Podcast

Harvey Organ: Get Physical Gold & Silver!

Gold & silver prices suppressed with prejudice
Friday, April 20, 2012, 5:10 PM
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Harvey Organ has been analyzing the bullion markets closely for decades. The quality and accuracy of his work is respected enough to have earned him an invitation to testify before the CFTC on position limits for precious metals back in 2010.

And he minces no words: Gold and silver prices are suppressed. With extreme prejudice.

In this detailed interview, Harvey explains to Chris the mechanics of how he sees this manipulation occurring, why he predicts this fraudulent pricing scheme will collapse soon, and why it's critical to be holding physical (vs. paper) bullion when it does.

The real suppression of the metals started in 1988. That’s when the leasing game started and was invented by J.P. Morgan.

These guys would go around to the mining companies and say, Listen, I’m going to pay you for your gold in the ground and I will sell it. You just pay me as you bring it out. So that was cheap financing to the miners. Barrick, the biggest mining company of them all, went in on this and it financed a lot of Nevada projects.

Once the leasing game came, the actual selling, the extra selling, suppressed the price. In the first five years, it started at maybe three hundred to four hundred tons. It didn’t start to get really bad until probably ’97-’98 with the Long Term Capital affair. And that’s when the leasing started to become around maybe 1,000 tons of gold. And it hasn’t stopped.

And silver is the same.

And that’s why you've had a long-term, 20 years of suppression of the metals. The problem now is that the physical is now gone. Where is going? It’s gone from West to East. 

A lot of people don’t know that China used to refine close to 80% of the world’s supplies of silver, because it’s very toxic. Up until probably 1985, the Chinese handled 80% of the world’s refining of silver. Now they're down to 40%, but that’s still a major part of China’s industry. They are keeping every single silver ounce they refine, and gold. They are keeping it for themselves; their reserves are rising (though they don’t tell exactly). Two years ago they went up to 1,054 tons and I can assure you it’s probably triple that now. These guys are not stopping. Just like they are not stopping in oil. They know what the game is, and they are slowly taking all their U.S. dollars that are on their shelf and converting them to gold, oil, copper – anything that’s real.

And the game ends when the last ounce of gold has left London – not COMEX, because in a nanosecond it will come back to here. 

The big problem in London is that their derivatives on gold are about 50 to 100-to-1. That’s the amount of derivatives. So if I take out that 1 ounce, the balloon around it – the derivative – is getting bigger and bigger and bigger until it’s ready to totally implode.

And that’s what you are seeing now. So right now, people are going to say: How high can it go? And I’m going to tell you: You are going to go to sleep on Thursday night and gold may be $1,670. And then you wake up the next day and it’s going to be a banking holiday. And gold will be $3,000 bid, no offer. No offer – and it will be a banking holiday. Because there will be a failure to deliver.

You’ve got to have physical coins or bars. If all you have is a piece of paper – that’s all it is!  It will just blow up in smoke.

So just go buy your physical and be thankful that you are getting it at a cheaper price today.     

Click the play button below to listen to Part I of Chris' interview with Harvey Organ (runtime 32m:36s). 

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To listen to Part 2 - Click Here.


Harvey received his Bachelor of Science degree in 1970 and an MBA in 1972 at McMaster University, majoring in finance. It was during this time period where Harvey got exposed to the derivative market that was just starting on Wall Street.  Harvey has been trying to expose the fraudulent manipulation of the gold market ever since  the "Long Term Capital" downfall in 1998.  It has been Harvey's duty to share what he knows and expose the fraud and educate the intricacies of of the gold and silver paper and physical markets, which he does through his website Harvey Organ's Daily Gold and Silver Report.


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372 Comments

Jim H's picture
Jim H
Status: Diamond Member (Offline)
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Posts: 1595
Victor... it's late.. but I have to call BS on you...

You said,

"If you get a run on a bullion bank, this proceeds entirely analogous to a run on the bank. The holders of unallocated gold request allocation and drain reserves (physical bullion) from the bank. At no point in time is there a premium on allocated gold over unallocated gold. At no point in time is there a reason for the gold price to rise."

Victor.. I have been nice throughout this thread.. but what you say here is utter, unadulterated Bullshit.  When there is a run on the (nonbullion) bank... The FED can run a truckload of freshly printed money out to the bank post haste... but when there is a run on the physical metal of the few bullion banks.. .there IS NO PRINTING PRESS to refresh it.. only the slow and steady pulse of freshly mined metal... which does NOT BELONG TO THE BANK at that point in time.. but could.. if the bullion bank could come up with the $$ to pay the (now rising) price for more.  

You forgot that one little point. 

Erik T.'s picture
Erik T.
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Posts: 1233
Victor, I apparently did a

Victor,

I apparently did a poor job of deliniating my views vis a vis the futures market vs. unallocated bullion accounts. We are closer to agreement than you think! Specifically:

victorthecleaner wrote:

Erik,

you write

he simple answer is the price goes up until there is enough metal to go around.

I think this is not true.

First, think about gold banking. This is completely analogous to banking with dollars. Here is a simplified picture: The assets of the bank are outstanding loans and cash in the vault. The liabilities are the account balances of the customers and the bank's equity and capital reserve. The cash in the vault is called "reserve". The "reserve ratio" is the amount of cash in the vault divided by the amount of loans outstanding.

The problem with banking is that you can have a run on the bank in which the account holders no longer trust the bank to be able to let them withdraw cash (because they suspect that loans went bad or because they suspect the bank cannot call in some long-term loans quickly enough). In this case, the customers line up at the teller window and withdraw cash from their accounts until the bank runs out of reserves and has to close.

Important: Even if the cutomers are lining up to withdraw cash, this does not mean that cash rises in price, and it does not mean that cash commands a premium over an account balance.

This goes on until the bank is out of reserves and has to close. At that moment, cash still has its usual value, but all remaining account balances are worth zero. Note that the bank is never short dollars and never long dollars.

Bullion banking is exactly analogous. Allocated gold is cash. Unallocated gold is an account balance. A gold loan is a loan. The reserve of the bank is physical gold in the vault.

If you get a run on a bullion bank, this proceeds entirely analogous to a run on the bank. The holders of unallocated gold request allocation and drain reserves (physical bullion) from the bank. At no point in time is there a premium on allocated gold over unallocated gold. At no point in time is there a reason for the gold price to rise. This goes on until the bullion bank is out of reserves and has to close. At that point, physical gold is worth the same as before, but all remaining unallocated balances are worth zero. Not that the bullion bank is never short gold nor long gold.

I agree with you in the case of unleveraged, fully paid-up fractionalized unallocated bullion bank accounts. In that case, it works exactly as you describe, although I suspect that long before "the bank is out of reserves", they would make a phone call to regulators and ask for and receive government intervention, e.g. a bullion banking holiday, if you will.

The place where we may still disagree, and the origin of my statement "if there is not enough bullion to go around, the price goes up until there is" statement, is the leveraged futures market. One of the favorite goldbug memes is "Some day all the longs in the futures market will stand for delivery, the COMEX will default, and physical prices will decouple from paper". There are many reasons this is a silly argument, starting with the fact that only a very small percentage of the futures longs have the capital to stand for delivery in the first place. But if they did, what would happen is shorts would be assigned for delivery, and if the shorts who got assigned didn't have the metal to deliver, they would have to buy it on the spot market, causing the spot price to rise. That rise in price would be transmitted via arbitrage to the futures market, until either the shorts had enough metal to deliver, or the longs saw high enough prices to make them want to cash-settle, or some combination of the two. That's why I said the outcome when there is not enough physical to go around would be that prices rise until there is enough to go around.

Victor wrote:
Important: There is no reason to expect a short squeeze. There is no reason to expect the gold price to rise when that happens.

The reason I disagree is that if a run on bullion accounts begins, at least initially the bullion banks would need to start buying physical on the spot market to cover their obligations. That's where the price rise comes from - bullion banks that are operating at 8 - 10% reserve ratio might estimate, for sake of example, that the formative run is going to draw physical out of 20% of their accounts. In an attempt to shore up confidence, the bank would in that situation use other assets to double their reserves (buying on the spot), hoping to avert a full-on bank run. That's where the price rise comes from. When the run gets fully established and it becomes clear that delivering to the first few guys who ask for allocation isn't going to shore up confidence, the bullion banks probably stop buying at that point and ask for a holiday from regulators while they try to figure out what to do next.

Victor wrote:
Now on the futures market, say COMEX. For simplicity, let's assume that there is exactly one market maker. The speculators are either long or short the future, and in order to keep the example simple, let's assume that each speculator has the market maker as a specified counterparty of their contract.

This is equivalent to gold banking plus dollar banking as follows:

If a speculator goes long the future, this is the same as

1) buying physical gold at spot, and

2) lending the gold to the market maker and borrowing dollars (a swap) until maturity of the future

If a speculator goes short the future, this is the same as

1) selling physical gold at spot, and

2) borrowing phsical gold from the market maker and lending him dollars (a swap) until matirity of the future

You see that the market maker can view the futures market as gold banking. The market maker lends and borrows gold, and he lends and borrows dollars, always for a fixed term.

This tells me that a run on the COMEX would work exactly in the same way as a run on a bullion bank. In particular, this means that there is no reason to expect a price rise and no reason to expect a premium on physical gold over paper gold.

I disagree. In the run-on-the-COMEX scenario, the commercial shorts have some bullion (that's why they have the luxury of being able to keep the contract open past the first notice date), but they don't have enough to cover ALL their short contracts. We know all the longs can never stand for delivery because they don't have the money, but let's assume as many as possible do stand for delivery, and that results in the commercial shorts getting more delivery assignments than they have bullion to settle with. Now they either need to buy back the contracts as fast as they can to avoid more delivery notices (upward price pressure on the futures themselves), or they have to buy bullion on the spot to cover the huge delivery demand (upward pressure on the spot price). Either way, the price pressure is to the upside.

Perhaps this is the crux of why we seem to disagree: On the other hand, if the commercial shorts really do have enough bullion to satisfy all the delivery notices they receive, without having to go get more bullion to meet that obligation, then in that (unrealistic?) case, I would agree with you: The shorts deliver from their bullion stock and there's no upward price pressure. I just don't see that scenario as realistic.

All the best,

Erik

victorthecleaner's picture
victorthecleaner
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Posts: 50
short squeeze?

Jim and Erik,

if you just have a run on the bank, and the bank cannot call in the oustanding loans quickly enough, you would not get a price rise. They would simply run out of reserves and one day stop trading. You get a price rise only if there is some short who had price exposure (i.e. was naked short) and is getting squeezed.

Now if you have a situation at the COMEX in which the majority of shorts is producers, but the majority of longs is speculators and only 1/10th of the longs are strong hands who go for delivery, the price can even drop if the speculative longs try to liquidate (even though there is the 10th that stands for delivery and that eventually drains off the reserves).

So again, nobody guarantees you a short squeeze. I do find the standard recommendations by people from Sprott to Turk irresponsible because they make their investors greedy for the big short squeeze. It might never happen. But if the market runs out of reserves and the bullion market is forced to settle in cash at the previous London fixing, all those goldbugs who invested in gold related financial products, will be left in the cold. In this case, only physical gold in your possession will do.

