Today, Jim Puplava of the Financial Sense Newshour interviewed Jeffrey Christian, recently made notorious for his disclosure of what GATA has been claiming for years, namely that the paper to physical gold market is about 100-to-1, during questioning at the recent CFTC testimony. Christian, who clarifies his stance on position limits and commercial position limits (he is concerned about PM markets moving away from exchanges to OTC) discusses concentration risk in financial institutions, swap dealers (OTC-futures hedging of presold gold while still in transit to end markets and not yet in Good Delivery form), but most notably the 100-1x leverage which is what everyone would like to hear Christian elaborate on. His version: "I was actually pretty clear but there are these troglodytes in the market that like to distort what whatever anybody says and they distorted what I said. What I said was that if you look at the turnover in the major futures and options markets, and the clearing volume in the London dealer market in gold and silver, you would see that there are 100x times as many ounces trading in those derivatives markets as is produced by mines and refineries every year and used and purchased by fabricators and investors. So that's a 100 to 1 ratio of derivatives to underlying physical new supply. It's not a 100 to 1 ratio of the turnover of the physical market relative to the futures or derivatives market because the physical metal will turnover 5, 6 maybe 8 times in any given year. But you do have a much larger derivatives market in gold and silver than you have a physical market, and that ratio is about 100 to 1."
Jeffrey then proceeds to once again ignore the underlying issue, and highlights other massively diluted ponzi construct markets in which there is a discrepancy between physical and derivatives. "If you look at fishes and loaves of bread, the ratio of derivatives transactions to physical underlying it's 5 to 1; if you look at aluminum or copper it is about 15 to 1." And for the prize: "if you look at currencies or treasury bills or notes, you find that the ratio of derivatives trading to underlying physical is about 100 to 1." Congratulations gold holders - the derivatives market has applied fractional reserve psychology to your holdings, and thrown in a pinch of Exter's pyramid, and made your claims about as valid as those of fiat pieces of paper printed every single day! Of course, just like in corporate CDS (where applying Christian's approach, the ratio of total notional CDS to outstanding debt is about 10 to 1, or a joke compared to the gold market's underlying to outstanding derivative gross notional), when Lehman blew up and a zero recovery on the Lehman bonds was virtually guaranteed (the Lehman CDS auction closed just over 8%), the gross instantaneously became net, and the scramble to cover derivative hedges seemed like it would end the world as the netting merely accelerated the bank run. In other words, Christian once again completely misses the point that should there be a run, and every contract shifts to a net notional position once the credibility of the derivative market is refuted (via counterparty risk or otherwise), you still would have at best a 1% collateral backing of your claim. In other words, the forced conversion of the futures market into physical precipitated by a bank run would result in a 99% loss of what investors had previously considered bookable assets. Christian's conclusion is that this is all fine and good - "the market is much larger than the underlying market, and there shouldn't be anything unusual about that because quite frankly that's how most markets work." Actually, that's how most derivative markets work. And when the asset being "derived" is that which is located at the bottom of Exter's pyramid, the whole premise of its value collapses, as gold only has worth due to the fact that unlike the aforementioned "currencies and treasury securities" it can not be diluted into oblivion by mad Federal Reserve economists, be it by printing presses, nor by speculative derivatives traders.
As for tonight's Jack Handy moment of insight from Jeffrey Christian, he says this brilliant pearl of wisdom: "I've worked at major banks banks and these guys are incredibly conservative, risk averse people. [no, don't fine tune your eyes, you read that right] Banks make their money at the margin. They borrow from so and so [we'll help you Jeffrey, that so and so is called the Federal Reserve] at 75 bps and they lend it out at 85 bps. They've made a tenth of a percent and they are very happy." [for an immediate refutation of this unbelievably naive claim from a so-called expert, see the following speech by the Fed's Brian Sack]. And that's why JPMorgan, would never, never, risk by a naked short in the COMEX, even though with their massive inventory, they are the COMEX. Also, quite amusingly, of the very "conservative, risk averse" big banks that Christian has worked with, his bio lists only Goldman Sachs: truly a paragon of prudent money management and not betting the farm on a taxpayer bailout! It continues: "the banks that have these large positions on the COMEX are not naked short! Those banks' management, their credit departments, the banks that they borrow money from [the Federal Reserve, which as we all know lent out against collateral that was considered "bottom of the barrel"] would never allow them do that. So they are not naked short." And it continues. As a reminder this drivel comes from a person who is self-described as "one of the world’s premier authorities on commodities derivatives, both for hedging and investment purposes."
Pay attention to the example presented by Christian at 43 minutes in, of the example of Warren Buffett and the Phillip Brothers cornering the silver market via an advance demand of 129 million ounces of silver for physical delivery in 1998. "This was congestion because there wasn't 129 million ounces of silver readily available for delivery to his account in London in the first 3/4 months of 1998... but by June it was there." We ask Mr. Christian, of the total Silver derivatives and physical market in 1998, what fraction of the market was 129 million pounds? And what was the physical to derivative leverage in 1998, and compared to today? And what would happen if just one percent of the total notional in gold derivatives were to demand physical delivery today? Christian's defense then "it was just a matter of the logistics of coming up with the metal." What would the logistics be of all the physical gold available in the world to derivatives having to be delivered. We can't wait for that particular explanation.
Lastly, Christian totally shoots himself in the foot by discussing how banks, because they are regulated by the OCC, will only leverage one's unallocated gold deposits by 12x (in other words will lend out your gold 12 times), as opposed to AIG, which is unregulated, and will leverage 40x. Good thing over the past month nobody has uncovered how both Lehman and all the regulated banks were using every scheme imaginable to leverage well into the 20s, and before Bear, into the 30s. Somehow AIG was the loophole in the regulatory system. You see, there is always just one cockroach... nevermind that Goldman Sachs itself was bankrupt absent taxpayer bailouts.
Seriously, where did world expert come from? Oh yes. Goldman Sachs. Move along.
At least some piece of truth from Christian: "You do see people come in and especially in the New York premarket before Comex opens, they'll come in with a large order if they want to move the price in their favor. And that does happen. It was much more prevalent in the 1990's. We used to always talk about this with our clients. And we used to tell our gold producing clients - Look, these guys come in, and when you look at the gold price you can see if there is a large order that comes in before Comex opens up, you know that a guy is trying to move the price, and it's not a matter of working a hedge."
And despite this, Christian claims "there's no grand conspiracy to move prices up or down on a sustained basis."
For anyone who wishes to lose 10 IQ points permanently and listen to Christian, his section begins at 26 minutes into the show.
h/t James and Hans