Former Goldman Commodities Research Analyst Confirms LMBA OTC Gold Market Is "Paper Gold" Ponzi

Tyler Durden's picture

When we put up a link to last week's CFTC hearing webcast little did we know that it would end up being the veritable (physical) gold mine (no pun intended) of information about what really transpires in the commodities market. First, we obtained direct evidence from Andrew Maguire (who may or may not have been the target of an attempt at "bodily harm" as reported yesterday) of extensive manipulation in the silver market. Today, Adrian Douglas, director of GATA, adds to the mountain of evidence that the commodities market, and the CFTC, stand behind what is potentially the biggest market manipulation scheme in the history of capital markets (we are assuming for the time being that all allegations of the Fed manipulating the broader equity and credit markets are completely baseless). Using the testimony of a clueless Jeffrey Christian, formerly a staffer at the Commodities Research Group in the Goldman Sachs Investment Research Department and now head and founder of the CPM Group, Douglas confirms that the "LBMA trades over 100 times the amount of gold it actually has to back the trades."

Christian, who describes himself as "one of the world’s foremost authorities on the markets for precious metals" yet, in the words of Gary Gensler, said "that the bullion banks had large shorts to hedge themselves selling elsewhere- how do you short something to cover a sale, I didn’t quite follow that?" and proves that current and former Goldman bankers are some of the most arrogant people alive, assuming that everyone else is an idiot and will buy whatever explanation is presented just because the CV says Goldman Sachs. Yet Christian confirms that the gold market is basically a ponzi: "in the “physical market” as the market uses that term, there is much more metal than that…there is a hundred times what there is." And there you have it: as Douglas eloquently summarizes: "the giant Ponzi trading of gold ledger entries can be sustained only if there is never a liquidity crisis in the REAL physical market. If someone asks for gold and there isn’t any the default would trigger the biggest “bank run” and default in history. This is, of course, why the Central Banks lease their gold or sell it outright to the bullion banks when they are squeezed by high demand for REAL physical gold that can not be met from their own stocks" and concludes "Almost every day we hear of a new financial fraud that has been exposed. The gold and silver market fraud is likely to be bigger than all of them. Investors in their droves, who have purchased gold in good faith in “unallocated accounts”, are going to demand delivery of their metal. They will then discover that there is only one ounce for every one hundred ounces claimed. They will find out they are “unsecured creditors”.

For those of you who missed the CFTC hearing, here are two of the must-watch clips. In the first one, Adrian Douglas introduces the underlying concerns about the Ponzi nature of the LBMA hedging situation, in which a wholesale rush to "physical delivery" would result in a one hundred fold dilution of gold holdings, and a 99% result of unsecured creditor claims (good luck collecting on that particular bankruptcy). We also meet Jeffrey Christian, formerly of Goldman and currently of CPM, in which not only does the "expert" state that a bullion bank short is hedged by further shorting, but confirms Douglas' and GATA's previous claims that the "physical" market, as defined, is a joke, as the OTC market treats gold purely as a financial asset, essentially conforming to the precepts of fractional reserve banking. As Douglas notes "He confirms that the LBMA trades hundreds of times the real underlying physical. This is even a higher estimate than I have previously made! It is, as I asserted before the Commission, a giant Ponzi Scheme."

 

Here is running commentary from Douglas based on a transcript of this part of the hearing:

S. O’MALIA: Both Mr. Organ and Mr. Epstein in the second panel, raised the concerns that short positions exceed the physical supply. The second panel kind of argued that that wasn’t a concern. Are you concerned that the shorts will not be able to deliver if called upon?

J. CHRISTIAN: No. I am not at all concerned. For one thing it has been persistently that way for decades. Another thing is that there are any number of mechanisms allowing for cash settlements and problems and a third thing is as many people who are actually knowledgeable about the silver market and the gold market have testified today that almost all of those short positions are in fact hedges, the short futures positions are hedges, offsetting long positions in the OTC market. So I don’t really see a concern there.

