In the modern history of the international market for the precious metals of gold and silver, the fallout from the COVID‑19 public health crisis during February – April 2020 will stand out like no other.
Around the world, fears regarding the lethality of COVID-19 resulted in national and provincial governments taking unprecedented action in locking down their economies resulting in:
a systemic collapse of economic activity including economic production, business sales and profitability;
some instances the quickest and sharpest collapse of share market prices (e.g. the S&P500);
an explosive rise in unemployment; and
mass hysteria and social panic.
This hysteria manifested itself in significant hoarding of particular products such as toilet paper, food, water as well as physical precious metals – i.e. physical gold and silver. The hoarding of physical bullion was in response to:
a dramatic fall in general economic confidence among businesses and consumers;
the rapid loss of wealth being experienced in financial markets (resulting from the rapid loss in share markets);
nervousness about the solvency of financial institutions such as banks and hedge funds; and
the unprecedented fiscal and monetary policy stimulus response by governments and central banks.
However, despite this surge in demand of physical precious metals, which some industry participants suggested was unprecedented in the past 30 years, the price behaviour of gold and silver did not reflect this surge as:
the internationally recognised price of silver (as expressed in Australian dollars) declined by 26.2% from 24 February 2020 to 18 March 2020;
the price of physical gold and silver decoupled from the internationally recognised price with physical bullion selling in both wholesale and retail markets anywhere between 10% to 30% over the internationally recognised price; and
the gold-to-silver ratio (GSR) reached an all-time high in human history on 19 March 2020 at 122.07 (see Graph 1).
Graph 1: Gold to Silver Ratio as measured by the Perth Mint in Australian Dollars
Such dramatic and unusual movements in the price of gold and silver, especially silver, during a period of economic crisis and surging demand have caused significant confusion among the ordinary public as to:
why did the gold and silver market exhibit this price action? and
how are the price of precious metals determined?
While industry participants and market observers attempted to rationalise these price movements by suggesting that:
margin calls on leveraged portfolios contributed to the liquidation of gold and silver positions (such as those held in Exchange Traded Funds (ETFs) or in the futures market (particularly at the COMEX)); and
a decline in the industrial demand for physical silver
were the rationale for these price movements, the role of market manipulation in both the gold and silver markets by governments, central banks and commercial banks cannot be discounted as a contributing factor.
To many people around the world the manipulation of gold and silver prices is largely an unknown scandal and even for many participants involved in the gold and silver market, such as retail investors, the mechanics of how gold and silver price manipulation operates is poorly understood.
It is due to the former as to why in January 2020, I published a detailed article entitled, ‘The Undeniable Manipulation of the Silver Market’, which conclusively proves that the internationally recognised price for silver bears no logical relationship with the physical market in Australia when one considers:
that the price of silver peaked in Australia on 22 January 1980 at $AUD 44.82 per ounce;
that the price of silver in January 2020 was 44% lower than its 1980 peak;
the size and growth of the Australian money supply (which grew by approximately 2600% between January 1980 and January 2020); and
the above ground stockpile of physical silver (which only grew by 92% over a similar corresponding period).
My January 2020 article also provided a high-level overview of the techniques being used to manipulate silver prices. The intention of this article is to provide greater technical detail.
How are gold and silver prices determined?
When considering what is the internationally recognised price of gold and silver, there are two prices which are important to observe – the ‘spot price’ (the current market price of unallocated gold and silver) and the ‘futures price’ (the price at a future point in time). These prices are both explained in Table 1.
Table 1: Difference between spot and futures prices
Gold and silver spot prices are determined by LBMA market participants who are central banks and large commercial banks which have trading desks (otherwise refer to as bullion banks). The London Gold Market is established and operates by ‘market makers’ which is the highest category of membership of the LBMA. Market makers are required to fulfil particular duties and obligations (otherwise referred to as business requirements) including:
being able to respond quickly to requests for prices from other market makers, providing two-way price quotations (i.e. bid and ask prices) in line with current market quotations;
offering price quotation services during normal London Bullion Market trading hours; and
being able to quote a combination of spot, options and forwards for both gold and silver throughout the London business day in the maximum quantities.
By fulfilling these obligations, market makers provide liquidity to the London gold OTC spot market and London silver OTC spot market. By purchasing through either the London gold OTC spot market or the London silver OTC spot market, sellers have T + 2 days delivery date obligation.
Gold spot prices as defined by the LBMA Gold Price are set twice daily at 10:30am and 3pm London whereas the LBMA Silver Price is set once daily at 12pm daily. Both the LBMA Gold Price and the LBMA Silver Price are expressed in US dollars.
The process of setting these prices occurs through an electronic auction process which is referred to as the ‘London Fix’ The auction is administrated by the ICE Benchmark Administration (or IBA) which is part of the Intercontinental Exchange through a market-based platform called WebICE.
