The main way they do this is with 'paper gold' by selling ETF's such as the SPDR Gold fund. However, these ETFs are not the same as physical gold. In fact, there was the memorable occassion recently when the head of a new Gold ETF held up a gold bar on TV.
Because every good value Gold Bar has a serial number, it wasn't hard for goldbugs to look up the serial number and find that the bar of gold was technically owned by a completely different ETF.
This is the essential problem with ETF's your 'gold' gets mixed in with everyone else's, they charge you fees for 'storage and administration' and all the while, you have no idea at all where your gold really is, apart from a piece of paper statement from the gold fund.
One of the common predictions about gold in the future is that the massive upward fundamental pressure caused by sovereign buying, particularly China, Russia and India will force the value of physical bullion up and up, threatening the large American banks short gold positions, at which point, once again, they will dump masses of paper gold onto the market to depress the price.
However, it will only take one scandal with these kind of funds and there are several already working their way towards the courts and the public will begin to love faith in ETF's
Once this happens, the value of physical gold will being to outstrip the value of paper gold to a large extent, will will cause the market in paper gold to shrink further.
Of course, this could take a while, JP Morgan and Goldman Sachs essentially have access to a USD printing press, so there are all kinds of shenanigans they can get up to make sure that physical gold is not priced at it's true value.
This brings me to another point that is often said about gold, which is that, unlike equities, it gives no return or dividend. Well, to be frank, who needs a dividend when you have growth like this?
Or to put it another way, you get comparable returns to equities (not quote as much, it's true) however, the instrument ou hold can never become valueless. Unlike paper, which can become worth 0% of it's previous value, wiping out the wealth of whatever poor sucker held it in the first place, Gold has never, over it's 5,000 year history ever become valueless.
I guess it depends in what kind of an investor you are. I tend to play for the long game, which is why I am investing in gold, but you are not going to make money holding the gold the way you will scalping the FX market. On the other hand, you also wont lose the kind of money you might wind up losing by scalping the FX market.
To make this a bit clearer, here is the current daily chart for spot gold, covering the last few months.
Now, if you look carefully, you will notice that the so called 'bear market' in gold is actually an incredibly recent affair, which basically began in May when Bernanke crashed the Gold prices with one of his QE speeches. You can see this in the massive red slide that starts a few days into May and continues about half way into the month.
However, the thing you immediately notice, if you keep looking at the chart, is that Gold keeps trying to buck the upper edge. At the moment, everyone is talking about $1,600 being the current resistance to beat, even though it was definitively broken in early July, it has slipped back down to around $1580.
I believe that if it were not for the massive market manipulation by Sovereigns, Central banks and Banks that are so large that they may as well be counted as Central Banks, such as Goldman Sachs and JP Morgan, then gold would have followed its natural trajectory back up to $1620, then $1650 and $1700.
I am not the only person who thinks this, so for your edification, I have included an article from zerohedge.com (which is a totally awesome website that I cannot recommend highly enough.)
Please note that this article was written originally in 2010, but I think it still has relevance today.
[article begins]
http://www.zerohedge.com/forum/why-jp-morgan-short-silver-and-gold
Why JP Morgan is short Silver and Gold
www.marketskeptics.com updated their site on CME margin requirements. This is a very different approach from all the other talk of manipulation but if true would go a long way towards explaining why some of the clearing houses may be trapped into large short positions on gold and silver. If you agree with this, I urge you to write to the CFTC.
There are valid arguments to NOT limit positions. When large hedge funds or even countries want to buy or sell in large quantities, there needs to be a potential offset trader to provide a counterpoint and liquidity otherwise the markets would become very chaotic. It will also be hard for the CFTC to limit positions without risking a loss in market status/share to other exchanges.
Having said this, it is hard to believe that the large clearing house shorts would have maintained their positions IF they had had to put up margin and mark to market their own positions.
The "net margin" concept for clearinghouses is based on the idealistic expectation that they do not take a position themselves and that they serve the function of being an unbiased and neutral "clearing house" for buyers and sellers. Under the current system, if www.marketskeptics.com is correct JP Morgan or whoever theoretically, could be short 500 Million ounces of silver at $ 10 with the price now trading at, for sake of argument $ 50, and still NOT ONLY post NO margin but also NOT HAVE TO cover the losses on their losing position but ALSO pocket the cash equity value of the margins put up by the long position holders.
If the CFTC changed the rule to require that all parties post margin on their own position (therefore this does not affect clearing memebrs that do not trade for their own account) AND mark these to market I doubt very much that we would see the shenanegans or huge positions that we currently see. This also goes a long way to preserving the integrity of the market as genuine buyers and sellers would know that their positions would not be at risk. If you bought at X and sold at X+1 and the market traded up to X+10 and then someone called you to tell you that the person you thought you bought at X from was out of business, you would actually be short at X+1 with the market 9 points against you. Expand this thinking to large physical trades and you begin to see the type of exposure the market faces when the clearing houses take their own positions with no risk or even reportability to their own top management. Most companies do not pick up on rogue trading exposure until margin requirements trigger internal cash calls. With the "net" CME system there are never going to be cash calls and there is no mechanism to catch rogue or excessive trading.
Again, if you agree with this please write to the CFTC.
[end article]
Enjoy.
Christopher Carrion
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