Thursday 17 April 2014

Failure of a rigging scheme (?)

The majority of traders in precious metals futures probably aren't the geniuses the outside world takes them for. They do have more and better market information and statistics and consistently apply those sources of information, with the algorithms implemented on their trading platforms. They continue adding to their personal -or their company's- profits until proven wrong.

One of those statistics is a public data series of gold fix prices on the London Bullion Market Association (LBMA). The prices of gold, platinum and palladium are fixed twice a day on the LBMA. The AM-fix is at 10:30 GMT, while the PM-fix is at 15:00 GMT. For silver however, there is only one single fix at noon (12:00 GMT).

Since this series is public, it has drawn much attention. Several years ago (August 2010), Adrian Douglas of GATA, the Gold Anti-Trust Action Committee, published an article at their website, explaining and exposing the price rigging that had been going on ever since the start of the secular gold bull market after the turn of the century and probably before. Read an abstract or download a full paper at this link.

Quote: Following research done by GATA consultant Dmitri Speck, GATA board member Adrian Douglas has studied the morning and afternoon "fixing" of the gold price by the major London trading houses and concludes that it is just as much a price-suppression mechanism as the London Gold Pool of the 1960s admittedly was.
"The more gold rises overnight in essentially Asian markets," Douglas writes, "the more it is sold down into the PM fix. This was exactly the modus operandum of the London Gold Pool but now it is being done covertly."
In the table below, you find a break down of the yearly price changes of gold during since 2008 into a sum of the "overnight" changes, during Comex, Globex, Asian and early European trading (after the London PM-Fix (and before the AM-Fix the day after) and the intense trading between the LBMA AM and PM gold price fixes. This interval also covers the NY Comex opening and early session till 11 AM (15 h GMT). Until 2011, the discrepancies are as demonstrated by Adrian Douglas.

Table 1

Aggregated price changes over the year (in USD)
Year Between AM and PM Overnight Total Year end (*)
2008 -108,45 108,95 0,50 865,00
2009 -65,65 317,15 251,50 1104,00
2010 -210,15 472,40 262,25 1410,25
2011 -372,15 564,65 192,50 1574,50
2012 21,35 63,15 84,50 1664,00
2013 9,90 -477,15 -467,25 1219,75
2014 53,25 25,00 78,25 1298,00
(*) For 2014 the last available price PM fix on 15 April

In 2008, despite peaking above $1000 in spring and plunging to $700 during the darkest hours of the financial crisis, gold ends the year flat, with the gold price on the London PM fix down about $108 and overnight trading up equally. The rigging of the PM fix worsens notably in 2010 and culminates in 2011, reaching an epic magnitude as gold reaches successive all time highs shortly quoting above $1900 in August that year.

Failure of a rigging scheme (?)
Apparently, 2012 shows the failure of this price rigging scheme, with the small yearly advance now equally spread during the two daily trading intervals.
Even more anomalous seems 2013, where the raids on the gold price are concentrated in "overnight" trading, whereas very little 'happens' during LBMA opening hours. Raids on the gold price most often were orchestrated in very thin markets. 2014 seems a repeat of 2012 so far.

One could argue that the breaking down of the gold price rigging scheme was due to Adrian Douglas exposing this openly. A questionable conclusion, since the major profits from applying the "overnight long/daytime short" tactics would only be realized within well over a year after the publication.

The inversion of 2013 could very well confirm the scheme still holds. Only, with an aggregate gold price plunge, there is no need for additional selling pressure during LBMA opening hours. On the contrary: the bullion dealers most likely have reduced their short positions significantly during 2013.

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