Gold investment statistics commentary

Reprinted: World Gold Council Report

Quarterly statistics commentary Q3 2012

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Overview

This commentary summarises gold's price performance in various currencies, its volatility statistics and correlation to other assets, and the macroeconomic factors that influenced gold's behaviour during the quarter. In this issue, we explore the influences that unconventional monetary policy has on financial markets. In particular we discuss the effect of central bank policy actions on gold.

Q3 in summary

• Gold (US$/oz) returned 11.1% in the third quarter as investors responded to further central bank measures aimed at stimulating the economy. Volatility decreased during the period, with gold prices experiencing little movement in the first half of the quarter; correlations to other assets, generally low, remained similar to those seen in Q2.
• Central banks announced a continuation of their unconventional monetary policy¹ programmes in Q3.
• Central banks have numerous rationales for undertaking unconventional monetary policy, including lowering borrowing costs and supporting financial markets.
• Financial assets have responded to central bank policy announcements, but gold's reaction has been the strongest.
• There is a consensus that these policies drive investment into gold purely due to inflation-risk impact. We believe that there is not one but four principal factors that provide further support to the investment case for gold:
  • Inflation risk
  • Medium-term tail-risk from imbalances
  • Currency debasement and uncertainty
  • Low real rates and emerging market real rate differentials

Summary of gold price performance in Q3 2012

Table 1: Performance of gold with respect to various currencies - click to enlarge

Chart 1: Gold (US$/oz) performance and key events during Q3 2012

Table 2: Timeline of central bank action in Q3 - click to enlarge

Third quarter review

By the end of September, gold (US$/oz) was up 16% year-to-date with two thirds of the gains generated in Q3. This performance was echoed in most currencies with returns ranging from 5.0% to 11.1%, using end-of-period gold price data, and 0.7% to 5.2% using average prices. The difference between these two measures reflects gold’s sharp price rise towards the end of the quarter.
Exchange rate shifts had a notable impact on some key regional gold prices. During the first half of the year Indian rupee depreciation caused the local gold price to breach a key psychological threshold, generating the strongest return of the 19 different currency-denominated gold prices monitored by the World Gold Council. That currency weakness reversed in the third quarter, leading to a modest return of 5% for gold in rupee terms. Consequently, the year-to-date performance of the rupee gold price ranked only 11th (+15.7%) as of the end of Q3.
As Chart 1 illustrates, gold’s strong performance began in earnest only in the latter half of August. The first few weeks of the quarter had been quiet for gold as well as other assets. For equities and bonds, the likely cause was a combination of northern hemisphere vacation doldrums and low conviction amidst a slowing global economy and uncertainty about the fate of the euro area.
For gold, as for many other assets, central bank policy announcements and actions in late August and early September created a catalyst for price activity. It is critical to note that while gold prices react to monetary policy developments, they are more generally determined by a geographically and thematically broad set of factors. A number of positive gold-specific developments also took place in Q3, including the IMF’s reporting of central bank purchases of gold by Russia, Turkey, Ukraine and the Kyrgyz republic. Just before the start of the third quarter, Turkey announced that it had raised to 30% the proportion of gold held by commercial banks as capital requirements. This requirement will likely boost demand as Turkish commercial banks use gold as part of their capital portfolios.
Price volatility during the period was subdued, ranging from 11.4% for rupee investors to 16.4% for yen investors. Gold’s lower than average volatility was echoed in other markets: global equities, bonds and commodities all posted numbers below their long-term averages.²
Correlation statistics between gold and other assets were similar to those experienced in Q2 2012 (see Chart 2). Its correlation to developed and emerging market equities was slightly higher than normal, but its correlation to global bonds and commodities was lower than in Q2. However, these deviations from long-term averages were not large enough to imply atypical behaviour. In prior quarterly commentaries we have shown how gold’s correlation to equities hovers around zero over the long run, but can fluctuate over shorter periods of time.
In particular, both gold and equity prices moved higher during Q3, leading to an elevated correlation. However, prices were driven higher by different underlying reactions. While both responded to monetary policy announcements and measures undertaken by central banks around the world, equities responded to central banks’ pledges to stimulate economic growth; gold, on the other hand, moved higher encouraged by factors that we discuss in the section titled “unconventional monetary policy and gold”.

