If you follow Gold and Silver, a great deal of interest is being focused on an interesting development in the MF Global issue which will have a significant impact on the precious metals.
For years you have heard how the 'gold bugs' have advocated that you hold actual phyiscal Gold and Silver bars as opposed to certificates which 'represent' Gold and Silver.
It has been said that as much as 99 times as much “paper” or digital gold is bought on commodities exchanges such as COMEX, as there is traded in actual delivery of physical Gold and Silver.
What does this mean?
Simply put... there is not enough actual Gold and Silver in the world to match up to all the 'paper' claims for the metal. Iif all parties “stood for delivery” it would be impossible for the warehouses and the short players to actually meet their obligations, and “someone” would be left standing without a chair.
The amount of physical Gold and Silver that the COMEX delivers on a daily basis is negligible compared to the massive historical short positions that have existed for decades.
For example, during a two-week span across last January and February, COMEX arranged for the physical delivery of 543,500 troy ounces of gold with their contracted warehouse depositories, a figure that represents an average of just 38,786 troy ounces of gold per day. At this rate of daily delivery, it would take the COMEX more than two years to deliver all the gold represented by the current net commercial short position should the holders of long contracts ask for settlement in physical delivery.
Through the use of futures markets, the Commodities Futures Trading Commission (CFTC) has granted bankers a mechanism to perform alchemy and turn paper into Gold on the COMEX by allowing them to establish obscene short positions that represent 25% to nearly 40% of annual Gold production at times while simultaneously allowing them to renege on their fiduciary responsibility to actually physically possess the Gold represented by their short positions. In other words, the CFTC has allowed Gold to operate under the principles of the fractional reserve banking system on the COMEX futures markets.
In Silver the situation is even more obscene.
Since the Great 2008 Financial Crisis, the demand for physical Gold/Silver has ramped up exponentially prompting many observers (including this blog) to focus attention on how the demand for phyiscal has stressed the COMEX system.
For those dubbed 'Gold bugs' or 'Silver bugs' the real issue has always been, “If I asked for physical delivery of an amount of Gold or Silver that I should be able to receive, would I receive it?”
If you were India, China or the United Arab Emirates and you wanted to buy 200 tonnes of gold at the price established in futures markets, but you knew that there was no possible situation whereby 200 tonnes of gold would ever be delivered to you via the futures markets, what would you do?
Would you buy 200 tonnes of gold in the futures markets only to know that you would suffer a default of this delivery and likely be forced to pay a much higher price in the future or would you try to arrange to buy 200 tonnes of gold NOW from the IMF or another Central Bank?
Of course, you would choose the latter tactic.
The fact that Gold/Silver cannot be printed out of thin air is the essential quality that makes it a form of money much more sound than the Euro, the dollar, the Yen or any other form of fiat currency.
This concern of the 'Gold/Silver bugs' has been derided and dismissed for years.
However, tens of billions of dollars of Gold/Silver exist only in digital form on the COMEX and the CFTC has allowed bullion banks to indeed achieve alchemy with gold (and silver) in the futures markets. By allowing these mechanisms ,that have absolutely zero to do with physical supply and demand of gold and silver, to persist bullion banks can suppress the price of paper gold and paper silver in futures markets.
But in the end, they will never be able to perpetually suppress the price of real physical gold and real physical silver. There will come a time when the prices for real physical gold and real physical silver completely sever the already tenuous umbilical cord they maintain to the suppressed prices of gold and silver established by the agent bullion banks of the US Federal Reserve and the Bank of England in futures markets.
Which brings us to MF Global.
Last week we made a post about MF Global, Rehypothecation and Canadian Banks
. It turns out that in investment banking, assets deposited with a broker can be hypothecated such that a broker may sell securities if an investor fails to keep up credit payments or if the securities drop in value and the investor fails to respond to a margin call (a request for more capital).
Re-hypothecation occurs when a bank or broker re-uses collateral posted by clients, such as hedge funds, to back the broker’s own trades and borrowings.
This practice of re-hypothecation runs into the trillions of dollars and is perfectly legal.
It is justified by brokers on the basis that it is a capital efficient way of financing their operations much to the chagrin of hedge funds. In the UK, there is absolutely no statutory limit on the amount that can be re-hypothecated.
When MF Global went bankrupt news immediately spread that investors like Gerald Celente, who was heavily invested in paper futures contracts, got screwed.
His so-called 'gold' held at MF Global was instantly rendered a "General Unsecured Claim" and Celente may or may not receive a pennies on the dollar equitable treatment post liquidation.
What was less known was the fate of physical gold in the hands of the very same insolvent MF Global financial syndicate.
Last week Bloomberg
broke a stunning story whereby HSBC was suing the MF Global brokerage trustee to establish who was the rightful owner of gold bars worth about $850,000 and silver bars underlying contracts between the brokerage and a client.
In it's court filing HSBC wrote, "Five gold bars and 15 silver bars underlie eight Comex contracts between the brokerage and client Jason Fane of Ithaca, New York, London-based HSBC."
Both parties (Jason Fane and MF Global) have asserted claims to the bars, creating difficulties for HSBC, which is storing them. Jason Fane claims he deposited the bars with MF Global for storage. And MF Global has used the bars for collatteral in it's own dealings (rehypothecation).
HSBC has asked a judge to decide who the rightful owner is.
“HSBC has received conflicting instructions regarding ownership and disposition of the property. Accordingly, HSBC is exposed to multiple liabilities with respect to the disposition of the properties.”
Fane wrote HSBC after the bankruptcy, asking the bank to transfer the bars to his account at Brink’s, according to a copy of his letter filed in court. The trustee wrote HSBC saying the gold and silver was “customer property,” (property of MF Global, a customer of HSBC) and the bank shouldn’t turn it over to Fane.
MF Global's liquidation trustee James Giddens was basically saying Fane could not have his Gold and Silver back. The trustee claims MF Global rehypothecated Fane's Gold and Silver as collateral when it purchased CDS contracts. Thus the trustee will be taking the delivery of the said Gold and Silver due to it's SENIOR creditor status.
The crux of this suit is whether or not MF Global was rehypothecating, or lending, or repoing, that one physical asset that it should not have been transferring ownership rights to under any circumstances.
This is at the heart of the whole commingling situation: was MF Global using rehypothecated client gold to satisfy liabilities?
The thought alone should send shivers up the spine of all those who have been deriding Gold/Silver bugs, who have been warning about precisely this for years.
The implications could be staggering.
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