John  Browne

For decades many of us in the hard money world have speculated that cloak and dagger activity by large financial interests has played a large role in determining performance in the gold market. The focus of this alleged manipulation is believed to be in the London market, and has been widely referred to as "The London Fix." However those who have blown the whistle have been dismissed as alarmists, gold bugs, conspiracy theorists or worse. But recent revelations should bring us closer to the truth.

On March 11, 2014, the Wall Street Journal reported that AIS Capital Management had filed a class action suit, against a number of large banks including, Barclay's PLC, Deutsche Bank, HSBC, and many others, alleging that the banks conspired to manipulate the price of gold for their own gain. This suit comes on the heels of official investigations in the UK and in Germany.

Like the London Inter Bank Offered [interest] Rate (LIBOR), the London Gold price forms a benchmark for the spot price for major gold metal transactions throughout the world. The LIBOR scandal rocked the financial world. But Germany's senior financial regulator declared possible gold manipulation as "worse than LIBOR". These words appeared to give new meaning to the word 'fix'. To get at the truth, it helps to try to follow the international flows of gold, to see who is buying, who is selling, and where the gaps may appear.

Major gold trading has long been shrouded in mystery. Despite returns required by the IMF, trading in the Far East is difficult to trace accurately. In 2009, China's central bank disclosed that its gold holdings had increased by 75 percent from 600 to 1,054 tonnes, or metric tons. According to Wikipedia, this made China the world's sixth largest holder.

Gold Field Mineral Services (GFMS) estimates the world's total gold production for 2013 was 2,982 tonnes. With an annual production of some 428 tonnes, according to Forbes Asia, China is the world's largest producer. But, like Russia, China exports no gold. If China's last three years annual assumed production is aggregated, China's 2009 declared holdings of 1054 tonnes should have increased since by some 1,284 tonnes, for a total of some 2,338 tonnes. This would make China one of the world's largest holders. But the story does not end there. China imports massive amounts mainly via Hong Kong and Shanghai.


John Browne

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc.