Harvey Organ has been analyzing the bullion markets closely for decades. The quality and accuracy of his work is respected enough to have earned him an invitation to testify before the CFTC on position limits for precious metals back in 2010.
And he minces no words: Gold and silver prices are suppressed. With extreme prejudice.
In this detailed interview, Harvey explains to Chris the mechanics of how he sees this manipulation occurring, why he predicts this fraudulent pricing scheme will collapse soon, and why it's critical to be holding physical (vs. paper) bullion when it does.
The real suppression of the metals started in 1988. That’s when the leasing game started and was invented by J.P. Morgan.
These guys would go around to the mining companies and say, Listen, I’m going to pay you for your gold in the ground and I will sell it. You just pay me as you bring it out. So that was cheap financing to the miners. Barrick, the biggest mining company of them all, went in on this and it financed a lot of Nevada projects.
Once the leasing game came, the actual selling, the extra selling, suppressed the price. In the first five years, it started at maybe three hundred to four hundred tons. It didn’t start to get really bad until probably ’97-’98 with the Long Term Capital affair. And that’s when the leasing started to become around maybe 1,000 tons of gold. And it hasn’t stopped.
And silver is the same.
And that’s why you've had a long-term, 20 years of suppression of the metals. The problem now is that the physical is now gone. Where is going? It’s gone from West to East.
A lot of people don’t know that China used to refine close to 80% of the world’s supplies of silver, because it’s very toxic. Up until probably 1985, the Chinese handled 80% of the world’s refining of silver. Now they're down to 40%, but that’s still a major part of China’s industry. They are keeping every single silver ounce they refine, and gold. They are keeping it for themselves; their reserves are rising (though they don’t tell exactly). Two years ago they went up to 1,054 tons and I can assure you it’s probably triple that now. These guys are not stopping. Just like they are not stopping in oil. They know what the game is, and they are slowly taking all their U.S. dollars that are on their shelf and converting them to gold, oil, copper – anything that’s real.
And the game ends when the last ounce of gold has left London – not COMEX, because in a nanosecond it will come back to here.
The big problem in London is that their derivatives on gold are about 50 to 100-to-1. That’s the amount of derivatives. So if I take out that 1 ounce, the balloon around it – the derivative – is getting bigger and bigger and bigger until it’s ready to totally implode.
And that’s what you are seeing now. So right now, people are going to say: How high can it go? And I’m going to tell you: You are going to go to sleep on Thursday night and gold may be $1,670. And then you wake up the next day and it’s going to be a banking holiday. And gold will be $3,000 bid, no offer. No offer – and it will be a banking holiday. Because there will be a failure to deliver.
You’ve got to have physical coins or bars. If all you have is a piece of paper – that’s all it is! It will just blow up in smoke.
So just go buy your physical and be thankful that you are getting it at a cheaper price today.
Click the play button below to listen to Part I of Chris' interview with Harvey Organ (runtime 32m:36s).
Harvey received his Bachelor of Science degree in 1970 and an MBA in 1972 at McMaster University, majoring in finance. It was during this time period where Harvey got exposed to the derivative market that was just starting on Wall Street. Harvey has been trying to expose the fraudulent manipulation of the gold market ever since the "Long Term Capital" downfall in 1998. It has been Harvey's duty to share what he knows and expose the fraud and educate the intricacies of of the gold and silver paper and physical markets, which he does through his website Harvey Organ's Daily Gold and Silver Report.
Our series of podcast interviews with notable minds includes:
My hat is off to Adam and Chris for bringing us such an outstanding contrast of guests. The most important skill for investors to develop is their ability to both listen with an open mind, while at the same time being skeptical and critical. Learning to differentiate between concrete, logical, fact-based arguments and emotionally charged bullsh*t - and correctly identifying each - is a learned skill, and it takes a lot of work to perfect.
