Vince Lanci Unravels What Gold Silver Swap Dealers (Banks) Actually Do
Summary
➡ Bullion banks, like JP Morgan and Citadel, have become the only major players in the gold and silver markets due to their vast information and client base. However, this dominance has led to a lack of competition and a dependency on these banks, making it difficult for them to manage their risk. Despite being overbought, gold is expected to continue its rally, with banks and the press showing a bullish outlook. For those interested in buying gold and silver, Miles Franklin offers weekly specials.
Transcript
First, let’s look at the markets themselves. Here’s the gold fix front page. The dollar is up 17 at 100 spot 85. Ten-year yields are 381 up a pip. The S&P 500 is up 4.5 at 5636. The VIX is 1618 up 33. Gold is up 12 and stable at 2524. Silver is over $30 now at 30 spot 07 up 23 cents. Copper is up 2 cents at 424. The gold-silver ratio is creeping lower again. WTI is up $1.99 call it $2 at 7818 give or take. Natural gas is down 3 cents. Crypto is down. Bitcoin is 63.876.
Broken well above the 58 to 60, 58 to 62 range. Ethereum is also down 5 at 2741, considerably lagging Bitcoin in this last leg higher. Palladium and platinum are both strong. Palladium is up only $1 at 959 and platinum is up over $9 at 972. Grains, soy and corn are down. Soy is down 10 at 985. Corn is 372 down 4 and wheat off your screen there is down a little bit. The gold fix home page. We have many stories there, several of which are on the topic we’re going to discuss today. However, to draw your attention, this is the Hartnett Report, the walkthrough made famous by Zero Hedge, but our own take on it for precious metals investors.
This is the Friday story about gold breaking higher after the Fed Open Market Committee conversation. And this came out last night, yesterday afternoon, I should say, why are the banks and press so bullish all of a sudden on gold? Now that title is about a segment of almost a two-hour conversation in which we do weekly, almost weekly, in which several founders and I discuss the Commitment of Traders Report in depth. No one else does it like this. If you’re interested in learning about the Commitment of Traders Report and how to truly interpret it, as opposed to being fooled by sensationalism and general mediocrity, you should subscribe.
If not, that’s fine by us as well. All right. We’re going to leave this up while we go through the market. These are the stories put out yesterday. We’ll do some chart work as well. Have no fear. All right. Starting with going to take a quick sip before I start on this long-winded conversation. Okay. Market rundown. Last week saw a choppy market environment with equities ultimately ending higher driven by Friday’s speech from Powell at Jackson Hole. Yields and the dollar moved broadly lower as the market interpreted the speech with a dovish tone.
This may be obvious to you, but we’re doing this professionally. Gold experienced volatility at first, but ended the week very strong while oil extended the week lower as geopolitical risk premiums diminished. Geopolitical risks didn’t diminish. Geopolitical risk premiums diminished. Last night, overnight, trading showed mixed price action with Hong Kong bouncing back after a week or close on Friday. Expect a quieter session in Europe today, which we’re in the middle of right now. Due to the UK bank holiday, gold and oil are both higher now, however, with a firmer dollar simultaneously suggesting a return or an exaggeration of Middle East nervousness.
The week ahead in context of Friday’s speech or event, there was some debate on whether Powell could out-dove the market, especially considering the S&P had rallied in nine of the previous 11 sessions and was nearing the all-time high reached just a month ago. However, initial market reaction was positive. Yesterday’s Fridays, I should say market reaction was positive with equities buoyed by Powell’s recognition of the unmistakable cooling in the labor market. It’s uncertain if this speech will be enough to drive markets higher this week. A September rate cut seems certain now, but the key question is the pace and size of future cuts.
In summary, now that we have figured out that Powell is almost definitely going to cut, the market has to ask itself, will it rally because of that or has it rallied too much and will 25 basis points be enough or will the forever greedy stock market need 50 basis points? Essentially, while Powell’s comments were dovish, they shifted attention to upcoming jobs reports, making the next nonfarm payrolls print critical. I think if you look at that, you’ll see that if the nonfarm payrolls is normal, then it’s 25 basis points. If the nonfarm payrolls is very weak, the market will start to expect 50 basis points.