[Note: It is interesting that Mr. Christian is not concerned about the ability of the shorts to deliver because they can cash settle! He clearly has no understanding that when someone wants to buy precious metals giving them cash  instead is a failure to deliver. It is a default! But he is not concerned! He says that the short position is actually hedged by a long position on the OTC but we will see later in this testimony how he describes the “OTC Physical Market” and we will see that the long position is not bullion but is in fact an unbacked (or only partially backed) I.O.U. bullion.]

S. O’MALIA: Mr Organ would you like to respond?

H. Organ: I do see a risk on this, and I think it is a risk that we have to be very, very careful of. As countries like China, South Korea and Russia start demanding and taking physical delivery of their gold and moving it offshore to their shores and putting pressure on the Comex, and we will probably come to a point in time where we will have a failure to deliver.

A DOUGLAS: Mr. Chairman, could I make a comment?

CHAIRMAN GENSLER: No! Who are you?

A DOUGLAS: I would…

CHAIRMAN GENSLER: No! I said “No!”

A DOUGLAS: Oh! You said “No”?

CHAIRMAN GENSLER: I don’t know who is this?

A DOUGLAS: I am Adrian Douglas; I am assisting Harvey.

CHAIRMAN GENSLER: Alright, Sir. Yes.

A DOUGLAS: I would just like to make a comment. We are talking about the futures market hedging the physical market. But if we look at the physical market,the LBMA, it trades 20 million ozs of gold per day on a net basis which is 22 billion dollars. That’s 5.4 Trillion dollars per year. That is half the size of the US economy. If you take the gross amount it is about one and a half times the US economy; that is not trading 100% backed metal; it’s trading on a fractional reserve basis. And you can tell that from the LBMA’s website because they trade in “unallocated” accounts. And if you look at their definition of an “unallocated account” they say that you are an “unsecured creditor”. Well, if it’s “unallocated” and you buy one hundred tonnes of gold even if you don’t have the serial numbers you should still have one hundred tonnes of gold, so how can you be an unsecured creditor? Well, that’s because its fractional reserve  accounting, and you can’t trade that much gold, it doesn’t exist in the world. So the people who are hedging these positions on the LBMA, it’s essentially paper hedging paper. Bart Chilton uses the expression “Stop the Ponzimonium” and this is a Ponzi Scheme. Because gold is a unique commodity and people have mentioned this, it is left in the vaults and it is not consumed. So this means that most people trust the bullion banks to hold their gold and they trade it on a ledger entry. So one of the issues we have got to address here is the size of the LBMA and the OTC markets because of the positions which are supposedly backing these positions which are hedges, but it is essentially paper backing paper.

[8 seconds of silence]

CHAIRMAN GENSLER: Oh! I guess I get time. Errr…Umm. I don’t have any other questions. Commissioner Dunn.

M. DUNN: I appreciate the difficulty of trying to do this by remote but at the end of your testimony you start talking about bona fide hedge exemptions for commercial traders and must be part of position limits and not to grant hedge exemptions to swap dealers would be devastating for liquidity of exchanges and the price discovery capacity, and we got into who determines what is legitimate, but could you amplify on that a bit and what you see as a danger there?

J. CHRISTIAN: Yes I can amplify on it; but amplify on it a bit is more difficult because it is a very big subject. The first thing is that precious metals, copper, other metals, energy these are all traded internationally and are fungible commodities by and large. There are a lot of strange things that have been misspoken about the difference between the wholesale and the retail market and we don’t really have the time to go over those, I think. But the fact of the   latter is…

[The lights go off]

J. CHRISTIAN: Oh excuse me. I am in a building with motion sensitive lighting and it doesn’t recognize what I do as human activity.

CHAIRMAN GENSLER: Those were your words not anybody’s here.

J. CHRISTIAN: No, they were my wife’s! If you start putting position limits on bona fide hedgers for example, the bullion banks, and the previous fellow was talking about hedges of paper on paper and that is exactly right. Precious metals are financial assets like currencies, T-Bills and T-bonds they trade in the multiples of a hundred times the underlying physical and so people buying them are voting and giving an economic view of the world or a view of the economic world and so when you start saying to a bank I have a number of people… [

Note: This is mind blowing. He openly admits that the LBMA OTC market is not trading in physical gold or silver; it is trading in paper promises. Gold is not intended to be a “financial asset” like T-Bills and currencies. That is the whole point of owning it. Actual physical bullion is a tangible asset with intrinsic value that doesn’t have counterparty risk. He believes the purpose of trading paper promises in gold is for investors to “vote” on their view of the economic world! He confirms that the LBMA trades hundreds of times the real underlying physical. This is even a higher estimate than I have previously made! It is, as I asserted before the Commission, a giant Ponzi Scheme.]

J. CHRISTIAN: well, actually let’s go back to a concrete example of Mr. Organ when he was talking about August of 2008 when there was an explosion in the short positions in gold and silver held by the bullion banks on the futures market and he seemed to imply that that was somehow driving the price down. If you understand how those bullion banks run their books the reason they had an explosion in their short positions was because they were selling bullion hand over fist in the forward market, in the physical market, and in the OTC options market. Everyone was buying gold everywhere in the world so the bullion banks who stand as market makers were selling or making commitments to sell them material and so they had to hedge themselves and they were using the futures market to do that. So if you place position limits on the futures market they will have to find some other mechanism to hedge themselves …and they will. And someone else will provide that market…

M. DUNN: Jeffery, I am going to cut you off because I want to ask another question of Mr. Organ.

[It is hard to imagine more inane drivel than this. He conjures up the image of bullion bankers selling bullion like crazy to the general public who are in a feeding frenzy and the bullion bankers are “hedging themselves” by selling gold short on the COMEX!!! Did he get that idea from a blonde? A little while later Chairman Gensler also realized that this was the biggest baloney ever concocted as a cover for massive gold market manipulation by JPMorgan and HSBC in 2008 and so poses a follow up question]……

And here is the second must watch clip:

CHAIRMAN GENSLER: I would like to follow up on Commissioner Dunn’s question for Mr. Christian, if I might, because I didn’t quite follow your answer on the bullion banks. You said that the bullion banks had large shorts to hedge themselves selling elsewhere, and I didn’t understand; I might just not have followed it and you’re closer to the metals markets than me on this, but how do you short something to cover a sale, I didn’t quite follow that?

J. CHRISTIAN: Well, actually I misspoke. Basically what you were seeing in August of 2008 was the liquidation of leveraged precious metals positions from a number of places and the bullion banks were coming back to buy it, and they were hedging those positions by going short on the COMEX and that is really what it was.

[Even on a second attempt Mr. Christian invents the most ridiculous poppycock to explain away the blatant manipulation of the precious metals in 2008. If, in his own words, investors were buying gold hand over fist everywhere in the world why would leveraged long holders dump all their long holdings? They would have ordinarily been making a fortune. The bank participation report of August 2008 shows that 2 or 3 bullion banks sold short the equivalent of 25% of world annual silver production in 4 weeks and the equivalent of 10% of world annual gold production. There was simultaneously a decrease in their long positions, which were almost non-existent anyway, which is incoherent with a notion the bullion banks were mopping up dumped leveraged investments. For an intelligent and coherent explanation of what happened in August 2008 read my CFTC written testimony here]

CHAIRMAN GENSLER: So I am glad I asked because I really didn’t follow that. But if I think of the earlier charts of the positions of the bullion banks that Mr. Sherrod had these concentrated shorts have been, well you know, reasonably consistent, they are not exactly the same on every day, but his charts showed a similarity across a couple of years. So what are bullion banks, I mean I am just trying to understand, what are bullion banks hedging on the other side, we heard from other panels, but you seem to be familiar, is it warehouse receipts, what is it?

J. CHRISTIAN: Well it’s a tremendous number of things. You were at Goldman shortly after me and we had an MIS system that kicked out a daily gold book.

CHAIRMAN GENSLER: That’s really remarkable because we don’t seem to have a lot of similar views, but you know, a lot of people were at Goldman Sachs.

J. CHRISTIAN: Well I didn’t like the trends at Goldman so I left in 1986. But honestly, and bad jokes aside, if you look at a bullion bank’s book, its gold book for example, you will see an enormous number of things; there will be gold forward purchases from mining companies, there will be forward purchases from refineries, there will be gold that has been leased out to electronics manufacturers, component manufacturers, and countless manufacturers and jewelers. As gold flows through the beneficiation process and again these are all long complex issues that are hard to reduce, but you know, a lot of producers will sell their gold the moment it leaves their possession at the mine. It might be in concentrate form or it might be in dore form. It then goes to a smelter or a refinery. The bullion bank buys that and it agrees a price at the time it is buying it but it won’t be allowed to sell that metal until the refinery outturn which maybe two weeks but it could be six months. So they will go into the market and short the market in order to cover the commitment they have made to buy at that price and then when they get the metal in the physical market then they can either sell that metal in the physical market and unwind the hedge in the futures market or the forward market or do something else. There are all sorts of other derivative contracts that investment banks and bullion banks will sell to investors, to other banks, pension funds, to insurance companies and each of those will often have a long exposure in gold which will be  hedged with an offsetting short position [note: There he goes again with that blonde idea that when you sell gold to someone you hedge that with a short position!]. So if you look at a bullion bank’s gold book or silver book you would find a large range of topics. One of the things that the people who criticize the bullion banks and talk about this undue large position don’t understand what is the nature of the long positions of the physical market and we don’t help it; the CFTC when it did its most recent report on silver used the term that we use “the physical market”. We use that term as did the CFTC in that report to talk about the OTC market in other words forwards, OTC options, physical metal and everything else. People say, and you heard it today, there is not that much physical metal out there, and there isn’t. But in the “physical market” as the market uses that term, there is much more metal than that…there is a hundred times what there is. If I look at the large short positions on the COMEX my question is where are the other shorts being hedged? because the short position, that I believe the bullion banks use to hedge their physicals, is larger than their short position on the COMEX and the answer is that they hedge it in the OTC market in London.

CHAIRMAN GENSLER: I thank you for that detailed discussion

END

The CFTC position limits hearing was supposed to usher in a new era of transparency and honesty into the dealings of the gold market. In a very ironic way, it did just that.

Here is Douglas' must read conclusion - and a warning for anyone who believes that following a wholesale run on commodities, investors will be able to have access to what is contractually theirs.

This is a stunning revelation. Mr. Christian confirms that the “physical market” is not in fact a physical market at all. It is a loose description of all the paper trading and ledger entries and some physical metal movements that occur each day  on behalf of people who believe they own bullion in LBMA vaults but in fact they don’t. They are told they have “unallocated gold” or “unallocated silver” but that does not mean the LBMA has physical metal set aside for those customers and has just not given specific bar numbers to the customers. No, it is the most cynical and corrupt definition of “unallocated”…the customer has NO bullion allocated to him. NONE! The LBMA defines the owners of “unallocated accounts” quite clearly as “unsecured creditors”. That means they have NO collateral. NONE. Can it be any clearer? It is a giant Ponzi scheme.

Mr. Christian confirms what many analysts and GATA have been alleging that there is not much REAL physical metal, but testifies that there is actually one hundred times the REAL Physical metal being sold based on the much more “loose” definition of what “physical” means to the bullion banks.

The last sentence of his statement is mind-blowing. He says the “physical” positions of the bullion banks are so huge that they are much bigger than the COMEX short position. He says the “physicals” are hedged on the OTC market in London! Did you get that? Let me walk you through it. The bullion banks are selling what is supposed to be vault gold but it is just a ledger entry if the customer never asks for delivery. They must balance their exposure with a ledger deposit entry. This has to be some paper promise of gold from a third party, or some derivative, or even some real gold bullion. If all the ledger entries balance out then the bullion bank has no net exposure in exactly the same way the futures market works with a short offsetting a long. A futures market can never default if no one asks for delivery as only paper contracts are traded. The loosely defined “physical” London market is an identical scheme. As long as everyone is prepared to buy and sell “ledger entries” for imaginary gold in the vault no one will ever discover the fraud.