Regulars on this site have, in just 7 short days, been treated to both the well-reasoned arguments of a truly accomplished and well-spoken precious metals expert with well researched views supported by facts and evidence (Paul Tustain, featured last week), and have now also been exposed to a completely transparent charlatan, who asserts emotionally charged but factually hollow arguments that categorically lack credibility (Harvey Organ, in this interview).
I suggest readers listen to both podcasts again before reading further. The expose that follows debunking Mr. Organ for the charlatan he truly is will have less value if you just read it. You’ll learn a lot more by first listening to both podcasts and keeping score yourself. Listen for assertions of apparent fact, and see which of the claimed "experts" supports his arguments with logic and reason, versus nonsense and emotional innuendo. Develop your own skill at differentiating well reasoned analysis from utter nonsense, then compare your own notes to mine to see whether you picked up on the same things I did.
This interview was particularly compelling because Mr. Organ never once - so far as I was able to tell - ever supported a single thing he said with shred of evidence or objective data. His arguments were persuasive to be sure, but they were emotional statements that lacked the support of evidence. For those who have studied precious metals markets, they were also just plain inaccurate in many cases. I was only willing to listen once, and thought I would note any factual inaccuracies to myself on a Post-It sticky note. By the end of the first half of the interview, I had no less than 7 sticky notes full of notes on the most absurd things Mr. Organ said. I couldn’t keep up with all the BS because it was coming faster than I could write, but I’ll outline just a few highlights below.
Please forgive the fact that the quote mechanism inserts the word "wrote" after the attributed author. Where you see "Harvey wrote:" below, please read it as "Harvey said:". Please also excuse the fact that I was scribbling notes as fast as I could, and cannot reproduce exact word-for-word quotations. But you’ll get the gist of it.
[quote=Harvey]The Banking Cartel raids [the precious metals markets] to contain the price
…
They Raid and Fleece the longs out of the COMEX[/quote]
Ok, those are some pretty strong allegations, and they certainly ignite the imagination of anyone whose general disposition is to distrust government. But where’s the supporting arguments? Why would the banking cartel want to suppress the price, and how do they achieve that? Contrast to Paul Tustain, who made very clear statements about how the AM/PM London fixes can be and are manipulated by bankers who seek to profit from the general trend of metals movement from west to east.
I think the key here is to understand that charlatans like Mr. Organ and GATA strive to appeal to investors’ emotions, rather than positing logical arguments and/or citing verifiable facts. But why do they do this? What comes to my mind is a very impressive and pertinent book, The True Believer, written in 1951 by Eric Hoffer. I cannot recommend this book strongly enough to investors who wish to hone their ability to separate cogent logical argument from irrational appeals to our emotions, which is what people like GATA and Mr. Organ are all about. Here’s a summary of Hoffer’s perspective from Wikipedia:
[Quote=Wikipedia]
Hoffer believed that self-esteem was of central importance to psychological well-being. He focused on what he viewed as the consequences of a lack of self-esteem. Concerned about the rise of totalitarian governments, especially those of Adolf Hitler and Joseph Stalin, he tried to find the roots of these "madhouses" in human psychology. He postulated that fanaticism and self-righteousness are rooted in self-hatred, self-doubt, and insecurity. In The True Believer he claimed that a passionate obsession with the outside world or the private lives of others was an attempt to compensate for a lack of meaning in one's own life. The book discusses religious and political mass movements, and extensive discussions of Islam and Christianity. A core principle in the book is Hoffer's assertion that mass movements are interchangeable: fanatical Nazis became fanatical Communists, fanatical Communists became fanatical anti-Communists, and Saul, persecutor of Christians, became Paul, a fanatical Christian. For the "true believer", substance is less important than being part of a movement.[/quote]
My contention is that Hoffer's thesis is exactly what this is all about. GATA, Harvey Organ, Ted Butler, and other charlatans appeal to what Hoffer described as the True Believer. People who are dismayed by the world around them, and who correctly perceive great injustice to exist around them. Their frustration with that bona-fide injustice generates an emotional need for something to believe in - to feel they are part of the in-the-know crowd who is up on the scam, whether it exists or not. Organizations like GATA provide service that emotional need, with a complete and total lack of logical or factual support.
