Manipulation, Anyone?

Coming as it did on the last day of the week at the end of a month, some might find the action that took place near today's close to be rather interesting.

From 3:54:28 pm to 4:00:02 pm, S&P 500 e-mini futures rallied 17.25 points on approximate volume of 356,300 contracts, or 19.3% of the total turnover from 9:30 a.m. until futures finished trading at 4:15 p.m.

Hmmm. Manipulation, anyone?

Comments

[golfersteve]

Long the market = illogical, irrational, and you're officailly insane given we're in a/headed for a depression
Short the market = lose your ass to GS boys

What's to do ? Pick up my ball and bat and leave the field and come back later, maybe.

[nevket240]

Welcome to the USSA !
The most corrupt country the Western World has yet produced.
regards

(it isn't just this example either. look at all the 3pm ramps that happen)

[Sandy Petitto]

GS and the SEC's modified circuit breaker rule has allowed the rally since the second week of April. Volume on SPY's for the last 10 minutes of trading was 46,399,682..... almot 20% of the entire days volume. How can traders stop them? expose them?

This is insanity. We need to take our government back. Those jerks are the ones pushing this.

(SEC website and check out April 8th artical that explains the Modified circuit breaker uptick rule)

[Dee]

Heli Ben has a revolt on his hands:

http://www.bloomberg.com/apps/news?pid=20601087&sid=ad3g0wmJFaZQ&refer=home

Ouch!

[John]

I've been watching the market for decades and I don't see anything unusual about today. Don't any of you remember last fall when the market DROPPED several hundred points in the last hour of trading? - I don't suppose anyone would care to find some statistics on total number of trading days in a year that the market moves a large amount in the last hour or so of trading. Why is it that people only scream manipulation when the market flies up at the end like it did today?

Please give specifics about exactly HOW or WHO is manipulating the markets and why now? Why not all last fall when it was tanking or earlier this year when the S&P went to 666.

[watcher]

Somebody bought like crazy, in the last 10 minutes, shares of Dow components CITIGROUP, JP MORGAN, CATERPILLAR, GEN ELECTRIC, and WAL MART.

The question is: WHO is "somebody"?

[OperationNorthwoods]

John,

Who said the market is just pushed up? The criminals at GS/Morgan/PPT will drive a company into the ground if that's the profitable way to play things.

As far as specifics go, the who is simple: the GS and Morgan crowd. The how includes index purchases, naked short-selling, and countless small matters, such as the use of the media or key assets in certain companies.

As far as why they didn't prop things up last Fall, well, that was part of the scam to drive Congress into giving total monetary control to the Fed cartel.

[John]

Watcher - Thanks for taking the time to reply to my post. I swear I'm trying not to be confrontational but where is the proof of this? I trust that you, as well as many other posters believe this is what's going on but I'm waiting for someone to come up with something along the lines of actual evidence rather than conjecture. . . . Does that make sense? Again, I'm not trying to be confrontational, I'm just not one to believe an opinion about something without actual proof . . .

Thanks again!

[Don]

There's something else that I find intriguing, and which you don't here much discussion about.

The March 13th low in the S & P, which is already an historic bottom ... was 666. That's more than a little creepy. It's almost as if this level was picked by someone as the crisis bottom, but by whom and for what purpose?

[Dee]

Oy that bloomberg story went poof!. Crap and I didn't copy it. Did anyone get it?

I agree Don. The 13th and 666. Very creepy.

[bamb]

On July 24, 1998, Alan Greenspan stood before the House Committee on Banking and Financial Services and said, “Central banks stand ready to lease gold in increasing quantities should the price rise.”

That is exactly what the gold carry trade consists of. It is the process in which central banks lease out gold bullion to be sold on the open market to suppress prices.

Here’s the thing: The large majority of these transactions take place on the London Bullion Market (LBM). This is an over-the-counter (OTC) market in which there is little-to-no transparency. A number of organizations have conducted studies on the amount of gold lending that takes place. Some of the organizations include Gold Fields Mineral Services (GFMS), the World Gold Council (WGC), and Virtual Metals (VM). As a result of the lack of transparency, the numbers reported in regard to gold leasing vary slightly from one another. For the sake of argument, I will be using the most conservative figures reported.

