The Phaserl


The Illegitimacy of Comex Pricing

by Craig Hemke, Sprott Money:

We’ve known for years that the Comex derivative pricing scheme was a fraud, where market-making Bullion Banks create unlimited amounts of paper gold in order to soak up speculator demand. Then these same banks shuffle warrants and warehouse receipts back and forth to create the illusion of physical delivery. But now, even the price “discovered” electronically on this exchange has become completely useless.

Look, I recognize that we’ve plowed this ground so many times already that you probably think that we’ve run out of things to write about. Let me assure you that that’s not the case and that there is a serious purpose behind this post. First, though, please be sure to review some of the work we’ve done in the past on the subject of Comex illegitimacy. First, here’s an article on the inherent unfairness of the ability of The Banks to simply create new derivative contracts from thin air whenever speculator demand for paper gold increases:

And we’ve recently spent considerable time documenting the fraud of Comex “delivery”. Here are two links that summarize and detail the problem:

This circular charade of delivery continues in February. Recall that back in December, the proprietary (House) account of JP Morgan stopped or took delivery of 2,021 of the total 2,073 gold contracts that were allegedly settled. The primary issuers of this gold were the House Account of HSBC at 818 contracts and the House Account of Scotia at 699.

And what has taken place so far in February? The House Account of HSBC has stopped or taken delivery of 1,181 contracts while the House Account of JPM has issued 651 back out? Do you see how this works?

So, we’ve established that:

  1. The Comex, by design, is inherently unfair as the market-making Bullion Banks have the unfettered ability to issue as many paper derivative contracts as “the market” desires whenever there is speculator demand.
  2. The Comex can only claim legitimacy in discovering price if there is actual physical delivery made at said “discovered” price. However, there is no physical delivery at Comex. Instead, it’s just a bi-monthly circle jerk where Banks make and take delivery on a rotating basis. Therefore, the only price discovered is the price of a Comex contract, NOT the price of gold.

The object of this post is to draw your attention to the third spoke of Comex illegitimacy…the price itself.

Much has been written over the past three weeks about the “renewed bull market in gold”. Price began the year at $1061 per ounce and it reached an intraday high of $1263 last Thursday. That’s a 19% move in six weeks and certainly something that all of us in the gold community should be excited about. However, since this price has been found in large part through trading on the Comex and other electronic exchanges, is this really the price of gold?

Yes, there are physical exchanges of metal that have been made all over the planet based upon this Comex price. Right now, you can visit any of our site’s sponsors, affiliates and advertisers and they’ll gladly sell you an ounce of gold at the current Comex price plus a small premium. But, again, is the price discovered on Comex really a price of gold, itself? The point of this post is to contend that it’s not.

Here’s just a sample of a few headlines this morning. Gold has fallen back to near $1200 and, as you can see, there’s much hand-wringing regarding what may happen next:

The financial media, financial analysts and brokers will all tell you that the Comex derivative price of goldreally is a proxy for actual, physical gold. The news articles all reference this price and contend, to varying degrees, that this price is influenced by:

  • “Investors” seeking the safe haven of gold
  • Traders sensing the growing momentum of the trade
  • Hedge funds buying or selling based upon technical factors

Media, analysts and brokers all watch the “price” rise and fall and reach conclusions regarding the overall market and where it’s seemingly headed. “Is this a bull market or a bull trap?”, for example.

But what if I could show you that the price discovered on the Comex and other derivative exchanges isn’t influenced by “investors” at all? What if, instead, this “price” was simply determined by the whims of the HFT computers…machines that take their trading cues from signals completely unrelated to the fundamentals of gold, itself? And what is the single most important trading cue for the HFT algos? Changes to the relationship between the U.S. dollar and the Japanese yen, commonly referred to as the trading pair USDJPY.

Well, we’ve written about this before, too. We first noticed this phenomenon back in September of 2014. Here’s just one example of what we wrote back then:

ZeroHedge soon picked up on this, too, and they wrote about it in November of 2014:

Our friend, Paul Mylchreest, noticed the same correlations and he added this terrific piece in December of 2014:

And it is this correlation that has driven the “price” of gold higher in 2016, nothing else. Oh sure, it’s nice to hear anecdotal stories about increased physical demand and “lines around the block”, but those fundamental factors have had little to no effect on “price”. Instead, it’s all about the rapidly increasing value of the yen or, expressed inversely, the rapidly declining value of the USDJPY.

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