But enough on Hoffer. Let's get back to Mr. Organ's fantasies.
[quote=Harvey]
Open Interest is basically defined as longs who are standing for delivery.[/quote]
Umm, hello? Open interest refers to the number of outstanding contracts - for each open contract there is exactly one long and one short (it takes two to tango), and by definition, there are always an equal number of longs and shorts. The number of longs standing for delivery is determined only after the contract's deadline for cash settlement. Mr. Organ's statment is so completely far out of touch with reality that one must question what motivated it. Talking about longs standing for delivery triggers unconscious beliefs and fears about whether the system can deliver against those who stand for delivery. And that plays perfectly into Hoffer's theory that this is all about playing to the self-esteem and insecurities of the audience. It has nothing to do with the reality of how precious metals markets function! The definition of "Open Interest" is well known, Commodities 101 level stuff. This kind of statement reveals an agenda to mislead the listener into emotional territory.
[quote=Harvey]The [bullion banks] manipulate and actually influence the price collusively!
...
And it kinda hurts guys.... And you can't beat these guys...[/quote]
Ok, so we have an allegation that bullion banks manipulate the price of the metals. We further have an emphatic allegation that this manipulation is collusive. Is there a single shred of evidence to support these allegations? No. Is there any discussion of the mechanism or technique of manipulation? No. Is there any logical argument whatsoever even explaining what their motive might be? No. But we can't leave it there. We have to add "You can't beat these guys", which appeals to the emotional need of Hoffer's True Believer to feel in-the-know about what the evil banking cartel is up to. Sans evidence or even logical explanation.
[quote=Harvey][referring to the Feb 29 selloff] These are sellers who have absolutely no interest in profit!
... then just a few minutes later...
These guys make a lot of money![/quote]
Ok, which is it? Are they truly sellers who have no interest in profit, and if so, why is that? And if that is the case, why are they making so much money on these non-profit-motivated trades? Again, we have commentary that is categorically lacking in logic, reason, and common sense. But boy does it feel good to the True Believer to feel they have the inside scoop on the evil cartel's operations!
[quote=Harvey]Then they just let the HFTs take [the market] down!"[/quote]
Wait a minute here. HFTs mostly exploit liquidity inefficiencies, and profit from scalping bid-ask spreads. So how does an HFT algo "take down" a market to do the bidding of an evil bullion bank? If there is a rationale for how this would actually work, why didn't Mr. Organ state that rationale in the interview? Or could it be that this is really about the fact that HFTs have been widely publicized as a major mechanism by which Wall Street rips off retail investors (that part is true by the way), and that appeals to the emotional needs of the True Believer?
[quote=Harvey][Paraphrased - I couldn't write fast enough] Feb. 29 was a raid. I knew it when I saw it because of the price action[/quote]
Harvey, ever heard of fundamentals? The whole reason Gold has performed so well over the last few years is central bank money printing. Feb. 29th was a day when FOMC minutes were released revealing that much-anticipated QE3 wasn't going to happen when everyone thought. The big sell-off makes perfect sense, and is supported by fundamentals. But a logical, rational, and coherent explanation based on reality doesn't appeal to the emotional needs of Hoffer's True Believer. Harvey's comments do.
[quote=Harvey]The COMEX is supposed to be about price discovery, not the price!"[/quote]
This is a long-standing Ted Butler argument, and so far as I can tell, it derives from a basic lack of understanding of economic terminology. I believe what Mr. Organ means here is that he believes (as does Mr. Butler) that the futures market is not supposed to set the price of precious metals, and that by law it is prohibited from doing so. Rather (according to Butler), the futures market is only supposed to discover the price. This sounds good to a person who is unfamilliar with the phrase price discovery, and it definitely appeals to Hoffer's True Believer, who wants to feel he knows the inside scoop on some sort of dastardly injustice.
