Who sets the price of gold?

By Mr.Burns, 2/9/2014

Who sets the price of gold?  Is the price of gold set or is the price discovered though supply and demand, bid and ask?  If bid and ask, where?  Which market or exchange determines the real price of gold?

The answer, as far as I can tell, and that may not be very far, is YES or no or maybe.

The price of gold is both set and discovered, and in many different places at different times.  In the past, the largest gold market for the exchange of physical gold and gold futures was the London Bullion Market.  A few years ago an exchange traded fund was launched which enabled gamblers to bet on the price direction of gold.  It became large enough that rather than just reflecting the current price of gold, it also became a price maker in the paper gold market, and therefore also became an influencing factor on the price of physical gold.  The symbol for this exchange traded fund is GLD, so all further reference to this particular ETF will be GLD.

Time to back up here and explain something.  The paper market for gold is the market in which the buyers and sellers rarely or never take physical possession of gold.  The paper market is also much larger than the physical market, by a factor of a hundred or more times, and the paper market has way more weight on the pog than the physical market.  The number of ounces contracted compared to the number of ounces that are registered for sale at the COMEX is about 90 to 1 right now.  The number of ounces contracted compared to the number of ounces registered for sale at the London Metal Exchange is said by Jeffrey Christian, managing partner of the CPM Group, to be 100 to 1.  No one knows for sure about the LME because the LME is opaque on it’s reporting; no actually it is obfuscatory.

The number of ounces contracted compared to the number of ounces registered for sale at the Shanghai Gold Exchange is 1 to 1.  On the SGE, you cain’t sell what izn yours.  And the number shares of the ETF, GLD compared to the number of ounces kept in HSBC’s vault is anybody’s guess, because it is neither State Street’s, nor the World Gold Council’s, nor HSBC’s, nor anyone else’s responsibility to audit the gold that is supposedly in HSBC’s vault and supposedly backs up GLD shares.  In the prospectus, HSBC says that it has or purchases the physical gold to back shares of GLD, the prospectus also says that neither HSBC, nor the Trust, nor the World Gold Council are liable for loss, damage, theft, or fraud.  The prospectus also says that if a subcustodian, (that is someone or something holding the gold in their vault for HSBC), does not have the gold it says it does, that HSBC is not liable for whatever the subcustodian does not really have.  It also says that because the London Bullion Market Association’s rules are so arcane that no one really understands them, if there is a breach of contract between the subcustodian and HSBC, (in other words, there is no gold), there may not really be a breach of contract and no one is liable.  It also says in about a hundred different ways that if the gold ain’t there, HSBC ain’t paying for it.  The propectus says that HSBC may pay if HSBC is negligent, but it may not.

Bob Pisani from CNBC was allowed into HSBC’s vault, after being blindfolded and driven to an unknown location, and verified the existence of gold in a vault. He showed one bar and it’s serial number on television. “Zero Hedge” checked the serial number against the list of serial numbered bars in HSBC’s custody for the GLD and found that the bar that Bob Pisani held up to the camera was not on the list.

Disclaimer time:  I am not an attorney, nor am I fluent in legalese.  I am of inferior intelligence, and if you take anything I have written as gospel or made any sort of monetary bet on the information herein, you are of inferiorer intelligence than me and deserve to lose whatever you lose.

You can read the prospectus for yourself here:  Gold is a possesion.  GLD is a promise.

And the subcustodians can appoint subsubcustodians.  And the laws wherever the subsubcustodian is located may be different from English law, so the chances are slim to none that if the subsubcustodian doesn’t have the gold, the trust, (that is what it is called, seriously, talk about ironic), will be able to recover damages, or get anything back, or even try to get the gold.

As far as I can tell, (see Disclaimer above), the prospectus basically says that there is gold backing up the shares of GLD, but if there isn’t, there isn’t a darn thing you can do about it, and by buying GLD shares you understand and agree to to this arrangement and everything else in the prospectus.

Personally, I don’t know how much it matters if HSBC has the gold backing up the GLD shares or not.  If you buy a share or shares of GLD, you have nothing in your hand except a keyboard and a monitor that shows you own something.  Rather than sticking to the point, I digress.  Some folks are under the impression that if push comes to shove, the owner of a share of GLD or shares of GLD, can redeem her shares for real, physical ounces of gold.  Not true, unless you are what the prospectus describes as an authorized participant, and you aren’t.  I know you aren’t, because the authorized participants hate me and stopped reading my posts last week.

