After manipulating the silver price for many years, it recently came to light that Deutsche Bank has also manipulated the gold price. At least, that is what happened if were to believe the multitude of gold blogs. Deutsche Bank was sued because of an alleged manipulation of the Gold Fix and the troubled German bank decided to settle the case. With the risk of being called stupid, evil or a tool, I will tell you a little secret: Deutsche Bank is innocent. The idea that Deutsche Bank “manipulated the gold price” is simply wrong. It is a mere attempt to justify outlandish conspiracy theories.

Historical Background

The theory states that a number of large bullion banks conspired to manipulate the “London Gold Fix”, a benchmark (a reference price) during both the morning and afternoon of a trading day in London. Somehow, even though the ones that are pointing an accusing finger often have no idea how these manipulations would exactly look like (I will return to this point in a later stage), these evil, cigar smoking, predatory bankers profit from defenseless investors in gold and silver. Because such in the gold market participating big banks (the so called “bullion banks”) determine this benchmark price – the London Gold Fix, the banks are able to profit from their privileged position of power.

At any rate, that is the line of thought of a majority of investors in the gold market.

Of course, it is at the very least odd that investors in gold tell you that the gold price is being manipulated downward. These gold investors, after all, invest in gold for the long run. This is akin to someone who decides to invest in Bernie Madoff´s investment fund, after it became public knowledge that the fund was in fact a giant Ponzi-scheme. Who would invest in gold when one is convinced that the price of that very same gold is a result of arbitrary whims of parties with opposing interests?

Investing in gold and being at the same time fully convinced of the fact that gold price is not a “real” but manipulated market price, is a rather incoherent position.

Let me try my best to show you that there are indeed good reasons to invest in gold, yet that at the same time you have no reason to be worried about systemic price manipulation. And let us – in contrast to other media – dive into the court case to go through the plaintiffs’ allegations one by one.

The “Gold Fix” Does Not Determine Prices, But Deduces Prices

The “London Gold Fix” was an attempt to establish a benchmark price: a reference point for the broader gold industry. Nothing more. It is, above all, the result of a process of price discovery, in which the large bullion banks assemble orders of clients and their own proprietary trading desks and begin to auction. Yet it is important to remember that the gold market does not come to a halt during the Gold Fix. Active trading in the gold market continues, fix or no fix. And that also implies that member banks have to take into account the new market prices that arise during the Gold Fix. Whenever the gold price changes, clients might refuse to buy or sell at the new price as a result. The large bullion banks of the “`Gold Fix” do not determine the gold price, they deduce the gold price.

Deutsche Bank Admits to Manipulation

The fact that Deutsche Bank admits to being guilty of price manipulation means, according to some, that they have truly manipulated the gold price. They compare this case with similar cases in their own personal lives. When John says that he has been cheating on Mary, then that must be true. After all, John has no incentive whatsoever to plea guilty. The fact that he openly admits to having cheated, must therefore mean that John has, beyond any doubt, cheated on Mary.

Applying this principle on financial institutions in the midst of a conflict with government institutions (or, more specifically: regulators) is, nevertheless, a mistake.

And on December 3, 2016, Deutsche Bank agreed to pay $60 million dollar to settle the case, after the bank already paid $38 million dollar to settle a case for alleged manipulation of the silver price. A clear plea of guilty, right?

Naïve Trust in the Law and the Treacherous Web of Regulations

Deutsche Bank is not the problem. Banks in general are not the problem. The alleged manipulation of the gold price (which I refuted before) is not the problem. Yet the reason why many investors in the gold market believe that these are the problems is simple: a hopeless naivety when it comes to how regulatory bodies and law procedures operate.

A relatively unknown banker, Frank H. Hamlin III of Canandaigua National Bank and Trust, wrote for example to his shareholders that “regulations are vague in explaining what conduct is actually prohibited” and that “various agencies (prosecutors) are abusing the legal system in order to further their own political and economic interests.” Hamlin is unfortunately right.

The fact that Deutsche Bank decides to settle, is not a plea of guilty. It is a pragmatic solution to a legal problem that, even when we only take legal representation costs and other legal costs into account, even were the case to be won, might prove to be very expensive.

Every possibly applicable law, new or old, is involved to find a possible offense. Of course, there exists so many rules and regulations, especially in the financial sector, that in the end one could always find an offense if he or she simply keeps looking.

In the end, they found very little. But the damage was already done: millions were wasted in complying to compliance rules and requests for information by the regulator. New employees were hired. Various employees dedicated their time to nothing else than obeying the orders of the regulatory body. And the regulator had what it wanted: a completely devastated opponent. “Bullying,” they would call this kind of nasty behavior in the U.S.