Finally let's add the next layer to the story. The bullion banks are flat, they are neither short nor long gold. So what can they do if they face a run on their reserve? Purchasing bullion for US$ alone will not work because they are banks and don't want to go long. But they can borrow gold. Technically this would be a swap, i.e. they lend US$ and receive gold as the collateral. For example, they could purchase spot gold and at the same time sell the forward. For the term of this loan, they can use the gold in order to satisfy allocation requests. (And then they need to call in outstanding loans so that they can return the borrowed gold when the swap matures).

If everyone does this at the same time, this would push gold into backwardation. So, yes, you would see the spot price increase and the futures prices collapse.

So the only spot price increase you get is because the term structure starts to invert, not because of a short squeeze! Take a look at November 2008. The market went into backwardation on Nov 20 and 21, but the total increase in the spot price was merely some 10% over that month. Well, we know the market survived, but that's still pretty lame for the short squeeze that is announced by the gold bugs. Similarly Sept 29 and 30 in 1999. This was the Washington Agreement and would have probably killed the London market had the BoE not intervened. Again, the price increase was less than 20%.

Sincerely,

Victor

Erik T.'s picture
Erik T.
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Posts: 1233
victorthecleaner wrote:Jim

victorthecleaner wrote:

Jim and Erik,

if you just have a run on the bank, and the bank cannot call in the oustanding loans quickly enough, you would not get a price rise. They would simply run out of reserves and one day stop trading. You get a price rise only if there is some short who had price exposure (i.e. was naked short) and is getting squeezed.

Victor, you keep saying that they would just run out of reserves and stop. That doesn't make sense to me - if there is a run, the remaining unallocated longs demanding delivery won't go away. In that case the bank needs to either acquire more metal or call in a favor from regulators and ask for a banking holiday. I wouldn't be surprised if there is a clause in some of the unallocated account agreements allowing them to cash-settle with longs requesting delivery at the most recent fix , but that's just a guess on my part. In any case, Victor, your discussion seems to ignore the question of what happens to the remaining unallocated longs when the bank runs out of reserves. Am I missing something?

Victor wrote:
Now if you have a situation at the COMEX in which the majority of shorts is producers, but the majority of longs is speculators and only 1/10th of the longs are strong hands who go for delivery, the price can even drop if the speculative longs try to liquidate (even though there is the 10th that stands for delivery and that eventually drains off the reserves).

Now this is a really excellent point I hadn't thought of until one of your earlier posts. If the day comes when "all the futures longs decide to stand for delivery", what that will really mean is that they SELL 90% of their long position, so as to be able to stand for delivery of the amount of metal equal to the amount of money they actually have. All the spec longs selling 90% of their holdings all at once so they can stand for delivery of the rest would definitely shock the market to the downside. Or perhaps more likely, would create an unusual moderation of the big upward price move underway that led people to conclude it was time to get out and exchange their profits for physical metal.

Victor wrote:
So again, nobody guarantees you a short squeeze.

Victor, what's wrong with you? Don't you listen to King World News? The big short squeeze comes when wealthy Asian investors decide to put the squeeze on the evil-doing bankers. Didn't you know? Besides, that's how we do it here in Asia. When we want to orchestrate a short squeeze, we don't employ the element of surprise for maximum effect, the way you would do it in America. No. We tell Andrew Maguire all about it months in advance so that he can telegraph our intentions to retail investors! Didn't you know that?

Erik

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Strawboss
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Victor - You are living in a dream world

Victor,

Your argument about a bullion bank expereincing a run on their fractionally reserved unallocated accounts to the point where they simply run out of physical - close up shop and the price of physical isnt effected is ridiculous.  No offense intended, but, your argument is preposterous.  Here's why...

Lets pretend that the bullion bank in question is Kitco, and their unallocated accounts are demanding delivery of physical metal which is putting Kitco under great stress.  With each day that goes by, they are losing more and more physical until they simply close their doors (classic bank run scenario).  Your position is that it occurs in a vacuum and the spot/futures markets in gold are unaffected.

What you are missing is that if that was to occur, you can bet your life that a great percentage of other unallocated account holders in various funds are going to perk up and pay attention and that a sizeable amount of them are going to also take delivery or at the very least, seek to allocate their positions so they at least hold title to their gold.

News of a run on gold in an unallocated fund would spread like wildfire and would surely trigger a mass exodus from unallocated accounts.

Your failure to address this obvious ramification is the basis for my calling your argument preposterous.

Switching gears...

Yes, I agree that many of the longs dont have the financial wherewithal to demand delivery as they are highly leveraged and only seeking cash settlement anyways - their intent isnt to take delivery.

However, it stands to reason that at some point in the future (near or far who knows) there are going to be other pension fund managers that are going to arrive at the same conclusions that Kyle Bass has and seek to take physical delivery of gold through the COMEX.  It is even reasonable to assume that a day may come when CFO's at major corporations seek to hedge their cash positions with some physical gold (think what would happen if Apple decided to plow 10% of their cash into physical gold as a hedge).

COMEX operates on the assumption that very few longs will stand for delivery.  That is a fatally flawed assumption when the likes of Kyle Bass come to play.

bbacq's picture
bbacq
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Posts: 26
A few points on this discussion...

I am still not sure that the parties currently discussing hypothetical gold-price scenarios agree on the conditions that "causes all the longs to liquidate" (though I think I have now clarified that only 1/Nth or more need to stand, and others liquidating in the discussed scenario).  There is analysis of what might happen once the process begins, but I think the environment matters, and here is why.

The economy and all within it are a complex system in which there are risks that people try to manage.  Provided that that system, including rule of law, contract enforcement, etc remain functional in the current mode of operation, mechanisms that exist within the system for managing risk might well be effective, but should elements of the system stop functioning for some reason, the "rules" no longer apply.  In the scenarios discussed, I am not sure there is agreement on the state of rule of law, solvency of governments and large banks, etc. that precipates a large fraction of gold futures (or option, or unallocated acct) holders to stand for delivery.

"For example, if total gold liability exposure is X tons of gold, the bank might hold 1/20th or 1/50th of X in physical bullion, but might also be long a sufficient number of futures and forwards to hedge price risk. So if the price spikes out of control, on paper the bank is covered because they already locked in their price for enough bullion to cover all their obligations if they ever had to. If we apply accepted accounting practices, this scenario makes the bank look squaky-clean: They are fully hedged and have no price risk whatsoever. Unless, that is, the system melts down and the counterparty to their hedge trasaction doesn't deliver, in which case you get the domino-effect that was feared if AIG had defaulted in 2008."

Exactly.  One needs to be explicit about the counter-party risk environment before one can discuss price-discovery mechanisms and pricing.  Given Jeff's comments on the lack of regulation of many players, we have justification for being nervous.

Victor, I think Jim has a good point about gold vs fiat in your banking analogies, and Erik above points out that we must consider the remaining longs (or bank creditors) beyond the reserve ratio.  Your assertion that pricing does not change in the case of bank runs may be false, and even more so in the case of the gold analogy.  You cannot draw a box around the bank and its creditors and consider it in isolation if you want to have the model reflect reality.  People make the same mistake about the second law of thermodynamics, and use it when inapplicable.

Since, in our current system (haha), currency is created whenever someone enters into debt with a bank, and destroyed whenever someone retires a loan, when bank runs are occuring (massive withdrawls and either voluntary or involuntary retiring of debt), the money supply is contracting.  If we are to believe the monetarists who subscribe to the quantity theory of money, then that reduction of money supply rapidly has an effect on prices denominated in the currency in question.  This is the deflationary scenario in which prices decline as money supply shrinks.  So prices do change (if we believe the monetarists).  The value of money increases.  If the frac-gold-bank analogy were perfect, then the same would apply there, ie the value of gold would increase under the same conditions.  I believe your example requires that none of the withdrawn assets be used to pay down debt, else money supply changes and thus prices.  The gold-bank equivalent would be that none of the delivered gold would be used to satisfy leasing obligations.  Please correct me if you feel I am wrong in this.

The analogy is also not perfect, as Jim points out, because of the difference in the nature of the goods in the bank/market.  One good, fiat currency, is created and destroyed at man's whim.  The other, gold, is not.  Both can and have served as place-holders for the money-concept, ie as currency, and co-temporaneously as well.  Both can be hoarded and dis-hoarded to act as demand and supply to the market, but the goods are different in nature, and man, who is the arbiter of value in the market, understands this difference, and, all else equal, will impart greater money-value to the good that is less easily created or destroyed.  Further, in the case of fiat, we operate under a coercive system in which a very small subsegment of society is (madness!) entitled to enter into debt (and expand the supply of fiat currency) on behalf of the rest of society, and there is little feedback-coupling to this segment - negative consequence for bankers in our current limited-liability-and-insured-frac/Fed/BIS central system is almost non-existent, so the net incentive for excess is everywhere.

"The big problem I see there is that bankers tend to think in terms of what allows them to manage perceived risk according to the accounting rules imposed on them, not true risk if the system melted down."

Yes.  One needs to differentiate in one's analysis whether one is thinking inside-the-box/system, or outside it, i.e. once natural cause and effect are again free to exert their influence on markets.  There is uncertainty in nature.  For the last hundred years or so we have in our hubris assumed that we were smart enough to create organizations that could reduce net, overall, long-term risk.  We were wrong.  LTCM is a grand example, and Victor may be right that we were closer to a system-reset then than in 2008.  The most effective way to deal with uncertainty is through emergent-self-organized spontaneous order, which requires freedom, not coercion.  I stand with Mandlebrot, Taleb and others in this assertion.

Erik, I think your final conclusion above is flawed:  "If the day comes when 'all the futures longs decide to stand for delivery' [ed: note it just requires >1/Nth], what that will really mean is that they SELL 90% of their long position, so as to be able to stand for delivery of the amount of metal equal to the amount of money they actually have. All the spec longs selling 90% of their holdings all at once so they can stand for delivery of the rest would definitely shock the market to the downside."

I think that is a very specific example, and not at all likely, but, again, one must agree on preconditions in hypothetical analysis, and I think you mistake market leverage for account margin requirements in that (unless, by coincidence, you are talking about both 10% physical reserves *and* a 10% fiat-margin requirement imposed by the clearing-house).

I think the scenario being discussed is "strong longs standing" ie those who have 100% fiat backing for their gold positions, and not the historical situation in which highly-margined speculative long players are forced to liquidate under price-pressure.  Erik I think you were closer to the truth when you suggested prices would move until the market cleared.

Victor, I think the preconditions you have in mind are some sort of exogenous event in which weak speculative long gold players also have exposure elsewhere, and in some financial crisis seek to liquidate their long gold positions to cover other obligations at the same time as the "strong longs" are standing.  I think you are right that there could be a tug of war going on in that case, but I am not sure we can easily predict who wins, and therefore which way prices move.  It depends on lots of factors, so you'd have to elaborate on assumptions to get agreement here I think.

Erik, I shouldn't take the sarcasm bait, but I and a large and growing contingent of society believe that the bankers will, ultimately, be meted justice and sanity in our money and our markets will return, and this very blog discussion is evidence of that.  How exactly, and when?  Anyone's guess.

best regards,

bbacq

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Travlin
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Fundamental errors here

Victor

I appreciate your contributions, but you have fundamental errors in your description of a bank’s balance sheet, that go beyond keeping it simple. The parts I high-lighted show you do not understand this matter.

victorthecleaner, post 200 wrote:

First, think about gold banking. This is completely analogous to banking with dollars. Here is a simplified picture: The assets of the bank are outstanding loans and cash in the vault. The liabilities are the account balances of the customers and the bank's equity and capital reserve. The cash in the vault is called "reserve". The "reserve ratio" is the amount of cash in the vault divided by the amount of loans outstanding.

