Big jump in gold sales spurs manipulation talk

Some Analysts Say Only Manipulation Is Government's Attempt to Take Down Oil

By Moming Zhou
MarketWatch.com
Friday, August 29, 2008

http://www.marketwatch.com/news/story/big-jump-gold-sale-spurs/story.asp...

NEW YORK -- 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 fall.

"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 Investment.

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 other.

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 month.

"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.

... 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 Services.

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 credit crisis.

In July, the Securities and Exchange Commission, the stock market regulator, limited so-called "naked" short selling of shares in Fannie Mae, Freddie Mac, and 17 other financial firms.

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.

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 under way 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 July.

... Fundamentals

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 CFTC.

"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 futures markets.

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."

* * *

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at http://www.gata.org/.