By Simon Kennedy

China Investment Corp. Vice Chairman Gao Xiqing said that central banks’ quantitative easing policies are hurting the value of money just one day after the Federal Reserve maintained plans to buy $600 billion of Treasuries.

“You know money is gradually becoming not worth the paper it’s printed on,” Gao said at an event sponsored by HSBC Holdings Plc at the World Economic Forum in Davos, Switzerland today. Recent gains in commodity and food prices reflect the “long-term view” of investors that prices will accelerate, he said.

The Fed and the European Central Bank have kept their benchmark interest rates at record lows to spur their economic recoveries, triggering concern in emerging markets that the resulting flood of capital will undermine currencies such as the dollar and spark inflation.

“We’ve started collecting Zimbabwe notes,” Gao said, referring to an economy whose currency was scrapped in 2009 after inflation reached 500 billion percent. He noted investors are also discussing whether central banks will pursue more rounds of quantitative easing.

The Fed yesterday reiterated its intention to keep its benchmark “exceptionally low.”

Gao, whose sovereign wealth fund manages about $300 billion, signaled that while industrial nations are now more welcoming of China’s money following the financial crisis, their past criticisms may hurt their ability to attract it.

‘Long Memories’

“People have long memories,” he said. “We have this yo- yo when being treated by a few major countries.”

“In many countries we are now treated differently,” he said. “We should be the most welcome investor.”

Inflation concerns have become a new theme in the hallways of Davos’s Congress Center as emerging markets including China tighten policy and record food prices fan social unrest in North Africa. Chinese inflation ran at 9.6 percent in December.

Inflation nevertheless is not an immediate concern and prices for securities that offer protection against it are “not up there yet,” Gao said. A record $13 billion auction of 10- year Treasury Inflation Protected Securities last week attracted lower-than-average demand.

“In shorter run, you look at the numbers and fundamentals and you think there’s some inflation pressure but it’s not something we have to worry about,” Gao said.

Article Source

I do recall mid year 2010 when the buzz was some of Paulsons investors cashed out amid rumors he had lost his touch. I guess not.

By AZAM AHMED and JULIE CRESWELL

John A. Paulson made $4 billion betting against newfangled mortgage investments. But he made even more betting on an old-fashioned investment: gold.

The hedge fund manager John A. Paulson, right, invested heavily in gold on the belief that the dollar would lose value in the coming years. His gold investments are primarily done through a gold exchange-traded fund.

Mr. Paulson, a hedge fund manager who sprang to fame when the housing market collapsed, personally made about $5 billion in 2010, according to two investors in his company.

How? Mr. Paulson bought gold — lots of it. His firm, Paulson & Company, owns securities that represent the rough equivalent of 96 metric tons of the metal.

It is an outsize wager by almost any standard. Mr. Paulson’s firm does not actually own all that gold. But if it did, it would be sitting atop more gold than the Australian government. Mr. Paulson himself would be holding more gold than Bulgaria.

Mr. Paulson is known for betting big. His payday for last year exceeds the $4 billion he made for 2007. He became one of the most celebrated hedge fund managers in the business after his firm shorted subprime investments.

The 2010 income, which was first reported by The Wall Street Journal, was the culmination of a remarkable comeback for Mr. Paulson last year.

While Mr. Paulson’s firm oversees about $36 billion of assets in a range of hedge funds, the bulk of his personal fortune is invested in his funds that buy securities linked to the price of gold. Gold jumped almost 30 percent in 2010. So far this year, however, it has fallen almost 6 percent.

While some other hedge fund stars turned in strong performances last year — David Tepper of Appaloosa Management, Daniel Loeb of Third Point and William A. Ackman of Pershing Square, for instance — Mr. Paulson’s payday most likely dwarfed theirs, as he oversees funds that are substantially bigger.

Throughout much of last year, Mr. Paulson’s funds lagged the market. Amid questions about whether the funds had become too big to beat the markets or whether Mr. Paulson had lost his touch, some investors asked for their money back midyear.

But those who stayed were rewarded. In the final quarter of the year, many of Mr. Paulson’s core stock holdings rose substantially. His two largest funds, with a combined $18 billion in assets, the Advantage and Advantage Plus fund, were up 11.1 percent and 17.6 percent by the end of the year. (The difference between the two funds is that the Advantage Plus fund uses leverage, or borrowed money, to increase its returns.)

The average hedge fund gained a little more than 10.5 percent in 2010, a lukewarm year for many hedge fund managers, according to a composite index tracked by Hedge Fund Research of Chicago. Many investors would have achieved bigger gains by putting their money in an index that tracked the Standard & Poor’s 500-stock index, which was up about 15 percent last year, including dividends.

But Mr. Paulson’s personal payday was probably greater than that of many of his investors. The $5 billion he earned was almost twice the entire payroll of all Major League Baseball teams. While part of that came from his firm’s 20 percent cut of his funds’ profits — a typical “performance fee” in the industry — the bulk of his gains came from his own money he has in his funds.

Investors say Mr. Paulson has about $10 billion of his own money invested with the funds and that the vast majority of his money is invested in a special gold-share class he created a few years ago that is invested alongside his other portfolios.

So, while the Paulson Advantage fund was up 11.1 percent last year, the gold class shares of that portfolio surged 30.8 percent, according to investors in the fund, who spoke on the condition they not be named so as not to endanger their professional relationship with Mr. Paulson.

Mr. Paulson invested heavily in gold on the belief that the dollar would lose value in the coming years. His gold investments are primarily done via a gold exchange-traded fund, SPDR Gold Shares.

One of the largest E.T.F.’s in the world, SPDR Gold Shares is a trust that holds nearly 1,230 metric tons of gold bars in the vaults of HSBC bank in London.

The gold fund has attracted a lot of big investors who are looking for a hedge against inflation. George Soros and Eric Mindich of Eton Park both held substantial stakes in the gold shares trust, according to filings with the Securities and Exchange Commission.

“It’s massively popular. It’s been growing by leaps and bounds ever since the financial crisis,” said Scott Burns, director of E.T.F. research at the research firm Morningstar.

Investors in the special gold shares class do not pay an additional management fee for their stake in the gold funds, but they do give Mr. Paulson 20 percent of any profits. Only about one-third of his total investors are in the gold-shares class, many choosing instead to invest directly in the gold fund and keep all of their gains.

Article Source

By Bloomberg News

China should increase its gold and silver reserves, the Economic Information Daily reported today, citing an interview with central bank adviser Xia Bin.

