Copper prices accelerated lower overnight and are sitting at 5 week lows following rapidly growing fears that the commodity warehousing probe will uncover exactly what we have been warning about for months - there is no 'there', there. As we explained in great detail here [5] and here [6], the discrepancy of reportedly 80,000 tonns of aluminum and 20,000 tonnes of copper is sparking wholesale liquidations as carry traders, lenders, and borrowers all scramble to find out if their promised commodity is there. Iron ore, which has seen its price tumble dramatically, is also on the watch list as the port had said it was investigating whether iron ore warehouse receipts were fraudulently used multiple times to raise finance by different banks.
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As we concluded yesterday,
So far it is unknown just what happens next: when it comes to copper and certainly gold, there has been a substantial downswing in prices. How much of that is attributed to CFDs unwinding is unclear. But the bigger question, and not just for gold prices, but for the Chinese economy is if indeed the funding deal house of cards is imploding, what happens to China's shadow banking system, which is extremely reliant on the billions in "rehypothecated" dollars emanating from non-existent metal collateral.
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[9]
Because should the Qingdao port fiasco spread and be confirmed at all other venues that use commodities for funding purposes, then that may just be the straw that breaks the already weakened back of China's credit system. How the PBOC will respond to that may be just the variable that answers what happens to China's inflation, and thus to the price of the simple, unencumbered underlying physical metals in the coming weeks and days.
Stay tuned.
For those who want to learn more, please read "How China Imported A Record $70 Billion In Physical Gold Without Sending The Price Of Gold Soaring [10]"