Assets = Loans and cash. However, cash includes accounts with the bank’s own money. Only a minimal fraction is “currency” or “folding money” kept in a vault.

Liabilities = Deposits owned by the customers.

Equity = The bank’s capital, plus cash owned by the bank that is specifically allocated by law as a reserve for bad loans, plus retained earnings not yet allocated for expenses, reserves, or capital.

Wikipedia has an article with a sample balance sheet that explains more.

http://en.wikipedia.org/wiki/Fractional_reserve_banking#Example_of_a_bank_balance_sheet_and_financial_ratios

Travlin

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bbacq
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Posts: 26
Other discussions and sources of info...

I suggest those interested in the debate on what money is, and what might happen to gold etc to have a read of an article recently published on ZeroHedge by Jeff Snider.

"If the greatest trick the devil ever pulled was convincing the world he didn’t exist, the greatest trick our central bank ever pulled was convincing the world we couldn’t live without it."  Kudos to Jeff...(with whom I have no affiliation)

Jeff goes on to explain the nature of the market's systematic ability to limit monetary excess in a private, decentralized banking model, and he echoes thoughts I first read in "Competiton in Currencies", a collection of articles published by the Cato Institute long ago.  His thoughts are not new, but are expressed in a delightfully articulate fashion, with modern references.  Jeff clearly understands the complexity of the problem of what to use to represent the concept of money in our economies, and its simple solution.

That the best monetary tradeoff lies in maximising freedom and limiting coercion is not obvious to many.  I have been posting links to "I, Pencil" over at tfmetals as a good place to start, as appreciating the message therein requires admitting that we are no longer "in control" of even the most basic means for our sustenance and daily life, and that that is a good thing!  If we were "in control", we would be far fewer, living in squalor and misery in a much simpler world that we could understand.  It is only by abandoning attempts at global control and instead focussing only on our own interests - ie through freedom -  that economic specialization has produced its bounty for mankind.

All the arguments about specific pricing mechanisms and levels and banks and regulation etc etc in the end come down to one very simple moral dichotomy, as most eloquently expressed by Bastiat in the 1850s when he said: 

"All that I have aimed at is to put you on the right track, and make you acquainted with the truth that all legitimate interests are in harmony." [emphasis is Bastiat's, though I would have put it in bold 40-point]

Of the two sides that either agree or disagree with this statement, respectively, he adds:

"In the one case, we must seek for the solution in Liberty - in the other, in Constraint.  In the one case we have only to be passive - in the other, we must necessarily offer opposition."

Central banks, sanctioned by our governments, have for a hundred years coercively imposed upon us fiat currency, a regime of spectacular failure-to-deliver of equity to the common man. (I hope y'all catch the DTCC-double-entendre. ;-)

Every individual is on one or the other side of Bastiat's dichotomy.  Either one sides with the central planners and bankers, and thinks it is right and moral and good to coerce others, or one sides with the contingent advocating a return to sound money, ie freedom and competing gold-backed currencies.  I suppose one could try to argue that legitimacy is unknowable, but that is silly and pedantic sophistry in my opinion.

I know which way this monetary argument will finally swing, that fiat and central banking dies, I just don't know when or how exactly.  I personally would rather it happens sooner, because I understand that the longer a complex system is held against its true nature, the more disruptive will be the return to normalcy and a deeper societal appreciation of Bastiat's simple principle.  I am delighted that sites and discussions like this exist, so that more people can learn the truth about all this stuff.  Bless the internet!

bbacq

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bbacq
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@Travlin: Victor's balance sheets, digital money...

Travlin, though I am sure Victor can defend his own position, I believe it is the case that in the interest of expediency in the analogy he has summarized things so.  We clashed swords on balance-sheet definitions over at tf, and the points were clarified.  I believe Victor will clarify that "cash in the vault" in his example includes bits on balances in certain accounts in computers.  I have posted elsewhere that there is effectively no monetary difference between bits and paper, and why.  I believe the bank analogy stands, and is at least useful for thinking about reserve ratios and the physical call option (though, as I discuss above, we may disagree as to the degree of market-isolation in which can consider the analogy valid, ie I hold that bank runs are deflationary).

I'd like to add that if the folks running the board here would rather I did not provide links to other sites, I would be happy to provide quotations here instead.  It is not my intent to coopt this thread, drive trafiic to other sites, or anything else sinister like that.  I have just covered some of this ground before, and simply wish that more people understood the truth about Life, the Universe, and Everything, rest Douglas Adam's soul...

bbacq

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run on BBs

Thoughts on why a run on the BBs, and even on the COMEX, may not *necessarily* lead to higher prices:

Continue victor's analogy of Bullion Banks as fractional-reserved fiat currency banks.

A run on the BBs is like a run on currency reserves.

Futures contracts are not like bank accounts. They are like CDs with a defined maturity date, where the holder does not have the option for early termination. So say you have such a CD and you see a line around the block in front of your bank. What do you do? Do you get in line? No, of course not, because even if you made it to the front of the line, your contract stipulates that you will get no cash from the bank that day.

What you do instead is you sell your CD on the open market, for a loss, because you know that you cannot get your cash today and you fear that the bank may not be there to deliver the cash when the CD expires. This is why futures longs may liquidate and the paper price of gold may collapse even when the physical reserves are being run. Because the ability of the contract to deliver the underlying physical good has been shown suspect, and so the contract itself is worth less / worthless.

So, Erik T, the paper price would not collapse because leveraged longs will liquidate 90% of their positions so they can take delivery of the final 10%. Rather the paper longs will liquidate 100% of their positions because a) those interested in paper profits will be showing a large paper loss and will want to get out of their positions and b) those interested in procuring physical gold will realize that the futures market is not a viable place to do so.

Now back to unallocated accounts at the bullion banks, and back to the fiat-bank analogy. The unallocated account holders are like the savings account holders at a currency bank. If you had a savings account at a bank and you saw the line around the block, you would jump in for sure. Because you know that, if you get to the front of the line, you might get your cash out. If you don't make it to the front of the line you will be wiped out!

At least this was how it worked in the 1930's, when the dollar was pegged to gold and there was no option for running the printing press. You either got your cash or you got nothing.

Now apply this to a BB. There was a run on the physical reserve and the bank shut its doors (how is that different from a 'bank holiday' anyways?). Do unallocated account holders bid up the price of gold? No, they are wiped out, now at the mercy of the bankruptcy proceedings.

Does the bank bid up the price of gold? It will probably try to borrow gold, as victor said, but why would it buy gold?

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Not only 'why would the bank

Not only 'why would the bank buy gold', but would it even be able to?

Picture again the 30's american bank going under due to a run. Why didn't they just buy more currency? 

Because they don't have the liquidity. The have loans as assets on their books, and if they couldn't call them in or sell them for cash then they had no other recourse to try to raise the cash to stem the run.

It could very well be likewise with the BBs. When the physical reserves run out, that's it; either the bank sells its loan book, calls in loans, or goes bust. There's no massive currency stockpile waiting to be deployed to aquire more physical reserves.

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A couple of more points

A couple of more points (sorry for the multiple posts). Bullet points only because they lack coherency:

- Think about Exter's pyramid. Where do unallocated gold accounts go? USD? COMEX gold futures? Physical gold?

- The trouble is that right now all different forms and contracts for 'gold' trade at par. Should we see a run on the BBs, this will no longer be the case. The paper price we are used to seeing on kitco will collapse, but when someone calls a bank for an OTC gold order at that price they will be laughed at. It will be terribly confusing!

- In the 1930's when banks suffered runs, there was price deflation aka appreciation of cash. But CDs from shaky banks still traded on the secondary market at a large discount to the prior value. What we currently think of as the 'price of gold' is not the price of physical gold (analogous to cash) but rather the price of gold contracts (analogous to CDs).

- This might all seem like semantics and bickering between different gold camps. However, it is an important discussion because physical gold holders who do not understand what may happen face the prospects of selling at exactly the wrong time, because 'gold is crashing, the gold bull market is over, the gold story was completely wrong'.

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Physical Gold - Exeter's Pyramid

Physical gold is at the inverted base of Exeter's pyramid.  All paper products (including paper gold products) are above gold.

In a desperate rush for the exits - thats an awful lot of physical paper "assets" that will try to run through the door into physical gold.  Unless...the powers that be are able to keep all the dishes juggled in the air without any "accidentally" crashing to the ground.

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Strawboss,So now you see

Strawboss,

So now you see the predicament. Our 'price of gold' that we see on kitco etc. is the price of paper assets. As you say, these assets will try to 'run through the door into physical gold' and thus they will need to be liquidated into currency first.

So 'gold contracts' will crash in currency price, even as physical gold will soar in currency price -- but you won't see the latter, because physical gold is not quoted (in size at least). Our current gold pricing mechanisms are based on the paper gold price and thus they will break down in a period of confusion. Contracts for gold will not perform.

Physical gold will soar in value but there won't be a market in place to quote a price.

Again, this might seem like semantics, since both a hypotherical short squeeze and this scenario end with a radically higher physical-only gold price. However, the two situations will look very different as they are happening.

*EDIT* both scenarios end with higher gold prices, but the short squeeze scenario does not necessariy specify a physical-only price, does it?

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Michael H

Michael H wrote:

Strawboss,

So now you see the predicament. Our 'price of gold' that we see on kitco etc. is the price of paper assets. As you say, these assets will try to 'run through the door into physical gold' and thus they will need to be liquidated into currency first.

So 'gold contracts' will crash in currency price, even as physical gold will soar in currency price -- but you won't see the latter, because physical gold is not quoted (in size at least). Our current gold pricing mechanisms are based on the paper gold price and thus they will break down in a period of confusion. Contracts for gold will not perform.

Physical gold will soar in value but there won't be a market in place to quote a price.

Again, this might seem like semantics, since both a hypotherical short squeeze and this scenario end with a radically higher physical-only gold price. However, the two situations will look very different as they are happening.

*EDIT* both scenarios end with higher gold prices, but the short squeeze scenario does not necessariy specify a physical-only price, does it?

Michael - expand your mind.  There is only a tiny, tiny fraction of worldwide "wealth" currently invested in "gold" (including the paper derivatives).

Whatever downward price pressure on the paper market because of paper gold holders converting to physical will be more than compensated for by the "new money" rushing through the door to get their hands on physical.

As I indicated earlier, can you imagine if Apples board of directors decided to invest 10% in physical gold?  Or what about Calpers?  Or the Norwegian SWF?  Or any of the other hundreds and thousands of other monied interests...not even taking into account all the worlds billionaires and millionaires...

Thats an awful lot of liquidity that gold is going to have to sop up.  In fact - gold is the only asset that can truly extinguish all the debts and get the system back to a normal state of function.

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Strawboss, I agree with you;

Strawboss,

I agree with you; if tons of new money wants to invest in physical gold, then the price will skyrocket. And I also agree that this is likely in the future.

Most of this thread's discussion has not been about that end game, however. It has been about how the current market operates, and how the current market may cease to operate.

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paper gold crash

Michael H,

nice to see you here. I sign every single one of your statements above.

