The Gold Spread and Wall Street Banks

It is so obvious, and so apparent, that I wonder why commentators have only now seen fit to begin commenting.
“It” of course, being the pronoun referencing the gold spread and the insane, short-term profits the Wall Street Banks have been reaping right before our eyes.  


 

By CL, TFMetals Report:

From Wikipedia: Arbitrage:

“In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices.”

When does arbitrage arise?

“Conditions for arbitrage – Arbitrage is possible when one of three conditions is met:

(1) The same asset does not trade at the same price on all markets (“the law of one price”).

(2) Two assets with identical cash flows do not trade at the same price.

(3) An asset with a known price in the future does not today trade at its future price discounted at the risk-free interest rate (or, the asset has significant costs of storage; as such, for example, this condition holds for grain but not for securities).

Arbitrage is not simply the act of buying a product in one market and selling it in another for a higher price at some later time. The transactions must occur simultaneously to avoid exposure to market risk, or the risk that prices may change on one market before both transactions are complete. In practical terms, this is generally possible only with securities and financial products that can be traded electronically, and even then, when each leg of the trade is executed the prices in the market may have moved. Missing one of the legs of the trade (and subsequently having to trade it soon after at a worse price) is called ‘execution risk’ or more specifically ‘leg risk’.

In the simplest example, any good sold in one market should sell for the same price in another. Traders may, for example, find that the price of wheat is lower in agricultural regions than in cities, purchase the good, and transport it to another region to sell at a higher price. This type of price arbitrage is the most common, but this simple example ignores the cost of transport, storage, risk, and other factors. “True” arbitrage requires that there be no market risk involved. Where securities are traded on more than one exchange, arbitrage occurs by simultaneously buying in one and selling on the other.”

But, conditions for arbitrage, at least in non-manipulated markets, normally lead to Price Convergence –

“Price convergence – Arbitrage has the effect of causing prices in different markets to converge. As a result of arbitrage, the currency exchange rates, the price of commodities, and the price of securities in different markets tend to converge. The speed at which they do so is a measure of market efficiency. Arbitrage tends to reduce price discrimination by encouraging people to buy an item where the price is low and resell it where the price is high (as long as the buyers are not prohibited from reselling and the transaction costs of buying, holding and reselling are small relative to the difference in prices in the different markets).”

SilverMapleSDBullion

So, let us apply this knowledge to the price of physical gold, as referenced by the Comex spot pricing, and most interestingly, with respect to Indian gold demand and their market conditions.

There is a dramatic price difference with respect to gold priced in USA federal reserve notes as compared to the price of gold in Indian rupees.  The situation is so readily apparent, that smugglers have taken to swallowing gold in quantity in order to profit from the price difference.

Of course, the price difference is caused by excessive government meddling, in this case, massive import taxes:

“The gold bars are valued not just by the owner but by the Indian government. In total they’d command an import duty of $17,000 dollars. It’s little wonder some people would go to extreme lengths to try to avoid that.”

photo 

Ouch!

Is price manipulated to allow for western banks to profit in the short term?

Let us just examine the naked facts of the divergence in price between our western physical gold price, and the Indian physical gold price.

In the normal course of events, that huge price difference would lead to price convergence, that is, the price of Indian gold should fall, while the price of western Comex gold should rise.  Indeed, this is what is expected from the academics: “The speed at which [divergent prices converge] is a measure of market efficiency.  Arbitrage tends to reduce price discrimination by encouraging people to buy an item where the price is low [increase in demand causes prices to RISE] and resell it where the price is high [increase in supply causes prices to FALL].”

We can easily see that the so-called “markets” are neither markets nor efficient, because there is NO movement lower of the spread.  Instead, efforts are taken by Indian authorities to KEEP the prices artificially high through import restrictions and taxes.  But why?  Think hard on that one and the answer is IMMEDIATELY clear.  (Think in terms of incentives, of both sides to these transactions).

Let us also not forget about this assumption: “as long as the buyers are not prohibited from reselling and the transaction costs of buying, holding and reselling are small relative to the difference in prices in the different markets.”  Well lookey there . . . Bingo!

Indian import restrictions/taxes, i.e., “transaction costs,” on gold have lead to ARTIFICIALLY high prices, thereby encouraging arbitrage by preventing price convergence.  This is page one from the HUGE, multiple volume treatise entitled “Central Planning Failures.”  And, naturally, the question arises as to who benefits from this?

So, now that it is obviously apparent there exists a massive risk-free arbitrage opportunity, wouldn’t you expect the big Wall Street Banks to be right in the thick of it?  Of course!

 

“[T]here’s evidence that Wall St smuggled a HUGE amount of gold from GLD into India to make huge premiums and fast money and that the amount of gold smuggling in India over the last 4 months was more than in the last 10 years prior to the Indian government doing stupid legislation!”

Really, now, you don’t say?  Gold has been secured at low prices from the western banks/gld scam, sold into the Indian markets for huge, short-term premiums, prices have NOT converged AT ALL, and we all wonder whether western gold prices are artificially low through manipulation?  No chance of that, none at all, right?

And finally, there is this:

http://www.usagold.com/cpmforum/2014/04/24/cme-plans-to-launch-physically-settled-asia-gold-futures/

Now why on earth would the CME want to establish an eastern futures market for gold?  

Perhaps because there is lots of gold in the east, dwindling amounts in the west, if at all, and the world’s capital engine for growth is shifting inexorably east in real time, right now?  What better place to open a futures market, no?

This last development should put the nail in the coffin on manipulation deniers.  It is fast time to prepare, please do so before it is too late.

 

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