The auction process (as shown in Diagram 1) is conducted according to the following steps:
1. the auction chairman sets the opening price in line with market conditions;
2. participants enter buy/sell orders by volume (i.e. number of ounces) priced in US dollars;
3. should the net volume of all participants fall within the pre-determined tolerance at the end of a round (i.e. the tolerance level is set at 10,000 ounces), the auction will be complete (if not, the auction is conducted again); and
4. Netting of orders is processed automatically for participants with all house and client orders, plus any share of the imbalance, contributing to their final net volume. This net volume is then matched against other participants to produce trades with immediate trade confirmations.
Diagram 1: The IBA Auction Process
Some market participants, such as London based gold trader Andrew Maguire, have commented that the London gold and silver spot markets should be considered as simultaneously a:
commodity market; and
foreign exchange market,
given that gold and silver are both traded commodities which have industrial applications as well as being alternative forms of money to government issued fiat currencies.
As being foreign exchange markets, the London gold and silver OTC spot markets:
are both very liquid markets; and
have very tight bid/ask spreads.
The LBMA Gold Price as expressed in US dollars is identified by the trading symbol XAUUSD whereas the LBMA Silver price is identified by the trading symbol XAGUSD.
Of the Futures markets, the most critical is the COMEX which is based in New York and is part of the Chicago Mercantile Exchange (or CME) Group. To understand how a futures market operates, some key terms require definition and explanation which are outlined in Table 2.
Table 2: Key Terminology of the Gold and Silver Futures Market
Within the gold and silver COMEX futures market, futures contracts spanning months ahead are openly traded by both ‘commercial’ and ‘non-commercial’ entities. The amount of physical gold and silver that is traded in the futures market as represented by the ‘open interest’ is held within a COMEX approved warehouse or depository so that contracts which ‘stand for delivery’ can be honoured.
The weekly movements in short and long contracts held by the ‘commercials’ and ‘non-commercials’ are recorded and reported via the COT report. Notices of gold and silver physical deliveries as settlement of futures contracts whereas quantities held within the COMEX warehouses are reported on a daily basis. COMEX warehouse reports detail the amount of eligible, registered and pledged gold and silver held within approved warehouses or depositories.
Twice a month (i.e. bi-monthly), certain parties with long contracts have the ability to ‘stand for delivery’ requiring those parties with short contracts to deliver the requisite amount of physical COMEX defined gold and silver bars. For those parties not standing for delivery, these contracts are either rolled over in the next month’s futures contract or are settled in US dollars (i.e. a cash settlement).
Historically, the net position of the ‘commercials’ have been a superior indicator of future price movements. Generally, gold and silver mining companies use the futures market to lock in a price for their forward production as a risk mitigation hedging mechanism.
The CTFC is charged with the responsibility of overseeing the operations of the COMEX to ensure that trading activity in these markets are consistent with the legal requirements as defined by US law.
The relationship between spot prices and futures prices
The internationally recognised price for gold and silver is the spot price determined in the London OTC spot market, however this price is heavily influenced and ultimately determined by the price established in the futures market, especially the COMEX which accounts for the overwhelming majority of all gold and silver futures trading globally.
This is because the same international bullion banks which operate on the COMEX also operate in the London OTC spot market as well and thus possess monopolistic dominance over these markets. One of the mechanisms in which bullion banks exert influence on the OTC market is through EFP contracts as these contracts allow traders to switch gold and silver futures positions to and from physical, unallocated accounts. Bullion banks can:
trade EFP COMEX gold and silver contracts on the global OTC market via the Clearport platform; and
settle EFP COMEX gold and silver contracts in London.
Thus, the futures traders within these bullion banks make leveraged derivative bets on worldwide futures exchanges which determine the fluctuations in the gold spot price.
In normal market conditions, the most immediate month’s futures price of gold and silver typically only differ by a few US dollars from the LMBA gold and silver spot prices.
How are gold and silver prices manipulated?
Given that the futures market ultimately influences and determines the price of gold and silver, it should come as no surprise that a majority of the market manipulation occurs at the COMEX which is the largest gold and silver futures market globally. In my previous article, The undeniable manipulation of silver prices, I provided a high-level outline of some of the techniques used to facilitate this manipulation.
Of these outlined techniques, the use of ‘unbacked short contracts’ is the most egregious technique.
This technique, which is described succinctly by Craig Hemke from TF Metals report, involves:
Long Futures contracts demanded and purchased by speculators who acquire the contract via loans (or margin) and who never take physical delivery;
Short future contracts are supplied by banks who have little to zero access or ability to deliver physical metal if forced to do so – meaning that the eligible gold and silver stored in a COMEX approved warehouse or depository only making up a fraction of the total amount of open interest bullion metal which is being traded.