Chart 2: Gold's correlation to global assets - click to enlarge

Unconventional monetary policy

Events leading up to Q3 announcements

The key developments in Q3 were undoubtedly the series of declarations by central banks to expand their unconventional monetary policy programmes (UMP). Weak global macroeconomic data during the preceding quarters had created expectations among investors of further stimulus from major central banks. However, policy meetings were not scheduled until the latter half of Q3; thus, positioning for outcomes was kept on hold in anticipation of announcements. In addition, a concomitant slowdown in both India and China had also raised hopes that the Reserve Bank of India (RBI) and People’s Bank of China (PBoC) would act, fiscally or monetarily, to support their economies. Similar sentiment had been expressed in Brazil and South Korea.
As the quarter progressed, the case for further easing was emboldened by the weak incoming macroeconomic data. Global manufacturing indicators fell to a 36-month low in July – with noticeable slowdowns in the US and Europe.³ China’s industrial production growth reached the lowest level since May 2009, with GDP following suit to reach 7.6% YoY. The euro area contraction continued with 6 of 17 member countries in recession.⁴ Japan’s trade deficit quintupled to US$32bn, as a worsening export outlook compounded internal weakness.⁵ The news flow, though by now largely expected and supportive of further easing, helped drive asset prices higher across the board.
By the final week of August, the Federal Reserve (Fed) provided the first hints that it would consider an extension of its QE programme, despite some signs of housing and retail sector buoyancy. In addition, the European Central Bank (ECB) announced plans for its new bond buying programme on the premise of an ‘irreversible’ euro plagued by severe dislocations in the region’s government bond markets. By September, central-bank commitment to further stimulus had been announced in the US, Europe and Japan. China had launched a new infrastructure-spending programme to the tune of US$158bn, and India had vowed to lower its barriers to foreign investment.
The Fed extended its quantitative easing programme to an open-ended run rate of US$40bn per month. The ECB announced a new bond buying programme named “outright monetary transactions” (OMT), and the Bank of Japan (BoJ) announced a boost to its asset purchase programme, surprising markets by doubling the size of earlier extensions.
By the end of the quarter, gold was 11.1% higher, global equities finished up 6.2%, commodities were up 11.5% – the best performance since the first quarter of 2011 – and global bonds saw yields fall further and prices edge up 3.3%. Weakening economic data had finally spurred a concerted reaction by central banks, leading to a sharp rally in asset prices as the long wait for further easing came to an end.

Rationale and effect of unconventional monetary policy

Universally, the motivation for UMP is the need to remedy anaemic economic activity in the face of fiscal restraint and already exhausted conventional monetary policy. Central bankers hope a policy of asset purchases will, in the short to medium term, lower borrowing costs and increase perceived wealth through rising asset prices. The weakening of a domestic currency would also be a welcome spur for the export sector. Using these motivations, central banks have undertaken unprecedented monetary policies since 2008 (Chart 3).


Chart 3: Central bank balance sheets have collectively expanded - click to enlarge
Despite the difficult environment for central banks, they have arguably achieved some successes in financial markets: as the Bank for International Settlements (BIS) asserts, “unconventional monetary policy likely helped prevent further catastrophe after the global financial crisis and helped secure liquidity in Europe during the peak of its crisis.”⁶ These actions have, in aggregate, supported credit as well as equity markets (Chart 4). They have bought time for banks and governments to address solvency issues, lowered debt-servicing costs, and boosted asset prices and corresponding sentiment based on perceived wealth creation. However, few of these positive effects are directly linked to underlying growth.