How Does Deutsche Bank Manipulate the Gold Price?

What is strange about these kind of cases, is that the ones that sue Deutsche Bank never are able to explain exactly how the bank manipulates the gold price and reaps rewards from their manipulation. A sequence of vague theories is what follows. Moreover, plaintiffs often resort to statistical analyses of historical price data that could be easily criticized (but is often taken at face value). We will look at one of these cases.

Let us take a look at what the judge had to say about this under the heading “The Methods By Which Defendants Allegedly Manipulated the Fix Price”:

  • Banks could share information and push prices down during the Gold Fix
    But, as we might read, “Unlike other benchmark fixing cases (for instance the LIBOR-case), however, here Plaintiffs have no direct evidence of such communications”.

  • Statistics prove we are right!
    We also read:

    “In support of their claim that Defendants manipulated the Fix Price, Plaintiffs present data analyses demonstrating that pricing behaved in what they characterize as distinctive or “anomalous” ways around the PM Fixing. A basic premise of Plaintiffs’ argument is that, absent collusion or manipulation, trading around the PM Fixing would have been “random” in the sense that gold prices would have been equally likely to move up or down around the PM Fixing. Id. ¶¶ 124, 178. Instead, from 2001 through 2012, the spot price of gold moved downward around the Gold Fixing much more frequently than it moved upward. Id. ¶¶ 7, 21 & chart. Plaintiffs present analyses of data purporting to show that, in every year from 2001 through 2012, the spot price of gold decreased during the PM Fixing on at least 60-75% of the aggregate annual trading days, an occurrence that is statistically highly improbable under circumstances where the chances of a price increase or decrease are roughly equal.”

Fortunately, even the judge cites the famous quote: “lies, damned lies, and statistics”.

  • How did banks profit precisely?
    The answer is by reducing longs (especially in gold futures) before the Fix (or even by being net short) and buy physical gold during the Fix.

  • Last but not least: Deutsche Bank has pleaded guilty
    We read: “To demonstrate that Defendants were capable of collectively profiting from illegal manipulation of the Gold Fixing process, Plaintiffs point out that many of the “world’s leading banks” have either admitted to manipulation or have been subject to regulatory penalties for manipulating the LIBOR financial benchmark and for colluding to move markets with respect to foreign exchange (“FX”) benchmarks!” In other words, the fact that banks received a fine or settled (what is, apparently according to some, equivalent to “pleading guilty to having manipulated”), means they are guilty!

In short, a lot of vague allegations, very little hard evidence. And with hard evidence I mean, at least, a coherent theory on how a specific bank would have manipulated the gold price for its own gain during the Gold Fix.

What Is the Answer to These Allegations?

Let us begin to go through the notes to find an answer to these and other allegations. Let us start with the first point:

  • Banks could share information and push prices down during the Gold Fix
    So what? Sharing information and conspiring does not suffice to reap a reward from sharing confidential information.

  • Statistics prove us right!
    If it is true that the gold price dropped a majority of times just before and during the Gold Fix, then why nobody acted upon this knowledge? Why did smart investors not begin to short every day when the Gold Fix bullion bank auction kicked off? What would have been the effect of these type of shorts? Profits for these speculators (that have nothing to do with the Gold Fix), a higher gold price than otherwise would have been achieved, and there is no statistic left to “prove” gold price manipulation. The fact that no investor did this, in a period of ten years, says enough. Apparently, the pattern was not as predictable as in retrospect the plaintiffs allege.
    An explanation for the fact that the price dropped more often during the Gold Fix than that it went up, were the net sales of gold reserves by governments and central banks. These supplies were sold through the large bullion banks that formed the Gold Fix, and these sell orders were submitted during the Gold Fix. Here is a well-written paper that explains this idea further.

The most important allegation is that the member banks of the Gold Fix were “net short.” The judge had the following to say about this allegation:

As an initial matter, Plaintiffs’ theory regarding Defendants’ short futures positions is improperly predicated on “aggregate” CFTC data showing that, as a whole, large bullion banks reporting more than 200 calls, puts, and futures contracts were “net short” on gold futures and options throughout the Class Period.26 SAC ¶¶ 211-12 & chart. Accepting Plaintiffs’ assertion that Defendants were included in the CFTC’s aggregate data, the data does not plausibly support an allegation that any particular bank was net short at any particular time (let alone that all of the Defendants were net short throughout the alleged conspiratorial period). Moreover, Plaintiffs’ data is limited to COMEX positions, whereas Defendants are also alleged to have maintained large physical positions and traded gold derivatives in markets (other than COMEX) around the world.

