Falling Gold and Silver Prices Being Driven By Market Makers and Traders Not Fundamentals Part 2

Continued from Part 1

What Does All This Have To Do With Gold and Silver Prices?

Most people know that trading in stocks or ETFs is not the same as trading in the actual physical metal, at least for the retail investor. But the big boys get to play the physical metals in the Over The Counter (OTC) market.

From WIKI:

Internationally, gold is traded primarily via over-the-counter (OTC) transactions with limited amounts trading on the New York Mercantile Exchange (NYMEX) and Tokyo Commodity Exchange (TOCOM). These forward contracts are known as gold futures contracts. Spot gold is traded for settlement two business days following the trade date.

The spot fix price for gold is set by the London Bullion Market Association (LBMA).  “There is a brief conference call among the five members of the London Gold Pool (Scotia-Mocatta, Barclays Capital, Deutsche Bank, HSBC and Société Générale). The London spot fix price is the price fixed at the moment when the conference call terminates.” 

According to Wiki again:

Although the physical market for gold and silver is distributed globally, most wholesale OTC trades are cleared through London. The average daily volume of gold and silver cleared at the London Bullion Market Association (LBMA) in November 2008 was 18.3 million ounces (worth $13.9 billion) and 107.6 million ounces (worth $1.1 billion) respectively.

This means that an amount equal to the annual gold mine production was cleared at the LBMA every 4.4 days, and to the annual silver production every 6.2 days according to IFSL research out of London. Please note that this could not be done without the ability to trade the metals via fractional reserve methods. Meaning, they trade unallocated accounts that are only partially backed by physical gold (or silver). Is it any wonder that these traders can cause falling gold and silver prices even when the fundamentals point to higher prices?

What Good Does the CFTC Do?

Like the rating companies that gave good ratings to bad investment products, what good does a regulator do when they don’t do their job? The Commodity Futures Trading Commission – CFTC was set up by the U.S. Commodity Futures Trading Commission Act of 1974. The primary mission of the CFTC is to guard market participants against price manipulationabusive trade practices, and fraud for those who participate in the metals market.

While the CFTC was set up with good intentions, if it were true that they wanted to “guard market participants against manipulation, abusive trade practices and fraud,” then why doesn’t the CFTC crack down on these traders when they do this? Isn’t the fact they trade unallocated accounts with no metal backing them considered fraud to begin with? According to the Wiki article on this issue; Similarly to a bank run this makes LBMA unallocated gold accounts susceptible to loss if a sufficient number of market participants request delivery of physical bullion.

Gold and Silver Traders Are Not Held Accountable

And herein lies the key. These OTC traders don’t take delivery of the metals, so no one has to “pay up.” I remember about 30 years ago when I was in college I worked at the Chicago Mercantile Exchange (CME). There were traders at the CME who at the end of the day would have this down and out look sometimes because they for example as one trader told me, “lost big today” in the grain market. This means they were on the wrong side of the trade. You see, he felt the effect of the bad decision he made for the trade and had to personally account for it. He either had to pay for the trade one way or the other, either by dollars or by movement of grain. Farmers do this all the time when they wait for the price of say corn to rise in the future while they store it at grain elevators. They hedge their bet through a put option just in case the price falls. If the farmer brought the grain to the elevator and sold that day, he might take some of the proceeds and buy a futures contract to capitalize on any potential rise in price.  But with farmers, they can provide the product to cover a trade or take delivery on the other side of the trade. You don’t see that with gold and silver bullion traders. They can go short for as long as they want without having to pay up the metal.

That’s why, as the IFSL report referenced above states, “this means that an amount equal to the annual gold mine production was cleared at the LBMA every 4.4 days, and to the annual silver production every 6.2 days.” The logical conclusion thus is, if only a few participants take delivery, it exposes the ponzi scheme.

Banking System Similarities

Continue to Part 3 to read more of this article…

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About Doug Eberhardt

Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534


Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don’t trade with capital you can’t afford to lose. This is neither a solicitation nor an offer to Purchase/Sell futures or options. No representation is being made that any account will or is likely to achieve gains or losses similar to those discussed in this outlook. The past track record of any trading system or methodology is not necessarily indicative of future results.

All trades, patterns, charts, systems, etc. discussed in this outlook and the product materials are for illustrative purposes only and not to be construed as specific advisory recommendations. All ideas and material presented are entirely those of the author.