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Are Exchanges Getting Ready for a Gold Squeeze?


Gold’s price has been manipulated, but has the effect worn off?

Christopher-LemieuxSMBullion.Directory precious metals analysis 12 December, 2014
By Christopher Lemieux
Senior FX and Commodities Analyst at FX Analytics

Gold has been the most hated asset during this central bank induced equity rally. Given such bearishness, one would expect gold to be at that highly talked about $1,000 level, but it is not. It’s actually up modestly on the year, which is downright frustrating for risk bulls.

There have been interesting, underlying events that have come to light in recent months. These events could lead to speculation that the various commodity associations and exchanges may know something that Main Street does not. In recent months, the gold forward offer rate (GOFO) has seen attention on various alternative financial media outlets. The GOFOs have received this attention because these are the rates institutions and central banks use to lend gold in terms of collateral. And, the one- and six-month rates have been the most negative since the Lehman Brothers crisis. The six-month rate also set a record for the most consecutive days negative. The 12-month rate was a mere six bps until it was negative for the first time ever. This was important because it indicated that institutions were actually swapping dollars in order to hold onto physical bullion, and pay for doing so.

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As soon as the GOFO negative rates were getting buzz, the London Bullion Market Association (LBMA) has decided not to further publish these rates. Chief executive Ruth Crowell said the reason was due to a lack of participation. There was apparently so little participation that the GOFO rates indicated the largest rehypothecated bullion shortage in a decade. The LBMA is loosely overseen by the Bank of England, and the majority of the association’s members are central banks, large dealers and refiners. Does the LBMA not want to publish the physical gold rush?

Now, the Chicago Mercantile Exchange (CME) will implement memorandum S-7258 on December 21, which will cause the exchange circuit breakers to halt for five minutes if a huge price movement was caused by “triggering events.” The first limit is $100 before the first five minute break. The exchange would re-open and the limit will be reset for another $100. This process will continue for a total of $400.

Does the CME and LBMA know something we don’t?

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