How Two Financial Giants Set the Gold Price

How Two Financial Giants Set the Gold Price

There are a few under-the-radar moves happening in the physical gold market.

Gold is in high demand right now.

All this buying yet once again, the physical gold market moves don’t reflect what’s happening with the gold price.

Given the tetchy geopolitical backdrop, the physical gold price should be rallying.

But it isn’t.

It’s still shuffling along the US$1,210 mark.

What gives?

Got gold yet?

Never has there been a more important time to become an owner of physical gold. Not the paper stuff. Not the ETFs.

A small part of your money, stored as a hunk of shiny yellow metal.


That is, the price of physical gold doesn’t reflect the demand for the yellow metal.

As of June this year, central banks held a collective total of US$1.36 trillion worth of gold accounting for 10% of the world foreign exchange reserves.

Then, in the September quarter, bar and coin demand for individual investors – people like you and me – rose 28% compared to the same period the year before.

And Wall Street is coming back into gold by the looks of it.

Exchange traded funds in North America and Europe upped the tonnes under management in October, growing by 3.4%.

All these bumps in physical gold stores, yet the price isn’t going anywhere.

Well, I know why.

Wading through technical muck

One of my pet peeves when explaining the gold price action is to blame it on what’s happening in COMEX.

While not wrong, COMEX trading does tend to set the gold price in the short-term, it dawned on me that many people don’t understand how the COMEX trades affect the gold price.

It’s a gripe of mine because some analysts get stuck on using jargon-y terms they barely understand themselves.

COMEX exchange is one of the world’s biggest derivatives exchanges for metals. COMEX is the financial meeting point for speculators and professional traders alike.

This where the BIG money trades. The multi-million dollar gold trades moving in and out.

Here, you can ‘bet’ on the direction of gold by either going ‘long’ or ‘short’ without actually owning the physical metal.

In other words, people can buy or sell a gold contract depending on whether they think the price will rise or fall.

The idea is that if you analyse the COMEX gold trades, outsiders feel like they get a glimpse of how the big money is thinking.

More ‘buy’ gold futures means big money is bullish on gold, for example. And more ‘sell’ gold contracts means the big money thinks the price of gold will fall.

The COMEX exchange mystifies most people.

So it frustrates me when I hear commentators waffle on about the ‘COMEX’ action. They know very few people outside of the Wall Street bubble actually know what it means.

In saying that, what make COMEX such an important player in the gold price action?


Like I said, COMEX is big money.

The precious metals trading playground of the Wall Street types. What happens in the COMEX gold futures market often predicts the short-term price points for gold.

It’s a peek behind the curtain of where the billions of hedge dollars of flowing.

But it never used to be like that.

In the old days – when gold futures were first traded in 1974 – they were used as a way to hedge what was happening with the physical gold price. In other words, gold futures trailed the gold price.

Nowadays, COMEX gold futures are the leading indicator.

Meaning now, the COMEX gold futures price is what the physical gold price becomes.

Make no mistake; COMEX is a ‘price maker’ when it comes to the physical gold price.

But it doesn’t do it alone.

It takes two behemoth institutions to create the gold market.

Hiding demand for physical gold

COMEX traders can’t set the price of gold on their own.

What’s happening across the pond in London plays a large role as well.

This is where the London Bullion Market Association (LBMA) enters our story.

The LBMA is the largest physical gold trader in the world.

And while not an official LBMA member, the Bank of England offers ‘custodial services’ to central banks around the globe.

The important thing to note here is that the LBMA is an over the counter (OTC) trader. So, there’s no clearinghouse for any of the physical gold trades, for example.

But this is where things get tricky.

See, while the LBMA ‘trades’ physical gold for big money, it doesn’t often move that gold out of the vault.

Really, it ‘shifts’ the ownership of physical gold around on a book-keeping ledger. Gold rarely leaves the secure vaults of the LBMA.

The problem is, as the LBMA is an over the counter trader, we don’t get to see the actual prices traded like we would with shares trading on the ASX, for example.

Making the daily physical buying and selling of gold trades extremely murky to outsiders.

Yet, the OTC trading that happens in LBMA acts as the ‘pseudo’ demand for the physical gold.

And this data then feeds into the prices used by COMEX gold traders.

Together, the LBMA and COMEX are the ‘big money’ buying and selling gold.

They set the price for the gold market.

And more importantly, they are the guide for big money’s daily demand for physical gold.

The problem for mere market punters like you and me is we don’t see the daily physical demand.

We are left to sift through daily price movements for gold.

Securing your money away from ‘The System’

Together, two of the biggest, most powerful trading institutions in the world set the gold price for the rest of the market.

Yet us, the mere non-Wall-Street-wizards, aren’t privy to the daily physical demand for gold. That is, the people that want to hold the yellow metal in their hands each day.

We do get access to that data. But, it generally comes once a quarter from the World Gold Council.

When this report drops, we finally see what the daily global demand is only three months later.

This is partly why physical gold demand can be increasing EVEN as the gold price is falling.

Yet, when I go through these reports from the World Gold Council, I see that people aren’t dumping gold.

In all of the reports that I read, demand for physical gold ownership is the highest it’s been in four or five years.

Investors aren’t ‘fleeing’ gold; it’s only the price that’s falling.

The demand for physical gold is being masked. And it can be, because two giants of the finance industry set the price for the rest of the market.

If we KNEW the actual physical demand for gold on a daily basis, I highly suspect the REAL gold price would be much, much higher.

This is why you should ignore the daily price movements of physical gold. Leave that minute detail to the technical traders.

Instead, focus on owning physical gold for long-term wealth protection.

Some money out of the system.

Something set aside for the decades ahead.

Kind regards,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia