Through recent decades the gold price has managed to trend higher by means of a ‘stair-step’ movement in which prices rise, trend sideways and then rise again. This has made gold bars and coins fall out of favour as an investment theme with speculators and short-term investors. At one point in 2022, premiums on gold coins such as gold sovereigns and gold Britannia coins to fall very close to spot. Many market observers agree with the Gold Anti-Trust Action Committee in thinking that the price of gold is being contained by the paper market casino. Recent developments with the Bank for International Settlements (BIS) shows that their repositioning may be a capitulation in trying to contain the gold price.
The BIS options expiry has been close to a trillion US Dollars of accrued directly related gold derivative contracts which are marked-to-market, only a small amount of this is captured by the Office of Controller report. Usually this happens at the lowest price of the month’s trading activity, after which prices are allowed to rise again. Every single dollar above or below that month’s mark-to-market sweet spot has equated to close to a trillion dollars of exposure in the past. The OCC report only tracks the exposure of all insured US commercial banks and the Trust Companies. So, each quarter, based on information filed by the banks of the office of controller report, discloses these insured banks derivative activities but with a disclaimer. ‘Figures above exclude any contracts not subject to risk-based capital requirements such as foreign exchange contracts with an original maturity of 14-days or less’. Showing that anything less than 14-days does not need to be reported.
Jeremy Lefroy posed the question to the UK parliament why the UK derivative gold exposure of the same insured banks was not being reported anywhere by UK regulators. Having been bailed-out by the UK taxpayers in 2008, the question was is the Bank of England aware of the large unreported derivative exposure that may be slipping through the net. It became apparent that there was no record of the derivative exposure in the UK which leads us to the exchange for physical point, when the Comex futures price can move into the over-the-counter market in the UK and it can be crystalised into physical gold.
The UK bank derivative exposure was completely unreported. After the Treasury had been put on notice, the plan to regulate the over-the-counter gold market to the UK was sped-up and by the time the exchange for physicals blew-up in March 2020, the planned Basil 3 net funding stable ratio that were impossible to push back to January 2022 because they knew there was an issue. Despite the LMBA’s lobby efforts to delay it, it came in late 2021. We have evidenced this very stealth-like unwinding of these interconnected derivative bets with the object of laying as much of this short load onto unsuspecting specs. The trouble for officials is that as soon as Basel 3 regulations were imposed in January, sovereign and central banks buying of gold accelerated – taking advantage of this transitory paper to physical period where for the first time since Nixon took the dollar off the gold standard, spot gold contracts had to be backed by deliverable physical. Effectively reopening the gold window and solving this unregulated over the counter issue. By the 25th of January 2022, the Bank for International settlements, had their mark-to-market sweet spot at $1,780/oz which had been exceeded by 75USD. So, something had to be done in a hurry. This time the over-the-counter longs came into the crosshairs for physical delivery.
Right on cue, by no coincidence, by calling in spec-owned non-deliverable contracts, gold was hammered back to the mark-to-market sweet spot for the BIS at $1,780/oz. but due to the fact that spot gold was physically deliverable at the Comex spot price since 1971, this mark-to-market event drove gold in such a deeply actionable backwardation where the spot market was stronger than the futures market which made the futures market very attractive. There was $6 backwardations at the time which incentivised the Comex to be drained creating a risk-free arbitrage opportunity was being represented to everyone which jumped on the exchange for physical delivery by central banks, sovereigns and wealth managers, driving the paper gold prices dangerously close to a major breakout inflection point. This loss of control caused a panic with specs selling the rally which had been relied upon to cap the rally of the paper gold price, but with backwardations outside of the paper casino meant that they could not hide it anymore.
By the February, gold had risen to $1,900/oz. This time the specs had moved into a buy the dip stance and were naked long and closed the BIS sweet spot at $120 offside. We know that the BIS has been covering but this was a huge development. The gold rally was mostly central bank buying causing the rising premiums, a few days later gold had risen £300/oz higher resulting in billions of dollars of agent bullion bank exposure was offside. This is when the CME intervened by reducing margins into a silver price rise which was a very manipulative move to bail out this huge position. They needed the specs to not just be rinsed of their longs but to move in short to take the load. This move had never been done before in a rising market which showed that something was clearly wrong. What could be seen from this is that open interest is a control to the house’s benefit. This operation concluded in July of that year and brough gold back to £1,780/oz, the BIS sweet spot again. But it looks as though this was the last kick of the can and the new rally point saw the specs wrong footed again, this time short against the house. Make no mistake, the BIS and their agent banks are now able to allow a higher gold price to emerge.
During this period, one can observe how the BIS swaps had reduced drastically. The BIS is a secretive organisation that does not issue minutes from its meetings and is one of very few organisations that is not accountable to any government. The BIS acts as the bank that allow other central banks to earn a yield when depositing some of their physical gold in the BIS site account for trading purposes, however, based on market wholesale footprints, up until Basil 3 regulations were implemented in January 2022, no physical gold has left this site account since 2015. Instead, the paper swap and lease liability were laid on the balance sheets of the four bullion banks who have gold accounts with the Bank of England.
