Big jump in gold sale spurs manipulation talk
By Moming Zhou
Some analysts say only
manipulation is government's attempt to take
Recent heat from Congress and regulators, along
with public speculation, over whether commodity
prices are being manipulated has also reached
gold pits, where the debate was stirred by a
surge in bets last month that gold prices would
"Congress is already investigating allegations
of manipulation in the oil market, and it seems
likely that it is only a matter of time before a
similar investigation will be required in the
precious metal markets," said Mark O'Byrne,
executive director at Gold and Silver
Three unidentified U.S. banks held 86,398 short
positions, or bets that gold prices will fall,
in the COMEX gold market as of Aug. 5 -- 10
times more short positions than a month earlier,
a government report showed.
The report by the Commodity Futures Trading
Commission, which regulates U.S. futures
markets, also showed short positions held by
three U.S. banks in silver futures had increased
more than four times during the same period.
"The data in the bank participation report is so
clear and compelling that it is hard to conclude
anything but manipulation," said Theodore
Butler, a precious metals analyst, in a note.
The sudden jump in short positions coincided
with a slide in silver and gold prices, which
fell $12.30 an ounce in July and another $89.20
in August, their biggest monthly loss since at
least 1984, according to Factset.
Manipulation vs. speculation
Taking a short position, even large amounts,
however, doesn't equate to manipulation, which
would imply collusion between several big
players to influence prices one way or the
But the fact that three big banks were singled
out in the CFTC report is nothing new. The
regulator's reports always show the largest
three players in futures markets in any given
"One can take any data and make it suit their
argument," said Jon Nadler, senior analyst at
Kitco Bullion Dealers.
"The theory that the market is somehow
sinisterly manipulated, especially as it comes
at a time when U.S. regulators are keeping a
keen eye on the goings-on in the commodities and
financial markets for just such type of
evidence, is simply ludicrous and totally out of
touch with market reality."
The talk of manipulation in metals markets
follows similar allegations that crude oil and
agricultural commodities prices were bid up by
speculators, and were not the result of
fundamental demand and supply situations.
As oil surged this year and almost reached $150
a barrel in early July, while food prices also
kept on rising, cries grew louder in Congress
that something had to be done.
The CFTC took steps to stamp out "excessive
speculation" in the oil markets, while Congress
also held numerous hearings and investigations
into other futures market.
In July, the CFTC charged Dutch company Optiver
Holding BV with manipulation of crude oil and of
other energy futures. In at least five out of 19
attempts, the defendants successfully
manipulated certain energy futures contracts,
causing artificial prices, the CFTC alleged. See
Of oil and elections
Some analysts say the surge in oil and gasoline
prices earlier this year caused many worries in
Washington, where all eyes were already turned
toward the presidential elections in November.
"My gut feeling is that the Republicans wouldn't
mind taking oil back down under $100 before the
elections," said Paul Mendelsohn, chief
investment strategist at Windham Financial
Mendelsohn said he believes the government has
tried to make the U.S. economy, oil, and markets
appear in better shape and also to temporarily
curb the immediate effects of the slumping
housing market, of bad home loans and of the
In July, the Securities and Exchange Commission,
the stock market regulator, limited so-called
"naked" short selling of shares in Fannie Mae (FNMFannie
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FNM) , Freddie Mac (FREFreddie Mac
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FRE) and 17 other financial firms. See related
The measure temporarily halted some financial
stocks from falling further. But when the rule
expired earlier this month, most stocks covered
by the moratorium started dropping again. See
Jeffrey Saut, market strategist at Raymond
James, also believes that the commodities bull
run may have run out of steam, even if only
temporarily, because of the upcoming elections.
"There is a lot of nervousness, especially in
energy pits, about the efforts underway to
propose wrong-footed legislation from
politicians who want to bring down the price of
gasoline," said Jeffrey Saut, market strategist
at Raymond James.
"I don't believe we have a speculative bubble,
but these moves are going to drive a lot of hot
money out of commodities pits between now and
the elections," he told MarketWatch back in
Many analysts also point to fundamental factors
that helped bring down prices in commodities
over the past month and a half.
"There is indeed a rational explanation for the
decline in the price of gold and silver: the
dollar has staged one huge rally, and
fundamentals suggested the dollar should rally,"
wrote Mike Shedlock, an investment advisor at
Sitka Pacific Capital Management, in an online
blog post on Wednesday.
Dollar-denominated commodities, such as gold and
crude oil, tend to fall when the dollar rises,
as the commodities become more expensive to
purchase for holders of other currencies.
The dollar has rallied against the euro and the
British pound as European economies showing
increasing signs of slowing down.
A slump in the dollar in the first half of this
year, as the credit crisis flared up and the
U.S. economy slumped, had helped push gold and
silver prices to historic highs.
Banks and markets
As for the banks involved in the recent short
selling of gold, they are only market makers,
taking orders from large money players, such as
hedge funds, said Jeffery Christian, founder of
commodities research firm CPM Group.
Banks "stand to buy or sell the commodities,
taking the other side from other people or
institutions entering a market," said Christian.
Gold and silver prices slumped recently "because
investors, particularly short-term,
technically-oriented funds, were selling."
Short-term funds tend to use over-the-counter
channels to trade gold and silver and their
positions were therefore not recorded by the
"What you have here is the footprints of hedge
funds exiting the commodities markets en masse,"
said Kitco's Nadler.
Banks, playing as a market maker to buy
contracts from funds, hedge their risks by doing
opposite trading in the futures market: They
sell, or short, gold and silver contracts in the
That explains the recent jump in banks' short
positions, said Christian.
"Banks are the passive agents usually in
markets," Christian added. "They make the
markets, and take what is coming at them."