One slipped out from underneath JP Morgan’s boot… will the others follow suit?
The long rumored rigging of precious metals by JP Morgan has become official in recent months as lawsuits and government investigations resulted in the bank paying hundreds of millions of dollars in settlements. However, we’re not even allowed to know what is the exact amount that they will pay, and neither will we ever know why no one even got arrested over this. Yes. But this is how the world works when it’s ruled by out of control central banks and the Fraternity Of Monetary Criminals (FOMC) a.k.a. the Federal Open Market Committee.
What I wanted to talk about today, is one of the ways that metals prices are being held down, and how platinum might have escaped from underneath the heavy boot of JP Morgan.
The whole world uses the US dollar metals prices from the COMEX as a benchmark, because it’s the world’s largest futures and options exchange for metals. Futures and options are two of several financial instruments classified as derivatives. The COMEX stands for Commodity Exchange, Inc., founded in 1933 in New York, and is operated out of New York to this day. This is where the rigging of the metals prices happens, on the COMEX, and it is done in US dollars.
A derivative contract is called such, because it is supposed to derive it’s price from the underlying asset. However, in some cases the opposite can happen, and it becomes a case of where the tail is wagging the dog so to speak. In these situations it’s the derivative contract that starts to dictate the price of the underlying asset. This scenario can persist for years or even decades on contracts where traders rarely take physical delivery of the underlying asset. Instead, they just keep renewing the contracts. This is called rolling the contracts forward. Gold is a prime example of a market where for a few decades now most market participants were no longer interested in receiving delivery of the actual physical metal. This means that it has been decades since the books have been “squared” so to speak on this particular commodity. The derivative price of gold, also called the paper price, has been drifting apart from reality at least since 1971 in which year the gold standard was abolished. That was the last time physical gold was actually used for something by the establishment. Until 1971 it had to be always kept track of and kept on standby because someone could walk in at anytime and ask to have their dollars exchanged for gold. This situation is especially pronounced in the gold market even as compared to other precious metals. It’s because gold has little industrial use, in contrast to silver and platinum for example where these metals are actually used in factories to produce stuff.
Someone like JP Morgan who is close to the printing press and therefore has access to unlimited liquidity, can use derivatives to suppress the price of gold. One futures contract on gold controls a hundred troy ounces of gold, but the margin requirement is only a few percentage points of the actual value of the gold being controlled. Therefore, in theory, given unlimited liquidity, an infinite number of short futures contracts can be opened by the manipulator and thus keeping a lid on the price. This will work until for some reason market participants start asking for physical delivery. And this is how in recent weeks platinum managed to escape this mechanism of price suppression as forecasts for future shortages of the physical metal were released by experts on the platinum market. Will market manipulators manage to put the cap back on the bottle or will other precious metals, like gold and silver, follow platinum’s lead?
Michal J. Krol CFA FCSI