The LBMA does, however, buy and sell some real physical metal as well. But we now know form Mr. Christian’s testimony that this is one one-hundredth the size of the paper gold trading. The LBMA states on its website that it trades 20 million ozs of gold each day on a net basis. We can calculate the net trade of REAL physical gold should be about 200,000 ozs each day; that is 6.25 tonnes per day or 1625 tonnes per year. This is very much in line with the size of total global mining output of approximately 2200 tonnes per year.

So the giant Ponzi trading of gold ledger entries can be sustained only if there is never a liquidity crisis in the REAL physical market. If someone asks for gold and there isn’t any the default would trigger the biggest “bank run” and default in history. This is, of course, why the Central Banks lease their gold or sell it outright to the bullion banks when they are squeezed by high demand for REAL physical gold that can not be met from their own stocks.

Almost every day we hear of a new financial fraud that has been exposed. The gold and silver market fraud is likely to be bigger than all of them. Investors in their droves, who have purchased gold in good faith in “unallocated accounts”, are going to demand delivery of their metal. They will then discover that there is only one ounce for every one hundred ounces claimed. They will find out they are “unsecured creditors”.

GATA has long advocated the ownership of real physical bullion. The “bombshells” dropped in the CFTC Public Hearing have only served to reinforce that view. We believe we have made significant new inroads into exposing the fraud, and the suppression of precious metals prices and it is documented in the CFTC’s own hearing.

March 27, 2010
Adrian Douglas
Director of GATA
Proprietor of Market Force Analysis
www.MarketForceAnalysis.com
info@marketforceanalysis.com

h/t MarketForceAnalysis

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cymro33's picture

Roeuters: President O announced details of his new initative to pass the “Retirement Annuity Act “(RAA). The president said the taxpayer does not have the necessary sophisticated financial knowledge (no inside information, no lobbyists to ensure laws are written in their favor, etc.) to compete against banks and hedge funds. Mutual Funds have failed miserably.

1.    All workers will contribute 10% of their after tax salary to their RAA account. Employers will match with 15%.
2.    Funds will be invested in 10, 20, and 30 year TIPS. (Govt will continue to calculate the inflation rate so that it will never exceed 2.25%)
3.    The worker on retirement at age 72 ½ will draw an annuity until death.

The President said this is a win - win for taxpayers and Govt. The cash collected weekly will pay for Govt liabilities (similar to Social Security) and the taxpayer will have their investment in rock solid backed Govt TIPS.
 

Bob's picture

Just to clarify: So these new "benefits" will run parallel to the Social Security program investments I've been making for my whole life?

Or will they transfer the present value of my SS "contributions" into the RAA?

This has gotta be voluntary, right?

cymro33's picture

This will be in addition to SS. Govt data found that 31% of workers have saved nothing for retirment. The program will be mandatory.

cymro33's picture

Just in from Tyler Durden   “ It's Official - America Now Enforces Capital Controls”

'And so the noose on capital mobility tightens, as very soon the only option US citizens have when it comes to investing their money, will be in government mandated retirement annuities, which will likely be the next step in the capital control escalation, which will culminate with every single free dollar required to be reinvested into the US, likely in the form of purchasing US Treasury emissions such as Treasuries, TIPS and other worthless pieces of paper.'

bc0203's picture

Cymro33,

The only mention of a "Retirement Annuity Act" when I google it is HR 828, which was introduced on Feb 3, 2009.  According to Washington Watch, the purpose of that bill was the following:

"H.R. 828 would amend chapter 84 of title 5, United States Code, to allow individuals who return to Government service after receiving a refund of retirement contributions to recapture credit for the service covered by that refund by repaying the amount that was so received, with interest."

The actual text of the bill is less than a page long, and pretty much says the same thing.

What are you referring to?

 

 

 

bc0203's picture

Oh I get it.  Your post was satire.  Next time start with, "I can see it now," and use a date in the future, so you don't make those of use of us who might be affected have a mild coronary.

Double down's picture

Mild!  I have to clean my chair!

Segestan's picture

Adrian Douglas for President.