Chart 4: Asset returns resulting from central bank actions- click to enlarge
“Monetary policy is not panacea,” Fed Chairman Bernanke said during a Q&A session in June. There are a number of potentially negative consequences, including the returns for savers and shortfalls for pension and insurance funds, food price inflation, and ‘moral hazard’ in financial markets. These and other consequences are well documented.⁷
While the highlighted longer-term reaction of assets has largely followed expectations, as shown in Chart 4, there have been a few exceptions. Equities in Europe and Japan have fallen since the advent of UMP. In addition, strong initial responses to announcements of monetary policy – both initiations and extensions of programmes – have tended to fade. The FTSE 100 has gained a mere 2% since November 2008, despite positive jumps following announcements. Finally, the yen has disappointingly kept rising despite aggressive easing by the Bank of Japan, further hurting the critical export sector.
We may not know for some time if these untested central bank policies will work for the real economy. In fact, Bernanke, in his most recent speech at the Fed conference in Jackson Hole, said “In summary, both the benefits and costs of non-traditional monetary policies are uncertain; in all likelihood they will also vary over time depending on factors such as the state of the economy and financial markets, and the extent of prior Federal Reserve asset purchases.” Recent academic research supports this uncertainty of success and the fleeting impact of current measures.⁸

Unconventional monetary policy and gold

A common perception is that UMP has a singular effect that is reflected in gold price reactions – the rise in inflation risks. However, a closer look shows that unconventional policy affects gold through four principal channels. While these effects will to some extent be present in conventional policy easing, they are exaggerated by unconventional policy.
First, Inflation risk is understandably the strongest rationale for gold’s reaction to unconventional policy. There is a well-established relationship between the amount of money in an economy and the rate of inflation – whereby too much money chasing too few goods causes price appreciation. However, this is not a straightforward relationship, and inflation can be contained if economic growth keeps pace with money supply growth.
Current unconventional policy has increased the monetary base in most countries without increasing the money supply (Chart 5). This is largely due to a tightening of commercial bank lending.⁹ The distinction is important: a simple metaphor might be a cheque that is yet to be cashed. While recent evidence shows that central bank balance sheet expansion has not fed through to an increase in money supply growth, money supplies are likely to increase over the long-term when the liquidity in the system translates to private sector spending.
The increase in money supply could be a potential catalyst for higher inflation in the future – a likely positive for gold investment. Previous research by the World Gold Council shows that a 1% change in money supply, six months prior, in the US, Europe, India and Turkey tends to increase the price of gold by 0.9%, 0.5%, 0.7% and 0.05%, respectively.
This crisis has forced central banks to aggressively fight against the risk of deflation. While a deflationary spiral is the greatest tail risk for many of these central banks – even low levels of inflation and dis-inflation could be troubling given high public debt levels in most advanced economies. In this context many market participants speculate that central banks have actually increased their tolerance for inflation, exceeding target levels for brief periods of time to accelerate the deleveraging process. To this end, some point to Bernanke vowing to not withdraw stimulus “[prematurely]”, suggesting an acceptance of higher inflation down the road. Similarly, the Bundesbank head, Jens Ulbrich, announced in May that a slightly higher inflation target could be accommodated.¹⁰ While the inflation needle has yet to move, there appears to be a willingness to tolerate a higher rate of inflation in future to ensure the sustainability of fragile economic growth.

