or wealth transfer to Asia?

Twice a day at 10:30AM and 3PM - the price of gold is set on the London market by the five members of the London Gold Pool (HSBC, SocGen, Deutsche Bank, Scotia-Mocata and Barclays). This is known as the London fix and it's used as the benchmark to price gold, gold products and derivatives in markets around the world.

I've been looking at some charts and an astonishing pattern has become apparent. It's a pattern which, if you'd traded it methodically, would have earned you 1% every 20 days over a period of 24 years. That compounds to a staggering 2,050%!

The strategy is really quite simple. You buy gold at the London PM fix (3PM), as the American markets have just opened for trading, and you sell your gold the following morning at the London AM fix (10:30AM), as the Asian markets are closing.

My thanks, as always, to Tom Fischer of Herriot Watt University for the charts below. The first demonstrates the 20-day 1% gain that would have been yours since 1985 (the green line).

And, as our next chart shows, if you reversed the strategy, bought gold at the AM fix and sold at the PM fix, you'd be down a bankrupting 0.67% per 20 days.

What is more astonishing is how this pattern has accelerated since 2007. Sell gold in the morning, buy it back in the afternoon, and a cool 1.78% 20-day profit will be yours:

Do the opposite, however, and you'd have suffered a 20-day loss of 0.86%, despite the fact that gold is in a runaway bull market.

The trouble is, of course, that transaction costs all but invalidate this strategy. But there is nevertheless a great deal we can read into this pattern.


Why would anyone want to manipulate the gold price? Well, despite the fact that is is of barely any industrial use, gold is a highly political metal and a runaway gold price which, by the way, we will eventually see, I am sure tells you 'something is rotten in the state of Denmark'. If people are rushing to buy gold, it shows they do not trust the government to maintain the value of paper currency. So the aim of the manipulators, the theory goes, is to devalue gold and preserve the status of unbacked government currencies such as the dollar.

One reason for the theory is that there is more gold and silver sold on the Comex (the US commodities exchange) than is actually possible to deliver. In the case of silver, more is sold than is actually mined on an annual basis.

And certainly, the remarkable trading pattern of the London PM and AM fix adds more weight to the theory that the West is selling gold during Comex opening hours, possibly to suppress the price.

On the other hand, of course, we have Occam's Razor lex parsimoniae. This is the principle that the simplest solution is the best. So, rather than resorting to some mass conspiracy theory, could the answer be that Asians are buying gold and Westerners are selling just because Asians like, value and appreciate gold more than we do?

Whatever the reason for this price pattern, this transfer of gold from West to East is yet another demonstration, if you needed it, of the generational shift in wealth and power that is taking place. After all, they say that 'he who owns the gold makes the rules'.


Comment from Jesse.

As we recall, the folks at GATA have been showing this sort of market analysis for some time now, to a cooler reception than a Madoff whistleblower at the Chris Cox retirement party.

We'd be open to hearing of other serious interpretations of this phenomenon. But be forewarned; to say it is just nonsense is, well, nonsense. It is a statistically valid hypothesis, albeit an unexplained and a bit odd, at least for the moment.

Can a money machine really exist in free and efficient markets? Economic theory says it cannot, that it must be due to some flaw or inefficiency, or an artificial scheme such as the regular returns from the Madoff Fund.

We might agree with the surmise that it involves the steady selling of leased gold from the West into the gold markets, but that could only be confirmed by an audit, and an admission from some large central bank that they have been obligating increasingly large amounts of their inventory into the public markets in a previously undisclosed manner.

The transaction costs are a problem if you are standing at the retail counter, we fear, so don't get any ideas about playing this trade. Its a sinecure for the big boys only, who can take advantage of market inefficiencies by trading in large, ever increasing volumes, like the whiz kids at LTCM did until they blew their trade book up.

Oddly enough, the data from the Office of the Comptroller of the Currency report on Derivates shows that only two banks, JPM and HSBC, are holding almost $124,000,000,000 in gold derivatives between them, approximately 98% of all gold derivatives in the world.

At $850 per ounce, that represents about 145,882,353 ounces of gold.

As the tides of monetary bubbles recede, curiosities are turning up on the beach every day.