Increasing gold reserves at the “appropriate time” is in line with the strategy of internationalizing the yuan, the report cited Xia as saying. “Related departments” should employ a “buy in the dip” strategy over a very long period of time, Xia said.

Bullion soared nearly 30 percent in 2010, advancing for the 10th year, as the dollar dropped and investors sought a store of value amid currency debasement. China is allowing greater use of its currency for cross-border transactions, seeking to reduce reliance on the dollar.

The report is “a positive factor for gold prices in the mid-and-long term,” Hwang Il Doo, a senior trader at Seoul- based Korea Exchange Bank Futures Co., said today. Still “it didn’t have immediate impact on prices as gold’s gain has more to do with the unrest in Egypt at the moment.”

Total gold consumption in China, the second-largest buyer, may gain 15 percent in the first half, fueled by growing demand for alternative investments and a hedge against inflation, the China Gold Association said last week.

Imports of gold by China jumped almost fivefold in the first 10 months of last year from the entire amount shipped in 2009, the Shanghai Gold Exchange has said. Shipments were 209 metric tons compared with 45 tons for all of 2009, said exchange Chairman Shen Xiangrong.

The country increased gold reserves by 454 tons to 1,054 tons since 2003, the State Administration of Foreign Exchange said in April 2009. The metal only accounts for 1.6 percent of the nation’s reserves held by the People’s Bank of China, according to the World Gold Council. China doesn’t regularly publish gold-trade figures and rarely comments on its reserves.

Immediate-delivery bullion gained as much as 0.7 percent to $1,346.27 an ounce, and was at $1,339.25 at 12:53 p.m. in Seoul. The price rose 2.5 percent on Jan. 28, the biggest intraday increase since Nov. 4 as escalating tensions in Egypt fanned concern that unrest may spread to other parts of the Middle East, increasing demand for an investment haven.

Xia’s remarks echo comments he made last month in an opinion piece for the China Business News.

Article Source

For an excellent view into the unrest in Egypt as well as how this mirrors other countries and what could happen in other places I recommend this fine article by Gail Tverberg who writes the Ourfiniteworld blog.

What Lies behind Egypt’s Problems? How do They Affect Others?
By gailtheactuary

We have all been reading about Egypt in the newspapers, and wonder what is behind their problems. Let me offer a few insights.

At least part of Egypt’s problem is the fact that in the past the government has threatened to reduce food subsidies. Now it is planning to hold food subsidies level and raise energy subsidies, but it is not clear that the dollar amount of subsidy will be enough. The government is taking steps to make food and energy affordable for most, but there is worry that the steps being taken will not be enough.

Alex’s Notes: Well well, who would have thought.

Re-indexing the US $1.7 Trillion of currency against the 261.4 million ounces of gold gives us a gold price north of $6500 per ounce.

“We have at this particular stage a fiat money which is essentially money printed by a government and it’s usually a central bank which is authorized to do so. Some mechanism has got to be in place that restricts the amount of money which is produced, either a gold standard or a currency board, because unless you do that all of history suggest that inflation will take hold with very deleterious effects on economic activity… There are numbers of us, myself included, who strongly believe that we did very well in the 1870 to 1914 period with an international gold standard.” – Alan Greenspan, Fox News January 21, 2011

Alex’s Notes: For the Chinese President Hu Jintao to formally broadcast this message is a very important point. For years many have speculated as to the path China would take in regards to the worlds reserve currency situation. This pattern has been slowly observable over the last few years as to the pieces being put in place by China.

1. Buying commodities and more importantly the ownership of the in ground resources and rights to extract them across the globe

2. Raising gold in reserves up to 1054 tonnes in a few short years

3. Signing bi-lateral agreements to settle trade in Chinese currency with some of the largest countries of the world

When China becomes the largest consumer of oil and agreements are publicly announced that China can buy oil from the gulf states in Chinese currency, these will be huge signals.

Changes of reserve currency do not occur overnight. China will need to add the equivalent of several years worth of mining supply globally to bring its foreign reserves in gold in line with that of leading economic powers in the west for the currency to have the credibility needed to take on this role. Consider China the floor under the gold price.

BBC News – Chinese President Hu Jintao has said the international currency system dominated by the US dollar is a “product of the past”.

Mr Hu also said China was taking steps to replace it with the yuan, its own currency, but acknowledged that would be a “fairly long process”.

The remarks to two US newspapers come ahead of a state visit by the Chinese leader to Washington this week.

They reflect continuing tensions over currency issues between the two powers.

The remarks to the Washington Post and Wall Street Journal came in the form of written responses to questions. Mr Hu also reiterated criticism of a decision by the US Federal Reserve to inject $600bn into the economy, which some argue will weaken the dollar at the expense of other countries’ exports.

“The monetary policy of the United States has a major impact on global liquidity and capital flows and therefore, the liquidity of the US dollar should be kept at a reasonable and stable level,” President Hu said.
‘Important contribution’

Meanwhile, he disagreed with suggestions that letting the yuan appreciate in value would help China to combat inflation.

He said inflation, which reached 5.1% in November – its highest level in 28 months – was “on the whole moderate and controllable”.
Continue reading the main story

“Making the renminbi an international currency will be a fairly long process”

“We have the confidence, conditions and ability to stabilise the overall price level,” he said.

Beijing has previously come under pressure over its currency from the US, which has accused China of manipulating the yuan to help boost Chinese exports.

On Sunday night, three Democratic senators announced they would introduce a new bill to increase penalties the US considers to be “currency manipulators”.

However, the move is unlikely to receive support from senior Republicans – who recently took control of the House of Representatives.

The new House speaker, John Boehner, voted against another bill that failed last year that would have helped US companies challenge currency subsidies.
Currency reservations

Despite criticism of the current system, Mr Hu said he believed it would be a long time before the yuan – or renminbi (RMB) – was accepted as a global currency.

“China has made important contribution to the world economy in terms of total economic output and trade, and the RMB has played a role in the world economic development,” he said.

“But making the RMB an international currency will be a fairly long process.”

Some economists suggest that China’s growth strategy – with its focus on exports and state-led investment – may be incompatible with Mr Hu’s currency ambitions.

In order for the yuan to oust the dollar as a global reserve currency, international central banks and investors would need to be able to get their hands on huge amounts of the currency.

Yet neither of the ways in which China could supply the world with more yuan is at all appealing to Beijing, according to Michael Pettis, economist at Beijing University.

