Volcker Rule Impacts: Gold, Silver & Precious Metals Proprietary Trading By Major Banks

If regulators strike the right balance in imposing the so-called Volcker Rule that limits bank proprietary trading, precious metals markets could see greater transparency, according to one analysis penned on Wednesday.

Large-scale proprietary trades by major banks may have manipulated gold prices, exerting significant downward pressure, wrote gold strategist Jeffrey Nichols. If the Volcker rule ends such supposed trades, fundamentals in physical gold and silver markets should claw back some warranted traction, he said.

Banks don’t tend to confirm the details of their proprietary trading bets, which involve taking positions on markets and prices using their own money and not clients’. JPMorgan Chase & Co. (NYSE:JPM) declined to comment on any alleged precious metals proprietary trading to IBTimes. Goldman Sachs Group Inc. (NYSE:GS) also didn’t comment.

“It may be well known that they do this type of trading in general, but specifically with regard to gold and silver, I don’t think it’s been widely discussed,” Nichols told IBTimes in a phone interview. “I believe it takes place nonetheless. It would be extremely surprising if they weren’t doing this.”

Nichols blamed such “speculative” trading, which seeks quick profits from price moves, for exaggerating gold’s price declines. Gold has fallen more than 25 percent this year and is set to end the year lower than it began it for the first time in 12 years.

Trading on regulated futures markets is likely more significant than such bank trading on unregulated over-the-counter markets, said Nichols. The gold futures market is worth tens of billions, with much inventory traded via the COMEX commodities exchange, a division of the New York Mercantile Exchange (NYMEX).

“The intent is often manipulative with large strategically timed selling, at key chart points, intended to beget more selling and the opportunity for these players to close out positions soon thereafter with attractive trading profits,” wrote Nichols in his analysis. He added that heavy trading in so-called ‘dark pools’ can significantly impact pricing, despite being mostly opaque to the rest of the market.

Precious metal retailers also complained about the alleged practice, but were skeptical the Volcker rule could do much to curb the large “paper” market for gold, in which the yellow metal exchanges hands via contracts and exchange-traded funds, instead of in physical bullion form.

“It's widely believed that gold and silver prices have been manipulated by large bullion banks who specialize in high frequency trading,” wrote Lear Capital CEO Scott Carter in an email to IBTimes.

“These bullion banks "bang" the open or close in the paper gold market to influence the price to close out positions or influence the asset sentiment in the marketplace.”

Carter estimated that for every physical ounce of gold traded, there are 42 “paper” ounces traded. He believes that distorts underlying physical demand for gold, and consequent price trends.

The Volcker rule could bring more transparency to gold markets, said Carter. But he added: “I’m skeptical. If the new rule had any teeth to it, the banks wouldn’t have agreed to the change.”

“It is easy to understand many gold and silver analysts' concerns about the potential for price manipulation in the markets,” said bullion seller Anthem Vault, Inc. CEO Anthem Blanchard to IBTimes, citing banks’ ability to leverage and view trade volumes.

“The key will be how effective the regulatory agencies will be at distinguishing between 'prop' trading and true hedging activities,” he continued.

Under the Volcker rule, banks will have considerable breathing room to argue that certain bets are legitimately used to hedge risk across investment portfolios. Regulators, who include the CFTC, the Securities and Exchange Commission, and the Office of the Comptroller of the Currency, will have to decide when that defense doesn’t hold up.

But the final approval of the rule earlier this week by itself won’t majorly impact gold and silver prices, according to Nichols and Carlos Sanchez, a CPM Group commodities trader.

“I don't think the Volcker Rule will really have a significant impact on gold and silver trading. Banks have known this was coming up for years,” said Sanchez. “I don’t see any real impact on the market.”

Other gold experts also weighed in on Thursday, writing on industry sites like MineWeb. Some say, though, that the global gold market is too large to be significantly influenced by a handful of U.S. banks, and that markets are smart enough to outwit such simple manipulation strategies.

Gold opened at $1252 per ounce in New York on Thursday. Emerging market demand for physical gold has bolstered the metal this year, though that has been largely outweighed by negative sentiment and sales from U.S. and European investors.