Chart 5: Money supply growth has not kept up with central bank asset purchases - click to enlarge
In summary, while inflation is to many investors a primary concern, it is still some way off.  The near term threat of deflation remains real, and as long as central banks are willing to resort to unconventional measures, this will imply that the deflationary threat has not disappeared.
Research by Oxford Economics shows that both inflationary and deflationary environments could be conducive to gold investing. While gold’s performance during periods of high inflation is well understood, the deflationary environment is less understood. Using its global macro-economic model, Oxford Economics found that despite currency related headwinds, a deflationary environment would prove destructive to risk assets such as equities and housing, with gold outperforming.
Second, closely linked to the inflation effect is the impact that unconventional policy has on currencies. Although seldom explicitly stated, a weaker currency is a desirable outcome for most economies in the current environment. As global trade slows, a weaker currency becomes all the more important to maintain export competitiveness. While the term ‘competitive devaluation’ may be a little dramatic, the problems of currency strength are evident.
If a desired indirect effect of expansionary monetary policy is a weaker currency to promote export-led growth, then at least on that front, central banks like the BoJ and the Swiss National Bank (SNB) have not succeeded. Both the BoJ and SNB have had to resort to several episodes of intervention to prevent their currencies from rising too quickly. Elsewhere, countries have voiced their concerns over the ramifications of UMP. Sweden’s Riksbank will be monitoring the exchange rate closely after posting an “unexpectedly” rapid appreciation in Q3.¹¹ The Norwegian sovereign wealth fund has been selling the krone to counter investment flows, and the central bank has not ruled out currency intervention to maintain its inflation target.¹² Most recently, Brazil’s finance minister, Guido Mantega, expressed anger at the Fed over QE3, which he termed a “protectionist” move.¹³ Given that gold is typically transacted using its US-dollar price as reference, it naturally provides a hedge against an investor’s concern over domestic currency debasement; this is especially true for US dollar-based investors who typically see a negative correlation between the US dollar and gold.
Third, the willingness of central banks to engage in protective strategies provides an implicit ‘put’ option – an implied guarantee to prevent precipitous falls in asset prices. This, however, raises the risk of undermining the efficient flow of capital, which could foster new and dangerous imbalances in the global economy. By vowing to intervene to prevent slides, some of the tail risk has undoubtedly been removed in the short term. However, by extension, the distortion created by intervention can have a longer term impact on tail risks by incentivising credit buildups and the inefficient allocation of capital to firms and households at an artificially low interest rate.¹⁴
With increased tail risk looming in the longer term, investors need to take these rallies in financial markets with caution. As investor sentiment on the efficacy of central bank policy changes, equity markets might give away some of the central bank-led gains. During times of crisis and sharp market pullbacks, gold has proven to be an effective diversifier. Research shows that gold could play a role as a tail risk hedge by protecting investors against falls in equity and credit markets.
Fourth, an environment of unprecedented low interest rates – negative in real terms – can greatly impact savers and investors. In our Q2 commentary, we discussed the skewed risk/reward scenarios that investors face in such low-rate environments. One motivation for unconventional policy, to further depress interest rates, stems from the belief that households will increase their expenditures. However, prudent households will have to save greater sums of money to pay future obligations in a low interest rate environment. The almost universally negative real savings rates in developed countries are likely to see a shift of saving to real assets that will provide long-term real security.
In addition, the relatively higher real rates across emerging markets are attractive for investment flows into those countries from western investors as risk adjusted returns appear more favourable. Developed market currency weakness amplifies the attraction of emerging market investment. Flows of capital to emerging markets have a clear impact on wealth creation – a principal driver of gold demand in emerging countries.¹⁵

Conclusion

Most central banks currently view their country’s economic state as unacceptable and have acted to accelerate the economic recovery. However, there are many obstacles facing developed countries that will force central banks to continue their unconventional monetary policies. In the US, the Fed is motivated by the ailing labour and housing markets and would like unemployment and inflation to be closer to normalised levels. The market expects partial normalisation to begin around mid to late 2014, though if Japan were to be used as a guide, a prolonged period of subpar performance may lie in store. BoJ’s policies have set a precedent in unconventional monetary policy duration as they are now in their 12th year. The ECB is caught between regional recession coupled with fiscal austerity and a prolonged period of intervention before growth and price stability are restored to a consistent path.
The backdrop of negative real yields, a slow recovery and a likely continuation of expansionary monetary policies – with all the risks these present – provides further support to the long-term strategic investment case for gold.
¹Unconventional monetary policy refers to measures used to provide liquidity once policy rates are at the zero bound.
²2 Long-term average volatilities (December 1987 to date): Gold (15.7%), Global equities (15.2%), Emerging markets (18.8%), Global bonds (5.5%), Commodities (21.4%), US dollar index (8.6%), Q3 volatility: Gold (14.4%), Global equities (12.8%), Emerging markets (15.6%), Global bonds (3.8%), Commodities (18.1%), US dollar index (6.7%).
³The US ISM survey has ticked up in September to 51.5, down from a high of 60 in January 2011.
⁴NBER definition of two consecutive quarters of negative growth.
⁵Gross debt reached 236% of GDP and the budget deficit 10% of GDP.
⁶BIS Annual Report 2011/2012, Neely, Christopher J. The large-scale asset purchases had large international effects, 2012.
⁷BIS Annual Report 2011/2012, White, 2012. The unintended consequences of loose monetary policy. Economist, QE, or not QE?, July 2012.
⁸Berkmen, S. Bank of Japan’s quantitative and credit easing: Are they now more effective?; Gambacorta et al. The effectiveness of unconventional monetary policy at the zero lower bound: A cross-country analysis, 2012. Kozicki et al. Unconventional monetary policy: The international experience with central bank asset purchases, Bank of Canada review, 2011.
⁹Under the ‘transaction’ motive of money, nominal GDP equates to demand for money.
¹⁰Bundesbank prepared to accept higher inflation, Spiegel online, May 2012.
¹¹Minutes of the (Riksbank) monetary policy meeting, September 2012.
¹²“Norway won’t tolerate persistent Krone Gains, Qvigstad says”, Bloomberg, August 2012.
¹³Financial Times, September 2012.
¹⁴Reinhart and Reinhart. After the fall, 2010. Jorda et al. When credit bites back: leverage, business cycles, and crises, 2012.
¹⁵World Gold Council, India: heart of gold: strategic outlook. World Gold Council, China gold report: gold in the year of the tiger.