This may be the most significant piece of the gold bull puzzle that will push gold to $2,000 and beyond. I will dig in and share my in-depth research with you, starting with how the process is carried out, then going into the market impacts of the gold carry trade, and concluding with the future of the market for gold leasing.

How Does the Gold Carry Trade Work?

Gold leasing takes three different forms: direct leasing, central bank swaps, and forward hedging.

Direct Leasing

I am going to run through this in a simple step-by-step process. Central banks don’t directly take their bullion to the market and lease it out. They use a vehicle called a bullion bank (BB).

Although bullion banks are numerous, some of the more well known are Barclays, Goldman Sachs, JP Morgan, Bank of America, UBS, and Citibank.

The central banks loan gold to the BBs at a rate of approximately 1%. The BBs take it to the LBM and sell it on the open market. The BBs take the cash from selling the bullion and in turn buy Treasuries.

So if the story were to end here, the bullion banks would just walk away with a net 4% return. But it doesn’t end, because they only have the leased gold for a certain length of time. They eventually have to give the gold back to the central banks, but now they are at risk of price swings in a very volatile market.

The answer to their problem is to go long the futures market. Essentially, they buy futures contracts to hedge their risk. In other words, they secure gold for delivery at a specific price, on a specific date in the future. Once they buy their futures contracts, it doesn’t matter what the price action of gold is.

In a perfect scenario, after the gold lease rate and price risk hedging, the bullion bank will walk with a modest 1–2% gain. The central banks will receive a return on their gold, keep the price of gold suppressed in order to keep real inflation suppressed, and get a boost in the demand for Treasuries. It’s a win-win situation for both the bullion and central banks.

Gold Swaps

Gold swaps are very similar to direct leasing. The difference is that gold swaps usually take place between two central banks. These types of transactions occur in two different forms.

The first is very simple. Essentially, two central banks swap gold reserves and then carry out the action of direct leasing of each other’s gold. The reason for this is that it just adds more confusion for the accounting of the leased gold.

The second is slightly different. This transaction occurs when one central bank exchanges gold for currency with another central bank. Like gold leased to the BBs, a future date and price are set for the redelivery of the gold back to the initial central bank.

The IMF says of this type of gold swap, “Typically, both parties will treat the transaction as a collateralized loan.” Or the CB leasing the gold doesn’t remove the gold from its balance sheets, and the CB receiving the gold doesn’t add it to its balance sheet. As far as accounting goes, no transaction has even taken place. The gold market is flush with new supply and would beg to differ that a transaction hasn’t taken place.

In other words, the CB receiving the gold loans it out on the market while it is still on the balance sheet of the initial central bank. One might refer to this practice as double-counting the reserves.Forward Hedging

Forward hedging is a form of gold leasing practiced by gold producers. The most famous of these is Barrick Gold, but there are many other producers who partake in forward hedging.

Forward hedging is when a producer presells gold on the spot market that has yet to be extracted from the earth. Most of the buyers want delivery of physical gold. So the producer leases gold from a CB, with the idea that it will pay the CB back with future production.

The problem is that these producers often sell their gold at suppressed prices on the spot market and they often sell more gold then they can produce.

On the note of Barrick, did I mention that it has recently been sued for price fixing and price manipulation of the gold market? Barrick and its bank JP Morgan have admitted to price manipulation and that they have worked with the central bank in this process.

Implications of the Gold Carry Trade

The gold carry trade has one main goal, and that is to add huge amounts of supply to the market in order to suppress the price of gold. Although there are other added bonuses along the way for the participants, the main reason for suppressing the price of gold is so the world doesn’t know the true value of worthless fiat currencies.

I would like to use some statistics to inform you as to the implications of gold leasing on the market for gold. Remember that I will use the most conservative numbers I could find.

In 2005, according to GFMS, gold leasing was estimated to have added 2,970 tonnes of supply to the market. In that same year, jewelry demand was 2,700 tonnes, world investment was 736 tonnes, and official central bank sales were 656 tonnes. Over the last 10 years, average mine production has run at an estimated 2,500 tonnes per annum. So the amount of leased tonnage exceeded all of the above-mentioned statistics.