But returning to reality, the price of gold and silver is in fact set by trading in the futures market. The way the price is determined is through a free-market bid and ask system, where a stack of bids are matched by computers against a stack of offers, and trades clear immediately when buyers and sellers have compatible prices. The market "clears" when the outstanding bids are all lower than the outstanding offers. The result is that a price is determined - the bid is the price a seller can get immediately, and the ask is the price a buyer can get immediately. In Economics, this function of setting the price by clearing bids and offers is known as price discovery. Here's the Wikipedia entry:
[quote=Wikipedia]
The price discovery process (also called price discovery mechanism) is the process of determining the price of an asset in the marketplace through the interactions of buyers and sellers [1].
Price discovery is different from valuation. Price discovery process involves buyers and sellers arriving at a transaction price for a specific item at a given time. It involves the following: [2]
Buyers and seller (number, size, location, and valuation perceptions)
Market mechanism (bidding and settlement process, liquidity)
Available information (amount, timeliness, significance and reliability) including
futures and other related markets
Risk management choices.
In a dynamic market, the price discovery takes place continuously. The price will sometimes fall below the duration average and sometimes exceed the average as a result of the noise due to uncertainties.
Usually, price discovery helps find the exact price for a commodity or a share of a company. The price discovery is used in speculative markets which affects traders, manufacturers, exporters, farmers, oil well owners, refineries, governments, consumers, and speculators.[/quote]
So what’s going on here? Both Butler and Organ are going way out of their way to make a big deal about the travesty of justice (in their eyes) that the futures market is never (according to them) supposed to set the price - it’s only supposed to discover the price. Butler went so far as to claim in a CM.com podcast that this was "illegal, according to commodity law". Of course he didn’t cite a reference to the law he was referring to. Yet the definition of "price discovery" that is well known and accepted in economics is that price discovery is the process by which a price is set!
Are Butler and Organ intentionally and maliciously trying to appeal to the True Believer by trying to make a distinction that makes absolutely no sense? I suppose that’s possible, but I don’t think so. My guess is that these two men are just so profoundly ignorant as not to comprehend the meaning of the terminology they use so frequently and so authoritatively. But that’s only a guess. In any case, the argument is specious and without merit.
This says a lot to me. At this point we’re well in to the interview, and Mr. Organ has yet to back a single argument with a single fact or logical or ratioal argument. Now he wants us to trusthim. Why would we trust him? Answer: Because he’s a master when it comes to appealing to the emotional needs of theTrue Believer. Should we trust him? Of course not - he’s a complete charlatan.
Now that’s a hell of an allegation! You’d think someone making it would at least have a rationale to assert - even if a bogus one. But no, there was no discussion of reason, cause, or evidence. Just a statement that implied that the government is evil and up to no good. Calling all True Believers…
I probably got the exact wording wrong - I had literally run out of Post-it notes! But this is a recycled argument that was originally put forth by Andrew Maguire, another precious metals charlatan. They are trying to imply (or say directly in Maguire’s case) that the physical metal in London is somehow serving as collateral to back the cash-settled forwards market, which is pure and unadulterated nonsense. When an ounce of gold leaves London for the East, there are good reasons to be concerned - the East is getting all the real wealth! But the business about this de-collateralizing cash-settled forwards markets is plain nonsense, and everyone who understands how these markets function (that rules out GATA and Butler immediately) knows that.
Summary:
Ok, that’s as far as I got before exhausting my Post-It pad. The bottom line here is that there was not one shred of credible, knowledgable commentary on precious metals in this interview. Not one bit. This was nothing more than yet another charlatan appealing to the emotional sensitivities of Hoffer’s True Believer.