I’m not so sure they will get it, but that’s what the market will expect. On Friday, the nature of the stock market, as well as the gold market move, suggested a low quality rally. Now, obviously, it doesn’t look that way today. Suggested to make a low quality rally with shorts outperforming in stocks, indicating that further data might be needed to gain fundamental backing in the stock market. Looking ahead, the next two weeks will be slightly disrupted. UK is off today and the US is off next Monday. This week, the focus on the equity side will be Nvidia’s numbers and they will be on Wednesday.
We’re this next segment in which we discuss bank swap dealers in hopefully a synced and professional manner. I’m going to need to put on a thinking cap, so let’s get going. What do bank swap dealers do? Well, last week, perhaps today, I’m not sure, a precious metals expert said the following. Swap dealers’ net gold position on the COMEX is a nearly perfect inversion on managed money. It’s bullion banks facilitating hedge funds to speculate. Truly interesting. Let’s go into that so that people have a proper perspective on what bank swap dealers do. Bank swap dealers, banks in the precious metals space, as in all markets, occupy something called intermediation or in the common parlance, they are middlemen.
More specifically, they provide counterparty liquidity for other participants who wish to express a market opinion in futures by buying or selling. Most markets are not continuously liquid, similar to a house. You need to buy a house, you search for price and availability. That must be done before purchasing. You don’t just step in and buy. In financial markets, these services are provided by intermediators. They’re types of intermediators have a very specific role. They are more commonly known as market makers, of which I was one in the precious metals and energy options markets for a couple decades.
Some will call them dealers. That’s a term you’ll hear it referred to in the bond market. You also hear it referred to in stocks, depending on who you’re talking to, or specialists, as they were referred to in the old days. In a healthy market, they are the gold dust that keeps a market liquid when others who do not want to trade. They make markets when no one else will. Now, we’ll get into why they do that, even though they don’t technically have to. You may understand them better. This might make it very easy for everyone to get around the lexicon.
You may understand them better if you thought of them as bookies who take bets from both sides. Their edges, they’re statistically skilled, if they’re statistically skilled. They understand how far a line can move. A money line, a betting line spreads on a game, can move, and how to readjust their lines, their betting lines, efficiently. Price is a betting line. They also have a large amount of information flow that helps them handicap price movements in the micro. Their traditional way to make profits is to make money from the implied fees associated with the bid-ask spread on the markets they make.
They are implied fee collectors like bookies are. It’s free to transact with a bookie. It’s free to bet online. In fact, they’ll give you money. It’s the getting in and getting out. It’s the Roach Motel mentality that makes it important. All right. The fees they make are the bid-ask spread on the markets they make. That’s the implicit fee, the money line. Their risk in the market, and they have risk, that a market can be unbalanced for extended periods of time. And unless they rebalance their risk with someone else, another bookie or lacking another bookie, someone bigger than a bookie, like a Federal Reserve Bank, like a bank of international settlements, they can get run over.
Now, why do they do this if they can get run over? They do this because at banks, swap dealers and banks, because at banks, market making or liquidity provision is a service they provide to loyal clients who do other business with them, like clearing banking and other market trading. Therefore, as a service, per their bank’s rules, they are morally and in some instances, legally obligated to make markets. It’s not usually legally, but morally for sure. That’s not to say they don’t tip the scales to help themselves. As we all know from past manipulators, tactics, many bullion banks have been accused of successfully.
They are in the business to facilitate liquidity, not to facilitate speculation. What do I mean by that? They also provide liquidity for their clients that happen to be producers and end users without bank market makers. And believe me, I am not extolling the virtues of these people. With that bank market makers, producers will not be able to efficiently hedge their production. And without an efficient price or hedge of their production, they would not be able to operate. They are an integral part of the chaos that is capitalism. Now, right now, this is the good stuff, right? Right now, they are a victim of their own cartel-like dominance as their asymmetrical tactics and knowledge base have destroyed competing market makers over the year.
