CTFC consider London fix investigation

Mar 14, 2013·Alasdair Macleod

It seems that America's Commodity Futures Trading Commission (CFTC) is discussing internally the possibility that gold and silver is being manipulated at the London fixings.

This is according to The Wall Street Journal. It seems that CTFC officials have concluded that if Libor can be rigged, so can gold and silver at the London fixes. Whether or not they get anywhere with this line of enquiry, only time will tell.

It is certainly possible for bullion banks to rig fixings, simply by submitting a buy or sell order off their own trading books during the fix. But it should be noted that fixes are done on actual trade, so are not the same as a Libor fix, which is estimate-based.

The probable reason the CTFC is interested is that they have had to deal for years with allegations of gold and silver market-rigging in the US futures market. In gold and silver futures, the commercials (basically those participants who have physical bullion risk to hedge in the market) are dominated by bullion banks that have been running extremely large short positions – because they have substantial, or if they are too-big-to-fail, unlimited financial resources.

They have the following motivations:

  • Gold is regarded by market regulators as a high-quality asset for collateral purposes. It has come to be used as such to generate substantial returns in fees, commissions, interest, and trading profits. Bullion banks have geared up these returns in the London market by backing them with as little physical bullion as they deem prudent. They are therefore exposed to any significant rise in the bullion price and have a vested interest in keeping it under control.
  • The bullion banks’ large short positions in the US futures market, the result of keeping bullion prices from rising, exposes them to substantial losses from rising prices – given that physical liquidity appears to be drying up.

It is also suspected by many market participants that the authorities are colluding with the US bullion banks to supress the gold price, on the basis that a significant rise would throw up significant losses for the banks and might destabilise currency markets. In the past, central banks have kept gold prices down by leasing their gold, which being fungible was sold into the market. It is not known how much of this gold has been returned, but if there are leases outstanding, this is a further incentive for Western central banks to control the gold price.

In the case of silver, the short position held by the bullion banks recently peaked at over 275,000,000 ounces, which is one third of global mine production.

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