Bob's picture

Jeeze, should we be looking behind this Gold Curtain?

boricuadigm-shift's picture

I was just thinking about that.  Gold/Silver is cheap beyond our wildest dreams!  When all this shit is really exposed we would have wish they kept the game going for at least another 1-2 years.

Too much exposure in the last couple of weeks.  I'm wondering if the Elite already have all physical gold/silver they need and they are ready for the countdown.

"Houston, we are ready for the countdown"

"Up up and away"

 

DoChenRollingBearing's picture

-- Maguire.

-- New ZH thread on reporting American accounts overseas.

-- Now London apparently outed as a Ponzi / gold scheme.

As bugs said on the other thread, it's almost midnight.  Funny how fast things are happening now.

delacroix's picture

labor and energy to mine and refine 1 oz of silver $6  labor and energy to mine and refine 1 oz gold $635  silver is an insanely cheap bargain right now, and we use it up faster and faster. pretty soon it will be a rare earth element.

Cookie's picture

Rare earths are not 'rare', just extremely difficult to refine

DoChenRollingBearing's picture

delacroix and Cookie, I am interested in rare earth metals as a possible investment opportunity (esp. if I am wrong about TSHTF...!)

Apparently the US does not have adequate capacity to refine the various metals in that group.

I am considering actually buying Europium and Terbium as a medium term investment if our economies get back in order.  Maybe a miner or two of the same.

ANYBODY who knows something about rare-earth metals, please chime in!

A Nanny Moose's picture

Pitchforks and torches....priceless

simonyadig's picture

$1,100 X 100 = $1,100........ apparently.

BrianOFlanagan's picture

GLD investors must be sweating.

If it's not in your hand, you don't own it!

Harbourcity's picture

Arrogance is a common defense of elitists.  Look at Geithner and Bernanke.  They behave as if they are the only ones who knows what's going on and so we should listen to them even if we believe they're wrong.  It's exhausting because there is nothing at this time to hold these peoples feet to the fire.  They do what they do with impunity.

DaveyJones's picture

Arrogance is also a defense of white collar criminals to get you to back off

DosZap's picture

This has been my contention all along..........ETF's in PM's should not be allowed to operate, unless they have the reserves to back them.

It's a SCAM...............just like fractional reserve banking, you deposit a $1,000, they loan out $10,000,,,,,,,,,,,,,

Except this is worse, they have NOTHING , no reserves (physical of any kind).

Should be shut down, Gold & Slvr, would skyrocket.

NO PHYSICAL STOCK, NO ETF's...........period.

Now, control THAT!

Hulk's picture

seems to me that a Soros type could make a big enough delivery demand to trigger a delivery stampede and collapse the paper market. This is going to be interesting...

DoChenRollingBearing's picture

THAT would make it 11:59. 

Or 11:59:55.

jedwards's picture

I agree with you that a gold run will turn the paper gold instruments such as gold contracts and GLD into completely worthless items, however, I believe that this type of event will will take down physical gold as well.

If global confidence in anything gold-related falters, then I think people en masse will abandon gold completely because they won't know what is fake and what is real.  If this happens, I think the entire gold market could be wiped out.

Look at the auction rate securities market.  All it took was for a couple of failed auctions, and as far as I can tell, it's dead in the water, even though the concept is sound.  If people can't trust paper contracts for gold delivery, without the liquidity that electronic trading provides, I just can't see how people will be able to run to it as a store of value.

Shameful's picture

If you are correct it would be the buying opportunity of the millennium.  Or do you also think that people will cling to currencies while the central banks are desperate race to debase and devalue to 0?  I do think paper gold will go down but for some reason I don't understand why if there is demand for something then it turns out the supply is 1/100 of the expect supply it would crash in value.  That is like if I bought a Rolls Royce and then all the other Rolls Royces in the world disappeared, would mine get more or less value?

jedwards's picture

But your example doesn't match the situation.

What if you want to buy a used Rolls Royce, but there are fake Rolls Royces being sold at the exact same price as real ones, and you won't be able to tell the difference unless you bring it in to a Rolls Royce dealership (after buying it).

