By Patrick A. Heller
Commentary on Precious Metals Prepared for CoinWeek.com …..
With all the investigations into market rigging in the mortgage markets, LIBOR interest rate market, and foreign currency exchange trading, it should come as no surprise that official investigations have started into the manipulation of the London market gold and silver price fixes. Even though investigations are still in the early stages, there has already been major fallout over how the London gold and silver markets operate.
Last March, the US Commodities Futures Trading Commission (CFTC) began an inquiry into the process of establishing the twice-daily gold and once-daily silver price fixes in London.
The British Financial Conduct Authority (FCA) began a review last November of how Barclays Plc, Deutsche Bank AG, Bank of Nova Scotia, HSBC Holdings, Plc, and Societe General SA set the value of gold twice a day for the London market gold fix.
The London Bullion Market Association traded an average of $33 billion in gold each day in 2012, greater than the average of $29 billion traded daily in the New York COMEX market that year. It is the world’s largest gold trading center. In theory, the London fixes are set prices at which all buys and sells are settled. However, the determination of each fix takes from a few minutes to more than an hour. While the fix is being determined, each of the five parties involved in determining the fix price are trading metals and related derivatives.
As Thorsten Polleit, chief economist at German precious metals broker Degussa said, “Traders involved in this price-determining process have knowledge which, even for a short time, is superior to other people’s knowledge. That is the great flaw of the London gold-fixing.”
Rosa Abrantes-Metz, a professor at the New York University Stern School of Business who wrote a paper in 2008 that sparked the worldwide probe into manipulation of the LIBOR market said of the process of determining the London gold fixes, “It’s controlled by a handful of firms with a direct financial interest in where it’s set, and there is virtually no oversight—and it’s based on information exchanged among them during undisclosed calls.”
After the FCA disclosed their investigation, the London Bullion Market Association said it was reviewing its benchmarks for conformity to guidelines set by the International Organization of Securities Commissions last July.
In December, German banking regulator Bafin demanded documents from Deutsche Bank for an inquiry into suspected gold and silver price manipulation by banks.
No particular news had been forthcoming on either investigation until reports emerged last week that Deutsche Bank had suspended several foreign exchange traders from its New York offices. The bank then announced that it would exit its involvement in the London gold price fixing market and sell its seat to another member of the London Bullion Market Association.
Then the details of the initial return of the German central bank gold from the New York Federal Reserve Bank kept changing. Germany has tens of millions of ounces of its central bank gold deposited with the Fed. On January 16, 2013, it announced that it would be repatriating almost 10 million ounces of reserves from the New York Fed. After negotiations with the Fed, it was agreed that the gold would be returned over the course of seven years.
In theory, the exact gold bars that the German government had delivered to the Fed should still be there. Both central banks should have the brand names and the serial numbers of the exact bars. Therefore, if Germany received some of these gold reserves, they should match right up with the serial numbers on the inventory list.
However, that is definitely not what happened. Out of nearly 10 million ounces to be returned over seven years, the Fed delivered approximately 160,000 ounces by the end of 2013. Both the Federal Reserve and the German central bank confirm that the gold bars repatriated were not the same bars that Germany delivered to the Fed. The statements on the nature of the gold that was sent to Germany differ and also keep changing. One report is that the Fed had melted the gold to make them deliverable on commodity exchanges while another story said that the German central bank did so once they received the gold.
Whichever version is true, it is evident that the Federal Reserve might be unable to return to Germany the exact same gold bars that it had originally received. Since it would obviously have been simple to just return the same bars to Germany—if the Federal Reserve still had them—questions arise. Does the Fed still have the gold that Germany deposited? If so, why wasn’t it returned? If not, what happened to it?
This week, the five banks that set the London gold fix announced that they have formed a steering committee. This committee will seek external advice on how to improve the process of establishing the daily fixes. Obviously, the investigations into possible gold and silver market price manipulation have the management at Deutsche Bank spooked along with the other banks that set the London gold fixes. Will the truth about what has gone on ever be revealed?
Patrick A. Heller was honored with the American Numismatic Association 2012 Harry J. Forman Numismatic Dealer of the Year Award. He owns Liberty Coin Service in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Numismaster (under “News & Articles) . His award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.