Strawboss,

Whatever downward price pressure on the paper market because of paper gold holders converting to physical will be more than compensated for by the "new money" rushing through the door to get their hands on physical.

I am not sure this is realistic. They will see the quoted paper price of gold crash, as Michael H says. Why catch a falling knife, as the investment people say? The problem is that the market may die while it is down and before all these potential new longs get in.

Again, you should think about what this means for the ETFs. If I were Sprott, I would wind down the PHYS at that moment, pay the investors cash and purchase the physical gold myself or for my hedge fund. Adding insult to injury for the holders of Sprott paper.

Finally, you need to consider the political risk as well. What will the U.S. and UK government do when the bullion banks are running out of reserve?

There is one precedent. In March 1968 when the London Gold Pool lost a lot of its reserve, the US Treasury phoned the UK prime minister, and on the same evening, he basically woke up the Queen that night and had her sign an order to close the bullion market the next day. Nobody bid up the spot price in order to satisfy the redemptions. They just shut the market down for two weeks. During that period, Congress passed a law that made the US dollar irredeemable for foreign private entities. I would keep this precedent in mind.

Again, I urge everyone to take this warning seriously. If you just listen to the usual goldbug propaganda and expect a short sequeeze and a rising paper price (in order to make a nice profit in US$), you may be waiting for something that might never happen. Rather, the paper price may crash, most retail investors will be confused and sell or will be forced out of their ETFs. Then they close the market when the price is low, and a couple of weeks later, somebody else (ECB perhaps) starts making a physical-only market that discovers a price that blows even Jim Sinclair out of his socks, perhaps some $30000/ounce or more (payable in Euros, of course). Everyone who sold their physical or got shut out of his ETF, will be furious. Just as in 1968 the international holders of dollars who were a few days too slow.

And in 1971 the Bank of England herself. On Friday, August 13, 1971, they phoned the U.S. treasury and asked for redemption of $3bn at the then official price of $35/ounce for a total of about 2660 metric tons of gold. The U.S. government then met at Camp David on Saturday and apparently brought forward the plan they already had in the drawer, namely to terminate the gold redemption even for foreign governments and central banks. The BoE didn't get their 2660 metric tons. For some reason, however, this did not diminish their loyalty.

Victor

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Allocated/Unallocated, August 2011 & a run on Bullion Banks

Correlation is not causation and all that...

The similar time line of Venezuala repatriating gold and the spike in the gold price around August of 2011 is something I am focused on. The devil is in the detail and I have made enquiries. Strange bedfellows indeed.

In regard to differing opinions as to whether a run on the bullion banks caused by their failure to honour the convention of converting unallocated to allocated would, or would not, cause a spike in the price...I happen to think that those who hold their gold in unallocated accounts, (the most common form surprisingly, according to LPMC Ltd), would learn their lesson and be somewhat anxious to take delivery of their replacement purchases.

Not to mention those who, in the circumstances, were fearful that their allocated accounts might be Corzined. I think we would see a commercial signal failure as physical gold is removed from the trading system. It would be a brave central bank that, in the circumstances, would "stand ready to lease gold in increasing quantities should the price rise"...or braver still if, as Victor contends, the price remains unchanged or falls.

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S Roche, The similar time

S Roche,

The similar time line of Venezuala repatriating gold and the spike in the gold price around August of 2011 is something I am focused on

In order to verify whether this idea is plausible, we can take a look at GOFO

http://www.lbma.org.uk/pages/?page_id=55&title=gold_forwards&show=2011

GOFO is the interest rate on an unsecured US$ loan minus the gold lease rate. If GOFO is positive and grows with the term of the swap, the market is in contango. In general (US$ interest rates being fixed), a large and growing contango indicates that the gold price rise is driven by paper gold buying. A small and shrinking contango or even backwardation indicates a shortage of bank reserves, i.e. that these banks start borrowing gold. During the summer 2011, the market had a healthy contango, and so I don't think Chavez' action made any difference.

Secondly, I would be surprised if he had unallocated gold with a bullion bank. He most likely held allocated gold with the Bank of England or with the BIS, and this would have always been outside the bullion market.

I have a second comment on the idea that Chavez' had anything to do with rising prices: "The price action determines the news" rather than "the news determine the price action". By this I mean that depending on the price action, people tend to take those news items more seriously that seem to confirm the price action whereas they tend to ignore or discard other news items that seem to contradict the price action.

I suppose had Chavez repatriated his gold in December 2011, nobody would have made any big fuzz about it.

For instance, do you remember the explicit leak that the BIS was buying gold in early March this year? There is hardly anything more bullish for gold (physical that is). But this happened during a phase of declining prices, and so everyone remembers Chavez, but nobody remembers the BIS (although the latter can easily grab several 100 tonnes of physical without blinking).

I happen to think that those who hold their gold in unallocated accounts, (the most common form surprisingly, according to LPMC Ltd), would learn their lesson and be somewhat anxious to take delivery of their replacement purchases.

A lot of the unallocated gold has its origin in various gold-related financial products that are offered by all sorts of banks. Rather then buying gold in order to hedge their exposure, they just hold an unallocated balance with one of the bullion banks. Their customers don't even have the option of allocation. If they want to switch to physical gold, they need to sell their financial product first, then take the cash to the coin store and get their physical gold.

Finally, many who hold unallocated gold OTC do so on margin. So in a liquidity crisis they may have to sell because their bank or broker cuts the credit lines, or they get stopped out when prices decline.

Again, there are a number of reasons for why the short squeeze that is promised by the gold bugs may never materialize (although the market may well break one day).

Sincerely,

Victor

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The end game is impossible to predict

I think bbacq hit the nail on the head when he observed that it's hard to have a meaningful conversation about how a bullion bank "run" might go down unless you first agree on what preconditions would cause such a run. I would carry that thought a step farther, and opine that predicting how the end game goes down involves so many variables that it's impossible to make meaningful predictions.

Taken in isolation, the concept of levered futures longs having to SELL a lot of notional value of paper contracts in order to raise cash to BUY a much smaller amount of physical bullion seems to make sense. But it begs the question as to what caused the futures longs to suddenly make this change of strategy, and most of the plausible scenarios I can think of involve a situation where a panic is going on and a whole lot of money not previously in the PM market is buying, causing far more upward pressure than the liquidations of leveraged futures are causing to the downside.

In theory, the option of standing for delivery and the buffer of inventory held by the exchange guarantees that "the paper price decoupling from the physical price" is impossible. But that theory only holds so long as the system continues to function as designed. In times of great crisis, governments can usually be counted upon to do the stupidest things possible, as with the short selling bans in 2008, which appear to have been imposed by regulators who literally didn't even comprehend their implications on the options market. I would argue that in a crisis so bad that everyone is rushing toward the bottom of Exeter's pyramid, all bets are off. Not only would the enforcibility of paper contracts be up for re-interpretation, but it's entirely possible that governments could simply decree that all the physical metal in all the vaults is "temporarily seized", until the government can figure out how to "serve the common good", which is a euphamism for changing the rules retroactively to serve the interests of the people with the most power and influence.

The conclusion all this brings me back to is that there literally is no good place to store your gold. I'm dumbfounded to see how many seem to hold the opinion that "Because I paid a big premium to buy PHYS, and it is a PHYSICAL gold trust, I am covered no matter what"! This is ludicrous, because Sprott's vault is just as vulnerable as COMEX or LBMA's vaults to "emergency" government action that changes the rules retroactively.

I am strongly of the opinion that holding any significant amount of bullion in one's home is very, very foolish. Someone will eventually figure out you have it, and they will come kill you and your family to take your gold. Not worth the risk for any amount of wealth. Most pundits used to opine that allocated bullion bank accounts were the best solution, but I think MF Global makes it clear that the rules can and will be changed retroactively, and that such changes will not necessarily be equitable. Safe deposit boxes and private vaulting facilities are obvious targets for seizure if push ever come to shove. In short, I don't think there is any ideal place to store bullion. Jurisdictional diversification across several allocated accounts seems to be the best option for large holdings, but still doesn't offer a panacea.

Best,

Erik

p.s. bbacq - you have made several references to tfmetals. Are you the same person who writes under the "Turd Furguson" pseudonym there, or are you someone else who frequents that site?

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The endgame- there should bebig enough time window still

But, Victor

victorthecleaner wrote:

I am not sure this is realistic. They will see the quoted paper price of gold crash, as Michael H says. Why catch a falling knife, as the investment people say? The problem is that the market may die while it is down and before all these potential new longs get in.

Again, I urge everyone to take this warning seriously. If you just listen to the usual goldbug propaganda and expect a short sequeeze and a rising paper price (in order to make a nice profit in US$), you may be waiting for something that might never happen. Rather, the paper price may crash, most retail investors will be confused and sell or will be forced out of their ETFs.

I do not think that governments will act preemtively and bring down paper markets tomorow. More likely, as is characteristic to this crisis, they will drag it out until the last moment. That, minus Your broker going bust, will allow to take paper profits going long on PMs as of now when next QE's are immininet and actual since  jobs report has set a firm floor for paper PMs in USD,and convert into physical or , pay of debts or spend paper as You wish to purchase assets or whatever  etc for at least 1-2 years , which is better than nothing for many people. The partial default of US debt probably will come first, and that is not far away (2015?) since it grows and wil grow superexponentially with failing economy and growing deficits, and must crash (i.e US debt amount will be reduced in USD by at least 20-30% in very short period of time- <1 year)-which I call partial default, but NOT by debasing currency- by not rolling over, not repaying.

So in between  government closing PM paper markets and checking on populations physical gold there will be long enough time where they will solve the issue with propaganda, since the event of destroying paper PM markets will mean immedeate panic buying of physical and  can destroy the USD vs other commodities as well in the same day. Which is no in the USA interests, I guess, or , may be I am wrong. Would be interesting to hear Your thoughts about the US elite interests short term and longer term. Short term ( 1-2 years) especially.

I also doubt the USA will suceed in bringing down USD fast enough to avoid recession and   default. Which means USD as commodity-reserve currency-will enjoy a period of higher value (again 1-2 years)-against other currencies, not PMs-  as those owning USD tries to get rid of it without creating panic and reserve value drop.

Ivars

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Erik T. wrote:This is

Erik T. wrote:
This is ludicrous, because Sprott's vault is just as vulnerable as COMEX or LBMA's vaults to "emergency" government action that changes the rules retroactively.

The rebuttable presumption being that that Canada would confiscate gold along w the US and UK. I doubt this is a given, don't think there is any historical precedent. A global agreement to confiscate wouldn't seem to be perceived as being in the best interest of all nations.

Would like to hear any reasoned opinion on the matter.

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request and question

So rather than further discussions of a theoretical nature, I'd be curious to know how the various parties here (Erik T, victorthecleaner, S Roche, bronsuchecki, etc.) are positioning their personal assets (including but not limited to PMs) to best weather the storm.  This site focuses on practical, actionable information so some commentary from that perspective would be most appreciated. 

Also, this question has been posed repeatedly previously but has been conspicuously skirted.  Do the more knowledgeable commenters who have decried Harvey Organ, Ted Butler, and others as charlatans also feel that individuals such as Jim Sinclair and David Morgan are charlatans as well?

Thank you for an interesting and thought provoking discussion..