Now, let's say it's not just fake, but they explode.  Are you still interested in buying Rolls Royces?  If you have no confidence whether or not what you're buying is real, would you really want to bother buying it, or would you switch to Bentley because you know there are less fake Bentleys on the market?

If the problem of fake exploding Rolls Royces becomes rampant, the pool of potential buyers now decreases, and they'll all move to buying Bentleys.  Now, with the demand of Rolls Royces dropping, the value of your Rolls Royce diminishes.

If this becomes a global trend, and people move away from gold or Rolls Royces as a store of value, then it becomes a real problem.

I don't think this would occur until there's a gold run.  And I think the probability of a gold run is very small.  But if there ever a gold run, it could be the case that global interest for gold as a store of value could potentially be irrevocably damaged.  Maybe it might move to USD again like it did in 2008, or maybe the yuan, oil, platinum, etc.

Shameful's picture

If you are referring to the paper market, then I take possession of my Rolls and let other people play with paper Rolls.  The paper ones explode and my real one remains.  In this case there would be a clear distinction, as one exists the other one does not.

Now if there was fake physicals Rolls then yes you would be correct.  However it is difficult to fack 1 ounce coins.  Not impossible to be sure but any real counterfeiting would be at the hirer end of the market because harder to sound test and more opportunity for profit.  Now I'm not convinced of the whole tungsten bar scandal is gospel.  If that happen that could hurt the market, but again the small coins are still safe.  But those trying to sell large bars would find confidence at a premium.

But counterfeiting happens.  It happens a great deal with paper money after all.  I suppose one could even try to counterfeit oil (addatives) if we have to haul drums of it around as currency.  Counterfeiting has always been a problem, at least with counterfeit gold there is still gold in it otherwise hte fact could never pass.  With counterfeit paper it's all worthless.

Gordon_Gekko's picture

Testing for fake Gold isn't that hard. All you have to do is to melt it. Any kid in Asia knows it.

Cognitive Dissonance's picture

Which is what makes Gold coins so valuable. They are so small and thin it isn't worth it (yet) or even feasible (yet) to fake them with tungsten, making them good as Gold, pun intended.

Cookie's picture

+1 GG. I am astounded about the lack of knowledge in the western world about how here in Asia gold, is, was, and will always be money and the ultimate store of wealth. There are as many gold shops as 7-11's for God's sake!!

Renfield's picture

GG

That was a fine summary of recent key events in this paper-gold fiasco. Very clear for those of us less versed in goldbug-lore. I hope you will continue to write more in this vein - I need more stuff like this, condensed down, especially when showing family & friends who are even less money-minded than I am, and who are continually confused by the paper 'gold' price.

Khrysos bless you - and Adrian Douglas and Harvey Organ too!

Gold...Bitches's picture

and thats why you need to own some physical before this thing blows up

cognitis's picture

So many posters here divulge themselves to be dolts and gullible. Everthing provided by Blogger are nothing more than hearsay, fabrications, fallacies; as I observed in a prior post, the gullible rustic Andrew Maguire never provided "direct evidence" of anything but rather hearsay from anonymous sources; trading volumes of any derivative in excess of known inventories is common and necessary for liquidity, and only someone who has never traded any futures contracts at all should be ignorant of this commonly known fact; different prices between fungible markets at different times is also common and never indicates "market manipulation", since--golly gee Gomer--JPM could pump the gold market in Hong Kong as easily as in NYC or London. To the dolts and gullible who credit futures markets to owe them free money and a living: continue buying the headlines and conspiracy rants, since someone has to lose and get blown out at short-term bottoms.

Quintus's picture

You go your way brother, and we'll go ours.  One side will be right and one side will be wrong, only time will tell.

Now, those of us taking the Precious Metals side of the debate have heard arguments, if that is not to overly elevate the status of your little rant, like yours several thousand times before.  It always amazes me that you paperbugs devote so much time and effort to Gold-related discussions.  Any discussion of Gold or Silver seems to possess an irresistible attraction to paperbugs; pulling them in like bees to an open jam jar.  On the other hand, Precious Metals investors do not, to my knowledge, generally troll paperbug blogs and websites attempting to convince those who believe that their life savings are best stored in paper that they are wrong.  