He says the country could start running big trade deficits with the rest of the world – just as the US has been doing – and finance them by selling their currency to their trade partners.

Or it could allow foreign investors to pour their money into Chinese financial assets – like shares, bonds or yuan bank accounts – matched by similar Chinese investments in the rest of the world.

But Mr Pettis warns that for the numbers to add up, China would need to do these things on an unprecedented scale, which is likely to be unpalatable to the authorities.

Either of these moves is likely to go with an increase in the yuan’s value, making Chinese exporters less competitive.

And they may also fuel speculative asset bubbles in China – something that Beijing has been trying to clamp down on of late.

Original Article

Alex’s Notes: Fundamental Drivers for todays bull market in gold are still in place, there is no solution to the western debt and budget shortfall problem other than additional Quantitative Easing (modern central banker parlance for creating more money)

Temporary pullbacks in the price of gold during its 10 yr ascent is healthy, normal, and expected.

Do not allow yourself to be frightened out of your positions.

Associated Press
Monday, January 17, 2011; A13

The United States just passed a dubious milestone: Government debt surged to an all-time high, passing $14 trillion – $45,300 for every person in the country.

That means Congress soon will have to lift the legal debt ceiling to give the almost maxed-out government an even higher credit limit or dramatically cut spending to stay under the current cap. Either way, a fight is ahead on Capitol Hill, inflamed by the passions of tea party activists and deficit hawks.

Each side is blaming the other for an approaching economic train wreck as Washington wrestles with how to keep the government in business and avoid defaulting on global financial obligations.

Bills that would increase the debt limit are among the most unpopular in Congress, serving as pawns for decades in high-stakes bargaining. Until now, the ending has been the same: We go to the brink before raising the ceiling.

All bets may be off, however, in this charged political environment, despite some signs that the partisan rhetoric is softening after the recent shootings in Arizona.

Treasury Secretary Timothy F. Geithner says that not increasing the nation’s borrowing authority would be “a catastrophe,” perhaps rivaling the financial meltdown of 2008-2009.

Congressional Republicans, flexing their muscle after November’s midterm victories, say that the election results show that people are weary of big government and deficit spending, and that it’s time to draw the line against more borrowing.

Defeating a new increase in the debt limit has become a priority for the tea party movement and other small-government conservatives.

So far, the new GOP majority has proved accommodating. Republicans are moving to make good on their promise to cut $100 billion from domestic spending this year. They adopted a rules change by House Speaker John A. Boehner (Ohio) that should make it easier to block a debt-limit increase.

The national debt is the accumulation of years of deficit spending dating to the days of George Washington. The debt usually advances in times of war and retreats in times of peace.

Remarkably, about half of today’s national debt was run up in the past six years. It soared from $7.6 trillion in January 2005 as President George W. Bush began his second term to $10.6 trillion the day President Obama was inaugurated and to $14.02 trillion now. The period has seen two major wars and the deepest economic downturn since the 1930s.

With a $1.7 trillion deficit in fiscal 2010 alone, and the government on track to spend $1.3 trillion more than it takes in this year, annual budget deficits are adding about $4 billion a day to the national debt. Put another way, the government is borrowing 41 cents for every dollar it spends.

In a letter to Congress, Geithner said the statutory debt ceiling of $14.3 trillion, set last year, may be reached by the end of March – and hit no later than May 16. He warned that holding it hostage to skirmishes over spending could lead the country to default on its obligations, “an event that has no precedent in American history.” Debt-level brinkmanship doesn’t wear a party label.

Here’s what then-Sen. Obama said on the Senate floor in 2006: “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance the government’s reckless fiscal policies.” It was a blast by the freshman lawmaker against a Bush request to raise the debt limit to $8.96 trillion.

Bush won on a party-line vote of 52 to 48. Not a single Senate Democrat voted to raise the limit, opposition that is now complicating White House efforts to rally bipartisan support for a higher ceiling.

Democrats have used doomsday rhetoric about a looming government shutdown and comparing the U.S. plight to financial crises in Greece and Portugal. It’s all a bit of a stretch.

“We can’t do as the Gingrich crowd did a few years ago, close the government,” said Senate Majority Leader Harry M. Reid (D-Nev.), referring to government shutdowns in 1995 when Newt Gingrich (R-Ga.) was House speaker.

But those shutdowns had nothing to do with the debt limit. They were caused by failure of Congress to appropriate money to keep federal agencies running.

And there are many temporary ways around the debt limit.

Hitting it does not automatically mean a default on existing debt. It only stops the government from new borrowing, forcing it to rely on other ways to finance its activities.

Article Source

KANSAS CITY, Missouri (Reuters) – A gold standard that forces countries to back their currency reserves with bullion is a “legitimate” monetary system, though it would not prevent financial crises, Kansas City Federal Reserve President Thomas Hoenig said on Wednesday.

“The gold standard is a very legitimate monetary system,” Hoenig said, adding: “We’re not going to have fewer crises necessarily. You will have a longer of period of price stability or price level stability, but I don’t know that you’ll have lower unemployment, I don’t know that you’ll have fewer bank failures.”

Article Source

Alex’s Notes: I can still remember a few years ago when it was announced that the IMF would be selling off its gold. The gold world was alight with fright and analysts running in circles convinced that the gold price would be crushed.

There are those in the gold community that believe the entire point was to cause exactly that reaction in the market, fear, and just maybe it would hold the price of gold down a little while longer. After all, a little known piece of information that of course was never mentioned in the IMF press releases is that IMF gold is sold privately directly to Central Banks, it never touches the open market. You cannot in fact even buy IMF gold if you aren’t a Central Bank, as was proven by Eric Sprott when he asked the IMF if he could buy some and was refused.

The new rumor about a huge amount of gold coming into the market has been started by a very well respected economist within the establishment who has recently suggested that the US should sell off its entire gold reserves to pay down the debt. This is particularly amusing because for one, even if the US sold off its entire gold reserves which comes to roughly 261.5 million troy ounces¹, that would still only come to $360 Billion and some change. Its been recently reported that the US deficit for 2010 has stealthily come in at a whopping number approaching $5 Trillion. This is a joke.

Still, it may have had some effect as news media “financial experts” the world over are parroting the question, “well what if the US sells its gold reserves? what then?”

Lets just for a moment entertain the idea and do a thought experiment.