Thus, sellers sell metal they don’t have and buyers buy metal they don’t want to take delivery of.
To understand how the COMEX operates in practice under this scheme, Hemke describes that as gold and silver prices:
rise - the supply of open interest contracts increases as bullion banks issue new futures short contracts to meet the increased demand by speculators. This slows the pace of prices rising and creates an effective price ceiling;
fall - due to buying/momentum exhaustion due to the formation of a price ceiling, speculators sell their gold or silver long contract exposures thus allowing the bullion banks to buy back these long contracts to cover their artificially created short contracts and delivery obligations. This results in the supply of open interest contracts declining.
The use of unbacked short futures contracts has reached a scale of staggering proportions.
As noted by Ronan Manly from BullionStar, in 2018, only about 34 tonnes of registered gold stocks were delivered through futures contracts and yet 260,000 tonnes of gold were traded on the COMEX (or 27 million ounces per day) which is:
more gold than has ever been mined in history;
86 times annual gold mining supply.
Moreover, Ronan Manly noted as recently as 16 April 2020 communication from the COMEX to the CTFC states that up to 50% of gold stocks recorded in COMEX warehouses and depositories as ‘eligible gold’ may in fact be held as a long-term investment and may not be available to be used for delivery obligations.
Such a revelation is material because it exposes the fact that:
there is significantly less gold available that can be used for gold contract deliveries than what the COMEX has stated to market participants; and
the scale of unbacked short futures contracts is greater than what was estimated or understood by those market participants, analysts and observers aware of widespread market manipulation on the COMEX.
Finally, another technique which has been deployed to manipulate gold and silver prices are EFP contracts which according to Craig Hemke have been used in staggering and literally impossible quantities.
For example, Hemke notes that from 24 November 2017 to 24 November 2019, 4,444,344 contracts were executed which implies that 13,820 tonnes of physical gold were exchanged in London which is 5 times more than annual gold supply.
Hemke notes that this amount of unencumbered gold did not exist on the open market during this period which as of November 2019 was more than the combined holdings of the United States, Germany, and Switzerland!
Hemke concludes that the issuance and execution of this scale of EFP contracts point to systemic manipulation and fraud and that EFP contracts are used as a means to control prices off-exchange as they reduce a multi-party transparent contract at the COMEX to a two-party non-transparent contract.
Thus, the staggering use of unbacked short futures and EFP contracts to suppress the price of gold and silver has continued into 2020 and is a key factor as to why the physical price of gold and silver ‘decoupled’ from the futures price during the February – April 2020 period with the onset of the COVID‑19 public health crisis and the subsequent surge of demand for physical gold and silver bullion.
With the onset of COVID-19, unprecedently fast and unusual price movements occurred throughout the gold and silver markets, especially with:
the decoupling of the price of gold and silver between the internationally recognised price and the price within the physical market;
collapse in the international price of silver which resulted in the GSR rising to an all-time high in human history at 122.07.
The purpose of this article was to further expand on the mechanisms of how the prices of gold and silver are manipulated beyond those outlined in my previous article, The undeniable manipulation of silver prices.
Discussion as to why:
gold and silver prices manipulated; and
regulators such as the CFTC haven’t addressed the manipulation
are topics for subsequent articles.
Nevertheless, despite this manipulation, many market participants and observers have started to issue bullish forecasts for gold and silver over the coming 18 months towards the end of 2021 such as Bank of America who have issued a 2021 forecast for the price of gold at $US 3,000 per ounce.
Such forecasts are in response to the unprecedented unleashing of economic stimulus around the world in response to the COVID-19 crisis which has included central banks hyperinflating their currencies through dramatic increases of their money supply which in turn diminish their currencies’ purchasing power.
Time will ultimately tell whether such forecasts are correct.