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Bullion bank run

Now we are starting to get into something interesting. On my to do list is a paper on a bullion bank run or how a paper/physical price divergence would play and this discussion has provided some good material. Problem is that I see that paper being at least 100 pages long, primarily because there are a multitude of actors in the bullion market with different motivations and how each reacts to some trigger event (or no event at all, just a slow melt) and react to each other's actions is complex to say the least.

I'll provide some more comment later tonight because now I have to spend time with my partner going "shopping" and she doesn't see this as more important (crazy huh) but a few points:

  • standard unallocated agreement with a bullion bank has no obligation for conversion into physical and is thus in push come to shove a cash settlement, with that cash settlement likely to be based on the London Fix
  • in a slow melt (no dramatic trigger event) where it is not clear to pro market participants and central banks that a run is developing, bullion banks will meet physical redemption demands (reserve drain) by leasing from central banks.
  • even in a trigger event/obvious bank run, central banks may still lease their reserves to a bullion bank to avoid a gold run triggered bankrupty of that bank
  • with miner hedge book basically zero there is possibly plenty of central bank metal ready to be leased (very low lease rate tells you that) I think it is foolish to assume that huge amounts of central bank metal is leased and thus no capacity there
  • note also that central banks tend to lease on longer terms while demand (futures & forwards, ie leveraged speculation demand) is shorter term in duration. That is, bullion banking has an inverted maturity transformation compared to normal banking (which is borrow short, lend long). Borrowing long, lending short means bullion banks may not have the same some of pressure in a run as cash banking. However, the at call nature of unallocated does mean a fair bit of short term stuff on the books most likely matched in part by longerish lending (backing forwards and futures).
  • ten years ago unallocated accounts with bullion banks were free of charges. a few years ago they started to charge for them. Rates are very low, but they do result in some cost of holding unallocated. Question is why. Leave you with that to think about.
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Positioning

ao wrote:
how the various parties here (Erik T, victorthecleaner, S Roche, bronsuchecki, etc.) are positioning their personal assets (including but not limited to PMs) to best weather the storm.

Re precious metals my personal position is not of much use because I work for a mint and thus have immediate access to information about physical flows and behaviour of our Depository clients as well as probably potential regulatory changes (or the Govt may not consult us first and just change) which means I can act right at the last minute to protect myself. I think Erik's advice is best, which is to diversify.

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Very interesting!

bronsuchecki wrote:

Now we are starting to get into something interesting. On my to do list is a paper on a bullion bank run or how a paper/physical price divergence would play and this discussion has provided some good material. Problem is that I see that paper being at least 100 pages long, primarily because there are a multitude of actors in the bullion market with different motivations and how each reacts to some trigger event (or no event at all, just a slow melt) and react to each other's actions is complex to say the least.

Quite interesting indeed, and I strongly encourage you to write that paper, Bron. Something that I'm coming to realize is that "debunking" the people who are promulgating factually inaccurate information and ill-conceived theories does no good - everyone knows that there are very real systemic risks, and the investor appetite for detailed analysis and commentary about them couldn't be stronger. Pointing out that the information now circulating on the net is BS isn't sufficient. Nothing could be better for the PM investment community than for people who are actually qualified to do so to start writing significant papers giving reasoned, well-researched perspectives on the same subject matter about which misinformation is now circulating.

Bron wrote:
in a slow melt (no dramatic trigger event) where it is not clear to pro market participants and central banks that a run is developing, bullion banks will meet physical redemption demands (reserve drain) by leasing from central banks.

Perhaps you can clear something up for us when you write again later. A very common goldbug argument is that if a bullion bank leases gold from a central bank and then uses that gold to deliver on an obligation to Investor "A", this is a travesty of justice because the same gold is now "owned" (i.e. double-counted) by both the central bank and Investor "A". The goldbugs would have us believe that Investor "A" doesn't really get clear title to that gold, because it is still owned by the central bank that leased it to the bullion bank.

My guess is that the "lease" agreement between the central bank and the bullion bank relies on the fungibility of gold, and calls for the bullion bank to repay the loan with an equal amount of gold, but not necessarily the same gold. Assuming this is true, it appears at first that the goldbug argument is nonsense - and that the central bank has no ownership claim on the specific bullion Investor "A" received. First, Bron, can you clarify that understanding? It is admittedly a guess on my part.

But even assuming my guess is correct, there does appear to be an interesting theoretical question of property law here. Presumably, the bullion bank's obligation to Investor "A" is to deliver "unencumbered" bullion - in other words, free and clear title. To my own admittedly limited understanding of property law, you can't convey free and clear title to someone else unless you first own whatever is being conveyed free and clear yourself. If the bullion being delivered to Investor "A" was obtained from a lease, setting aside any fungibility provisions for repayment in that lease, the question remains: where and when did the bullion bank obtain free and clear title to the gold before it was delivered to Investor "A"? Any ideas on this one?

Erik

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Off topic IMHO, but I'll answer as a courtesy to ao

ao wrote:

So rather than further discussions of a theoretical nature... This site focuses on practical, actionable information so some commentary from that perspective would be most appreciated.

Hi ao,

It's great to see you here. I'm afraid we disagree on the question of what's most interesting and appropriate. This thread began in reaction to an interview with someone who made numerous assertions - many quite damning and controversial - about the bullion markets, but without any factual or logical backup whatsoever to support those assertions. It has evolved into a discussion of the many fallacious manipulation theories (not only from Harvey but also GATA, Ted Butler, Andrew Maguire, etc.), and most importantly, a level-headed conversation about how these markets REALLY work, and thus why some of those theories are nonsense. In other words, I think the discussion is and should be about what the real facts are in cases where others have promulgated factually inaccurate theories. I find this "theoretical" discussion to be entirely appropriate to this thread, and I have particularly enjoyed Bron, Victor and Jeff's detailed technical contributions. There are plenty of other discussion threads on this site about what to invest in, and to be honest I find that aspect of your question to be off topic.

ao wrote:
Also, this question has been posed repeatedly previously but has been conspicuously skirted.  Do the more knowledgeable commenters who have decried Harvey Organ, Ted Butler, and others as charlatans also feel that individuals such as Jim Sinclair and David Morgan are charlatans as well?

"Conspicuously skirted" is an interesting viewpoint. When it was originally posed, I perceived that question as rhetorical sarcasm, and I ignored it because I thought it was both off-topic and irrelevant to this discussion. Solely out of deference and respect for your tenure and contributions as a veteran member of this site, ao, I'll be happy to answer it for you, despite the fact that I still consider it OT and irrelevant.

I'm not going to use the "C-word" in this thread any more, because so many people seem inclined to read meaning into it that I never intended. So going back to my original point, it is my personal opinion that GATA, Ted Butler, Andrew Maguire, and Harvey Organ, despite probably having the best of intentions, are people who simply do not posess the expert-level knowledge of these markets that they profess to have. I base that opinion on having reviewed their arguments, and finding that their conclusions appear in many cases to be based on a shockingly poor underestanding of basic concepts. The price discovery thing and the 100:1 "leverage" argument are perfect examples. It is always possible that it is I who have misunderstood their arguments, and I could be wrong in concluding that their writings are nothing more than a case of shocking ignorance of the basics being repackaged and sold as "Expert" commentary. It is for that reason that I have repeatedly invited anyone here to explain what the paper-to-physical ratio has to do with leverage, or how Ted's Price Discovery argument could possibly be anything more than Ted not comprehending the meaning of the phrase price discovery as used in economics. So that's my contention about these people - that they claim to be experts but critical analysis of their work reveals that they simply don't have a clue what they are talking about.

In the case of Jim Sinclair and Dave Morgan, I am not aware of either of those individuals making any representations of an "expert" nature that were later disproven or shown to evidence that they didn't know what they were talking about. I do think of Jim Sinclair as something of a PM permabull, and I don't always agree with him. But I don't think of him in the same category as the others I've mentioned.

I feel compelled to emphasize again that I see the question itself as completely irrelevant. What's important here is to understand why a lot of the well-known and widely accepted theories about PM market manipulation are simply not credible.

ao wrote:
I'd be curious to know how the various parties here (Erik T, victorthecleaner, S Roche, bronsuchecki, etc.) are positioning their personal assets (including but not limited to PMs) to best weather the storm.

Again, I see this as off-topic. My own interest in participating in this thread is to discuss the veracity of various PM manipulation theories, as I feel some passion for debunking the misinformation that exists in the blogosphere. But since you asked, I'll be happy to answer.

My core positions are gold and crude oil. I often speculate in markets as well, sometimes with leverage, but at the moment I have almost no trades on other than core positions. I think we're in a very hard-to-call phase here because (a) there are HUGE macro risks on the horizon suggesting great caution and downside risk, but (b) it's an election year and the incentive for the Obama administration to do anything possible to keep the economy propped up thru November is enormous. If not for (b) I would be short the SPX as a hedge against an equal or larger notional exposure to gold. I am out of silver for now because I think the "industrial metal" side of silver's dual personality is at risk when we experience the deflationary event I expect will come after the election and the realization of higher tax rates Jan 1st. I'm also working on re-engineering my Peak Oil trading strategy to focus on equities rather than crude oil futures. I continue to believe that the commodity price is the better way to play peak oil, but in the wake of the MF Global debacle I'm losing faith in the futures market rapidly.

All the best,

Erik

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Encumbrance

Erik T. wrote:
A very common goldbug argument is that if a bullion bank leases gold from a central bank and then uses that gold to deliver on an obligation to Investor "A", this is a travesty of justice because the same gold is now "owned" (i.e. double-counted) by both the central bank and Investor "A". The goldbugs would have us believe that Investor "A" doesn't really get clear title to that gold, because it is still owned by the central bank that leased it to the bullion bank.

My guess is that the "lease" agreement between the central bank and the bullion bank relies on the fungibility of gold, and calls for the bullion bank to repay the loan with an equal amount of gold, but not necessarily the same gold. Assuming this is true, it appears at first that the goldbug argument is nonsense - and that the central bank has no ownership claim on the specific bullion Investor "A" received. First, Bron, can you clarify that understanding? It is admittedly a guess on my part.

I covered this issue in respect of ETFs and claims that the allocated metal they hold could be encumbred in this post over a year and a half ago http://www.goldchat.blogspot.com.au/2010/08/gld-leasing-and-encumbrances.html quote:

In my experience most lease transactions are done in terms of unallocated account credits. In this case the lender has lent unallocated and if the Authorized Participant subsequently allocates this unallocated metal there is no direct link between the loan and the physical. The lender has an unsecured exposure to the Authorized Participant under the terms of the original lease. There is simply no legal link to what the Authorized Participant did with that leased unallocated gold.

In the case of lenders supplying actual physical bars (usually only be Central Banks) because it is understood that leased metal will be "used" (be that in a physical operation like a jeweller or mint, or for sale to create a short position), the contract cannot practically require the return of the same physical bars that were lent (ie the same bar numbers). If the lease contract was worded on a secured basis (most likely where the borrower is a jeweller or mint) the security would have to be against the general gold stocks of the borrower rather than the bars originally supplied as it is understood that the original bars are melted or sold.

Where lease contracts specify the return of physical at the end of the lease, it is acceptable to settle with any LBMA bar at maturity, with any ounce difference (due to the variability of 400oz bars) settled via cash.

As a result, there is no legal claim by the lender on the original physical bars supplied to the borrower. Therefore if an Authorised Participant borrowed physical and delivered that to GLD, there would be no claim or encumbrance by the lender to the Authorised Participant on those bars held by GLD.