US Gold reserves are worth about $360 Billion give or take a few billion. If the US were to sell it, China who has made it clear on numerous occasions now that it is buying gold and intends to buy more,  could buy the entire US Gold Reserves with less than half of its current capital in US Bonds – this would also be less than a third of its current foreign reserves war-chest. If it did buy the entire US Gold reserves, gold would still only make up less than 15% of China’s foreign exchange reserves. To put that into context you need to look at the idea that the US  gold reserves makes up 73.9%²³ of the US foreign reserves and today China has a paltry 1.6% of its reserves in Gold. I would think it would be a welcome development by China, and remove the one true asset the US has left.

While many “experts” parrot the idea that gold is a barbarous relic – I have learned from experience to “watch what they do, not what they say”. The fact that the US holds 73.9% of its foreign reserves in gold instead of paper should tell you a bit about what is truly thought about paper versus gold by the men pulling the puppet strings.

Chart: Gold Reserves Per Capita

Gold Reserves Per Capita

Chart: Paper Foreign Reserves + Gold By Country after Subtracting Debt

Paper Foreign Reserves by Country after Subtracting Debt

¹http://www.fms.treas.gov/gold/current.html

²http://en.wikipedia.org/wiki/Gold_reserve

³http://en.wikipedia.org/wiki/Foreign_exchange_reserves

IMF says completes 403.3 tonnes gold sales program

WASHINGTON Dec 21 (Reuters) – The International Monetary Fund said on Tuesday it had concluded the sale of 403.3 tonnes of gold under a program approved in September 2009 to help boost its lending resources.

All gold sales were at market prices, including direct sales to official holders, the IMF said in a statement.

The gold sales amounted to one-eighth of the IMF’s total gold reserves. The fund sold 200 tonnes to India’s central bank last year.

Other buyers have included Bangladesh, Sri Lanka and Mauritius.

The IMF said on Nov. 29 it told 19.5 tonnes of gold in October, but it has not yet provided details of sales in November or December.

Dollar goes down, gold goes up.

Volcker Says Dollar’s Role in Danger as U.S. Influence Declines Globally
By Peter S. Green – Bloomberg

Former Federal Reserve Chairman Paul Volcker, who is chairman of President Barack Obama’s Economic Recovery Advisory Board, said the U.S. dollar is in danger of losing its role as a global benchmark currency.

“The growing question is whether the exceptional role of the dollar can be maintained,” Volcker told a gathering of New York civic leaders at the University Club of New York last night.

The decline of the U.S. economy, political gridlock at home, U.S. involvement in two wars and “festering” geopolitical issues in the Middle East and Asia have undermined the ability of the U.S. to influence global events, Volcker said.

Volcker offered no prescriptive solutions as he spoke in broad terms of the country’s loss of stature.

“This is a troubling time for America, a troubling time for the world,” Volcker said in remarks to Common Cause, a civic group. He said the U.S. is facing its most difficult economic crisis since World War II. “If ever there were a need for clear-headed, confident leadership, nationally and internationally, that time is now.”

The dollar weakened today against 14 of the 16 most traded currencies tracked by Bloomberg, trading at $1.31 to the euro. For 2010, the Dollar Index, which follows six of the biggest U.S. trading partners, is up 3.9 percent. Bloomberg Correlation- Weighted Currency indexes show America’s legal tender has kept its value almost unchanged since 1975.

U.S. Example

Even as the U.S. remains the world’s pre-eminent nation by default, Volcker said, its example no longer inspires other countries to trust U.S. leadership. He said the U.S. is hobbled by lobbyists and an unwillingness to pass realistic budgets, as well as a civil service that he said has lost its ability to attract America’s best and brightest to public service.

“The time is gone when the U.S. could lay claim as the putative superpower with both unchallenged economic and military might,” Volcker said.

“The growing sense around much of the world is that we have lost both relative economic strength and more important, we have lost a coherent successful governing model to be emulated by the rest of the world,” Volcker said. “Instead, we’re faced with broken financial markets, underperformance of our economy and a fractious political climate.”

Article Source

Alex’s Notes:

Rev 3:18 I counsel you to buy from Me gold refined in the fire, that you may be rich

Some commentators in the gold space are calling this a huge problem for the ETF’s – I dont agree with this.

Fake gold scams have been around for as long as there has been a market for gold. The top of the knowledge food chain in metallurgy is the LBMA refineries and the companies that own them, some of which have the most advanced metallurgical scientists in the world on their staffs.

Metal that goes into the LBMA system comes from these refineries, after it has been refined only by heat and chemical processes. Metal within the LBMA system is all that is accepted by professional level managers of bullion. I am not suggesting some ETF’s do not have other massive gaping holes in their prospectuses wording which may at some point prove to be “paper gold” and nothing more than book entries. I do not however see that the scams perpetrated on the retail market by “sophisticated metallurgical engineers” would be bought by those managing professional quantities of gold.

The theory goes that if the largest ETF’s were to have problems it would be on the side of redemption’s. Some analysts have written that when the big ETF’s see the call for redemption’s in “baskets” of 100,000 shares each from their shareholders then the game is over for the ETF’s. What these analysts have failed to point out is that the only players allowed to redeem such baskets are the exact same players that are the major dealers in institutional sized gold transactions. Those redemption’s will never occur unless they want them to occur. Another often missed point is that those redemption’s do not actually have to be honored even if they were made, based on how the prospectus of some of these read.

Read the prospectus to be clear on whether that fund can prove its has the metal or not, who can actually redeem the shares, and consider the motives of those who have the authority to redeem if you cannot do it yourself as the shareholder.

By Robert Cookson in Hong Kong

Hong Kong goldsmiths have been sold hundreds of ounces of fake gold this year in one of the most sophisticated scams to hit the Chinese territory’s gold market in decades.

Industry executives say the scam – while not massive and hitting only the retail sector – uncloaks the increasingly elaborate gold swindles perpetrated by criminals in Asia as bullion prices soar to record highs of $1,400 a troy ounce.

The counterfeits have shocked Hong Kong’s gold community not because of the amount involved, but because of their sophistication.

“It’s a very good fake,” said Haywood Cheung, president of the Chinese Gold & Silver Exchange Society, Hong Kong’s century-old gold exchange, highlighting how criminals are developing new techniques to commit an age-old fraud.

Mr Cheung said he was aware of at least 200 ounces – worth $280,000 – of the fake gold that had been discovered by jewellers and pawn shops. But he estimated that ten times that amount might have infiltrated the retail market. In comparison, the large gold bars held by central banks weigh 400 ounces and are worth nearly $560,000 each.

