30 November 2012

ETF Price Suppression Mechanics

I've got a response up to Andrew Maguire's TF Metals Report article on the corporate blog "explaining" how bullion banks use ETFs to suppress the prices of gold and silver.

I wasn't planning on it turning into a 5200 word, 12 page article, but so many memes to set straight (do ETFs have the gold, ETF market making, share borrowing, 100:1 fractional reserve bullion banking) plus Andrew really didn't explain the "mechanics" very well.

I suspect Andrew expropriated Victor's idea about the ETFs being used as a source of metal, far too many similarities I think (eg reference to "inventory financing" and the selling and buying GLD versus unallocated strategies). Andrew really got himself into a knot however in explaining these.

I've had it on my to-do list to address Victor's post in detail, and I have sort of done that with this Andrew response, but it does not address Victor's inventory changes and "inventory strategy", for which I need time to analyse the numbers in detail myself.

I look forward to Victor rebutting my comments, which will be funny because he'll be supporting Andrew at the same time in a way.

One point I would make is that Andrew's post was originally written for TF's "Army" members. Ignoring the factual errors, the best that can be said is it was written in a slapdash way, stream of consciousness style, without much effort in writing simply and clearly. I would have thought paying members deserve better.

I was a bit suspicious when Andrew "arrived" out of nowhere with his evidence and then surprise, he shortly thereafter had a service to sell at http://www.coghlancapital.com/. Not supplying his CV also doesn't help (but FYI he has his own Wikipedia page). I also don't buy TF's explanation that Andrew "doesn't talk to ANYONE because of the ongoing CFTC investigation and the current silver manipulation civil lawsuit" - releasing a CV isn't going to be a problem in that respect. Jeff Christian has made a big deal about the CV, so why not bury him now on that matter?

Anyway, this article by Andrew has just got me asking more questions about him. This may seem like small stuff, but:

1. Andrew's use of "spot index" - this is not how London bullion traders talk (and I checked with a bullion bank contact to make sure and they said that phrase is not used).
2. Getting the number of GLD's APs massively wrong.
3. Borrowing shares "from the ETF".
4. "Allocated at the fix."

These are just not mistakes someone with deep knowledge of the bullion market would make. I note that his Coghlin website About section says "the last 19 years of which have been as a metals specialist" - doesn't say "precious metals specialist". My best guess at this time is he is a trader of base metals who made the switch to precious metals as that is the hot market and doesn't want to release his CV because it is hard to get people to pay you for precious metal trading advice if you can't demonstrate experience in that market.

Hey, this speculating without any facts and making stuff up is fun and easy. I should do more of it, everyone is doing it you know.


  1. Everyone knows that Andrew can't talk about his days as an insider at the gold market because that would blow London traders cover. /sarcasm.

    PS I didn't see a link to your report, are you planning to release it later? Can't wait to read it.

    PPS Does anyone else think the London trader meme is just a take off of Big Trader (who actually was really interesting?)


  2. Was your response in the comments section of the TF article? If so, I can't find it. Perhaps it was deleted?

    If not, I second BH. Where is it?

  3. Bron

    Thanks for taking the time.

    I also thought the similarities between Victor's post and Andrew's explanation peculiar.

    Also looking forward to Victor's response. :)


  4. Link here for those that want to read it :

    ETF Price Suppresion


  5. Yep sorry, forgot to include the link to the post on www.perthmintbullion.com

  6. "I suspect Andrew expropriated Victor's idea"

    Its Randal Strauss’ idea that FOFOA explored in "Who is Draining GLD?"

    Victor wrote a post a using data inspired by Lance Lewis' PUKE indicator to sketch out the empirical evidence supporting Randal Strauss' theory as laid out in FOFOA's "Who is Draining GLD?"

  7. I was not familiar with that site, and must confess that I found it, and particularly the comments section, flat-out scary, in a pathological kind of way (see below). I was totally baffled by the author’s argument, which was riddled with misunderstanding, inconsistency and holes as you pointed out. Additionally, I think that there are some philosophical issues.

    For example, consider “Most of us have been baffled over the years by the almost daily withdrawals and additions to the primary metal ETFs, GLD and SLV. There are seemingly no correlations to price movements” In other words, metal coming in or out must have an effect on price (or vice-a-versa) and the absence thereof is indicative of manipulation. This is patent nonsense. Have these people never heard of arbitrage? Nah, APs wouldn’t be interested in risk-free profit. Moreover, an investor could substitute long futures for long ETP. Net exposure would not change, but ETP metal holding could. What about big guys holding metal rather that ETPs since the storage charges are basically fixed beyond a certain point, as you and other have mentioned, meaning lower costs?

    To my mind, physical metal, ETP, futures etc. are all legitimate products to make directional bets on the metal, or arb inefficiencies among, products, markets and participants. If you don’t trust the ETPs, fine, hold the metal. But where does this visceral need to denigrate those investing in ETPs or futures come from? It can’t be as simple as a desire to bid prices up, since anyone who is long has that desire.

    And the comment section was pure paranoia and ignorance gold. A few at random (I couldn’t bear much):

    “you all need not know the exact mechanics of how GLD and SLV were created, and then deployed to control the price of the precious metals.” i.e. ignorance is bliss. Just listen to me and don’t worry about it. “first of all, it has been explained well enough for most to understand how fractional banking works. they have done the same thing with paper gold.” Beauty. It’s been explained well enough (if you don’t get it you’re an idiot) and so it must be the same here. Not only are there no facts whatsoever, there’s not even an attempt to make any arguments.

    “The only reason the bankers created SLV and GLD was to deflect investment demand for physical gold and silver into a paper vehicle (for the investors) they could control and manipulate.” Didn’t know that the World Gold Council was created and controlled by the bankers. Whodathunk that AngloGold, Barrick, Kinross, Newmont et. al. were interested in keeping the price of their product low. How altruistic management is! Those strikers in S. Africa should be ashamed of themselves.