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Risk

Erik T. wrote:
Unless, that is, the system melts down and the counterparty to their hedge trasaction doesn't deliver, in which case you get the domino-effect that was feared if AIG had defaulted in 2008. The situation gets even more complex if the bank is netting its exposure to include receivables denominated in gold as contingent reserve assets, or using calls to hedge risk of extreme price flutctuation. The big problem I see there is that bankers tend to think in terms of what allows them to manage perceived risk according to the accounting rules imposed on them, not true risk if the system melted down. I doubt they have any credible plan whatsoever for what they would do if the derivative system melted down.

I think 2008 may have shaken up this attitude, but I'd guess it is still dominant and driven by a bit of ego in risk departments who think they can quantify possibility of default etc with all their fancy formulas and VaR blah blah blah. This is why the issue of an unallocated gold run interests me and its dynamics need to be explored. It is also of commercial relevance to the Perth Mint for contingency plans to ensure our operations are robust to such an event occuring in other market players - eg how can we continue to provide liquidity to mining companies we refine gold for and for our customers on the other end.

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Free banking

victorthecleaner wrote:
Bullion banking is exactly analogous. Allocated gold is cash. Unallocated gold is an account balance. A gold loan is a loan. The reserve of the bank is physical gold in the vault. If you get a run on a bullion bank, this proceeds entirely analogous to a run on the bank. The holders of unallocated gold request allocation and drain reserves (physical bullion) from the bank. At no point in time is there a premium on allocated gold over unallocated gold. At no point in time is there a reason for the gold price to rise. This goes on until the bullion bank is out of reserves and has to close. At that point, physical gold is worth the same as before, but all remaining unallocated balances are worth zero. Not that the bullion bank is never short gold nor long gold.

Not exactly analogous, because you can't print gold, which a central bank can do for fiat and give this fiat to a bank in exchange for its illiquid longer-term assets. As a bullion banker you know that there is a limit on your ability to access physical gold from a central bank, so we would have to conclude that bullion bankers are more conservative than cash bankers in the amount of reserves they hold (notwithstanding their risk manager's ego I mentioned above).

I have just finished reading George Selgin's "The Theory of Free Banking: Money Supply under Competitive Note Issue" and I would strongly suggest it is worth your time, all 140 pages. Reason is because I suspect that bullion banking operates very much like the free banking Selgin describes. The key conclusion is that a free banking system is stable and self regulating with regard to the amount of credit vs reserves. This may mean that the bullion banking system is more robust than many think. You will also find it interesting in describing a fiat banking system most likely to be compatible with Free Gold.

As to your point that the remaining unallocated would be worth zero, I would say it will be worth whatever the bank can sell the gold assets that back it. If it is just a confidence run, then the assets are still good, just they mature later than the at call unallocated. If physical cannot be lent with those assets as collateral, then they may need to be liquidated at a discount, but some price will be obtainable.

However, if the run is due to the assets having no value due to counterparty failure on whom the bullion bank has an expsoure, then yes the corresponding unallocated liabilities to clients would be worth zero.

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Liquidity run

Erik T. wrote:
The reason I disagree is that if a run on bullion accounts begins, at least initially the bullion banks would need to start buying physical on the spot market to cover their obligations. That's where the price rise comes from - bullion banks that are operating at 8 - 10% reserve ratio might estimate, for sake of example, that the formative run is going to draw physical out of 20% of their accounts. In an attempt to shore up confidence, the bank would in that situation use other assets to double their reserves (buying on the spot), hoping to avert a full-on bank run. That's where the price rise comes from. When the run gets fully established and it becomes clear that delivering to the first few guys who ask for allocation isn't going to shore up confidence, the bullion banks probably stop buying at that point and ask for a holiday from regulators while they try to figure out what to do next.

I disagree, the bullion banks already have a gold asset, just an illiquid one. They are not short gold, they are short liquidity, so they aren't going to buy gold as that means they are going long and have to use up cash which would be booked as an expense (ie loss). They would first look to borrow gold which they would then repay when their gold assets mature.

Later as they get more desperate, or concurrently, they may look to liquidate their gold assets at a discount to raise cash to buy gold. This will manifest as backwardation, where future contracted gold (be it a COMEX future or an OTC forward) is selling at a discount to spot physical gold.

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no market place

Michael H wrote:
So 'gold contracts' will crash in currency price, even as physical gold will soar in currency price -- but you won't see the latter, because physical gold is not quoted (in size at least). Our current gold pricing mechanisms are based on the paper gold price and thus they will break down in a period of confusion. Contracts for gold will not perform. Physical gold will soar in value but there won't be a market in place to quote a price.

I disagree. The Perth Mint trades 300t of physical gold a year and we don't use COMEX or any other exchange. The OTC market, which is just an internet like network of bilateral trading relationships, will (just like the internet if one of it nodes fails) readjust and continue to trade. Keep in mind that for all the paper gold that is being traded (and there is a lot of it and it makes up the majority of the market) there is also a significant amount of physical trading occuring. 

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Bron... Wow!

Bron,

Thanks so much for taking the time to share all these ideas. Your replies are veryt complete and very thought-provoking!

But as much as I myself am freaked out by the thought of playing Devil's Advocate for the goldbugs, I am still struggling to understand where (from the standpoint of BCL property law) the bullion bank who leased gold from a central bank obtained free and clear title to the gold they delivered to Investor "A" in my example.

I completely "get it" in the sense that I understand the bullion bank's obligation to repay the central bank is in terms of fungible bullion that may be different bullion. I am not questioning your assertion that the central bank does not have an ownership claim on the bullion given to Investor "A". But I still don't see how Investor "A" got free and clear title to something the bullion bank never really had free and clear title to. When and how does the bullion bank obtain free and clear title (needed to transfer said title free and clear to Investor "A") to bullion it has leased?

Thanks,

Erik

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thanks

Thanks Erik for your detailed and informative reply and for your forbearance regarding my request for some practical suggestions regarding investment strategies.  In reading your comments, I realize how it could be seen as OT but for those of us more oriented towards investing as opposed to trading, it was a question that seemed (to me at least) to naturally follow and need asking.  I don't disagree with you that this discussion is quite interesting nor that it is appropriate but, being a pragmatist, my thoughts just naturally are drawn to how we can find practical application for this information.  And quite frankly, as I am an amateur and not a pro in the investment genre, some of this discussion went over my head initially and required re-reading and further study and investigation on my part.  My intent wasn't to re-direct the thread, only to learn more and clarify some basic information for myself (and others).

With regards to the issue of other parties such as Jim Sinclair, that inquiry did not seem to me to be OT.  Sinclair has long expressed the belief that the gold market is heavily and regularly manipulated and therefore, at least some of his views seemed to be in alignment with the parties you decried.  I was obviously interested in your (and others') opinions since I've come to trust Sinclair as a reliable source of information and want to know if he or David Morgan were viewed in the same light as Organ, Butler, et al by those possessing more knowledge than me.  With regards to him being somewhat of a PM permabull, I guess for this particular secular bull market in gold, he is and I know he has strongly recommended against trading this market in the past year or so.  But, to my knowledge, he was largely or completely out of gold for most of the 80s and 90s so I don't know if that label is completely valid.

Anyway, thanks for creating this thread and not being afraid to challenge the status quo.

As an addendum to this post, I can almost hear the buzzing and crackling of all those high powered neurons in CM's head processing the information of this thread.  Since his commentary has been conspicuous in its absence, I'm sure we'd all appreciate hearing his views on this thread as well.

And as one more addendum, for someone who says he is not a pro, I've been very impressed by victorthecleaner's commentaries.  I'd be very interested in knowing what his background is and how he amassed his considerable nowledge on the issues, if he'd be willing to share that.

Thanks all.

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Chris' Buzzing and Crackling Head

ao,

I'm also waiting for Chris to jump in and give us his take on the information provided in this thread.

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This might help

Erik T. wrote:

I completely "get it" in the sense that I understand the bullion bank's obligation to repay the central bank is in terms of fungible bullion that may be different bullion. I am not questioning your assertion that the central bank does not have an ownership claim on the bullion given to Investor "A". But I still don't see how Investor "A" got free and clear title to something the bullion bank never really had free and clear title to. When and how does the bullion bank obtain free and clear title (needed to transfer said title free and clear to Investor "A") to bullion it has leased?

Erik

Here is an analogy that may shed some light on your question. What I say about cash banking is accurate. I expect the principle applies to gold as well unless the transaction was under a contract that provided otherwise.

One I deposit $1,000 cash (that’s currency, folding money) with a bank in a savings account. This is a demand deposit account, meaning I can withdraw it all at any time. So it’s my money and they are just holding it for me, right? Wrong. I have effectively granted them a $1,000 loan, to do with as they please, callable at any time. But I  no longer own the money. I own a claim against the assets of the bank. If they go under and don’t have it, they won’t pay me, because I gave up ownership when I made the deposit. At that point I hope the FDIC will make me whole.

Two I deposit $1,000 cash (that’s currency, folding money) with a bank to buy a CD with a six month term. When it matures they pay me $1,000 different dollars plus interest in currency. This is analogous to leasing fungible gold as you discussed. But the same principle applies. All I own is a claim against the bank’s assets. They have legal ownership of my paper dollars and can sell them to Investor “A” with a clear title, so to speak.

This might be an answer to your question, but I’m not familiar with the specifics of gold leasing, so I’m not sure.

Travlin

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Travlin wrote: One I

Travlin wrote:

One I deposit $1,000 cash (that’s currency, folding money) with a bank in a savings account. This is a demand deposit account, meaning I can withdraw it all at any time. So it’s my money and they are just holding it for me, right? Wrong. I have effectively granted them a $1,000 loan, to do with as they please, callable at any time. But I  no longer own the money. I own a claim against the assets of the bank. If they go under and don’t have it, they won’t pay me, because I gave up ownership when I made the deposit. At that point I hope the FDIC will make me whole.

Trav,

When you DEPOSIT money in a bank, title to (meaning ownership of) the money is conveyed to the bank at the time of the deposit. As you correctly describe, you no longer own the money - the bank owns the money. You own a credit receivable from the bank.

But in the case of gold leasing, the central bank is not DEPOSITING gold in an unallocated account (an action that would convey title to the bank).

So in order for this system to "work", somehow the act of LEASING the gold to the bullion bank would have to convey title (ownership) to the bank. That is very strongly at odds with the conventional use of the word lease, which typically connotes a transaction where ownership of the asset is not conveyed, as in the case of leasing a car.

What I'm stuck on is that in order for the bank to use the gold to make good on an obligation to deliver "unencumbered" bullion, they have to OWN the bullion they are delivering. The idea that the central bank would enter a transaction that conveys OWNERSHIP of bullion to the bullion bank in exchange for the bullion bank owing an equal amount of gold plus some form of "interest" also makes perfect sense to me, and I see why all parties might want to enter such a transaction. But calling that a lease seems very, very strange to me. I feel like there must be more to this story that I don't yet understand. Perhaps Jeff or Bron can shed more light on this.

Best,

Erik

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leasing

Erik T,

I think there are two ways a central bank can lease gold.

(A) The first is a swap involving allocated gold. Legally this is a repurchase agreement, i.e. when the position is opened, the title to the bars is transferred from the central bank to the borrower. At the same time, the brrower of the gold lends the CB cash (the other side of the swap - serves as cash collateral for the loan). When the swap matures, the borrower needs to return an equal weight of (allocated) gold. In the meantime, the borrower can sell the borrowed gold to a jeweller who melts it down and creates necklaces from it. During the term of the swap, the CB does not own gold, but only has a claim against the borrower (who may default).

In fact, when Drexel-Burnham-Lambert went bankrupt in 1990, the CB of Portugal lost gold in such a swap. As far as I remember, this was actual physical gold.

(B) The second way a CB can lend gold is using unallocated gold. So for the term of the swap, the CB can go short unallocated gold and take cash as the collateral. The borrower is then long (borrowed) unallocated and posts cash as the collateral.

If you compare US$ banking to bullion banking, then (B) is analogous to a refinancing operation. The commercial bank deposits securities (here: US$) with the CB and receives a reserve balance (here: unallocated) in return. (A) then corresponds to a refinancing operation in which the commercial bank does not receive base money as a ledger entry as the reserve, but actual tangible cash.

Note that in the 1990s when the European CBs leased a lot of gold in order to support the London market, both happened, the leasing of unallocated and the leasing of allocated gold. Funny that the Americans are sometimes so pendantic with their statistics. They publish the inventory of the vault at the FRBNY in which the gold of foreign governments and CBs is stored, and you can see from these data that between 1993 and 1999, about 3000 metric tons were removed from this vault. For 1999, there are also estimates that about 10000 to 14000 metric tons of gold were on lease. Apparently at least 3000 of these involved cases in which the physical was moved. The remainder may have been largely paper.

Finally, the Washignton Agreement says there will be "no more sales than those already decided". Then, you see the CBs report some 2000 tonnes of gold sales 1999-2004. The part that belongs to the Euro zone CBs most certainly came from the FRBNY vault. Interesting that the physical was moved before 1999, but the sale was booked only after 1999. You see from these data that the gold was initially only leased and after 1999, the repayment of the loan was effectively waived.

This may also tell you something about the long term chart of the gold price. The low was between 1999-2001. Yet, most sources claim the CBs in aggregate were sellers until 2007 (?) and only afterwards buyers. If you follow the physical, however, you see that the gold was removed from the vaults before 1999 and not afterwards. The movement of the physiscal tracks the price action much better.

Let's finish with some politics. You see from these data that it was the Euro zone CBs who called the shots with respect to the gold market. During the 1990s, i.e. before the Euro was available, they supported the London market by leasing and then even selling a substantial amount of their own gold. From 1999 on, however, they backed off and left the market alone. This was enough to make sure the price turned the corner and is now in an increasing trend. Basically since May 2001, the gold price in US$ has been rising at a rate of about 19% annually.

Sincerely,

Victor

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victorthecleaner wrote:(A)

victorthecleaner wrote:

(A) The first is a swap involving allocated gold. Legally this is a repurchase agreement, i.e. when the position is opened, the title to the bars is transferred from the central bank to the borrower. At the same time, the brrower of the gold lends the CB cash (the other side of the swap - serves as cash collateral for the loan). When the swap matures, the borrower needs to return an equal weight of (allocated) gold. In the meantime, the borrower can sell the borrowed gold to a jeweller who melts it down and creates necklaces from it. During the term of the swap, the CB does not own gold, but only has a claim against the borrower (who may default).

This is exactly how I figured it worked, and I agree that the central bank does not retain title, and that there is therefore no double-counting or multiple claims of ownership, as the goldbugs are so wont to believe.

But what puzzles the heck out of me is that anyone would think it appropriate to call this a lease. This is clearly a repo, or if you prefer, it could be termed a swap or even a loan of bullion. But a lease? Why use that term to describe a transaction that seems (to me, admittedly not a lawyer) to have little to do with the customary use of that term? Does anyone know why they call this bullion leasing, when it really appears to be a bullion repo agreement?

All the best,

Erik

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Gold leasing

The use of the word leasing is not really appropriate as that is not what happens in most gold borrowing transactions, eg it is used when refering to the borrowing of unallocated gold, where obviously there is no specific physical asset to which title could be retained as would be implied by the word "lease".

Usually banks enter into specific precious metal lease agreements in addition to a master ISDA due to the unique nature of gold leases. Each bank has their own standard lease agreement and it would probably also be customised depending on the nature of the transactions contemplated with that counterparty. So there isn't really any clear answer to the question of title as it is case by case specific.

Generally lease agreements have "we retain title" clauses (even when contemplating unallocated) which I think is just a way of the lender establishing a right to go after the borrower if they don't repay. Below is some wording from an actual agreement which effectively acknowledges that title cannot practicably traced because it is "standard custom and dealing in the industry"

Furthermore, the Lessee hereby agrees that in the event that any Leased Metal is (i) sold by the Lessee to a third party, and/or (ii) used, converted or otherwise dealt with in such a manner that the Bank’s title to such Leased Metal can no longer be traced, the Lessee shall hold in trust for the Bank all consideration (including cash) received for such sold Leased Metal and/or any item or object that such Leased Metal has been used in, converted into or otherwise dealt with.

...

Lessee will not, directly or indirectly ... Use, convert, commingle or otherwise deal with any Leased Metal or any part thereof except in the ordinary course of its business as now being conducted, or which is standard custom and dealing in the industry in which the Lessee is a participant.
 

Certainly banks word things in their favour, but I would not interpret the above as meaning allocated 400oz bars would be encumbered should someone further up the "daisy chain" of transactions in relation to that 400oz failed to repay a lease. My reasoning here is 1) because it is understood as "standard custom and dealing" that physical metal leased to a borrower is likely to be sold/use etc and 2) such an interpretation could easily backfire on the bank as the physical metal it holds would also be so encumbered as other banks, seeing this bank going against standard custom would retailate by doing the same.

Anyway, my guess is that the majority of "lease" transactions involve unallocated, which means they are really borrow/lend and there is no associated physical which can be "traced". The only time I can see leases being done where title is retained over specific bars by the lender (and the lender wants those specific bars back) is swaps/repos where the lender is only looking for short term funding, just using the gold as collateral.

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Time for a POLL: Who learned what from this thread?

This thread is now two weeks old, has seen 240 posts and almost 23,000 views. It has also been cross-linked by PM websites throughout the blogosphere. But the last few pages of comments have been dominated by just a few people.

I'd like to ask those readers who previously held GATA, Ted Butler, Harvey Organ, and Andrew Maguire in high esteem to indicate whether this discussion has changed your perspective at all, and if so, in what way(s)? My hope in beginning this discussion was to wake some of you up to the possibility that these people, well-meaning as they may be, really don't know what they are talking about. I hoped some of you might realize that continuing to have faith in their viewpoints and advice, and particularly, making investment decisions based on same, is something that might warrant reconsideration. I certainly respect everyone's right to their own opinion, and I understand that some of you will think it is I who don't know what I am talking about. I'm just curious to know whether and to what extent this thread has changed anyone's mind.

The non-participation of the people being criticized (even after being apprised of this thread and encouraged to join the conversation) seems quite telling to me. In my own estimation, despite the fact that these people may have good intentions, their absence here tells me that on some level - conscious or unconscious - they know deep down that their arguments are specious, and they don't want to be shown up by the people here who actually know of which we speak. I suppose the counter-argument would be that it is me and the others here who have exposed the fallacies of the most popular manipulation theories who don't know what we're talking about. Ted Butler claims not to have time or interest in defending his views here, and has previously described Jeff Christian as a "lightweight" unworthy of Ted's time or energy for a debate. Harvey Organ has stated flatly that he refuses to participate in ANY discussion to which Jeff is a party. Either these guys are scared to be shown up by Jeff's superior market knowledge, or they are just so much better informed that they truly view people like Jeff and myself as "lightweights" not worthy of their time. And they can't find time or interest to come defend their views here, despite the fact that 23,000 people have now viewed the thread, or that showing us up publically would be a profound marketing opportunity for them. You have to make up your own mind which explanation is more likely.

To Jim H and others who have previously viewed GATA, Ted, Harvey and Andrew as experts on these markets: I hope you'll chime in and let us know whether this discussion has changed your views in any way.

Thanks,

Erik

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Nice article Bron

Nice article - the last paragraph of which mirrors my thoughts that I shared with Victor - i.e. what happens when significant numbers of "monied interests" start flowing "meaningful sums" of their assets into the base of Exeters' pyramid.

http://www.perthmintbullion.com/Libraries/Website_Downloads/120416_Blog_Watch.sflb.ashx

 In this recent news article, Schroders Private Banking rejects claims that gold is in a bubble on the basis that

"The rise in price has been orderly, with no replay of the surge seen at the end of the previous bull run."

However, they have reduced their gold positions partly because of a high in their proprietary "relative pricing power measure" of

"above 500, where the level in 1930 was taken as 100" which suggests to them that "either gold is expensive and is therefore likely to fall in price or the rise in gold's price is a portent of inflation to come". Because they have ruled "out extreme inflation in the near-term, Schroders Private Banking concludes gold's price could be set to fall."

Nevertheless, their head of asset allocation, Robert Farago, concludes:

"It is not difficult to appreciate the value of a metal of which there is just 170,000 tonnes in existence at a time when I frequently find myself mixing my billions and trillions. For private clients who can afford to tuck away a meaningful sum of money in gold without worrying about its performance over the next decade, this seems a highly sensible option."  

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Erik T: Poll

This thread has changed my views substantially. The links and discussion have been very thought-provoking and informative.

A small aside to anyone who decides to contribute any papers or articles on the precious metals markets and bullion banking: it helps non-professionals immensely when articles explain details and illustrated with simplified numbers. I'm just speaking off the top of my head here based on some articles I tried to understand last week, but when I read an article that states "the bank was willing to allow the party roll the forwards because this is worth more to the bank" and doesn't elaborate, this is a bit obscure. If another article gives simple notional amounts and explains why and how process x is worth more to the bank this is immensely more useful. Illustrations, even very simplified ones, are lacking in many articles that aim to debunk the staunch GATA/Harvey Organ crowd. As a non futures trader, I'm willing to spend the time to do my homework and understand derivative and banking concepts when they are explained properly. If someone talks about synthetic calls or some arbitrage or who knows what I will sit and follow as long as the article guides me through what they are talking about, and I think I speak for a large number of non-professionals out there. However, when articles vaguely mention some process, assume I fully visualize the implications thereof and jump five steps ahead I have nothing to hold on to and I get lost. I know this seems slightly off topic but Erik did mention in his reply to Bron that the PM investment community is starving for good analysis, and this point is related to that. In skimming articles on hedging, bullion banking etc to try to understand this stuff further in the last week or two, I've read a bunch of good articles and I've read other articles that left me with more questions than answers.

But yes, I feel that this thread has made me a lot wiser regarding what goes on in the gold and silver markets. Hopefully I'll be better prepared for the future as a consequence!

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Eric T:Poll

I started out thinking the PM market was massively manipulated. I still think it's being manipulated, just maybe not as much as I thought. The opinion I want now is our faithful guide, Chris Martenson's.

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Bron,

Bron,

Thanks for the reply. I will continue to think on what you wrote. Perhaps if I reword my statement, you will find it closer to your position? If not then feel free to correct me

....