In one case, executives discovered a pure gold coating that masked a complex alloy with similar properties to gold. The fake gold included a significant amount of bullion – about 51 per cent of the total – alloyed with seven other metals: osmium, iridium, ruthenium, copper, nickel, iron, and rhodium.

The complex nature of the fakes suggest they were produced by a metalsmith with sophisticated equipment and extensive knowledge of metallurgical engineering.

Even Luk Fook Group, one of Hong Kong’s biggest jewellers, was tricked into buying $11,500 worth of fake gold this summer before putting its stores on alert. “This was the biggest hit ever,” said Paul Law, executive director of the firm.

In the past, counterfeit gold in Hong Kong and the rest of Asia was either rough and easy to detect, even to the naked eye, or involved gold-plated tungsten, a metal with a similar density to gold, but which traders and jewelers can easily identify.

The complexity of the latest batch of fake gold would have reduced the profitability of the scam, since it used a significant amount of bullion, and because iridium and osmium are expensive.

In most cases, the fakes passed basic scrutiny, only to be revealed later by more sophisticated tests involving high temperatures and chemicals.

Industry executives stressed that the scam targeted the street-level sale of scrap gold to jewelers. Mr Cheung said none of the fake gold had infiltrated the much more bigger market for gold bars, which is protected by more rigorous controls.

Article Source

Alex’s Notes: For China to legitimately figure into a future world reserve currency it is likely to have to add a substantial amount to its reserves in gold. Currently sitting at a reported 1054.1 tons, this is far lower than the US current reported reserves of 8133.5 tons, and Germany’s 3402.5 tons. To bring China’s reserves in line with that of other major economic powers would put substantial demand pressure on gold, and not just for a short time as Central Banks are now net buyers of gold for the last six quarters straight. We are looking at a sustained “price floor” where China will likely be there to catch any dropping price in gold.

By Bloomberg News

China is considering gradually increasing the nation’s gold reserves, the 21st Century Business Herald reported today, citing an unidentified consultant to the government.

There are limits to China’s ability to increase gold holdings on a large scale within a short time, so the gains in the government reserves will be a slow, incremental process, the newspaper said, citing the consultant. China currently has 1,064 metric tons of gold, accounting for 1.6 percent of its foreign exchange reserves, it added.

Gold has gained 22 percent this year, reaching a record $1,424.60 on Nov. 9, as a weakening dollar and concern about the global recovery has spurred demand for a store of value. China should purchase gold and oil overseas with its foreign-exchange reserves to avoid losses from a weakening dollar, Shao Fenggao, an official at China Construction Bank Corp., said on Nov. 1.

“People have always been speculating about China’s gold reserves, but I think there is not much point in second-guessing whether the government is going to buy gold,” Ronald Wang, general manager for greater China at the World Gold Council, said by phone from Beijing today. “They have access to information and they must have a plan with regard to gold.”

China remained the biggest foreign holder of U.S. Treasuries, after its holdings rose by $15.1 billion to $883.5 billion in September from $868.4 billion in August, according to the Treasury’s statistics.

Low Holdings

China’s gold holdings are far lower than the 8,133 tons held by the U.S. government, and are only higher than 25 countries of the 110 countries tracked by the International Monetary Fund, the newspaper said.

Meng Qingfa, a researcher at the China Chamber of International Commerce, wrote last month in the International Business Daily that China should increase its gold holdings.

China’s gold market may double in the next decade as retail investment and jewelry demand gain, the council’s Wang said Nov. 3. Demand may gain to 800 tons to 900 tons in the next ten years, Wang said. China’s jewelry and investment gold demand was 428 tons in 2009, according to the council.

Immediate-delivery gold fell 0.2 percent to $1,337.10 an ounce at 11:16 a.m. Shanghai time, heading for the longest slump since July.

Alex’s Notes: If you have been reading these entries for any period of time you already know that this is very fundamental to creating additional demand for gold.
By NEIL REYNOLDS

Boston University economist Laurence Kotlikoff says U.S. government debt is not $13.5-trillion (U.S.), which is 60 per cent of current gross domestic product, as global investors and American taxpayers think, but rather 14-fold higher: $200-trillion – 840 per cent of current GDP. “Let’s get real,” Prof. Kotlikoff says. “The U.S. is bankrupt.”

Writing in the September issue of Finance and Development, a journal of the International Monetary Fund, Prof. Kotlikoff says the IMF itself has quietly confirmed that the U.S. is in terrible fiscal trouble – far worse than the Washington-based lender of last resort has previously acknowledged. “The U.S. fiscal gap is huge,” the IMF asserted in a June report. “Closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 per cent of U.S. GDP.”

This sum is equal to all current U.S. federal taxes combined. The consequences of the IMF’s fiscal fix, a doubling of federal taxes in perpetuity, would be appalling – and possibly worse than appalling.

Prof. Kotlikoff says: “The IMF is saying that, to close this fiscal gap [by taxation], would require an immediate and permanent doubling of our personal income taxes, our corporate taxes and all other federal taxes.

“America’s fiscal gap is enormous – so massive that closing it appears impossible without immediate and radical reforms to its health care, tax and Social Security systems – as well as military and other discretionary spending cuts.”

He cites earlier calculations by the Congressional Budget Office (CBO) that concluded that the United States would need to increase tax revenue by 12 percentage points of GDP to bring revenue into line with spending commitments. But the CBO calculations assumed that the growth of government programs (including Medicare) would be cut by one-third in the short term and by two-thirds in the long term. This assumption, Prof. Kotlikoff notes, is politically implausible – if not politically impossible.

One way or another, the fiscal gap must be closed. If not, the country’s spending will forever exceed its revenue growth, and no one’s real debt can increase faster than his real income forever.

Prof. Kotlikoff uses “fiscal gap,” not the accumulation of deficits, to define public debt. The fiscal gap is the difference between a government’s projected revenue (expressed in today’s dollar value) and its projected spending (also expressed in today’s dollar value). By this measure, the United States is in worse shape than Greece.

Prof. Kotlikoff is a noted economist. He is a research associate at the U.S. National Bureau of Economic Research. He is a former senior economist with then-president Ronald Reagan’s Council of Economic Advisers. He has served as a consultant with governments around the world. He is the author (or co-author) of 14 books: Jimmy Stewart Is Dead (2010), his most recent book, explains his recommendations for reform.

