This is how the banks are making a mockery of the new Basel III regulation in order to manipulate the gold market and make huge profits

in LeoFinance2 years ago

In some of my previous posts I have mentioned the new banking rules established by the legislation known as "Basel III", noting in particular that the ceiling for banks beyond which they cannot increase their positions in derivatives is undoubtedly the most interesting novelty, from the point of view of those who deal with precious metals.

A brief summary of Basel III

In summary, under Basel III rules gold in physical form is classified as a zero risk asset in line with cash and currencies, unallocated gold or "paper" gold that banks typically deal in the most will now have to meet strict rules that would effectively limit paper gold transactions. The new Net Stable Funding Ratio (NSFR) requirement specifies that an 85% Required Stable Funding (RSF) must be held by banks against the funding and clearing of unallocated gold (paper gold) precious metal transactions. Previously it was zero and as a result will increase the cost of holding unallocated gold and most likely lead to less activity making physical gold more attractive and less exposed to hedging or selling activities.

So while classifying gold in physical form as a risk-free asset, unallocated or "paper" gold, which banks typically deal in more, will instead be treated as a risk asset. Which means that a bank holding unallocated gold positions must also hold extra reserves to back up those same paper gold positions.
Instead, on physical gold, due to its risk-free status in theory it could trigger more demand from banks while transactions on "paper" gold could slow down.

Ultimately, the dollar and yield trends remain the key factors for gold, but the general opinion is that over time and especially when the UK, one of the world's largest gold trading centers, adopts the rules dictated by Basel III towards the end of the year, it could have a clearly favorable impact on physical gold and therefore on the price.

Will manipulation by banks end?

Since banks that manipulate the price of gold and silver downwards have to use large amounts of derivatives for this purpose, we wondered whether Basel III would be able to put a stop to these frauds, or whether the banks would find a way to circumvent the rules and continue their illegal activity.

Today, unfortunately, for the first time we have an example of bank fraud conducted under the new Basel III regime.

The fraud, i.e., the downward manipulation of gold, was done by banks operating in the Comex, i.e., the U.S. derivatives market.

This is significant because among the banks operating at the Comex, in addition to several international banks, there are many that are based in America, which have already adopted Basel III, unlike the London banks, which will reluctantly adopt it next year.

We would therefore have expected this manipulation to take place in the LBMA, i.e. in the London derivatives market, taking advantage of the last available window of time before Basel III comes into force. Instead, the fraud was consummated at the Comex, where Basel III is already in force...

This fact not only confirms the usual disregard for the law with which fraud has always been perpetrated in the precious metals market, but also suggests something different.

It must in fact be taken into account that the new Dubai market aspires to subtract from the LBMA the sceptre of leader of the precious metals market; and to this end it has published a series of documents in which it accuses London of illicit conduct and fraud to manipulate prices downwards.

Could this be the reason why this time London has remained "in the dark" and has preferred to send ahead its American accomplices?

In any case, in this article we limit ourselves to describing the scheme by which the fraud was carried out, highlighting two surprising aspects, namely that:

1 The fraud was committed by exceeding the limits imposed by Basel III regarding derivatives exposures.

2 This illicit number of positions is documentable and has been reported to the US financial authorities.

Let's first look at the general pattern of this manipulation. Then we will make some additional comments later.

The scheme

  1. Between November 3 and November 17, the price of gold at the Comex rose 6.5% on the back of a sharp increase in demand for new futures related to this metal.

  2. To dilute this spike in demand, the bullion banks that manipulate the market created and placed 112,799 new contracts on the market. In practice, it is as if these banks have created from nothing about 351 tons of gold, adding them to the market in order to cool the upward trend of quotations ...

  3. As soon as the demand for derivatives started to dry up, the banks then placed bearish positions they had previously opened on a parallel market onto the market. In this way they started to steer prices downwards.

  4. Finally, when the quotes fell to the level desired by the banks, the banks closed the short positions they had secretly opened, with a gain of about $2 billion.

Now, I will explain some interesting details that put in the right light the criminogenic level of the whole operation.

In point 3 we said that the banks had opened short positions in a parallel market, before placing them in the official market.

This parallel market is called TAS (Trade and Settlement) and allows you to buy and sell shares of derivatives without these operations appearing in the normal market and therefore without the official quotes being influenced.

The transactions were however visible in the Exchange Open Interest index, which measures the rate of opening of new positions, official or not, which in fact jumped 31%.

While these positions were being opened, gold continued to rise until it reached a peak of $1875 on November 16th.

At that point, on November 17th the banks started to offer new derivatives on the market (equal to those famous 351 tons of physical gold), increasing the availability of total derivatives and causing a slowdown in the growth of quotations.

After 2 days, then, the banks dropped their nuclear bombs, putting on the official market the huge bearish positions secretly opened on TAS.

The entry of this mass of short positions in a very short time, quickly brought the price of gold to $1790, canceling the bull market that was looming this month.

Let's now see how the banks made money in this operation.

In the last COT report on November 16, banks held 287,539 short positions in the form of derivatives.

During the build-up phase of the deal (November 4 to November 11), when the price of gold was rising, all of these short positions were resulting in a hypothetical loss of about 3.2 billion for the banks (i.e. if the positions had been closed at that time, that loss would have been realized).

The rapid descent of prices, however, reversed the value of these downward positions, which were in fact closed with a gain of 2.2 billion.

So the delinquent elements of the entire operation were essentially three:

  1. The banks made an illicit profit by manipulating the quotes at will.

  2. The banks manipulated the price of gold downward.

  3. The banks had to open more derivative positions than allowed under the new Basel III regulation in order to complete the operation.

However, this time the criminals left a trace of their misdeeds.

In fact, open positions in the TAS market leave a footprint and are recoverable on subsequent analysis.

For this reason, the author of this discovery, Craig Hemke, a publisher and editor of the TFMetals Report website, collected all the data (of which this article is only a brief summary) and reported them to the CFTC (the competent American regulatory authority) on the official page dedicated to this purpose.

Moreover, the website SprottMoney from which we took this information, invited all its American readers to do the same.

We don't know if this time the CFTC, in case it would be inundated with complaints, would take any action against this umpteenth bank fraud.

Having turned a blind eye the hundreds of other times before, it is fair to have serious doubts about that. In any case, hope costs nothing.


At the conclusion of the story, the lesson we can draw is that unfortunately it appears that Basel III is not a sufficient deterrent to discourage banks from their fraudulent actions in the precious metals market.

If anything, the changes that could be made would be in how these frauds are executed.

It is likely that the Comex will replace the LBMA as the operational fraudster, at least as long as Dubai continues its media pressure against the London bullion market (I doubt Dubai will dare to mount such a media campaign against its far more dangerous American competitors as well...).

Furthermore, if for some reason the CFTC should wake up and the banks were forced to limit their positions in derivatives, there would always be the option of increasing the general availability of derivatives on the market, calming the upward trend of quotations. A strategy adopted with a certain effectiveness right in the initial phases of this last scam, as we have seen.

Of course, this last measure would not succeed in counteracting a very strong wave of purchases like the one that took place last week, but it would contribute to weaken the trend.

Overall then, I have to admit that my hopes on a possible revival of the gold bull trend, at least for now, are put aside as we await new developments...

Thanks for reading


The content of this post is based on the fantastic work of Craig Hemke to whom all credit is due for the discovery made and the effort in countering the scam perpetrated by bullion banks. On the links below you can learn more about the issue and, if interested in contributing, file a complaint with the regulator (currently with little success).


Gold picture by pokmer | released free to use under Unsplash license

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