I’m certain I’ll be flamed relentlessly for this post by the many true believers on this site. That’s ok. I hope to offer those few who are here to actually learn about how markets truly function some insight, and I hope this post has helped at least a few people differentiate between the cogent and well-reasoned arguments of Mr. Tustain and the nonsensical ramblings of Mr. Organ. That’s what investing is all about - learning that both the real players and the charlatans can talk a good story, and learning to tell the difference.
All the best,
Erik
p.s. To Adam and Chris, I openly challenge Mr. Organ, Mr. Butler, or both to a debate on these topics in a future podcast on this site.
[Moderator’s note: All readers please be sure to read Erik’s post <a href=/comment/134615#comment-134615" rel=“nofollow”>here, clarifying his use of the word "charlatan." Left by itself, that word implies intentional deception for personal profit, and we have no reason to think that Mr. Organ is anything but honest in his intentions.]
Erik
What a LONG reply … you put a lot of effort into this … just to be noticed … BTW – do you offer a daily blog like Harvey where you have to get the page out for the eager readers …every day ? And is your blog free?
Perhaps before you can openly challenge and get the media attention for that ‘5 minutes’ you need to show us your stuff … I for one cut Harvey more slack as someone who is passionate onthe subject like Harvey will slip up on a phrase here and there - it is the overal intent that counts for me. The effort that Harvey & Ed Steers ( another free blog posted daily ) put into this effort is amazing, IMHO
Greg
Whooee! Them thars fighting words, Partner.I think that your Believers book would be a precurser to Iain McGilchrist’s "The Master and his Emmisary." It is a Left brain Thing. The silly thing makes up a model of how the world works and then holds onto it as though it’s existance depends on the model being true. With fatal results in Hitler’s case.
I am going to take a chance on Brillouin Energy. I shall convert my silver into shares. Huge Risk, Huge reward.
One more point, if I may … when someone is so eagar to ‘debate’ …http://www.youtube.com/watch?feature=player_embedded&v=7hnIqE1_ZGU
the above link is Jeffery Christian ( no side ) to Bill Murphy of GATA ( yes side ) to the ‘debate’ … I would like to pick my team — say John Embrey or Rick Rule ( both from Sprott ) … bring on the sleeze balls for the NO side … you can tell Bill is so passionate that it gets in the way for a ‘debate’ …
History will not be kind to Blythe and the trolls
Greg
[quote=GregGGH]What a LONG reply … you put a lot of effort into this … just to be noticed … BTW – do you offer a daily blog like Harvey where you have to get the page out for the eager readers …every day ? And is your blog free?
Perhaps before you can openly challenge and get the media attention for that ‘5 minutes’ you need to show us your stuff … I for one cut Harvey more slack as someone who is passionate onthe subject like Harvey will slip up on a phrase here and there - it is the overal intent that counts for me. The effort that Harvey & Ed Steers ( another free blog posted daily ) put into this effort is amazing, IMHO
Greg
[/quote]
I don’t have a dog in this fight and am happy to not feel a need to have an opinion on manipulation…but for the sake of objectivity…having a free blog, passion, and putting a lot of effort into something have little to do with seeing things clearly. There are many deluded free blogs, many deluded passions, and much deluded effort in this world.
I doubt you know any of these folks well enuf to know what their intentions are.
bring on the sleeze balls for the NO side
Emotionally charged words like this don't do much for your argument either.
I haven’t listened yet, but always find Jim Rickards worth the time:
Part 1 is focused on Gold manipulation and why gold plays such an important role in the world, even if conventional wisdom doesn’t believe so, gold is not only being watched by central bankers, as Mr. Rickards put, "the gold price is being managed."
Another podcast/post about gold manipulation, and to think that gold is just in consolidation period. I can’t imagine the whining and rationalizations when there is a significant decline in gold.
Am I the only one who recognizes the hypocrisy in all this? A person buys physical gold to get out of the manipulated markets, but then they spend all their energy complaining about gold being manipulated.
