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The Gold Endgame Begins

The Gold Endgame Begins

Apr 8, 2024

The Gold Endgame Begins

The last few months have seen a record jump in the price of gold. The yellow metal started the year at around $2,061, and in recent months a strong rally has taken place, rocketing it to a fresh high of $2,260 in trading early Monday morning.

The move has come to the elation of many a goldbug, who for the last two decades declared that a bull market was just around the corner as the central banks began easing and faith collapsed in fiat currencies.

Finally, their day in the sun is here. It appears that China is driving this massive move in gold, with Shanghai prices soaring above Western and arbs moving in to profit from the difference. Global central banks are also accelerating gold purchases, as it is the original neutral reserve unit and serves as a useful hedge against fiat debasement- with manipulation games aside.

Many have hypothesized that the gold markets are manipulated, and there has been substantial evidence of this for years.

Central banks have the ability to influence gold prices a few ways:

  1. Buying and Selling Gold: By participating in the market as either a purchaser or vendor, central banks can exert pressure on supply and demand.
  2. Gold Leasing: By leasing out their gold holdings to commercial banks, which then sell this gold, central banks can increase market supply, which might lower prices. (BIS)
  3. Engaging in Derivatives: Central banks can use futures contracts and other financial derivatives to affect gold prices.
  4. Forward Guidance: Remarks by central bank officials can affect market perceptions and thus influence gold prices.

For example, in the writings of ANOTHER, the anonymous 1997 blogger who claimed that Saudi Arabia was buying massive quantities of bullion and hiding it through the oil market, he claims that Western central banks made deals with bullion banks to sell forward gold certificates which represented real gold.

This added large selling pressure to exchanges and suppressed the gold price for decades, until a large trader out of Hong Kong realized what was happening and started draining the UK’s gold reserves. This was quickly halted as the BIS had an emergency meeting and halted all physical gold sales and leasing contracts.

I wrote a whole summary here- it’s a very interesting read.

But it doesn’t even just have to be machiavellian central banker manipulation- the actual market substructure of precious metals essentially opens the door to price suppression. VBL laid this out in depth during a recent podcast episode I did with him. Here’s an excerpt:

VBL: So investors know that miners are always selling regularly and so they wait. They wait for it to come to them, right?

Banks push it there. So they front run their own business. And that's, and that's part of it. And it gets really, really ugly when you get down into the depths of it. You know, they, here, here's, here's something. There are two banks. There's your bank, right? The Peruvian bull bank and the VBL bank. And we  have mining clients.

We both have Newmont as a mining client. Newmont calls me, tells me he wants to sell.  He calls you and you're telling me on a text or an IM that Newmont's on the phone. And you and I know that Newmont is getting itchy. It's like a person who walks into the room too many times. Like, okay, they, they want something.

[...] And so you and I say, you know what? This guy's going to sell. And we start to say, we. Start to sell for our own books before Newmont even sells and that's, and that's it. That's the Rico aspect of it. I'm selling this idiot over here. So I'm, I'm selling first.

You go, yeah, I'm going to sell too. Well, let's see who can sell the worst. And that's what happens. And the market sells off and it's a license to steal. And it's a license to steal because the miners, unfortunately, the miners haven't gotten very sophisticated over the years. Whereas oil producers, they did get sophisticated.

So the miners sell through the banks because they have to, they're captive clients. They have to do their business there. And the COMEX is a garbage dump for them. And that's what happens at the granular level.

PB: Here's one of the things that shocked me when I first started looking into, you know, gold market manipulation is most people don't take delivery and it's like an overwhelming amount, something like 97% of buyers of gold futures are not taking physical delivery.

They're just handling cash delivery. 

VBL: That's right. 

PB: Which means that you have this entire marketplace of commodity futures, which in every other commodity, the speculators are the minority and the majority is people who actually have usable demand like oil, you know, giant oil users, right?

Like Chevron or Gazprom- If they're going to produce oil and they're going to sell it, or they're going to buy oil because their reserves are running low. They're going to actually demand delivery and they're going to take that delivery and take it out of the exchange. With gold that is not the same case.”

This is exactly the problem. The gold futures markets are almost completely cash settled, (as Stormy states, 300:1 cash to delivery in terms of value) and it’s incredibly easy to just spin up mass amounts of paper gold and sell them into the market, without ever delivering physical.

For our Gamestop friends, this is basically naked shorting!

So the system is set up to allow private participants to continually naked short gold, the central banks sell forward ownership certificates that never settle for real gold, and traders to spoof the market to move price action.

Here are just a few examples: 

  • August 10th, 2022: former JPMorgan gold traders Gregg Smith and Michael Nowak were found guilty of fraud. They engaged in "spoofing," a tactic that involves placing large, deceptive orders in the futures market only to cancel them later. This manipulates the supply and demand, artificially inflating or deflating prices to enable profitable transactions. The U.S. Department of Justice reported that this fraudulent activity by JPMorgan lasted over eight years, involving thousands of illegal trades.
  • June 21, 2021: James Vorley, an ex-trader of precious metals for Deutsche Bank, received a one-year prison sentence for engaging in manipulative trading practices within the precious metals futures market.
  • September 29th, 2020: JPMorgan consented to a settlement of $920 million in response to charges of illicit trading strategies in the precious metals futures market.
  • January 29th, 2018: the Commodity Futures Trading Commission (CFTC) imposed a $30 million civil monetary fine on Deutsche Bank for price manipulation in the precious metals market. From February 2008 to September 2014, traders at Deutsche Bank employed spoofing techniques that affected stop-loss orders. The CFTC also pursued anti-spoofing charges against UBS Group, HSBC, and six individual traders.