He says the U.S. cannot end its fiscal crisis by increasing taxes. He opposes further stimulus spending because it will simply increase the debt. But he does suggest reforms that would help – most of which would require a significant withering away of the state. He proposes that the government give every person an annual voucher for health care, provided that the total cost not exceed 10 per cent of GDP. (U.S. health care now consumes 16 per cent of GDP.) He suggests the replacement of all current federal taxes with a single consumption tax of 18 per cent. He calls for government-sponsored personal retirement accounts, with the government making contributions only for the poor, the unemployed and people with disabilities.

Without drastic reform, Prof. Kotlikoff says, the only alternative would be a massive printing of money by the U.S. Treasury – and hyperinflation.

As former president Bill Clinton once prematurely said, the era of big government is over. In the coming years, the U.S. will almost certainly be compelled to deconstruct its welfare state.

Prof. Kotlikoff doesn’t trust government accounting, or government regulation. The official vocabulary (deficit, debt, transfer payment, tax, borrowing), he says, is vulnerable to official manipulation and off-the-books deceit. He calls it “Enron accounting.” He also calls it a lie. Here is an economist who speaks plainly, as the legendary straight-shooting film star Jimmy Stewart did for an earlier generation.

But Prof. Kotlikoff’s economic genre isn’t the Western. It’s the horror story – “and scarier,” one reviewer of his book suggests, than Stephen King.

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By Simon Heapes

Most people have certainly heard of Bill Gross. After playing black-jack professionally in Vegas to help pay for college, in 1971 he founded Pacific Investment Management Company with $12m in assets. Today  PIMCO runs the largest bond fund in the world, its famous and huge $252billion Total Return Fund. The company manages over $1.2trillion in assets globally, and is the largest bond-fund manager in the world. Bill Gross became a billionaire running this business, so when he talks about bonds everyone listens. His CNBC nickname “The Bond King” is well deserved, few know more about bonds and no one is more influential. Once a month, Gross writes his “Investment Outlook”. His new November edition, which he published last week, is nothing short of explosive.

After discussing the futility of the USA election since both of the parties perpetually grow government, he delved into the whole Quantitative Easing two (QE2) inflationary nightmare. He wrote, “Wednesday is the day when the Fed will announce a renewed commitment to Quantitative Easing, a polite way to say “writing checks.” The market will be interested in the amount (perhaps as much as an initial $500 billion) as well as the targeted objective (perhaps a muddied version of “2% inflation or bust!”).” Gross went on to discuss the impact on bonds.

“Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a Ponzi like characteristic. The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need as with Charles Ponzi to find an increasing amount of future gullibles, they will just write the checks themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not.” These are very strong words considering it is Bill Gross, not some random commentator, writing.

Later he wrote, “It raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead-end where those prices can no longer go up. Having arrived at its destination, the market then offers near 0% returns and a picking of the creditor’s pocket via inflation and negative real interest rates.” He concluded, “But either way it will likely signify the end of a great 30 year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment.”

Bill Gross and PIMCO are already making these adjustments for the end of the bond bull and the coming inflation Bernanke’s Fed is dooming the world to suffer. PIMCO has been steadily reducing its Total Return Fund’s allocation to government debt. In September alone, the last month the data is available, its government debt fell from 36% of holdings to 33%. Back in April, this bond giant even started to offer equity funds! These funds have been enjoying in flows too. To see PIMCO start shifting into equities is amazing.

The world’s greatest bond investor calling the end of the three decade bond bull is stunning. Remember all the foolish ostrich investors who flooded into Treasuries over the last couple years? They are going to be in serious trouble. The Fed is going to force massive inflation into the system, via direct monetization of Treasuries, that is going to ultimately eviscerate bond holders. Gross himself wrote about this.

“Bond holders, while immediate beneficiaries, will likely eventually be delivered on a platter to more fortunate celebrants, be they financial asset classes more adaptable to inflation such as stocks or commodities, or perhaps the average American on Main Street who might benefit from a hoped for rise in job growth or simply a boost in nominal wages, however deceptive the illusion.” He also pointed out here that commodities are more suited to inflationary times. This is super bullish for GOLD.

Gross was interviewed on CNBC yesterday morning. He pointed out another facet of the massive monetization that the Fed is undertaking, its impact on currency. He said, “I think a 20 percent decline in the dollar is possible. When a central bank prints trillions of dollars of checks, which is not necessarily what QE2 will do in terms of the amount, but if it gets into that territory that is a debasement of the dollar in terms of the supply of dollars on a global basis.”

He continued, “QE2 not only produces more dollars but it also lowers the yield that investors earn on them and makes foreigners, which is the key link to the currencies, it makes foreigners less willing to hold dollars in current form or at current prices.” So not only is Gold a primary beneficiary of the Fed’s inflationist policies, but in addition to the bondholders the dollar is going to get crushed. AFE has written about this for a decade now, and it is just incredible to see someone of Bill Gross’s stature warn about it.

The stock markets are utterly convinced, thanks to the Fed’s incessant telegraphing of QE2, that this week is the week it will be formally launched. Bloomberg surveys Wall Street economists and reported this morning that 53 of 56 expect QE2 to start this week. 29 believe the Fed will be pledging the initial $500b Bill Gross wrote about, 7 predicted $50b to $100b a month, and the rest expect up to $500b. A half a trillion dollars in new money created out of thin air, to buy government bonds, is an incredible feat of inflation. Not a single economist thought QE2 would not launch soon!

With the bond bull in mortal peril, we may very well be on the verge of a major shift in capital allocation. Rather than trillions of dollars parking in low yielding Treasuries where inflation will eat away any real returns, serious capital is going to start seeking tangible assets like we saw during the late 1970s. This includes gold of course!

If a small fraction of the capital hiding in bonds today shifts into Gold, it is going to make their secular bulls to date look tiny.

Kind regards,
Simon Heapes

About Simon Heapes: Simon Heapes is the Director of Treasury for the Anglo Far-East Bullion Company, a premiere private bullion custodian who has served affluent and institutional clients in the acquisition, vaulting, and liquidation of “good delivery” gold and silver for two decades.

David Morgan: This is the financial crisis that I and several others in my field have predicted for so long. It is proceeding pretty close to how I have expected it to proceed and the Western countries have handled it to the best of their ability. Which means they have ignored the fundamental flaw in the system and pretended they know what they are doing.

The world is swimming in debt and so far the solution is to borrow more money, or increase the debt even further. That is saying you can borrow yourself rich, and that can be done until you cannot make the payments anymore. All indebted nations are holding interest rates low so their debt servicing is “manageable” but in reality it is mathematically impossible to service the debt but very few in official roles (government) will ever admit this startling fact.

