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Who Controls the Gold Market?

Commodities / Gold and Silver 2010 Jun 07, 2010 - 10:44 AM GMT

By: Julian_DW_Phillips

Commodities

Best Financial Markets Analysis ArticleWhen gold price are slammed down in one day, as they were on Friday by more than $20 it is certain that some sort of concerted action was taken to push the price down. Fingers point at the leading U.S. banks. But then later on Friday, before its close, there came a huge surge in buying that took the gold price up to $1,220 from $1,192. This pressure equaled or bettered the downward pressures seen in that day. This bodes well this week for pressures between these two blocs to continue or even heighten until the gold price breaks one way or the other. It's time to look at who is controlling the gold market?


The Banks & Companies involved

The major banks seen as influencing the gold market are U.S. banks such as JP Morgan and the like [our task here is not to name particular names but to see their overall influence]. They are perceived as being anti-gold and have a long history of supporting certain governmental efforts to hold the gold price down. These efforts have been going on since the early 1980's. The gold price itself tells us that at best, if true, their efforts have only slowed the rise of the gold price.

But the slowing of the gold price's rise has served to allow the gold mine companies, who assisted in the downward pressure on the gold price to close their toxic hedgebooks at a loss, but not so big as to crush them completely. They are now almost out of the market for hedging. One would have thought that the banks involved in the gold market would have ensured that they too would have cut back their 'short' positions and milked the rising gold price for profits. But they haven't it seems and it is the leading banks alone, that are thought to be taking every opportunity to push the gold price down. This doesn't make sense unless they are long gold in other markets and have covered their price risks this way [or they are attempting to contain losses?]. But again their positions may be client positions which are actively taking positions to discredit gold and ensure that confidence in money remains with currencies and does not revert to gold as money. Again, this appears to be a lost cause, particularly as we look at the state of global economies in the West. The only institutions that would promote such actions would therefore be central banks.

Western developed nation's central banks, in turn, have stopped selling their gold. Eastern blocs continue to buy gold in the open market. The only other area that they would use to squash the gold price would be in the futures and options markets, where individuals would act as counterparties to a cash market not a physical gold market. Such cash markets only see 1% of these transactions result in a physical delivery of gold to buyers and where this happens the seller must confirm his intention to deliver. This would indirectly influence dealers but not unless there was such a volume of physical deliveries that it affected the physical gold market centered in London for longer than the very short-term.

But, yes, as we saw last Friday, the futures and options market does affect the gold price, so we will accept this downward pressure as a big influencing factor in the gold price, in the short-term.

Demand & Supply

When all is said and done the gold price is a result of the physical supply versus physical demand. This has to be tempered by the supply and demand at that particular moment. For instance in Asia market times, local buyers there express their thoughts in their market, outside the influence of New York and for a time London. Yes, there are arbitrageurs who will make a living out of the disparities between markets and so even out the price differences time zones throw up. Big players too, won't chase small price disparities between markets just to even out prices. They will allow prices to wander in the short-term even though they want gold. They will act in markets where they can get good volumes. This is best seen in London at the two London Fixes. Why? Because the five Bullion Banks that set prices at which all deals at the particular price fixing will be transacted at. They sit in a room linked by phone to their offices, which in turn are linked to their active clients, keeping them in touch with the prices being considered at that Fix. The volumes transacted change with each price change, making the dealing banks 'net out' the volumes to be transacted at a particular price. Once demand and supply are balanced at the Fix, the price is set and published. This ensures that the greatest volume is dealt at a price all deem to be a fair reflection of that morning or afternoon's demand and supply of physical gold.

So, the Fix is where the price of gold is controlled from.

Who are the controlling players?

Simply put, they are those buyers or sellers at that particular time who are the biggest ones at that time. A day later and these controllers may have stepped back passing control to someone else.

Overall and from a longer-term perspective we can see who the largest players are and they differ substantially in their actions.

  • Gold Exchange Traded Funds. These investors buy for the longer- term and are driven by a rising gold price. They like to buy when the gold price is about to or has started to rise and can buy large volumes for brief periods.
  • Physical gold dealers, supplying the retail trade. With the ability to buy forward these professionals like to buy when they see gold prices at short-term low levels. They may then export to India or a similar large markets where they hold gold in inventories. They then sell to retailers as demand rises at any particular time of the year. They are there at most times of the year and are ongoing buyers, but rarely sellers.
  • Physical bullion buyers. These run from banks to individuals to funds in Europe and eastward. They behave in a similar manner to investors in gold ETF's. Sovereign wealth funds would also be included in this category.
  • Central Banks. These institutions follow long-term policies that will act either as buyers or sellers until their investment policies change. The Central banks of Europe has stated they were sellers since 1999 and still state their agreement to sell no more than a certain amount until September 2014. But individual central banks have stopped selling. It appears that all the signatories of this agreement have now effectively stopped selling.
  • Russia and China. We separated these two central banks, because they are the leading two that have, in place, a policy of long-term buying. Russia has targeted gold at 10% of their Reserves, while China [with no set target percentage] has been buying gold for six years or more. In our view, we believe that both nations are buying locally produced gold as well as additional gold in the 'open', international markets. To maximize the quantities they buy, they target volumes of gold, not prices at which they buy. It makes sense for them to set price limits and wait for the offer of large amounts of gold to be bought persistently over a long period of time. This way, in one month they might buy 14 tonnes, the next 18 tonnes the next 6 tonnes and so on. Russia reports the amount purchased, Chine reports amounts bought five years after the event.

Where will these buyers take the gold price to and when?

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Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2009 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Julian DW Phillips Archive

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