Back to the subject at hand.  And if all you have is a piece of paper or a a few electrons saying that you own shares that have gold backing, all you really have is a promise, and that promise is only as good as HSBC’s word.  By the way, have you been watching the fines levied against HSBC, and other banks, for fraud, misrepresentation, and just plain old lying and cheating?  If HSBC ever has solvency issues, what do you have if you have shares of GLD?  You have a place in line with all the other creditors, and you will probably be at the back of the line.

Remember back a few paragraphs when I said that GLD had become so large that not only did it reflect the pog, but it was a factor in the influencing of the pog?

In the above chart the volume is not necessarily the amount of gold that the GLD holds, but it is rather the volume of GLD being traded.  The graph represents only 3 months of GLD trades, but in general as the pog rises so does the volume of GLD shares traded and as the pog declines, the trading volume of GLD declines also.  Kinda makes sense though, doesn’t it?  As the price of gold rises, the momentum traders enter the market and short term traders and chasers would rather trade electrons than carry around a bunch of metal, so GLD volume increases or decreases depending upon the trend, right?  Or, is a change in GLD volume a causational factor in the pog?

The estimated volume for Feb. 6, 2014, (the day before I am writing this), on the COMEX was 8,389 tonnes, so although the volume in paper tonnes of GLD traded is less than the COMEX, and much less than the LME, it is way more than the amounts of physical gold traded on any particular day.  Common sense says that the larger volume determines price more than smaller volume, so the GLD, the COMEX, and the LME all have more influence on the pog than physically traded gold.

The gold line in the above graph shows the ounces held by HSBC for the GLD from late 2008 to May of 2013.  The peak holdings appear to be about 43,000,000 ounces and in May of 2013, the held ounces are about 33,000,000.

In case you are wondering, and even if you aren’t, the green line in the above graph shows the total gold holdings by all the gold ETFs during 2012 and part of 2013, so you can see that the GLD is not the only ETF bleeding gold.  Of course you already knew that the COMEX registered gold inventory has been collapsing because you rush to your monitor on Saturday mornings to read my posts, right?   The present, February 6, 2014, number of ounces supposedly held in trust for the GLD is 25,626,058.06, so the GLD lost another 8 million ounces since May of 2013.

And just so you can see that the GLD is not the only gold ETF which has a declining physical inventory, the above chart shows some other gold ETFs and some unallocated gold repositories.

We can’t accurately know if or how much gold the LME is losing, or more accurately, selling, because the LME doesn’t give out that kind of info.  What we can infer from reports by Swiss refiners is that the LME is losing physical gold faster that a two dollar …, oops, let’s just say the LME is losing /selling a lot of it’s physical gold and quickly.  How do I infer that from Swiss refiners, you ask?  Oh c’mon, I know you are asking.  Swiss refiners are reporting that they have increased the number of work shifts and are now working literally 24/7 refining 400 oz. LGD, (London Good Delivery), bars, dore, and scrap gold into kilo and gram denominated bars.  In order for a gold bar to be included in the LME’s vaults as registered for sale on their futures platform, the bar has to be a 400 oz. LGD bar, kinda like the 100 oz. bars at the COMEX, but an ocean apart and a 400% increase in weight.  The Swiss refiners are also reporting that they have never been this busy or even close to this busy.  Scrap gold is the stuff that Americans sell at the “Cash for Gold” stores.

A 400 oz. London Good Delivery bar

So, the COMEX, the LME, and the GLD are all selling off major amounts of their physical stocks of gold.  The Federal Reserve is for the most part, telling Germany that the Fed isn’t going to give Germany it’s gold back.  And, (I forgot to tell you before, ya know, suspense and all that), when Germany requested that they be able to look at their gold being held by the Federal Reserve, the Fed said, “NO!”  That is when Germany said give us our gold, and the Fed said, “uh-uh”.  In my mind, and more than a few other conspiracy nut’s minds, when Germany asked for it’s gold and the Fed said, “NO!”, it means that the Fed does not have Germany’s gold.  Do I have proof?  Heck no.  Since when have I needed proof, or wanted it.  Proof would just mean that the sheeple know about it and there is no more money to be made.

I further take the Fed’s refusal to give Germany back it’s gold and refusal to even let Germany look at it’s gold as evidence that the Fed probably does not have much of any gold that the Fed is supposedly safekeeping for other countries and our own Treasury Department.  Our own Treasury Department’s gold is our gold, or was our gold.  No proof of that either, but I do know that Greenspan said before a Senate committee on July 30, 1998, “Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.”  The price of gold was $290 per ounce on July 30. 1998.  The price has risen, doncha think?

For every seller, there is a buyer.  So, who is the buyer?  Where is all this gold going?