David Morgan Explains Why Silver Is Catching Up, Why It’s Broken Out and Where It Goes From Here

Sunday, October 31, 2010 – with  Ron Holland

David Morgan

The Daily Bell is pleased to present an exclusive interview with David Morgan.

Introduction: David Morgan is a widely recognized analyst in the precious metals industry and consults for hedge funds, high net worth investors, mining companies, depositories and bullion dealers. He is the publisher of The Morgan Report on precious metals, author of “Get the Skinny On Silver Investing” (Morgan James Publishing, 2009), and featured speaker at investment conferences in North America, Europe and Asia.

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Alex’s Notes: I wrote about this becoming a reality years ago in an article published on Seeking Alpha.

I also agree that China would have to significantly increase its gold reserves if it wants to be a contender for the next worlds reserve currency.

What I do not agree with is that China can buy as much as it wants for $1300 an ounce. Good luck with that one.

BEIJING (Reuters) – China should significantly boost the amount of gold  held in state reserves, a newspaper run by China’s Ministry of Commerce said on Wednesday, citing a local researcher.

Meng Qingfa, a researcher with China Chamber of International Commerce, was quoted by the International Business Daily as saying that China should eventually boost its gold reserves to a level equal to that held by the United States.

U.S. reserves stood at 8,133 tonnes as of the end of June, significantly higher than China’s current level of 1,054 tonnes.

“Doubtlessly, if the yuan is set to become an international currency like the dollar or the euro, China has to get a huge gold reserve to support it, and a reserve of 1,054 tonnes is far from being enough,” Meng said.

He added that China can keep buying gold at a price of about $1,300 per ounce, and China could build up a gold reserve as large as the United States’ current one by using only 10 percent of its $2.65 trillion stockpile of foreign exchange reserves.

Meng’s view does not represent China’s official stance. But the domestic appeals for China’s foreign exchange reserve regulator to buy bullion has been intensifying in recent years as the dollar has fallen and the gold price has moved higher.

Yi Gang, head of the State Administration of Foreign Exchange, said earlier this year that China will be prudent in adding gold to its official reserves, wary that any move to buy the precious metal would only serve to drive its price higher.

China vies with India to be the world’s top consumer of gold. China is already the top producer, with output of 313.98 tonnes last year, up by almost 50 percent in five years.

According to the World Gold Council, China’s share of global gold demand has doubled from 5 percent in 2002 to 11 percent in 2009, and China’s domestic gold mines could be exhausted within six years. (Reporting by Zhou Xin and Ken Wills)

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For a Chinese commerce minister to say such things does not indicate that any agreement has been reached on a currency solution.

Until there is a path forward, gold will continue to rise.

BEIJING (Reuters) – Dollar issuance by the United States is “out of control,” leading to an inflation assault on China, the Chinese commerce minister said in comments reported on Tuesday.

Chen Deming, speaking at a trade fair in southern China, said that exporters had done a good job of preparing themselves for exchange rate changes as well as rising labour costs, but were suddenly confronted with new challenges.

“Because the United States’ issuance of dollars is out of control and international commodity prices are continuing to rise, China is being attacked by imported inflation. The uncertainties of this are causing firms big problems,” Chen was quoted as saying by the official Xinhua news agency.

Chinese officials have criticised U.S. monetary policy as being too loose before, but rarely in such explicit language.

At the G20 meeting in South Korea which ended on Saturday, Chinese Finance Minister Xie Xuren said that issuers of major reserve currencies — code for the United States — must follow responsible economic policies.

Along with posing an inflationary risk, a weak dollar also places appreciation pressure on China’s yuan since its value is so closely tied to the U.S. currency.

China’s consumer price inflation rose to 3.6 percent in the year to September, a 23-month high. It has been led mainly by food costs and many economists expect it to crest before the end of the year.

Despite his concern about the impact of U.S. monetary policy, Chen gave a positive outlook for Chinese trade next year. He said export growth would be stable, while imports would increase strongly.

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Does anyone find this surprising?

By Michael Lewis
Bloomberg Opinion

A few weeks ago we asked a simple question: Why are the same Wall Street banks that lobbied so hard to dilute the passages in the Dodd-Frank financial overhaul bill banning proprietary trading now jettisoning their proprietary trading groups, without so much as a whimper?

The law directs regulators to study the prop trading ban for another 15 months before deciding how to enforce it: why is Wall Street caving now?

The many answers offered by Wall Street insiders in response boil down to a simple sentence: The banks have no intention of ceasing their prop trading. They are merely disguising the activity, by giving it some other name.

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On Oct. 8th, 2010  I commented that in order for the IMF to provide a new reserve currency, perhaps in the form of a basket of currencies including gold, that China would have to be given a much larger seat at the table.

This is a move in that direction, although if the IMF will indeed become an option, the position for China will have to be much greater before its done.

Effect on gold? A SDR weighted with gold issued by the IMF would require countries like China to seriously step up their gold reserves. Why? Because sovereign governments currency issues are backed by the governments ability to tax its citizens and issue debt.

The IMF has no such citizens, therefore any true backing would have to be accomplished with gold – interesting how years ago the authority and ability to perform of the IMF was established by a bequeathment of gold from participating nations. That requirement of gold has not changed.

Analysis: IMF power shift opens way for more breakthroughs

By Lesley Wroughton

WASHINGTON (Reuters) – A G20 agreement to give emerging market countries more power in the International Monetary Fund opens the door for breakthroughs on easing global tensions over trade imbalances.

The surprise deal reached at weekend meetings of finance ministers from the Group of 20 in South Korea shifts IMF voting power to under-represented emerging countries like China, India, Brazil and Turkey.

Countries like the United States are betting that with greater representation emerging economies such as China will be more willing to address the trade distortions causing currency volatility and threatening increased protectionism.

The deal avoided a widening of the gulf between emerging and developed nations and a chaotic ending to a G20 meeting in which the United States failed to convince China and others to agree to targets to limit current account imbalances.

The IMF agreement also spares the G20 from losing credibility, opening the way for G20 heads of state, meeting in Seoul on November 11 and 12, to handle more politically difficult decisions on fixing the trade imbalance problem.

Treasury Secretary Timothy Geithner flew to China on Sunday for further talks with Chinese authorities in the hopes of finalizing a currency deal before the Seoul summit.

Youssef Boutros-Ghali, Egypt’s finance minister who heads the IMF’s steering policy panel, the International Monetary and Financial Committee, said problems in the world economy could not be addressed without acknowledging the rising clout of emerging economies.