John Adams is the Chief Economist for As Good As Gold Australia
 In multiple interviews which were broadcast on YouTube channels such as Reluctant Preppers, RoadtoRoota and Arcadia Economics, Andy Schectman - President and Owner of American retail bullion dealership Miles Franklin indicated that the retail demand for physical bullion in North America was unprecedented in his over 30 years of industry experience.  This calculation is derived from price data published by the Perth Mint.  https://www.adamseconomics.com/post/the-undeniable-manipulation-of-the-silver-market  http://www.lbma.org.uk/lbma-gold-price  http://www.lbma.org.uk/lbma-silver-price  Note that the LBMA is overseen by the Bank of England.  Note that a troy ounce is a unit of measure used for weighing precious metals (i.e. gold, silver and platinum) dating back to the Middle Ages. A troy ounce contains 2.75 grams more than a regular ounce given that one regular ounce contains 28.35 grams whereas a troy ounce contains 31.1 grams. The troy ounce became the official standard measurement for gold and silver in Britain and the US followed suit in 1828.  LBMA defined ‘Good Delivery Bars’ are bars which meet certain specifications as defined by the LBMA. The LMBA ‘Good Delivery List’ lists which refiners of gold and silver bullion bars have been accredited by the LBMA as meeting good delivery standards. See the following link: http://www.lbma.org.uk/good-delivery-list  COMEX defined Good Delivery Bars’ are bars which meet certain specification as defined by the COMEX and are produced by a refiner accredited by the COMEX. See the following link: https://www.cmegroup.com/education/courses/introduction-to-precious-metals/what-is-the-precious-metals-delivery-process.html  Historically, COMEX silver futures contracts were denominated in 5,000 troy ounces (see the following link: https://www.cmegroup.com/trading/metals/precious/silver_contractSpecs_futures.html), however starting from June 2013, contracts were also denominated in 1,000 troy ounces (see the following link: https://www.cmegroup.com/trading/metals/1000-oz-silver-futures.html).  http://www.lbma.org.uk/membership-rulebook  https://www.investopedia.com/terms/l/london-spot-fix.asp  The determination of the ‘LBMA Gold Price’ benchmark and the ‘LBMA Silver Price’ benchmark are regulated by the European Benchmark Regulation. See the following link: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32016R1011  https://web.archive.org/web/20160315140934/www.theice.com/iba/lbma-gold-price  See footnote 14.  Listen to Andrew Maguire in the following interview: https://www.tfmetalsreport.com/podcast/10110/pricing-system-broken-thursday-conversation-andrew-maguire  The COMEX is a designated contract market offering products subject to COMEX rules and regulations. The COMEX which is part of the New York Mercantile Exchange (or NYMEX) was part joined the Chicago Mercantile Exchange (CME) group in 2008.  The CME was originally established in 1898 as the Chicago Butter and Egg board and was renamed as the CME in 1919.  https://www.cftc.gov/About/Mission/index.htm  Data about COMEX delivery notices and gold and silver stocks held at approved depositories can be found at the following link: https://www.cmegroup.com/clearing/operations-and-deliveries/nymex-delivery-notices.html  As noted by Gijsbert Groenewegen, EFPs were created a century ago in commodities such as grains to deal with a temporary situation of where an emergency situation (such as a supply shock) resulted in an emergence of a naked short. See more at the following link: https://www.tfmetalsreport.com/blog/8942/guest-post-explaining-exchanges-physical-efps-gijsbert-groenewegen  See Gijsbert Groenewegen at https://www.tfmetalsreport.com/blog/8942/guest-post-explaining-exchanges-physical-efps-gijsbert-groenewegen  Note that according to the World Gold Council, over 90% of global gold trading is accounted for in the London OTC market, the COMEX and the Shanghai Gold Exchange. See the following link: https://www.gold.org/what-we-do/gold-market-structure/global-gold-market  As noted by the CME Group, EFPs are a key component in the pricing of OTC spot gold and spot silver. See the following link: https://www.cmegroup.com/trading/metals/precious/gold-futures-and-options/exchange-for-physical-gold-futures.html  https://www.cmegroup.com/clearport.html  https://www.bullionstar.com/blogs/ronan-manly/lbma-colludes-with-the-comex-to-lockdown-the-global-gold-market/  See the following graph, for example, from the World Gold Council: https://www.gold.org/what-we-do/gold-market-structure/global-gold-market  These techniques include: (1) selling unbacked sell orders into the futures market; (2) spoofing (i.e. the placement and withdrawal of fake trades on the COMEX); (3) rigging the rules of the COMEX which provides the capacity to deny market participants to receive physical gold and silver and forces contracts to be settled in cash; (4) the rehypothecation of physical silver bullion meaning that the same ounce of silver is used as collateral in multiple loan and lease agreements including with ETFs; and (5) the use of dark pools of money such as the US Government Treasury Department’s Exchange Stabilisation Fund to manipulate and suppress gold and silver prices.  https://www.sprottmoney.com/Blog/the-continuing-comex-fraud-craig-hemke-05-112019.html  As noted by JM Bullion, most futures contracts in recent times are either closed prior to expiration or are settled in cash. See the following link: https://www.jmbullion.com/investing-guide/paper-investments/gold-silver-futures/  Within financial market parlance – the selling of a short contract without holding the underlying asset is known as a ‘naked short’.  https://www.bullionstar.com/blogs/ronan-manly/new-comex-pledged-gold-shrinking-the-pool-of-registered-inventory/  https://www.bullionstar.com/blogs/ronan-manly/comex-bombshell-most-eligible-vaulted-gold-has-nothing-to-do-with-comex/  https://www.sprottmoney.com/Blog/exchange-for-physical-craig-hemke-04-122019.html  https://www.bloomberg.com/news/articles/2020-04-21/bofa-raises-gold-target-to-3-000-as-fed-can-t-print-gold