See, the beauty of a cartel is you get all the information and you get all the flow. The cons of a cartel is once you are the cartel, then there’s no one else left to talk to. So just to back up a little bit, right? These intermediators or facilitators, as the experts said, they’re in the business to facilitate liquidity for entry and exit into markets. And they wish to be paid a fee for opening and closing doors. They are the doorman to something that you want to do. They don’t act, they react to you.
And then they try to trigger you, which is what triggering a stop is. So because this cartel-like behavior, which, by the way, happened because they have the most information, they have the biggest producer clients, over the years, it systematically slowly wipes out competition because they have more information than competition. And eventually the competition leaves. And so the market becomes systemically dependent on them, which is why market makers like Citadel, like JP Morgan, get bailed out. They are the only game in town. And so we become dependent on them now, which means right now they cannot get out of their risk in markets that trend a long time, such as gold and soon silver.
They are like a very successful bookie who has eliminated the opposition. And having done that, they’ve destroyed their own ability to hedge risk. And now they suffer the same consequences. Now, as to the chart that you’re looking at, you’ll notice that the bank market making positions mirror the speculative fund positions. That is not a comment on the banks. That’s a comment on the funds. The funds are bullish. They have to buy from someone. They buy from liquidity providers. And in the metals market, liquidity providers are bullion banks because they are the cartel. They have created a cartel over years.
The market is not diverse. If you look at other markets, you will see similar patterns. In a market that’s speculatively bearish, let’s say oil sometimes, you will see the dealers or market makers be constantly long. That would be your Citadel’s, right? But it doesn’t show up on this report because it’s a more diverse list. So the precious metals market is essentially a cartel that deals with the bulls and bears in the market. The gold market is historically constantly bullish for the reason that gold exists. And therefore, the banks must sell to them morally and sometimes legally.
And their edge, aside from the information, is their edge is in the information that they have and the fact that they have more money than the speculators. The reason that they’re having a hard time right now, in my opinion, is because the speculators aren’t really speculating their physical players who want the gold. And because they want the gold, well, they have pockets that are deep, if not deeper, than the banks. So the banks will get out of their positions. The question is at what price. And it’s usually when the funds get out of their position.
Moving on. Data on deck. Heavy data week. I don’t know what to focus on, but I’ll tell you what not to focus on. Do not focus on the Fed speakers. Okay. Take my thinking cap off. Focus on PCE on Friday. Focus on durable goods today. Focus on home sales on Thursday. All right. That’s it. Let’s take a look at the charts. We covered the gold charts very extensively, and I’ll just say this in summary. On a daily basis, gold is overbought. The market is rallying, but gold is overbought, so it’s more vulnerable. On a weekly basis, gold is just getting started on its rally, according to a volatility indicator that I use.
And on a monthly basis, it’s about a third of the way through a bull run. So maybe another six months, according to that. The banks are all very bullish on gold. The press is picking up on gold. And so you should be careful. Always. But we are headed into the time of year when we have an election. So we have some conflicting information out there, but the gold bull market rallies on a wall of worry. So enjoy. Your next gold or silver order. And Miles Franklin brings us a gold and silver special each week.
And if you’ve been looking for a pullback in the rally to purchase gold and silver, this week’s deals include one ounce silver fill harmonics from the Austrian men in Austria. Fortunately, these beautiful coins are only three dollars and 10 cents over spot. Well, we still do have silver under the thirty dollar level of which it obviously eclipsed earlier this year. And on the gold side, this week’s special is one ounce gold Kuberance for only sixty dollars over spot. And again, you can place an order by calling 833-326-4653 or emailing us at Arcadia at milesfrankton.com.
Happy to answer any questions you have and get you set up with whatever you need. So call us at 833-326-4653. And as always, thanks for watching. Please note that this video is not intended as legal licensed financial trading advice and is to be used for informational purposes only. Please contact your financial advisor before making any decisions. And thanks for watching. Bye. [tr:trw].
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