Please feel free to curb your missionary zeal to bring enlightenment to the poor benighted savages (or 'Gullible Dolts' as you charmingly put it) in the Precious Metals markets.  We're fine as we are thanks.

SWRichmond's picture

Any discussion of Gold or Silver seems to possess an irresistible attraction to paperbugs; pulling them in like bees to an open jam jar. 

What a gem that is!  Isn't it amazing how the radical paperbugs always show up to cajole, threaten, debase?  Well, debasing is what they are best at, isn't it?

Gunther's picture

Cognitis,
the trading volume can be higher then the physical supply if the same stuff gets traded back and forth during the day. With the two daily sessions of the LBMA I do not see multiple trades happen but it might be possible.
The big issue is if more metal sold then really available. That is the equivalent of naked shorting stocks with the difference that is possible to ask for delivery of the metal. Nobody claimed that the bullion banks sell only metal short that they own thus they are in trouble if delivery is called. That is the point.

TheGoodDoctor's picture

I thought every trade needed to have a unique serial number that was tied to the bar. So, are they doing multiple trades from the same bar? Or are there multiple serial numbers per bar? How are they doing it to get away with it if there is a 100x multiple in the paper markets?

A_MacLaren's picture

So, are they doing multiple trades from the same bar?

Yes.  Unallocated accounts.  Pools of ledger entries. There is no bar in their warehouse with your serial number on it.

 

Lionhead's picture

The coy smile & pauses of Gensler after Adrian Douglas drops his bomb is priceless. The CFTC's paper scam game with the collusion of the bullion banks has just been officially exposed at their own hearing. As for Christian, his terms of obfuscation, e.g., beneficiation process & the physical market just add to the confusion to muddy the waters to the public investor. Oh, yes he admits, "Well actually, I misspoke." No doubt he did on his earlier comments.

If the CFTC allows business as usual in the futures/OTC markets, then the bifurcation between the real physical market & the paper market will continue with a premium on the physical market prices. Since they cannot fix that, they eventually loose control over price discovery. Game up boyz...

b_thunder's picture

"how do you short somethign to cover a sale"  -- no, it's not a hedge. it's doubling down, the favorite recommendation of so-called financial advisors whose previous recommended investments are under water.  "You liked it at 10?  You sure will like it at 5!"

 

" Mr. Christian is not concerned about the ability of the shorts to deliver because they can cash settle! He clearly has no understanding that when someone wants to buy precious metals giving them cash  instead is a failure to deliver. It is a default!"   --   it may technically be a default, but if the government declares a "gold holiday" and says you have 2 choices:  take cash (perhaps at fixed exchange rate, so not to overload printers in the Fed) or do 15 to 20 without possibility of parole, you'll gladly take that cash.

 

Waterfallsparkles's picture

Yes, they can cash settle because "Owners" do not Own the physical Gold they just have a Ledger entry in their name not an account backed by the Physical Gold.

Based on the Fiat Money system.  No one will ask for their Gold so sell 1,000.times what you actually have in your vaults.

Clever and misleading.  But, hey, anyone who deals in the commodity Markets should be smart enough to know.

Crime of the Century's picture

Many people in GLD think they will be able to collect "their" gold should they desire. Despite the blinding legalese in the prospectus, it was sold to them as buying gold. Real gold.

fightthepower's picture

I am not sure why you would sell something to hedge a sale. 

The actual transaction should go like this:  A mining company wants to sell 10,000 ounces of gold, they call up Goldman Sachs and sell the gold.  Goldman Sachs buys the gold from the mining company, then sells a gold futures contract to hedge the purchase.  Is that what he was talking about?

saulysw's picture

Ah, but when I too k delivery of my ounces, I decided to rid myself of worldly goods and threw them into the ocean. So sorry!

digalert's picture

I don't have the education or salary of these clowns in suits, so forgive me when I stumble on this,

"there is a hundred times what there is" statement. So to make it simple for me. I would be better off trading all my physical Gold for that there ledger Gold, then I'd be full of it.