If there is any basis to this... the price of gold will really skyrocket! ----------Original Message Posted 3/28/2010 3:16:42 PM----------
https://www.zerohedge.com/article/former-goldman-commodities-research-analyst-confirms-lmba-otc-gold-market-paper-gold-ponzi
Former Goldman Commodities Research AnalystConfirms LMBA OTC Gold Market Is "Paper Gold" Ponzi Scheme
Submitted by TylerDurden on 03/28/2010 12:47 -0500
When we put up a link to last week's CFTC hearingwebcast little did we know that it would end up being the veritable(physical) gold mine (no pun intended) of information about what reallytranspires in the commodities market. First, we obtained direct evidence from Andrew Maguire (who may ormay not have been the target of an attempt at "bodily harm" as reported yesterday) of extensive manipulation inthe silver market. Today, Adrian Douglas, director of GATA, adds to themountain of evidence that the commodities market, and the CFTC, standbehind what is potentially the biggest market manipulation scheme inthe history of capital markets (we are assuming for the time being thatall allegations of the Fed manipulating the broader equity and creditmarkets are completely baseless). Using the testimony of a cluelessJeffrey Christian, formerly a staffer at the Commodities Research Groupin the Goldman Sachs Investment Research Department and now head andfounder of the CPM Group, Douglas confirms that the "LBMAtrades over 100 times the amount of gold it actually has to back thetrades."
Christian, who describes himself as "one of the world’s foremost authorities on the marketsfor precious metals" yet, in the words of Gary Gensler, said "thatthe bullion banks had large shorts to hedge themselves sellingelsewhere- how do you short something to cover a sale, Ididn’t quite follow that?" and proves that current andformer Goldman bankers are some of the most arrogant people alive,assuming that everyone else is an idiot and will buy whateverexplanation is presented just because the CV says Goldman Sachs. YetChristian confirms that the gold market is basically a ponzi: "in the “physical market” asthe market uses that term, there is much more metal than that…there isa hundred times what there is." And there you have it:as Douglas eloquently summarizes: "the giant Ponzi trading of goldledger entries can be sustained only if there is never a liquiditycrisis in the REAL physical market. If someone asks for gold and thereisn’t any the default would trigger the biggest “bank run” and defaultin history. This is, of course, why the Central Banks lease their goldor sell it outright to the bullion banks when they are squeezed by highdemand for REAL physical gold that can not be met from their ownstocks" and concludes "Almost every day we hear of a new financialfraud that has been exposed. The gold and silver market fraud is likelyto be bigger than all of them. Investors in their droves, who havepurchased gold in good faith in “unallocated accounts”, are going todemand delivery of their metal. They will then discover thatthere is only one ounce for every one hundred ounces claimed. They willfind out they are “unsecured creditors”.
For those of you who missed the CFTC hearing, hereare two of the must-watch clips. In the first one, Adrian Douglasintroduces the underlying concerns about the Ponzi nature of the LBMAhedging situation, in which a wholesale rush to "physical delivery"would result in a one hundred fold dilution of gold holdings, and a 99%result of unsecured creditor claims (good luck collecting onthat particular bankruptcy). We also meet Jeffrey Christian, formerlyof Goldman and currently of CPM, in which not only does the "expert"state that a bullion bank short is hedged by further shorting,but confirms Douglas' and GATA's previous claims that the "physical"market, as defined, is a joke, as the OTC market treats gold purely as afinancial asset, essentially conforming to the precepts of fractionalreserve banking. As Douglas notes "He confirms that the LBMA tradeshundreds of times the real underlying physical. This is even a higherestimate than I have previously made! It is, as I asserted before theCommission, a giant Ponzi Schem."
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CHAIRMAN GENSLER: I would like to follow up onCommissioner Dunn’s question for Mr. Christian, if I might, because Ididn’t quite follow your answer on the bullion banks. You said that thebullion banks had large shorts to hedge themselves selling elsewhere,and I didn’t understand; I might just not have followed it and you’recloser to the metals markets than me on this, but how do you shortsomething to cover a sale, I didn’t quite follow that?