Remember that central banks are not required to report at all on their transactions of loaned gold. So those 2,970 tonnes of extra supply were also counted in central bank reserves, or they were double-counted.

Central banks are the largest holders of gold tonnage, estimated to have around 30,000 tonnes. So they have loaned out approximately 10% of their total reserves.

How Long Can This Go On?

If you are looking at this in a practical way, you probably came up with the exact questions I did when I first started to read about the gold carry trade. When the gold enters the market via a BB, it all has to be bought back at the end of the lease contract. Doesn’t that put us back at square one with the amount of supply in the market negating any long-term implications?

The answer would be yes if there were just a couple of transactions. But there are several gold leasing contracts signed every day. All the supply is constantly being recycled in and out of the market and there is always fresh gold being leased into the market.

The length of a gold leasing contract can extend anywhere from one month to several years. This allows for the central banks to analyze these markets and best time their transactions and how long they will be, in order to suppress the price of gold.

So can this go on forever? Definitely not, and the implications of the gold carry trade coming to end will bring with it the most spectacular price actions ever seen in the gold market.

Let me tell you why the gold carry trade will not be sustainable forever. It’s very simple. All we have to do is look at the step where bullion banks have to buy back the gold sold on the spot market in order to pay back the central banks.

In order for this to be profitable for the BBs, the price of gold has to experience very limited gains during the time the gold is leased out. Or the price of the futures contract purchased by the BB has to be near enough to the price of gold when the bullion bank initially unloaded the leased bullion on the spot market. If the price of gold heads too high, it will not be profitable for BBs to partake in being the intermediary for such transactions.

All we have to do is look at the fundamentals for gold and we realize very quickly that the price of gold is definitely going to go higher one way or another, which will disallow future leasing in the gold market. You are probably well aware of the fundamentals: Every one of the major economies of the world printing money at a rate of over 10% per annum; the Mount Everest of debt from both budget and trade deficits; an inevitable recession here in the U.S.; the inability of the U.S. to raise interest rates, due to the complete mess of the housing market; rising energy costs putting downward pressure on the U.S. dollar and increasing inflation in every other aspect of the economy; mine supply at historic lows; a possible U.S. policy that would include trade protectionism against China; and, last, but definitely not least, a U.S. Federal Reserve whose main goal is to create credit by keeping interest rates below the rate of inflation (negative real interest rates).

Fundamentals are fundamentals, but there has been some action in the International Monetary Fund (IMF) recently on this very topic. Before I go any further, I just want to let you know that I don’t trust the IMF any further than I can throw it. And I don’t really expect any timely results from its actions. What is important is that the notion of the gold carry trade is coming forefront. Here’s what’s going on in the IMF.

Hidetoshi Takeda of the IMF’s statistics department recommended in early 2006 that all loaned gold be excluded from the central bank’s reserve figures. The IMF’s committee on reserve assets considered Mr. Takeda’s paper and came to the conclusion that a new definition of gold reserves excluding loaned gold needs to be officially documented. It also stated that unallocated gold loans should be disallowed. Nothing recommended in Mr. Takeda’s proposal was rejected. Full details of his report can be read here: http://www.imf.org/external/np/sta/bop/pdf/resteg11.pdf

The IMF continued its research regarding the issue and made another report with a similar conclusion. What does this all mean? Well, the IMF is currently working on another official proposal to be worked through the system making it necessary to make all loaned gold public information and to exclude loaned gold from reserve accountings. The IMF currently “encourages” central banks to record gold loans/swaps, but does not “require” the recording.

If everything goes perfectly, and I don’t believe that it will, we could see these actions implemented by the IMF at the end of 2008. As I said, it seems like a far reach, but the more people become aware of the gold carry trade, the sooner it will come to an end. And I don’t like to put my bets on the IMF to make progress with in the accounting of leased/swapped gold, but it DOES have the power to change how central banks report the reserve holdings of gold.

The eventual unwinding of the gold carry trade, whether it be from the IMF or just market fundamentals, will bring amazing action to the gold market. Remember that gold leasing didn’t begin until after the precious metals run from 1979–1980. For the bull market in gold to continue, it will need to overcome the barriers set by central banks’ leasing of gold. But when this does occur, the floodgates will open and we can expect to see the price of our favorite yellow metal skyrocket.