“This deal was necessary for us to get anywhere. This was a necessary condition, not a sufficient condition, for any further reform of the institution,” he told Reuters by phone.

“Nobody got exactly what he wanted and nobody is going home with what he wished, but everybody walks home with a viable solution,” said Boutros-Ghali, who attended the G20 meeting in Gyeongju.

Just hours after ministers signaled a deal was unlikely and would be left to G20 leaders summit in Seoul on November 12, IMF chief Dominique Strauss-Kahn declared a historic agreement had been reached.

Analysts said the deal was fairly similar to what ministers were unable to agree just two weeks earlier at IMF meetings in Washington and questioned what had triggered the about-turn.

“It raises a possibility there may be another side to this deal,” said Domenico Lombardi, a former IMF board official and now a senior fellow at the Brookings Institution think tank in Washington. “It implies some sort of a commitment from emerging economies in terms of rebalancing the current accounts or in terms of greater exchange rate flexibility.”

The G20 communique on Saturday called for more market-determined exchange rate systems and the avoidance of competitive devaluations of currencies but failed to get into specifics.

HOLDING OUT FOR BETTER DEAL

G20 officials said the breakthrough IMF deal came during a separate meeting of BRIC countries — China, Russia, India and Brazil — and the Group of Seven industrial nations made up of the United States, Britain, France, Italy, Japan, Canada and Germany.

One official said Russia and Brazil argued the deal did not go far enough in shifting power to emerging economies, India was more conciliatory, while Turkey complained there was no deadline on achieving the shift.

In the end, the grand bargain transfers six percent of voting power to under-represented “dynamic” emerging economies, putting China below the United States and Japan in IMF voting power from sixth place. The changes will also see Europe give up two seats to emerging economies on the 24-member IMF board.

Analysts said the deal will increase the legitimacy of the IMF at a time when it is set to play a larger role in policing the global economy.

The IMF showed during the global financial crisis that it was an effective lender of last resort, but it still has to show its persuading powers on thornier issues, such as foreign exchange policies and current account imbalances.

Analysts said there were no guarantees that by giving emerging market economies more IMF voting power and stepping up IMF oversight of the world economy it will force them to change their policies.

“The lack of an enforcement mechanism makes it unlikely, however, that the enhanced surveillance procedures will work in getting countries to shift their policies — this approach has been tried before and did not work,” said Eswar Prasad, a former IMF official and now a senior fellow at Brookings Institution.

“The threat of ‘additional surveillance’ is unlikely to convince large countries to change their policies,” he added.\

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Traders will always likely find new loop holes to exploit. This reminds me of the cat and mouse played by computer security “whitehats” versus criminal hacker “blackhats”. The whitehats are always coming up with new ways to foil the blackhats, and the blackhats are always devising new ways around what the whitehats have created to stop them.

This is a never ending process, and what needs to really happen with the CFTC is that they need to foil the villains alot more often than once every 12 years.

The massive fundamental shifts we are seeing in the physical side of the markets will have their effect. Expect higher silver prices.

CFTC unveils new tools to stop market manipulation

By Roberta Rampton and Ayesha Rascoe

WASHINGTON (Reuters) – The U.S. futures regulator laid out plans on Tuesday for how it could use new and beefed-up legal tools to foil traders who seek to manipulate prices or defraud investors.

The Commodity Futures Trading Commission said it also wants to ask for comments on whether to crack down on certain practices used by high-frequency traders — such as “quote-stuffing” — but it stopped short of immediately proposing new rules specifically aimed at algorithmic trading.

In its latest set of proposed regulations following a sprawling Wall Street reform law, the CFTC sought to clear up some confusion about its traditional test for price manipulation, an effort to improve on its dismal record of having won only one such case in its 36-year history.

The rule, which will apply to all markets overseen by the CFTC, including swaps, also creates a “broad, catch-all anti-fraud provision” that does not require the CFTC to prove a trader fully intended to cause fraud, CFTC officials said.

The agency’s only successful manipulation prosecution was against a broker charged with manipulating settlement prices for electricity futures in 1998.

More recently, manipulation charges against four propane traders with BP (BP.L: Quote, Profile, Research, Stock Buzz)(BP.N: Quote, Profile, Research, Stock Buzz) were dismissed by a judge, who called the law “confusing and incomplete.” BP agreed to pay a record $303 million to settle related charges.

CFTC officials who briefed reporters on the new package of proposed regulations declined to say whether the rules would have helped them make their case against the propane traders.

The agency’s five commissioners, including Chairman Gary Gensler, will vote at a public hearing on Tuesday on whether to advance the proposal for public comment for 60 days.

After staff consider whether to make changes based on comments, the commissioners will need to vote again to finalize the plan by next July.

The new rule seeks to marry existing anti-fraud and anti-manipulation authorities together with a new section that “fills in all the gaps”, an official told reporters.

Existing regulations address “plain vanilla” person-to-person fraud, and price manipulation, such as market “corners” or “squeezes”, he said.

But the new provision could capture manipulative trading activity that “could potentially fall out of one of those two buckets”, he said.

Before, price manipulation cases required the agency to prove traders had the intent and ability to manipulate prices, tried to do so, and caused an “artificial price”.

That four-part standard will continue to exist, but the CFTC included guidance that “artificial price” means a price affected by illegitimate market forces, the official said.

BANS ON SPOOFING, BANGING THE CLOSE

The Dodd-Frank law also requires the CFTC specifically to ban three disruptive trading practices as of July 16, 2011 — a ban that does not require new regulations to take effect.

Included are “spoofing”, whereby traders make bids or offers but cancel them before execution, and “banging the close” — acquiring a substantial position leading up to the close of trade, then offsetting the position in the final moments to manipulate the closing price.

The agency has no obligation on whether to go further, but wants to gather more comments during the next two months about whether it should close a potential loophole in the spoofing ban, or prohibit any other practices deemed disruptive.

That will include “quote stuffing” — flooding the market with large numbers of rapid-fire orders and then canceling them almost immediately — a practice that some have argued contributed to the May 6 stock market “flash crash.”

The agency will also ask whether it needs to write rules requiring traders to test and monitor their algorithms.

For months, CFTC commissioners have said the agency needs to use its new powers to counter disruptive trades made by high-frequency algorithms.

Bart Chilton, a Democratic commissioner, and Scott O’Malia, a Republican, have said regulators should hold traders responsible for “rogue algos” that hurt markets.

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