J. CHRISTIAN: Well, actually I misspoke. Basicallywhat you were seeing in August of 2008 was the liquidation ofleveraged precious metals positions from a number of places and thebullion banks were coming back to buy it, and they were hedging thosepositions by going short on the COMEX and that is really what it was.
[Even on a second attempt Mr. Christian inventsthe most ridiculous poppycock to explain away the blatant manipulationof the precious metals in 2008. If, in his own words, investors werebuying gold hand over fist everywhere in the world why would leveragedlong holders dump all their long holdings? They would have ordinarilybeen making a fortune. The bank participation report of August 2008shows that 2 or 3 bullion banks sold short the equivalent of 25% ofworld annual silver production in 4 weeks and the equivalent of 10% ofworld annual gold production. There was simultaneously a decrease intheir long positions, which were almost non-existent anyway, which isincoherent with a notion the bullion banks were mopping up dumpedleveraged investments. For an intelligent and coherent explanation ofwhat happened in August 2008 read my CFTC written testimony here]
CHAIRMAN GENSLER: So I am glad I asked because Ireally didn’t follow that. But if I think of the earlier charts of thepositions of the bullion banks that Mr. Sherrod had these concentratedshorts have been, well you know, reasonably consistent, they are notexactly the same on every day, but his charts showed a similarityacross a couple of years. So what are bullion banks, I mean I am justtrying to understand, what are bullion banks hedging on the other side,we heard from other panels, but you seem to be familiar, is itwarehouse receipts, what is it?
J. CHRISTIAN: Well it’s a tremendous number ofthings. You were at Goldman shortly after me and we had an MIS systemthat kicked out a daily gold book.
CHAIRMAN GENSLER: That’s really remarkable becausewe don’t seem to have a lot of similar views, but you know, a lot ofpeople were at Goldman Sachs.
J. CHRISTIAN: Well I didn’t like the trends atGoldman so I left in 1986. But honestly, and bad jokes aside, if youlook at a bullion bank’s book, its gold book for example, you will seean enormous number of things; there will be gold forward purchases frommining companies, there will be forward purchases from refineries,there will be gold that has been leased out to electronicsmanufacturers, component manufacturers, and countless manufacturers andjewelers. As gold flows through the beneficiation process and againthese are all long complex issues that are hard to reduce, but youknow, a lot of producers will sell their gold the moment it leavestheir possession at the mine. It might be in concentrate form or itmight be in dore form. It then goes to a smelter or a refinery. Thebullion bank buys that and it agrees a price at the time it is buyingit but it won’t be allowed to sell that metal until the refineryoutturn which maybe two weeks but it could be six months. So they willgo into the market and short the market in order to cover thecommitment they have made to buy at that price and then when they getthe metal in the physical market then they can either sell that metalin the physical market and unwind the hedge in the futures market orthe forward market or do something else. There are all sorts of otherderivative contracts that investment banks and bullion banks will sellto investors, to other banks, pension funds, to insurance companies andeach of those will often have a long exposure in gold which will behedged with an offsetting short position [note: There he goes again withthat blonde idea that when you sell gold to someone you hedge thatwith a short position!]. So if you look at a bullion bank’s gold bookor silver book you would find a large range of topics. One of thethings that the people who criticize the bullion banks and talkabout this undue large position don’t understand what is the nature ofthe long positions of the physical market and we don’t help it; theCFTC when it did its most recent report on silver used the term that weuse “the physical market”. We use that term as did the CFTC in thatreport to talk about the OTC market in other words forwards, OTCoptions, physical metal and everything else. People say, and you heardit today, there is not that much physical metal out there, and thereisn’t. But in the “physical market” as the market uses that term, thereis much more metal than that…there is a hundred times what there is. IfI look at the large short positions on the COMEX my question is whereare the other shorts being hedged? because the short position, that Ibelieve the bullion banks use to hedge their physicals, is larger thantheir short position on the COMEX and the answer is that they hedge itin the OTC market in London.