So 'gold (futures) contracts' (on the COMEX) will crash in currency price, even as physical gold will soar in currency price -- but you won't see the latter, because physical gold is not quoted (on Kitco or the COMEX or the newspaper) (in size at least) (maybe you can get some coins on Ebay at near the COMEX price). Our current gold pricing mechanisms are based on the paper (COMEX futures) gold price and thus they will break down in a period of confusion. Contracts for gold will not perform. Physical gold will soar in value but there won't be a market in place to quote a price (that ordinary people can see).

...

I realize that the OTC gold pricing mechanism will continue to function, but how long would it take for the price discovered in that manner to become public knowledge? I can see it filtering to the coin dealers, as they would be in contact with their suppliers and so on up the gold production chain to the OTC market. But how would kitco, CNBC, and the WSJ obtain the price quotes so they can publish it?

Would GLD reflect the OTC market price?

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russiaways
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complexity, risk and a vote

Having read this thread off and on over the past weeks and gleaned what I could from technical and nuanced contributions without worring too much whether I totally understood them all I have learned and/or reinforced the following perspectives.

Markets, global sized and instantly connected are inherantly complex interactive systems that will resist or ignor all our efforts to totally understand and predict them.  In this respect I have come to a greater awareness of this complexity within the PM markets, but only insomuch as to see deeper levels of interaction, interpretation and more potential actions/decisions available to traders based upon their judgements.  It seems to me that there will always be a reasonable assessment available at any given time to support either a buy or sell position and an uncertain future will be the final judge (both near and far).

So for me it comes down to risk, how much and when will I take it and for how long.  Lucky enough to be of modest means I'm pretty much done with those decisions. My gold holdings can be concealed in one fist while the other could hold up a bag of silver at arms length.  Some 3 to 4 figure paper positions complete the package acquired since becoming aware in 2008.  Now, I sometimes feel like I should put more into PMs when insecure but because the only way for me to do that is with borrowed money it would only increase my insecurity and so I sit and watch (too much as I would be better off looking for income).  Had I more to invest I think the old adage of divirsity is sound but in a traditional sense too narrowly defined and with one lucky lotto ticket I would be looking for the productive land, forrest, mines and water resources more than paper and in more than one country as well.  And I would seek to multiply value by finding these assets close to home and leverage them by building relationships/community connections.  This perspective has been most revealed and valued by my exposure to Chris Martenson and it is the one most lacking in respect to merely owning gold and silver (ideally I would sustainably mine silver locally and employ the community).

As it is I am too heavily weighted into PMs as a large % of my meager investments but I also hold the view that I have spoken with my cash by trading it in and thereby voting against paper as much as I am able.  Despite taking the risks inherent in their ownership, the same risks of complexity are hugely multplied within the leveraged, fiat, political landscape of tradition investments and I feel good, knowing the value will not drop to zero and hoping I will not need to sell in some emergency. Instead I'll pass them on, a quaint reminder of a time of transition to a much better system.

Thanks to all for such a rich forum of discussion and learning, this site demonstrates some of the best practices that the internet can aspire to.

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Erik T.

Erik T. wrote:

victorthecleaner wrote:

(A) The first is a swap involving allocated gold. Legally this is a repurchase agreement, i.e. when the position is opened, the title to the bars is transferred from the central bank to the borrower. At the same time, the brrower of the gold lends the CB cash (the other side of the swap - serves as cash collateral for the loan). When the swap matures, the borrower needs to return an equal weight of (allocated) gold. In the meantime, the borrower can sell the borrowed gold to a jeweller who melts it down and creates necklaces from it. During the term of the swap, the CB does not own gold, but only has a claim against the borrower (who may default).

This is exactly how I figured it worked, and I agree that the central bank does not retain title, and that there is therefore no double-counting or multiple claims of ownership, as the goldbugs are so wont to believe.

But what puzzles the heck out of me is that anyone would think it appropriate to call this a lease. This is clearly a repo, or if you prefer, it could be termed a swap or even a loan of bullion. But a lease? Why use that term to describe a transaction that seems (to me, admittedly not a lawyer) to have little to do with the customary use of that term? Does anyone know why they call this bullion leasing, when it really appears to be a bullion repo agreement?

All the best,

Erik

Hi Erik,

This has actually been one of Turk's stronger points I think. Having entered into 'lease' agreements, the central banks are effectively reporting gold and gold receivables as one line item on their balance sheets. Given the tangible and unambiguous nature of physical gold possession, this seems inappropriate and perhaps even deceptive. If, as you suggest, CBs no longer hold title, why do they continue to report ownership of that metal? Of course this is probably what the 'Brown's Bottom' UK gold sale was all about. Namely accounting recognition of metal that had already left the vault to bail out the bullion banks after the 1999 Washington Agreement almost blew up the London market.  

The question is, are lease agreements - obscured on the CB balance sheet - masking immediate and ongoing demand for physical metal? Presumably to close the lease the bullion bank either has to coax the metal from private hands (at higher prices) or purchase mine supply, which is becoming increasingly expensive and risky.

jonesb.mta wrote:

I started out thinking the PM market was massively manipulated. I still think it's being manipulated, just maybe not as much as I thought. The opinion I want now is our faithful guide, Chris Martenson's.

The public record of the BIS makes it abundantly clear that gold is subject to the same intervention that is a characteristic of the forex market. They've referenced it in speeches and official documentation. Jim Rickards recently confirmed his own view - shared by many less excitable goldbugs like myself - that the BIS are co-ordinating gold's orderly ascent. Note also that Ben Bernanke's own famous treatise arguably calls for a devaluation against gold. It's clear to me that central banks want higher gold prices, but gradually and on their own terms.

For all the excellent commentary and analysis on this thread, I do think GATA have been done something of a disservice. For all their flaws, they have a solid and diligent track record of research and FOI requests that have illuminated the importance and political nature of gold. This during a time in which gold had become discredited as a monetary asset. The documents cited in this piece by Chris Powell represent a good collection of primary historical sources, from which it's fairly easy to conclude that gold is subject to co-ordinated central bank activity:

http://www.gata.org/node/9545 

The only question remains is whether you want to classify that as 'conspiracy' or 'policy'. I don't mind and will continue to accumulate physical metal.

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Jim H
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Excellent Post 50's...

Very good discussion of how leasing may make CB balance sheets deceptive. 

Erik T... Thanks again for all your energy in this thread.. I want to answer your survey.. but I am still

learning here  : )..  Will try to summarize my thoughts in the next day or two.

On a side note,  in case you have not noticed, TPTB and our wonderful mainstream media are ramping up the anti-Gold rhetoric as of late... I am sure most on this thread know how Charlie Munger (Warren Buffet's partner) disparaged Gold during the yearly Berkshire Hathaway Lovefest;

http://truthingold.blogspot.com/2012/05/i-cant-believe-charlie-munger-bu...

But then we get this today from Warren's Billionaire Bro Bill Gates (video link in linked piece);

http://libertyblitzkrieg.com/2012/05/07/watch-bill-gates-stutter-like-a-moron-on-gold/ 

"He also states that once people want to sell “there is no floor.”  I mean come on man.  Gold is the only currency that has survived purchasing power intact since the ancient Egyptians.  The worst part about him saying all this publicly is that he is actively discouraging the sheeple who actually listen to him from protecting themselves.  That is morally repugnant."

Can you say Contrarian Indicator?

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Erik T.
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Jeff Christian on Leasing

I contacted Jeff Christian about the leasing question. He didn't have time to write in the thread himself, but sent the following via e-mail:

In back-channel e-mail, Jeffrey Christian of CPM&nbsp;Group wrote:

A swap is not a lease. People refer to leasing gold ‘generically.’ In the first period, starting in the late 1970s and going through much of the 1980s, central banks leased gold to bullion dealers and banks. They lent the gold to the banks in a conventional leasing arrangement, and were repaid principal and interest along an agreed upon schedule. As the 1980s progressed, bank deregulation spread around the world, non-bank financial institutions became more involved in gold leasing, and gold lending volumes rose, central banks became more concerned about their exposure to the borrowers. They started moving to swaps and repurchase agreements, which gave them greater security. They still called it lending, but there was less real lending and more swaps. The Drexel bankruptcy greatly accelerated this change, as Drexel had enormous gold loans on its books, and many central banks wound up getting shares of New Street Co., the successor, in return for their gold. (It turned out all right for many of them, as gold prices fell and the New Street shares rose sharply. But, still they were central banks and not investors seeking work-out shares.)

So, swaps are not leases, most central bank lending the past 22 years has been swaps not leases, but people still use the term lease when referring to these transactions.

Most central banks reduce their gold holdings by the amount they swap gold, per conventional accounting. Banks that lend sometimes reduce their reported gold monetary reserves to reflect the lending, moving the gold on their accounts to a trading account instead of a monetary reserve account. Others leave leased gold on their books as monetary reserves. So, the people who fear ‘double counting’ are ultracrepidarians.

To 50sQuiff's point about CBs not reducing their stated gold holdings after leasing out gold, I am not knowledgable on that subject myself and have not researched it. My read of Jeff's comments, however, is that he is saying that "most" CBs do reduce their reported reserves when they "lease" out bullion. I haven't read the analysis from "Turd", so cannot comment. (Sorry, but I just can't bring myself to take seriously someone who not only hides behind a pseudonym, but who chooses "Turd" as that pseudonym). EDIT: I just noticed you said "Turk", not "Turd", presumably referring to James Turk. My bad - I get so confused by all the people hiding behind pseudonyms that I didn't notice you were referring to someone else.

Erik

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Erik T.
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Posts: 1233
Jim H wrote:"He also states

Jim H wrote:

"He also states that once people want to sell “there is no floor.”  I mean come on man.  Gold is the only currency that has survived purchasing power intact since the ancient Egyptians.  The worst part about him saying all this publicly is that he is actively discouraging the sheeple who actually listen to him from protecting themselves.  That is morally repugnant."

Can you say Contrarian Indicator?

Jim,

I agree that Gates' perspective fails to recognize some very important fundamentals. But I think you may be making a dangerous assumption here, and I think all of us would do well to think seriously about the "bottom falling out of the market" scenario.

Jim, your arguments are spot on, in the long run. But there is a HUGE amount of speculative money in gold, much of it held by weaker hands. If we see a general sell-off in risk assets (something I think VERY likely in the next 12 months), that correction will almost certainly take gold below the trendline that began in 2008 (presently around $1575). I think it quite possible that we could see a sell-off to the $1000 to $1200 level as a result. That will be the buying opportunity of a lifetime if it happens.

This really is mostly about psychology - on that point I think Gates is right. Right now the people in the gold market have strong conviction, and most have recognized the MSM gold-bashing and bubble-calling as nonsense. But if we see <$1400, a LOT of those people will "come around" to think it really was a bubble, and they will panic and sell. I hate to say it, but this whole manipulation conspiracy thing evidences quite clearly to me that a whole lot of the longs in the gold market are people who don't know much about how this stuff really works, and in my estimation that makes them quite vulnerable to panic selling at the worst time.

You have to remember that fundamentals are in the background. The only thing that affects the price (and Gates sort-of alluded to this) is whether there are more buyers than sellers. If the weak hands get shaken out and the price falls to the level that the hedge funds think they can get out at $1450 and get back in at $1150, it becomes a self-fulfilling prophecy. Yes, a bigger-than-expected QE3 could very easily take the price north of $2000, never again to go lower. But $1000 is just as possible. Really.

Erik

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