Deutsche Bank has agreed to pay a fine to end a lawsuit from a group of investors accusing it, along with other banks, of manipulating precious metals prices.
Deutsche Bank has also agreed to provide information on other banks having participated in the manipulation, so we should expect more revelations to follow.
This news is a de facto acknowledgment of direct manipulation of gold and silver prices by several large banks.
This may give us an idea about the topic of the exceptionally urgent meeting at the Fed at the start of the week...
Deutsche Bank has been at the center of all worries for awhile, primarily due to its enormous derivatives portfolio and, secondly, because its stock decline mirrors almost exactly that of Lehman Brothers before it went bankrupt.
Deutsche Bank sur le même chemin que Lehman Brothers pic.twitter.com/0iCJpWTeIr— Fabrice Drouin (@FabriceDrouin) 7 avril 2016
As was the case with the LIBOR manipulation scandal, the participation of several banks in the precious metals manipulation scheme is being confirmed. Anyhow, manipulating LIBOR – thus interest rates – makes no sense without intervening with gold prices because, in theory, in a free market, low rates are indicative of inflationary risks and, thus, a higher gold price.
These revelations are that much stunning in that the American regulator, the CFTC, had ended an investigation concluding there was no price manipulation in 2013. This development should potentially lead to a re-opening of this investigation.
Spot prices haven’t yet reacted to this news today but one may wonder if the beginning of gold and silver panic buying will start to materialise, partly due to investors becoming aware of price manipulation, but also and above all, due to the opening of the Shanghai Gold Exchange on April 19, this coming Tuesday.
Contrary to the COMEX and the LBMA, the Shanghai Gold Exchange requires participants to deliver beforehand to the exchange the amount of physical gold that will be negotiated. Thus, this has nothing to do with a market where “paper gold” certificates can be traded.
So the Shanghai Gold Exchange is a purely physical market. Consequently, there should then be two different spot prices: the Western spot price and the “Chinese” one, the latter being higher, since based on physical gold (meaning higher costs and premiums than for ordinary paper contracts).
So the question is: how high will the SGE fix the physical spot price?
If they fix it higher arbitrage will then come into play and will literally drain the physical gold from the COMEX and LBMA vaults towards Asia and the SGE.
Let’s understand this well: If the Shanghai Gold Exchange fixes the physical spot price 10% higher than the Western spot, for instance, massive buying will take place on the LBMA and the COMEX and investors will want immediate delivery in order to sell it 10% higher on the Shanghai Gold Exchange without any risk. This could effectively drain the physical gold these two markets are supposed to hold.
Having two different spot prices will therefore render the Western spot obsolete and probably put an end to the COMEX paper market, as well as the LBMA’s, where the majority of participants do not supply the physical gold equivalent to the volume of contracts being traded. A default on redeeming those contracts by physical gold will signal the end of those “paper” markets. This is the event the physical gold community is waiting for after the launch of the Shanghai Gold Exchange this coming Monday, April 19, 2016.
We can guess that the gold miners will quickly decide to sell their production at a higher price on the SGE in lieu of the “physical” London market (LBMA).
It would seem., also, that the CME, that controls and organises the COMEX market in the United States, is anticipating a major problem since an account has been opened directly at the Fed in its name in order to have better control of the funds deposited by its members (large banks) for taking speculative positions. The CME seems to be preparing for a major default of one of the largest participating banks... we could bet on Deutsche Bank defaulting, since it owns the largest derivatives position (short positions on silver are considered as derivatives).
Let’s recall that India, the largest consumer of physical gold in the world, has recently started to import gold again after the end of the jewellers’ strike, which should help push the gold price higher.
Let’s keep an eye open on these phenomena converging in the weeks to come, because the “liberation” of the precious metals spot prices is taking hold day after day.
Fabrice Drouin Ristori
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