In short, no evidence, but many vague allegations. And eventually a Deutsche Bank that decides to settle the case and retire from participating in the Gold Fix

What Is Left of the Allegations?

Which allegations remain standing? Why did Deutsche Bank decide to settle? The answer is simple: the biggest legal monstrosity ever invented: antitrust law. Read the following poem of R.W. Grant (or scroll down to the part highlighted in bold):

This is a legend of success and plunder
And a man, Tom Smith, who squelched world hunger.

Now, Smith, an inventor, had specialized
In toys. So, people were surprised

When they found that he instead
Of making toys, was BAKING BREAD!

The way to make bread he'd conceived
Cost less than people could believe.

And not just make it! This device
Could, in addition, wrap and slice!

The price per loaf, one loaf or many:
The miniscule sum of under a penny.

Can you imagine what this meant?
Can you comprehend the consequent?

The first time yet the world well fed!
And all because of Tom Smith's bread.

A citation from the President
For Smith's amazing bread.

This and other honors too
Were heaped upon his head.

But isn't it a wondrous thing
How quickly fame is flown?

Smith, the hero of today
Tomorrow, scarcely known.

Yes, the fickle years passed by;
Smith was a millionaire,

But Smith himself was now forgot
Though bread was everywhere.

People, asked from where it came,
Would very seldom know.

They would simply eat and ask,
"Was not it always so?"

However, Smith cared not a bit,
For millions ate his bread,

And "Everything is fine," thought he,
"I am rich and they are fed!"

Everything was fine, he thought?
He reckoned not with fate.

Note the sequence of events
Starting on the date

On which the business tax went up.
Then, to a slight extent,

The price on every loaf rose too:
Up to one full cent!

"What's going on?" the public cried,
"He's guilty of pure plunder.

He has no right to get so rich
On other people's hunger!"

(A prize cartoon depicted Smith
With fat and drooping jowls

Snatching bread from hungry babes
Indifferent to their howls!)

Well, since the Public does come first,
It could not be denied

That in matters such as this,
The Public must decide.

So, antitrust now took a hand.
Of course, it was appalled

At what it found was going on.
The "bread trust," it was called.

Now this was getting serious.
So Smith felt that he must

Have a friendly interview
With the men in antitrust.

So, hat in hand, he went to them.
They'd surely been misled;

No rule of law had he defied.
But then their lawyer said:

The rule of law, in complex times,
Has proved itself deficient.

We much prefer the rule of men!
It's vastly more efficient.

Now, let me state the present rules.
The lawyer then went on,

These very simpIe guidelines
You can rely upon:

You're gouging on your prices if
You charge more than the rest.

But it's unfair competition
If you think you can charge less.

A second point that we would make
To help avoid confusion:

Don't try to charge the same amount:
That would be collusion!

You must compete. But not too much,
For if you do, you see,

Then the market would be yours
And that's monopoly!"

Price too high? Or price too low?
Now, which charge did they make?

Well, they weren't loath to charging both
With Public Good at stake!

In fact, they went one better
They charged "monopoly!"

No muss, no fuss, oh woe is us,
Egad, they charged all three!

"Five years in jail," the judge then said.
"You're lucky it's not worse.

Robber Barons must be taught
Society Comes First!"

Now, bread is baked by government.
And as might be expected,

Everything is well controlled;
The public well protected.

True, loaves cost a dollar each.
But our leaders do their best.

The selling price is half a cent.
(Taxes pay the rest!)

The only allegation that could be “substantiated” was an allegation based on antitrust law. But breaking antitrust law can (a) never be proven and (b) never be avoided. After all, whatever one does, according to antitrust law he or she is always guilty! Are you charging the same prices as the rest? Price collusion. Higher prices than the rest? Monopoly. Lower prices than the rest? Dumping and predatory pricing.

What was the offense Deutsche Bank – until recently a member of the Gold Fix - was sued for and which was granted by the judge? Price collusion! A very strange situation, with antitrust law as a stick that can always be used to swing.

But Even Then…

Even if you still do not trust Deutsche Bank, you have to admit: all these allegations involve a manipulation of the gold price that would take at most an hour and can never be structural or permanent. If the gold price was indeed manipulated downward during the Fix, then the gold price would have to recover proportionally after the Fix.

All this means that an investment is gold is not affected by systematic price manipulation. Better yet, with the current debt burden and the fact that the actions of Trump accelerate the economic downfall, means that gold is one of the best investments to own for the coming years. And the gold price will surely rise again.

Disclaimer: I have no relation with and/or position in Deutsche Bank


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