Gold Lease Rates Plunged to Record Low in Early December
This is the reason for the ferocity of this sell off in my judgement, coupled of course with a general liquidation in stocks and other 'risk assets.'
Central Banks were leasing gold for record low rates to the bullion banks like JP Morgan and HSBC. Silver lease rates also fell in sympathy.
As you may recall, LIBOR - GOFO (Gold Offered Forward Rates) = Lease Rate.
The bullion banks use this leased gold as collateral for more fractional paper short sales, breaking the price trend and forcing liquidation. Their sales are done in the so-called Dr. Evil manner, of dumping large numbers of contracts on light markets.
There is also the liquidation factor from the collapse of MF Global, and the reluctance of small specs to engage in the futures markets at all because of capital risk and lack of confidence.
This allows the bullion banks to arrange for a big price swing that allows them to cover their short positions and also obtain other assets on the cheap such as mining companies.
Since the leased gold must be returned after a short term period, this is almost always a trading gambit, as opposed to outright net gold sales by the central banks which have virtually stopped in the past couple of years.
This at least is my take on what is happening. If this is correct we could see a repeat of the big market bottom and deep lows with a spring back as we have seen before.
If the CFTC were to do their jobs, as the Europeans had done with banks like Citigroup who employed their 'Dr. Evil' trading strategy there, we would not have this type of harmful volatility in key commodity markets.
On these dips one would imagine that long term buyers are taking advantage of the low prices to acquire bullion. As the bullion banks seek to return the borrowed gold, this demand attracts the momentum trading hedge funds that are now selling, so we see a big rally in the metals.
The obvious artificiality of these price swings obscure the efficient allocation of capital, and the orderly operation of markets. The CFTC and SEC have the tools to correct this, but they choose not to do anything constructive for whatever reasons.
This is not dissimilar from the gaming of the energy markets that Enron made infamous before its collapse. Financial structures based on this sort of artificial con game always collapse, given time and the latitude for their greed made possible by regulatory capture.
That is why the public should have no patience with the commodity market makers like MF Global, a TBTF bank, and even an exchange when they fail.
As for the complicit central bankers, regulators, and politicians, justice must be restored and prosecutions made in order to halt the growth of the moral hazard of complicity in fraud and insider trading that is now endemic, if not epidemic.