Talking Gold, with Andrew Maguire | Kinesis

Zubair Bukhari

28th April 2020

Talking Gold, with Andrew Maguire

This post is a summary of ‘Talking Gold’ – a fortnightly update from Kinesis strategic advisor and resident gold expert, Andrew Maguire, providing a detailed round-up of the recent action in the gold market – a regular feature from the Kinesis series ‘Live from the Vault’.

For the full analysis into the gold market, presented in illuminating detail, have a watch of the full segment in Episode 10 of Kinesis’ ‘Live from the Vault’.

In this episode’s demystification of the gold and silver bullion market, gold expert Andrew Maguire offers a compelling insight into a transatlantic collusion between the London Bullion Market (LBMA) and the Chicago Mercantile Exchange (CME), in the wake of the broken paper market.

As ever, our resident gold expert provides a refreshing wholesale market view of the reasons why physical gold bullion and silver bullion, priced in U.S. dollars, are set to make fresh highs.

For a detailed breakdown of the major drivers that foreshadow the upcoming paper market reset, have a watch of the week before last’s ‘Talking Gold’ from Episode 9 of Kinesis’ ‘Live in the Vault’.

LBMA collusion with CME

With the over-the-counter related LBMA spot market broken, in an emergency attempt to restore paper market liquidity the LBMA moved to collude with a competitor, CME, who provide the platform for the US-centric futures market.

LBMA and CME colluded to provide unallocated Loco London paper gold, as settlement for delivery obligations, with a new contract: the 4GC futures contract.

LBMA and CME designed the 4GC contract to provide a band-aid replacement for the broken Exchange of Futures for Physical (EFP) safety valve; with the aim of giving LBMA and CME time to cover off massive underwater naked short offside bets.

However, something is awry. The contract launched weeks ago – so, why has this contract not traded a single ounce of gold to date?

Author: Marco Verch
Image source: https://www.flickr.com/photos/160866001@N07/48880350827
Creative Commons 2.0 – https://creativecommons.org/licenses/by/2.0/

Where is the physical gold bullion?

Despite the web of misinformation LBMA and CME have spun to assure their customers that gold spot and futures contracts are backed by physical gold bullion, as it stands: no Loco London 400-ounce bars have entered any CME Group vaults. So, where’s the gold bullion?

The CME and LBMA have wheeled out a series of erroneous news reports, referencing bogus travel and insurance issues to explain why their phantom chartered aeroplanes full of 400-ounce gold bars are yet to arrive in New York.

It is looking increasingly as if this contract is not fit for purpose and consists of little more than smoke and mirrors.

Despite repeated inquiries, the CME and LBMA have refused to address our concerns.

Why have CME members not been marketing this new 4GC contract solution?

There are two reasons:

Insider banks, including the Bank of International Settlements, BIS, that are privileged to access the EFP, (Exchange for Physical), conduit, have utilised this sole link between the futures market and the significantly larger over-the-counter foreign exchange spot gold market in London to:

  • Earn immense profits (numbers to follow)
  • Keep the paper capping game alive

 

The 4GC has not been marketed to all traders, as it would render the existing EFP conduit pointless. The EFP conduit currently provides exclusive risk-free guaranteed profit for the first tier market-making US Bullion banks, which serves as an explanation for the colossal volumes getting cleared.

Let’s have a look at some of the March profits in the EFP.

  • Before the crisis on 23rd March, the March EFP volumes were netting insiders a daily $1.3 million risk-free profit, after costs.
  • In the week after the crisis, insiders netted a risk-free guaranteed $413 million in just seven days of trading, with over 221 tons traded through the EFP.

 

While the BIS has stepped in to try and manage the situation, industry insiders are still making a daily risk-free profit of $13.8 million, based upon the spread on April 23rd.

Observing the vast profits, it is patently clear why the US traders don’t want for the 4GC contract to sideline this insider cash cow.

CME officials have done everything possible to weigh on paper gold, including raising margins, multiple times and the doubling of position concentration levels from 3,000 lots to 6,000 lots per trader.

However, all actions are only a short-term attempt to shore up paper market liquidity, while insiders and officials move to cash settle and cover off as much mismatched paper to physical gold market dislocations as possible.

Andrew Maguire’s parting thought:

With physical gold in such strong demand, all parties need a higher US dollar price, including officials and the banks, who are definitely long for their own books.

Next Episode: Andrew Maguire discusses this week’s options expiry and the Bank of International Settlements options expiry, and much, much more.

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Watch the full episode 10 of ‘Live in the Vault’ here – for the complete ‘Talking Gold’ segment and more updates from within the Kinesis system.

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