.

The first chart shows the performance of the gold price over a 43-year period when buying at the LBMA AM fix and selling at the PM fix - which in effect means you were long only during the time when the major participants (bullion banks) were actively trading in the most liquid market.  As you can see, it has been a virtually guaranteed way to see your capital dwindle as the price has been forced relentlessly lower over time.

Now we see what the chart looks like if you bought at the PM fix in London and sold it into the following morning's fix (which in effect means being long gold overnight in the less-active markets when the bullion banks are relatively dormant):

The chances of such drastic bifurcation of trading in a single commodity over two specific timeframes within an extended period such as this are minimal to the point of obscurity.

So, given what we know about the widespread manipulation (and alleged manipulation) of supposedly sacrosanct, but vitally important benchmarks such as LIBOR and ISDAFIX amongst a group of large financial institutions in the interests of either generating profits or mitigating potential losses, bearing in mind that the bullion banks (with the exception of Scotia Mocatta) are all involved in setting both the LIBOR fix and the ISDAFIX, and taking into account that the regulators have somehow managed to gather evidence sufficient to extract ten-figure fines out of the banks found guilty of malfeasance in a matter of months but failed to even get past the point of “discussing internally whether the daily setting of gold and silver prices in London is open to manipulation”, let me ask you this:

Can it possibly be true that the prices of gold and silver are NOT manipulated?”

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© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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