Few analysts are watching the evolution of the COMEX/LBMA markets as closely as Jesse (Jesse's Café Américain). Both markets are where the gold spot price is determined and a lot of paper gold contracts and physical gold movement are involved. So it’s important to watch both markets waiting for a potential default event that would start to free the determination of the gold price from manipulation. In this interview with Jesse, we discuss the issues at the very center of the gold market today : COMEX/LBMA manipulation, default event and how investors should react to the long correction in precious metals.
Fabrice Drouin Ristori (FDR): Reading your blog and market comments, one can see you spend a lot of time analyzing what’s going on in the COMEX and LBMA markets. Can you explain why you think these two markets are key markets to analyse in order to understand gold ?
Jesse: Prices for gold globally are still being set largely by the COMEX and the LBMA, despite the remarkable shift in physical markets and bullion buying to the developing countries, especially those in the Mideast and Asia.
This may not make sense, and I have noted this many times, as ‘the tail wagging the dog.’ How can what are highly leveraged markets, paper markets I call them, that are dominated by speculation and short term transactions and wild price volatility, be setting the prices and thereby the resource allocations for a global market which has to some extent grown beyond them.
This is the symptom of the changes which we have been seeing in the evolution of the international monetary system. It has become outmoded to the point of instability, as the forces of the old Anglo-American banking cartel attempt to maintain the status quo in a system that no longer works.
As the physical exchanges continue to grow I am adding them into my thoughts, very actively. I expect the changes in the monetary system, which I have called the ‘currency war,’ to be driven by their countries and by them. It is the old story of thesis and antithesis. The synthesis will be a new monetary system globally. What that will be I cannot yet know, but I think we can know where to look, and what to look for.
FDR: You are among the few gold analysts who have been warning about a manipulation in the gold and silver markets for a long time now. Can you explain how it operates specifically on the COMEX/LBMA ?
Jesse: Thank you for the compliment, but I am hardly the primary one and certainly not the first. GATA and Ted Butler among others have been doing quite a bit of the ‘heavy lifting’ in sounding the alarm about irregularities in these markets. And I think that they are in a better position to explain the mechanics of it, having examined the market structures in great detail.
I first became interested in gold, and later in silver, around 1999 as a result of an intense study of the international monetary system. I had always enjoyed economics, and had managed a multi-billion dollar business unit that spanned almost 100 countries, so I became much more aware of the international currency markets and trade issues than most Americans certainly.
It was in this study that I first became interested in gold because one cannot understand money and international trade historically without understanding gold. And in another intense study of financial crises and bubbles, prompted by my own ringside seat at the tech bubble at the end of the twentieth century, I became intrigued by the role of money and paper and their interactions with real things and people.
Most manipulations of markets are control frauds by their nature, and contain all the usual characteristics of fraud. There is opacity, because frauds thrive in the dark, and on the asymmetric availability of information. There are always a few and very powerful insiders who have the ability to know more than others, to have access to privileged information, and to be able to manipulate the rules and the market mechanisms for their own purposes and advantage.
This is the heart of it. Everything else is detail, which you can surely find out in any amount of depth you may wish. But anyone who is watching these markets closely can no longer miss it unless they are naive or willfully blind.
FDR: In view of this manipulation and the objective it serves (protecting the current fiat monetary system), should long term gold/silver investors be worried about the more than two year correction we have been experiencing so far ?
Jesse: Corrections are all a part of a bull market. I would suggest that people not hold over large positions or use leverage if they are worrying. That is often a sign that they have not come to terms with what they are doing, and have not taken a position that serves them and their needs suitably. But to be direct, based on my own portfolio and positioning I am not concerned. My investment horizon is very long term. I am playing the turn of a page in history and these only have the appearance.
FDR: Do you consider the bail-in risks (bank account /pension funds seizure) as very likely to manifest in the coming months in Western countries ?
Jesse: I cannot say how likely because that is contingent on human decisions that have not been made. But it goes without saying that the risk of ‘bail-ins’ is much greater now than it was even a few years ago. We have the example of both Cyprus and even MF Global, and more broadly the entire bailout process engaged in by the US and the EU in response to the financial crisis. That was the beginning of the bail-ins of the public to support the bankers.
FDR: A lot of investors only focus on gold as an investment. Would you agree that investors know it’s the best way to protect themselves against what’s coming (inflation, bail-in), but don’t fully realize that, by investing in physical gold/silver, they are actually helping a move back to a sounder monetary system, which benefits societies in general ? Would you consider gold as a « political » investment, a vote against a corrupt monetary system, as confirmed by the recent scandals (LIBOR, exchange rates manipulation) ?
Jesse: I can see where some might see it that way but I don’t, and would prefer that it not become so. I liken gold to a refuge, a place where an individual may seek to protect some of their wealth from the uncertainty of uncertain times, which is what all times of major change become as you know. I think the political battles will be conducted on the world stage by very powerful players, and it would be better for the average person to ‘keep their heads down and stay out of harms way.’
FDR: It’s hard to make any forecast in the precious metals markets, but what are you looking at that would signal an end to the manipulation in the gold and silver markets ?
Jesse: I think that the tension between the paper markets and the physical bullion markets is growing little by little, almost daily now. And it has reached levels that are noticeable.
A few saw the financial crisis of 2008 coming, but predicting when it would arrive was quite a challenge. That is because imbalances can grow and grow, seemingly without end, and make one wonder if they are real. But as they grow, there comes some tipping point, that causes that imbalance to topple.
How can one predict when that tipping point will occur ? Many try but I believe it is not possible. As the imbalance grows, the power required to enable a tipping point becomes less and less, until at times something almost inconsequential can trigger the avalanche of consequences.
Sometimes it is the outbreak of war, sometimes it is the failure of a single banking institution, sometimes it is a piece of news that flashes across the public consciousness like lightning across the night sky.
What I can say is that we are now seeing some odd things happening in the gold and silver markets, increasing volatility and concentrated actions amongst a few powerful players. There is a struggle going on, and when something will happen to cause this tension to slip cannot be predicted precisely.
Those who claim to predict it follow roughly the same pattern, they forecast the even over and over and over, and when it does happen they say ‘see I did predict it.’ And all other past incorrect predictions are forgotten. People fool themselves this way in the market every day with their ‘systems.’
Watch for a break in the market, the failures to deliver. There will be little ones, here and there, and the powerful will seek to ‘fix them’ like plugging holes in a dike. Their supporters and representatives will actively downplay them, and ridicule those who sound any concerns over it. And for a while they will be in control, because the truth remains hidden and events will be difficult to predict.
But at the end of the day, the truth will come out, and things will make sense again, always. And then these same ones will say, ‘Who could have seen this coming ?’ This is how it always is, if you look back over the history of bubbles and crises.
FDR: I would like to thank Jesse again for taking the time for this interview.
Welcome to Jesse's Café Américain - These are personal observations about the economy and the financial markets. In providing information, I hope this allows you to make your own decisions in an informed manner, even if it is from learning by my mistakes, which are many. My comments are intended to be a reflection on general macro financial and economic events and trends.
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