The sentence for the JP Morgan traders, who had spoofed precious metals markets for 8 years, was a whopping 1 and 2 years.

What a stiff punishment!

In any regard, all this goes to demonstrate that the Western gold markets are fake- paper trades against paper trades, which means despite massive currency debasement gold has not gone above its 1980 peak when adjusted for the CPI.

Gold bugs won’t tell you this.

I largely believe this underperformance is due to the aforementioned factors- but, the system is fragile. If any large external investor begins buying futures and taking physical delivery, then the shorting mechanism begins to unwind, and other market participants can rush to take delivery as well so as gain actual ownership of the underlying. Given that there would be many more buyers (short bullion banks, short hedge funds, family offices, and foreign central banks) the price could rip upwards in an epic short squeeze- this is the gold “revaluation” that writers like ANOTHER and FOA have prophesied!

This may be starting to take place.

The Shanghai Gold Exchange (SGE) was founded in October 2002 with the approval of the State Council and under the supervision of the People’s Bank of China (PBOC). It was primarily internal facing for the first decade or so of its existence, but this changed 12 years later.

In September 2014, the SGE launched the Shanghai International Gold Exchange (SGEI), a platform designed for international investors to trade and hold physical gold. The term SGEI denotes the "International Board" of the Exchange, where various physical gold contracts are listed and traded. As these contracts involve physical delivery of gold, the SGEI also includes a facility - a certified vault for precious metals - for the storage of the physical gold that underpins this trading.

(The certified vault of the SGEI is situated within the Shanghai Pilot Free Trade Zone (FTZ) and operates separately from the network of vaults the SGE uses for China's domestic gold market. The gold stored in the SGEI vault is permitted for unrestricted import and export from the FTZ, as the FTZ is considered outside China's customs territory.)

This is a far cry from the mostly cash-settled COMEX futures markets or the opaque London OTC markets.

As VBL had discussed in our aforementioned podcast, the differing structure between East and West opens up a massive arbitrage opportunity. If gold prices in Shanghai rise above those in Chicago, traders can swim into the market and buy futures contracts on COMEX, take delivery, and sell the gold on SGE. If the price in China is consistently higher, this trade gets open for longer, and the drain will continue unabated.

And that is exactly what is happening. Gold prices in Shanghai on April 1st closed at record highs, well above where gold trades in the West.

Bai, a CEO of an investment company in China, tweeted: 

April 1,  SGE/SFE gold opened and hit ATH again. 
SGE gold=$2286.22/oz; 
SFE gold=$2296.78/oz.

For reference, gold futures in the U.S. reached a record high of $2,265 before paring gains and retracing, closing at $2,249.89. The $36 and $46 price differential (spot and futs markets respectively) may not seem like much, but leverage this up and traders can make a killing pulling physical gold out of COMEX and dumping it in Shanghai. 

This has been going on for months- look through Bai’s Twitter and compare the prices to domestic ones. The average spread has hovered between $30-$40 for the last few months, and at times is even higher. On September 20th, 2023, for example, the spread was $88. 

As this has continued, gold has drained out of Comex, consistently. I wasn’t able to backtrace Bai’s data before May 2023, but if I had to guess depending on this chart, I would say that the arbitrage probably opened (or widened to be material enough) in July 2022.

This is being driven by record Chinese gold demand, as investors flee Chinese stocks and real estate. Housing markets in China are collapsing as leveraged investment funds and property managers are defaulting on bonds and trust products, and contractors are left unpaid. The extent of the damage in real estate is much larger than even the government has let on- and I’ve covered it at length here and here

The misallocated capital from these markets is now flowing into gold- and imports are surging.

China stands at the forefront of consumer and central bank buying of gold, with no signs of stopping. The People's Bank of China emerged as the top purchaser of gold among central banks in 2023.

In 2023, the central bank of Poland emerged as the second-largest buyer of gold globally, acquiring 130 tons of the precious metal. Singapore had the third highest net gold purchases in 2023, driven by purchases by the Monetary Authority of Singapore (MAS), which bought 76.51 tons, but didn’t say why. As the world divests from Treasuries and (attempts) to move away from the dollar, the first step will be a rapid re-monetization of gold and bitcoin, leading to rapid price increases and a shattering of the paper markets that have dominated the West for decades.

Gold is treated much like an alternative currency- a counterbalance to fiat. While it is captured by institutions, this can be a good thing in some respects. Remember, institutions like central banks want assets that they can control and understand, and unfortunately Bitcoin is far to libertarian and technical for them to grasp. 

Gold on the other hand- now that has been around for thousands of years.

This isn’t to say that in the Dollar Endgame gold will become the new reserve currency- digital gold clearly holds a much stronger advantage here. But, governments will hesitate to jump on the Bitcoin train until the run is inevitable. Until then, they can divest from Treasuries and buy gold, unraveling the decades of market subterfuge done by the West.

We can thus view this run as a prelude to the eventual hyper-bull market that is coming for all inflation hedges. 

Goldbugs, your time may finally be here.

Originally published on The Dollar Endgame


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