This psychological pattern is guaranteed to end with empty pockets…
The one part of this I agree with is that Chris M. should interview Jeff Christian in a future podcast. He would do a better job than I can of debunking all this nonsense, and that would be of great value to the minority here who are interested in reality.
As for all the "passion" stuff, we all have our own passions. The Organs, GATA, and Ted Butler’s passion is to fill retail investors heads full of lies and propaganda. My passionate hobby is debunking this BS. Diff’rent strokes…
Best,
Erik
Erik, Tell me, have you read Jim Rickards’ book, "Currency Wars"? If so, what are your thoughts about what he says? If not, you might want to consider it.
Hi shudock,
I haven’t read it, but expect it’s quite good. I’ve heard Rickards interviewed several times about it, and it sounds like he’s basically making an argument I very much agree with, but am already well versed in. He’s a smart guy and I’m sure I’d learn something, but I’m also sure most of it would be old news, so I haven’t made time to read it. Not saying I won’t - just haven’t yet.
Best,
Erik
Erik, I have amended my point of view on the topic you wrote about many, many times over the years, as more pieces of the puzzle come my way. I am still amending it, almost every day. Certitude makes for a compelling argument in a debate, and will win many uncritical people over while barely trying, but I prefer being open to new possibilities, even when I think I’ve got the picture already, and even when it appears to others that I don’t have any answers. I prefer a bit more agnosticism demonstrated in folks who are trying to persuade me of something. (Incidentally, my book recommendation was not made as an illustration of "what I believe" - simply another perspective on the topic. )
To me, if a person wants to go about "debunking" concepts and philosophies on the Internet, and also cares whether people take their arguments seriously, it might be better to for them to check their approach to doing so, to truly investigate all corners, even if they think they already know what will be said. I am neither agreeing nor disagreeing with your arguments right now, because I can easily decide for myself what I think about those. Nor am I trying to convince you of anyone’s particular stance on the topic. But your easy dismissal of something that you haven’t read is telling. It makes me think that you have simply arrived at a point where you think you have it "all" figured out, stopped there, and dug in. What troubles me, and casts a shadow over your words for me, is your attitude toward others out there who are seeing the situation differently than you. While you may "know" that you are right, a loud, accusing condemnation of people who are clearly on the same path of discovery that you are on, makes it difficult for an observer to hear your argument. Half of your argument appears to be: "these people are crazy/greedy/nefarious and just want to fool you guys out there." But attacking messengers won’t help the fact that some people will think critically, and others will not, no matter who is speaking.
Peace, and thanks.
Erik,Thanks for you detailed and thoughtful reply. I would certainly enjoy listening to you debate. There are far too many people who do not realize just how close to impossible it is to pull off a manipulation of the futures market for any extended length of time. I certainly am a gold investor and I am still adding to my physical inventory. However I also believe CEF, SGOL, and GTU actually have the physical metal to back their claims and I have seen no credible evidence to the contrary. Gold is not the only physical asset that will soar if and or when the paper money systems crack. Perversely the current market rally may be discounting that situation right now and quality stocks with pricing power may be the biggest winners.
[quote=shudock]But your easy dismissal of something that you haven’t read is telling.[/quote]Wow. I just can’t seem to win today.
So let me see if I got this straight… You asked me what I thought of Rickards’ book, and I took the time to reply telling you that I hadn’t found time to read it yet because many of the arguments he makes in interviews are familliar territory, but that expected it would be a good read because I think Rickards is a smart guy.
Based on that, you perceive me as "dismissing" Rickards work? Maybe this Organ guy is contagious or something!
I wish you all the best, Sir.
Erik
Erik, I certainly appreciate that you have taken the time to share your knowledge.
Frankly, I am a bit confused about where I stand.