Investment statistics commentary archive

The quarterly Investment Statistics Commentary succeeded the Gold Investment Digest (GID), which was published between Q3 2006 and Q2 2011 and examined trends in price, investment markets and the macro-economy relating to gold and other assets typically found in an investor portfolio.
The Commentary complements the investment statistics analysis updated on a regular basis.
Investment statistics commentary Q2 2012
Investment statistics commentary Q1 2012
Full year 2011 - Download this do

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Why savers should be saving gold and silver now!

This article has been revised and reprinted on Sept 15th 2012.  It can be found Here!

Buying physical Gold and Silver may be the best course in 2012.

Did Bankers Deliberately Crash MF Global to Crash Gold and Silver Prices?

December 27th, 2011

Did bankers use the MF Global bankruptcy to suppress gold and silver prices and create the panicked appearance of collapsing precious metals to give themselves additional precious time to delay the crash of the Euro and the US Dollar? As crazy as this sounds, a closer investigation of some key data seems to imply this possibility. Though bankers claim that they created futures markets to provide a mechanism for commodity producers to hedge against volatile market prices, I have never bought the kool-aid the bankers were selling in this explanation for the rationale behind their creation of futures markets. Given that today, futures and spot prices for gold and silver in the short-term are entirely set by banker manipulation of the supply and demand for paper derivatives that often have no backing of any physical metal, I believe that bankers created futures markets for the explicit intent of allowing themselves to manipulate the prices of commodities and to enrich themselves, and themselves only, through the process of alternately and artificially inflating and deflating prices as would not be allowed in any type of free market. In other words, bankers invented futures markets to allow themselves to siphon off and steal money from other parties that wanted to invest in commodities with a mechanism, risk-free to them, that required deception and zero honest work and zero integrity.

The futures markets in commodities is such a deceptive market that it is hard to know even where to begin to unravel its many mechanisms of deceit in all their glory. Futures contracts traded on the world’s largest commodity markets such as the COMEX in New York and the LBM in London allow bankers to commit reverse alchemy, turning real physical gold and real physical silver into nothing but false paper contracts and air. Secondly, through futures contracts traded in New York and London, bankers routinely defy the economic principles of supply and demand, and set short-term prices for gold and silver that literally have zero to do with the supply and demand dynamics of the physical gold and physical silver market. In the world of physics, such an illogical, comparable feat of deception would be the indefinite suspension of the law of gravity. Bankers invented paper derivative gold and silver markets to allow themselves to literally defy and suspend every single sound economic principle that exists.