Special Report: 5 entirely new ways to play the gold trend. Including one hidden way to snap up gold for less than one penny per ounce… Read the entire report here.

[Sandy]

John,

If you've been trading the market for years, then over the past 6 weeks you should have noticed the charts freezing on you computer. You should notice that many institutions are sitting on the sideline and that in the month of April GS trading 1.2 Billion double that of Credit Sussie at 662 million. Artical in New York Post explaing the info and data. Google New York Post and in their search type Goldman Sachs to find the artical.

Also the following link should explain the rule the SEC has been testing. This DID NOT make the news. Why didn't they just simply put back the uptick rule? Sorry, but I shall answer this for you, because it would not fit their agenda. http://www.sec.gov/news/press/2009/2009-76.htm

I'm not trying to be confrontational here, but for a man with YEARS of experience trading you haven't been doing your homework. Are you drinking the coolaide?

[Alexandra]

I noticed similar patterns elsewhere. In IWM and SPY trading on May 26, 2009, for example.
However, that was in the morning shortly after opening between 9:30am and 10:00 am
More here:
http://zeropointfield.wordpress.com/2009/05/26/iwm-and-spy-are-up-how-come/

But your question about manipulation is somewhat moot, the whole game of trading IS about manipulation for profit. In other words he game is rigged and has been for a long time.

[tony carangi]

It's not manipulation if it's not intentional. I'm sure the poor specialist just slipped and accidently turned the bid dial way up trying to catch himself.

[Sandy]

Alexandra,
Thanks for the info/charts, but that day made sense. That was the day we got a better 'consumer confidence report'. Friday did not make sense at all. I've never seen Investors stay long over the weekend before a major company goes bankrupt. Also we were sideways all day long until the final ten minutes. Almost twenty percent of the days volume was traded the last 10 minutes. I know, people will say GM was priced in. That is nonsense! GM bankruptcy was not priced in the market in January, Feb. and March with current unemployment rates and current housing declines (new construction and forclosures). Current numbers were not part of the market then. Nor was the out of control spending by the government which is now creating inflation. Remember gas and food prices last summer. That's when main street started feeling the recession.

Bamb's information about Gold really explains so much more. Thanks Bamb! Is there a way to discover when institutions need to hedge their gold positions?

[Sandy]

Alexandra,

One other bit of info for you. On the 26th 5 institutions traded approx. 14,200,000 for the day. JPM being the highest of 5,000,000. That made sense due to the 'consumer confidence report.' However, Friday's action was 48,400,000 on the SPYs in the last 10 minutes. That would equal 9,680,000 per the same five institutions. That's almost double what JPM did all day on May 26th.

[Alexandra]

Sandy,
I guess the main point I was trying to make was that a handful of players have an extreme influence on prices, i.e. with collusion they can drive up or down the value of any security that is being traded, as well as the market as a whole.
The stock exchange "game" then is anything but fair, and the market is not efficient, it is skewed.
This has been going on for years and is not limited to the NYSE, it is also a pattern elsewhere.
For example the Bolsa Commercial in Argentina had a good month in May, was this really due to improving fundamentals?

http://zeropointfield.wordpress.com/2009/05/30/merval-had-best-month-in-three-years/

The rally there was driven by financials and oil, both not exactly a free-market. However, I haven't seen the detailed trading data to see whether there are such strange 'rigging-patters' or 'intervention-patterns' or 'invisible-hand-patterns'.

What then is actually reflected in these prices that are set by stock exchanges? Certainly not fundamental values based in reality. It almost looks more like a price setting mechanism driven by the few 'usual supects' who pick winners and loosers.

That would not be what I call a free-market and it would be a pretty awful discovery.

[sr]

Gs is selling stocks to the little investor and when they will be invest 100% they will sell short the same stock and clean them another time, it is part of their business. And the plunge protection team exist since 1987, for sure the market is manipulated. Believing the contrary is stupid! With 600 trillions in derivatives the banks are fighting for their survival, and they will destroy USA in the process, may be it is their real motive!