    “And, the bankers still control those ETFs' physical holdings, as the custodians (JPM for SLV and HSBC for GLD) have the ability, as per the prospectus, to replace all the physical holdings of silver and gold, with dollars. It's all there in plain black-and-white print in the prospectii.” “Audit these entities like a normal public company. Like a grocery store or a Target. It's an outrage that they are not.” I guess somebody didn’t bother to read the prospectuses. Must be listening to the first guy above.

    “From what I can tell GLD has physical for delivery minus what AP has borrowed short (backed by long contract using 1/100 leverage). Are there stats anywhere indicating how much the APs have borrowed short?” Why did that 1/100 meme get such traction? I guess Gobbels was right about lies. APs borrowing Au from GLD definitely bears repeating as it has the ring of truthiness.

  8. Bron,

    Nice commentary on the Andrew Maguire piece.

    RE the term "fly-wheeling": if I had to guess a meaning for the term in the context used, it would be "to absorb and dampen short-term fluctuations." In the same way that an engine's flywheel is designed to smooth out the periodic bursts of energy released by the firing cylinders.

    Not particularly sinister, especially considering that the short position is likely short-lived.

  9. Also thank you for succinctly describing the basket creation / redemption process.

    I guess it makes sense that the transactions would involve unallocated gold, since that is the 'book entry' form of gold and thus easier (free!) to move around.

    You wouldn't transact in allocated, because what good would it do GLD to receive title to bars that are outside of its vault?

  10. Found it!

    "Borrow Short"


    Haven't read it.

  11. Well.

    Fekete is an academic and a mathematician, hardly a metals trader. :)

    It does give some insight on what other sources Maguire drew in addition to VtC's article in doing his err exposition.


  12. Thanks Bron, it was a great read, really well written.

    I have a question about your conclusion that potential price management is to be found in COMEX or the OTC market;

    At the end of the day, does it basically require a gold price manager (if they exist) to sell their actual physical gold to bring the price down, and buy to raise it?

    When I'm encountered with a problem I can't solve, I try to turn it into plumbing: Where does the water start and leave, complicated plumbing connections be damned.

  13. Anon,

    I'll modify the post to mention Randal Strauss and Lance Lewis.

    Michael H,

    I think Maguire's use of flywheeling is more about the disconnect between GLD and the "real" price, but your definition of the word is interesting and more inline with what Victor's post is about - I like the visualisation it gives re dampening fluctuations.

    S Roche,

    Good find. Re-reading Maguire's post I don't think he is talking about borrowing short and lending long.

    Beer Holiday,

    The gold can only come from existing holders (central bankers or private investors) with the supply being acquired by BBs either by the holder selling or lending it.

    Keep in mind there is a difference between manipulation (short term) and suppression (long term).

    Seems I have some comments to respond to on http://www.tfmetalsreport.com/blog/4338/guest-post-smelly-smoke-signals-nn-l?page=1

  14. Bron,

    look forward to Victor rebutting my comments,

    Well, you haven't written anything that would contradict what I said in my GLD article, and so there simply isn't anything to rebut.


  15. At best, he is a back-office monkey trader wannabe.

  16. "Jeff Christian has made a big deal about the CV"

    Jeff Christian has made a big deal about the CFTC never acknowledging Andrew Maguire's emails. They did.

    Jeff Christian has made a big deal about the CFTC employee who replied to Andrew Maguire's emails having never worked there. Bart Chilton confirmed he did.

    Whatever. Andrew Maguire's trades make money, consistently. Jeff Christian's public short term calls have been woeful, he has buried himself, and seems ever more shrill while Andrew maintains a dignified silence....well, sort of.

    You may well be correct in your assessment.

  17. S Roche

    For what it is worth, I agree that Jeff handled that situation poorly.

    He initially stated that he was not aware that the CFTC had received those emails. Later he stated that he couldn't be bothered to check. The later, as you mentioned, he said that Bart Chilton never worked at the CFTC to his knowledge (and that he can't be bothered to check).

    In all those cases he should have done due diligence before making such claims. Not doing so has tarnished his credibility.

    It is possible to explain away these actions using basic human psychology, but that is no excuse.

    Nevertheless, even in conceding that, Maguire does seem to be operating under false pretenses, and is and has made many bogus claims.

    Hi trade record also is irrelevant to that fact.


  18. Hey MF,

    JC claimed Eliud Ramirez never worked at the CFTC, not Bart C.

    The thing about the "bogus claims" attributed to AM is that I can't find any evidence that Andrew actually made the claims himself. Others may have. He has lots of loopy supporters, as well as fine upstanding ones...

    His trading record is the ONLY relevant fact to anyone subscribing to his service, which Bron refers to as a possible motive for his appearance on the scene. The world is full of PhD's, with impressively credentialled CVs, who have Properly f'd up.

    I know of one well-credentialled PM analyst who called for $1350 gold on CNBC just as it hit its recent low of $1552. He even went so far as to add that gold-miners would do well to hedge right then. Purely co-incidentally, his business works with miners negotiating hedges.

    Not Jeff Christian's best call. But, if we are going to call people out for talking their book we will have a pretty full calender.

  19. It is probably better that Andrew doesn't have precious metals experience in terms of his trading - less theories and more just reading the price the better I suppose.

  20. S Roche -

    I do not subscribed to Andrew's trading service. I take it you do?

    Just for clarification: when you say that his trades make money - are you actually trading on his notifications, and making money in your own account?


  21. Left a response to some questions/criticisms at TF here http://www.tfmetalsreport.com/comment/241958#comment-241958