This is important to understand because not only does understanding this concept make the bulk of what you learn in business school a lie and entirely useless, but also because bullion banks such as Deutsche Bank, Citibank, JP Morgan, Goldman Sachs et al that serve as the puppet conduits for more powerful families that control Central Banks, routinely used to lease physical gold into the open market as their primary mechanism to suppress the price of gold and silver. However, as their mechanism of fractional reserve banking began to threaten the viability and utility of the most widely used fiat currencies in the world, the USD and the Euro, bankers understood that they needed to utilize and/or create another mechanism to suppress gold and silver prices that could replace selling physical PMs into the open market as they no longer wished to give up a solid asset with no third party counter-risk for what they knew they were turning into essentially worthless pieces of paper. Thus bankers increasingly turned to the paper futures markets to manipulate and control the price of gold and silver and also served up additional bogus derivative products to the public like the GLD and SLV ETFs. Bankers knew that there was no way they could possibly control the price of gold and silver if the supply and demand determinants of physical gold and physical silver had anything to do with the price, so they conspired to fool the world into believing that the fake paper price they set was set by the supply and demand of the physical markets.

Collapsing OI of Gold/Silver Futures Markets Directly Related to MF Global Collapse?
And here’s where MF Global enters the banking cartel gold and silver price suppression scheme. Today, short-term futures and spot prices of gold and silver have almost nothing to do with the physical supply and demand dynamics of gold and silver, as odd as that may sound. Bankers created the futures markets and paper derivatives in gold and silver to kill free markets and for the express purpose of suppressing gold and silver prices. Today we literally have no idea what the free market price of gold and silver should be or could be, besides the fact that both would be multiples higher than their current price, because of the fake paper market in gold and silver that the bankers created.

As well, bankers ensured that they armed a legion of worker bees in commercial investment firms all over the world that would represent these paper derivatives backed by very little physical gold and silver to their clients as the equivalent of investing in 99.999% pure physical gold and silver. In doing so, the worker bees thereby lured people all over the world into what will turn out to be the fatal mistake of not buying millions of troy ounces of physical gold and silver and instead buying their offering of fool’s gold and fool’s silver. When we receive a massive default of gold and silver futures contracts that stand for delivery on the COMEX or LBM, or if the SLV and GLD default, then, and only then, will the public start to see true price discovery of physical gold and physical silver in action. However, for clients of MF Global, unfortunately, they have already experienced the mistake of buying fool’s gold and fool’s silver from the bankers and have received air in exchange for gold and silver futures contracts they purchased that stood for delivery.

Bankers invented fake paper gold and silver contracts, because they knew that if they could not fulfill contractual obligations to deliver physical gold and physical silver because the contracts were a binding lie to begin with), that they could always renege on these contractual obligations and give the people the nothingness they truly owned in return. And thus, we have the story of MF Global.

Ratings agencies downgraded MF Global on Oct 25 and MF Global declared bankruptcy on Oct 31. If one scours the data that the Chicago Mercantile Exchange (CME) releases via its aggregated Commitment of Trader (COT) reports during this time period, one may not notice any data that immediately stands. However, investigation of the disaggregated reports reveals far more interesting patterns that almost undoubtedly can be traced back to the collapse of MF Global. In a period just preceding the MF Global collapse, from late August to mid October, the open interest (OI) in longs in gold and silver futures within the Managed Money category collapsed by 33.75% in gold (202,430 to 136,103) and 44.74% in silver (29,849 to 16,494). During this exact same time period, shorts in the gold and silver futures in the Managed Money category increased by 19.3% and 83.82% respectively (see the chart below). Within the Managed Money category, between Sept 13th and 27th, in just a two-week period, the drop in OI in the longs in gold and silver futures was even more pronounced, with a 25.41% plunge and 34.3% plunge in silver. I imagine if someone could trace the connection of this plunge in OI in the Managed Money category in the gold and silver futures markets, one would discover that a good deal of the plunge was somehow directly tied to the impending MF Global bankruptcy and its freezing and/or liquidation of gold and silver futures accounts in its possession.