While even I could see that open interest statement you quoted is patently false even to someone with as little knowledge as me, and I don’t agree with all of the arguments of GATA and others, I have to say that there are certain arguments that I am at least sympathetic to, or certain fishy events that make me suspicious that there might be "massaging" of the gold price.
For example, I read about the plunge in the gold price moments before the Swiss announced they were going to devalue their currency and not let it cross a certain line in relation to the Euro. The reports of gold in great tonnage being sold in very short time frames, rather than looking for best price over several trades, also makes me suspicous.
And I don’t want you to roll your eyes, but assuming JP Morgan is simply acting on behalf of clients in the silver market, and everything is hedged by forward contracts in the OTC market, why the need for such massive turnover of contracts on the COMEX? I’m not being sarcastic by any stretch, this is genuine question I have and I haven’t had a satisfactory explanation to it…
I do think there is a valid argument that the futures market is not acting well in its function as a price discovery mechanism when the "market value" of a commodity can drop by 15%, or whatever it was, in a matter of minutes on a Sunday evening, when most of the "market" is not even present.
Having said that, these anecdotal events and evidences don’t convince me by any means that price is "manipulated 100% of the time" as you quote some of these guys allege. I think that’s absurd. These events just seem fishy to me, but I am confused and frustrated because I feel like we don’t have enough information to answer all the questions that need answering…
PS Erik, I am trying to understand better how where the LBMA stands in all this in contrast to the COMEX. I have read about how the fix is generated on the LBMA and how deals occur privately on the LBMA directly between two participants. How then does price discovery take place on the LBMA? I am fully satisfied that price discovery can occur on a futures exchange but the LBMA is not really an exchange, and certain people emphasize that the COMEX is just a kiddies playground compared to the LBMA because so much physical precious metal is traded on the LBMA compared to COMEX. If you could perhaps kindly give me a quick run down about the LBMA influences COMEX and vice versa and the significance of the LBMA versus COMEX when it comes to price determination and which one matters more for pricing I’d really appreciate it very much. I have tried reading around the LBMA website and elsewhere and I don’t understand how a market which acts as a trade association, apparently, and doesn’t have a real-time auction process (deals are done privately between participants) can set price. I am quite confused about it and about how it interacts with the futures market.
PS I enjoyed your peak oil videos, I hope you produce more some time and release video notes of all the countries you are visiting.
CPTWaffle,
I’ll try to address your most salient points. I’ll summarize much of what you said as "But hey, isn’t there still good reason to be concerned about monkey business in markets, even if some of what Harvey said is BS?" The answer is a resounding yes. But unfortunately, the people who have self-appointed themselves "expert pundits" on these markets like Harvey, Ted, GATA, etc. haven’t the foggiest clue what they are talking about. That doesn’t mean there isn’t any market manipulation. It just means the amateurs "reporting" on it don’t know what they are talking about.
On LBMA vs. COMEX, I will take a stab at your question, but frankly the best possible way to address it would be if Chris were inspired to interview someone like Jeff Christian. As much as he’s been vilified by the PM conspiracy crowd, he’s actually one of the smartest guys I know, and his knowledge of the metals market is remarkable.
LBMA is for the big boys. It’s where the physical metal gets traded (worldwide center for that), and also where the biggest forwards market exists. I am pretty sure LBMA forwards are much larger on an annual clearing basis than COMEX, but I could be wrong - I don’t deal directly with the big players who operate in LBMA, so I have no first-hand knowledge. Only research I’ve done for articles debunking the GATA types. Again, Jeff would know the exact numbers off the top of his head.
Briefly, LBMA is about moving the metal. Technically, these are OTC contracts which means any two parties could set any terms and conditions they want. But most contracts are boilerplate, and roughly approximate the terms of a COMEX futures contract - the contract can be cash-settled up until a specified date, and if not closed by then the parties must deliver (or accept) physical. Even that is not always true - a "delivery fail" is - from what I understand - not really treated like a contract breach where people sue each other. Rather, the contract specifies delivery fail penalties, which are steep. I have the impression that traders view the option to fail and pay the price as a routine matter of business, but it’s a big enough penalty that the incentive to avoid it is very strong.
