HardAssetsInvestor

Written by Brad Zigler  |

June 30, 2009

Gold Manipulation Redux

Details

While it's unlikely the argument will ever be won, the evidence just isn't on the side of the gold-futures manipulation theorists.

• The manipulation argument
• The gold price/short position noncorrelation
• The rational explanations

We at HardAssetsInvestor.com (HardAssetsInvestor.com) often hear the volume level rise precipitously in the conversation whenever the words "gold" and "manipulation" are strung together in the same sentence.

So it was no surprise that the recent publication of "Has Gold Been Manipulated?" excited the chattering classes. The article questioned an assertion made by newsletter publisher Ted Butler, among others, that short gold and silver futures positions held by U.S. commercial banks are artificially depressing the metals markets.

A subsequent interview ("Bill Murphy: Manipulation Of The Gold Market") with the chairman of the Gold Anti-Trust Action Committee (GATA) also lit up the discussion boards.

The flurry of comments that followed these pieces, as well as the assertions of GATA's Mr. Murphy, plentiful though they were, still fell short of establishing the existence of a futures market manipulation.

Murphy, and a lot of commenters, were quick to point to remarks made by then-Fed chairman Alan Greenspan to a 1998 House committee acknowledging central bank proclivities to lease gold in the face of rising prices. That, they aver, is evidence of government manipulation.

Central banks have, indeed, leased gold in the past, and they're likely to continue leasing as a tool to manage their currencies. That, like it or not, is a central bank's mandate: to deploy its reserves - of foreign exchange and metal - to tweak and fiddle with the value of the legal tender.

Our original article didn't weigh in on central bank gold leasing operations. The article's focus was, instead, the futures market. Ted Butler asserted that the precious metal sell-off of 2008 was, in fact, due to a criminal manipulation by "concentrated commercial shorts" on the COMEX division of the New York Mercantile Exchange. U.S. banks, according to Butler and Murphy, hold a smoking gun - a lopsided and persistent short interest in gold and silver futures.

U.S. banks do, in fact, account for a substantial portion of COMEX open interest. That interest, too, has been pretty much entirely skewed to the short side since the Commodity Futures Trading Commission (CFTC) started reporting banks' market participation two years ago.

But is the existence of a large short position prima facie evidence of a manipulation?

For a prosecution of manipulation under the Commodity Exchange Act to succeed, monopoly or domination of the market on the part of the alleged manipulators must be proven. In addition, it must be demonstrated that the perpetrators' manipulative acts resulted in the creation of an artificial price.

Put simply, making a futures manipulation charge stick boils down to answering two questions: Would the current gold price be different if the alleged manipulation hadn't occurred? More importantly, do the banks have the actual ability to influence the price of metal?

Bank Short Interest

As a percentage of total open interest, U.S. banks' short interest has grown nearly 23% since June 2007. Over that same time, the COMEX spot price has risen almost 47%.
 

Figure 1: U.S. Bank Short Interest in Gold Futures

Table 1: Bank Participation in COMEX Gold Futures

(05-Jun-07 to 02-Jun-09)