After Phase I of the collapse in OI in the gold and silver futures markets, Phase II followed. When the story about MF Global’s legalized client theft hit the presses, an enormous public distrust of the entire futures markets started to build. If clients lost millions of dollars in gold and silver futures accounts due to forced liquidation or freezing of contracts that they were holding for delivery, anyone that had considered using the futures markets to take delivery of real gold and real silver following the MF Global debacle obviously reconsidered their options. Thus, due to the massive fraud of the futures markets that was revealed by the MF Global collapse, another huge drop in the OI of gold and silver longs in the Managed Money category occurred during Phase II (as labeled in the above chart) that respectively amounted to an additional respective 11.79% and 7.48% plunge. In essence, it appears that the MF Global collapse served up the exact same price suppression effect as a CME issued initial or maintenance margin hike in gold and silver futures, which forces a tidal wave of unwanted and involuntary liquidation of gold and silver longs that consequently violate technical support lines and trigger technical sells.

Of course, we also have to factor in the temporary OI-increasing effect of the risk-on CME event when they lowered initial margins to a 1:1 ratio with maintenance margins at the onset of November. Still, given the figures presented in the chart above, it seems that bankers used the MF Global collapse to force liquidation of gold and silver longs in the futures market quite rapidly and drastically. Why is this important? This is important because typically strong hands ride out any temporary banker manipulations of gold and silver prices downward. In this case, strong hands, if they existed at MF Global, were not given this opportunity and were forced to liquidate or had their accounts frozen whether or not they desired such an outcome. Furthermore, if primarily strong hands were forced out of the futures market, this would leave the majority of volume in the gold and silver futures markets primarily in the hands of the criminal banking cartel. We’ve seen repeatedly, this past year in the US S&P 500 index, when low trading volume primarily controlled by the banking cartel has translated into curious and inexplicable market bounces of 2% in a single day. In other words, low trading volume allows bankers excessive and easy manipulation over markets. If this was indeed the scenario bankers deliberately created with the MF Global collapse, then the MF Global collapse and simultaneous collapse of open interest in gold and silvers futures certainly would have paved the way for the banking cartel to easily manipulate gold and silver prices.

There was also further circumstantial evidence that bankers used the MF Global collapse to collapse gold and silver futures markets at the end of 2011. For example, in an article posted on the SilverDoctors blog by Jim Willie in which he gathered data regarding the amount of physical gold and silver ounces represented by the longs at MF Global that were standing for delivery in the futures markets before these contracts imploded, he stated: “JP Morgan increased the amount of registered silver and gold by precisely the amount that was suppose to be delivered [by MF Global]…JP Morgan effectively averted both a Comex default and a European Sovereign Debt implosion.”

Silver Lining in the MF Global Debacle?
Can there be a silver lining in the MF Global debacle? I believe that in the long-term, this extremely unethical, negative event could transform into a positive game-changer in the way people buy large amounts of gold and silver. Obviously, the futures market is not a safe market for anyone seeking to take delivery of millions of dollars of physical gold and silver as many MF Global clients learned. The GLD and SLV ETFs, of course, are no safer than any gold or silver futures contract for the same reasons. So in the future, and I mean the immediate future starting now, I believe that large buyers of physical gold and silver will now opt to bypass the bullion bank’s middle men in the futures market and go directly to the gold and silver mining companies to buy large quantities of bullion. This should eventually help usher in the death of futures markets as a mechanism for buying physical gold and physical silver and be a step towards establishing a free market for gold and silver prices for the first time in our lives. Mark Cutifani, CEO of AngloGold Ashanti, recently echoed the same: “Major [asset management fund] buyers are finding it is hard to get physical gold. People are coming directly to us [for large gold purchases,] people who want tonnes of physical gold, people with serious financial muscle, because they are finding it is very difficult to secure the volume of gold they want. That is something we have noticed over the last 18 months, and it has been increasing in the last six months. People are finding it’s hard to get physical gold.”

People that want to own physical gold and physical silver never should have been buying the GLD, SLV, or gold and silver futures. Now, in light of the MF Global debacle, scores of people will stay away from these fraudulent vehicles for good.

About the author: JS Kim is the Chief Investment Strategist and founder of SmartKnowledgeU, a fiercely independent investment research and consulting firm with a mission to help re-establish the monetary freedom that bankers have stolen from us. Despite believing that gold and silver will remain highly volatile in 2012, JS believes that long-term holders of physical gold and silver will be richly rewarded as bogus paper gold and silver derivatives start collapsing and reach their intrinsic value in coming years. Follow JS on Twitter and Facebook.

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