My understanding is that there is no particular price discovery mechanism on LBMA. The price is determined by the almost-24 hr worldwide futures market - COMEX, GLOBEX, etc. Then there is the London AM/PM fix which Paul Tustain discussed. My understanding is the parties can agree to any price they want, but that the AM or PM fix on a specified date is most often chosen. Again, I am on the edge of my knowledge here, and could be wrong.
The point of LBMA is that the whole "good delivery" system, bonded warehouse network, etc. is behind it. LBMA is not about setting or negotiating the price so much as it’s about making the deal to deliver once the price is agreed. Once two parties have agreed on a price, time of delivery, etc, LBMA provides the whole infrastructure to deliver the metal from one bonded warehouse to the next, etc.
My image of how this works is that trader A calls trader B on the phone, and says "Ok, Gold is at 1652 on the front month contract. Let’s do a deal for XXX ounces at $YYYY, you game?" The other guy agrees, and they ink an OTC contract that gets settled through the LBMA infrastructure.
I’m not comfortable saying any more because frankly the details of physical transactions on the London market are beyond my knowledge and experience. I’m going to reach out to Jeff Christian and see if he’s willing to comment in this thread. I doubt he will - he’s a busy guy and gets fed up with conspiracy theory nonsense easily. But I’ll give it a shot. He could tell you in excruciating detail how it all works.
I listened to Jeff Christian’s talk on Financial Sense recently and I wish he would do more interviews.
If you could get him to comment that would be great.
If Chris could get him to participate in a podcast interview that would be fantastic!
Thank you for your response, it does actually help my understanding a bit. I think I suspected much of what you say (price is discovered in the futures market but big deliveries are made OTC) but I have been reading some people, and some of them make themselves sound very sophisticated and knowledgeable, who maintain that the LBMA has more price discovery influence than the futures market. So thank you for clearing that up for me; I appreciate taking the time to respond.
I’ve exchanged e-mails with Jeff. He said he’d try to find time to reply here, but could make no promises. He’s a very busy guy, so we’ll see.
A little background - Jeff is actually one of the most generous people I’ve ever met in terms of being willing to give his time to help educate anyone who is interested in learning about PM markets. But he’s also been vilified by the GATA crowd so badly that as soon as his name is mentioned, some people (who generally have no idea what they’re talking about) come out of the woodwork hurling personal insults and baseless allegations. So if you put yourself in his shoes, it’s easy to see why participating in open Internet forums is not always fun for him.
Given the very strict moderation policies on this site dealing with civility toward others, my hope is to persuade Jeff that this is a place where he can share information without being personally attacked by the people who have been brainwashed by GATA. I hope others here will help make him feel welcome if I can persude him to take some time to post a contribution to this thread.
Jeff also said he would be happy to do an extensive interview with Chris on a future podcast. Just to keep everyone’s expectations set, however, I happen to also know that Adam has the podcast schedule booked for months. So don’t expect a podcast interview overnight… Also, it’s up to Chris and Adam to decide what fits their editorial agenda, so it’s really up to them to decide whether to invite Jeff to do an interview.
Erik great post & thanks for taking the time to do it. IMHO we need more post like this to try to make the best decisions we can about the future that seems so uncertain. I like some of the interviews Eric King does but his style of sounding like a guy at a circus shouting about the greatest snake oil on earth show is a turn off. He never that I am aware of ever interviews someone that has a negative view on gold & silver…it is always PMs to infinity & beyond LOL.<o:p></o:p> Thx again…enjoy your posts & the balance you offer.<o:p></o:p>
shrug That sure looks dismissive to me, and I was surprised by your answer, as it appears you have already made up your mind about something you haven’t read. I think it was a fair point to make.