CHAIRMAN GENSLER: I thank you for that detaileddiscussion
END
The CFTC position limits hearing was supposed tousher in a new era of transparency and honesty into the dealings of thegold market. In a very ironic way, it did just that.
Here is Douglas' must read conclusion - and awarning for anyone who believes that following a wholesale run oncommodities, investors will be able to have access to what iscontractually theirs.
This is a stunning revelation. Mr. Christianconfirms that the “physical market” is not in fact a physical market atall. It is a loose description of all the paper trading and ledgerentries and some physical metal movements that occur each day onbehalf of people who believe they own bullion in LBMA vaults but infact they don’t. They are told they have “unallocated gold” or“unallocated silver” but that does not mean the LBMA has physical metalset aside for those customers and has just not given specific barnumbers to the customers. No, it is the most cynical and corruptdefinition of “unallocated”…the customer has NO bullion allocated tohim. NONE! The LBMA defines the owners of “unallocated accounts” quiteclearly as “unsecured creditors”. That means they have NO collateral.NONE. Can it be any clearer? It is a giant Ponzi scheme.
Mr. Christian confirms what many analysts and GATAhave been alleging that there is not much REAL physical metal, buttestifies that there is actually one hundred times the REAL Physicalmetal being sold based on the much more “loose” definition of what“physical” means to the bullion banks.
The last sentence of his statement ismind-blowing. He says the “physical” positions of the bullion banks areso huge that they are much bigger than the COMEX short position. Hesays the “physicals” are hedged on the OTC market in London! Did youget that? Let me walk you through it. The bullionbanks are selling what is supposed to be vault gold but it is just aledger entry if the customer never asks for delivery. They must balancetheir exposure with a ledger deposit entry. This has to be some paperpromise of gold from a third party, or some derivative, or even somereal gold bullion. If all the ledger entries balance out then thebullion bank has no net exposure in exactly the same way the futuresmarket works with a short offsetting a long. A futures market can neverdefault if no one asks for delivery as only paper contracts aretraded. The loosely defined “physical” London market is an identicalscheme. As long as everyone is prepared to buy and sell “ledgerentries” for imaginary gold in the vault no one will ever discover thefraud.
The LBMA does, however, buy and sell some realphysical metal as well. But we now know form Mr. Christian’s testimonythat this is one one-hundredth the size of the paper gold trading. TheLBMA states on its website that it trades 20 million ozs of gold eachday on a net basis. We can calculate the net trade of REAL physicalgold should be about 200,000 ozs each day; that is 6.25 tonnes per dayor 1625 tonnes per year. This is very much in line with the size oftotal global mining output of approximately 2200 tonnes per year.
So the giant Ponzi trading of gold ledgerentries can be sustained only if there is never a liquidity crisis inthe REAL physical market. If someone asks for gold and there isn’t anythe default would trigger the biggest “bank run” and default inhistory. This is, of course, why the Central Banks lease their gold orsell it outright to the bullion banks when they are squeezed by highdemand for REAL physical gold that can not be met from their ownstocks.
Almost every day we hear of a new financial fraudthat has been exposed. The gold and silver market fraud islikely to be bigger than all of them. Investors in their droves, whohave purchased gold in good faith in “unallocated accounts”, are goingto demand delivery of their metal. They will then discover that thereis only one ounce for every one hundred ounces claimed. They will findout they are “unsecured creditors”.
GATA has long advocated the ownership of realphysical bullion. The “bombshells” dropped in the CFTC Public Hearinghave only served to reinforce that view. We believe we have madesignificant new inroads into exposing the fraud, and the suppression ofprecious metals prices and it is documented in the CFTC’s own hearing.
March 27, 2010
Adrian Douglas
Director ofGATA
Proprietor of Market Force Analysis
www.MarketForceAnalysis.com
info@marketforceanalysis.com