Sir Eddie George, Bank of England, September 1999
Below is a partial transcript of an interview with Jim Rickards on The Gold Chronicles from July 16, 2015.
You may listen to the entire interview here. This transcript is for the portion that runs from about minute 31 through 42. It is a very interesting interview and if you have the time you might wish to listen to the whole thing.
The reason I wished to share this transcript is the nice, compact description that Jim gives of the LBMA and how they manage their gold bullion contracts.
What provoked this discussion was an earlier question about the reported very large long positions of two banks, JPM and Citi, on the Comex that were noted back in May-June of this year.
Jim's supposition is that they must have had a physical gold short exposure elsewhere, and possibly on the LBMA. As Jim relates it the Banks do not typically take large positions in one direction but tend to work on spreads and make their profits with leverage on those fairly thin trades. And Jim should know since that massive buildup of leverage on thin trades that refused to perform is what blew up LTCM while he was there.
As is clear from this interview, the LBMA is a 'fractional reserve' exchange, with much of the gold being hypothecated some number of times.
IF there is a shortage of physical bullion developing, it will most likely appear in either London or Switzerland. That is because London is the gold hub for the West, and they tend to operate on some multiple of claims to actual free holdings. And Switzerland is where the gold is procured and refined for the formats of the Asian markets
As you know, I have been looking carefully for some time at the odd happenings with physical bullion on the Comex. At least they seem very odd to me if not to some others. You can be the judge.
And as you may recall, there were some pieces in the news about the 'tightness' of gold in London and the dearer prices being paid for gold available for immediate delivery. Again, nothing huge, but another point of data.
And of course there is Goldman in there taking delivery of bullion for their house account reportedly.
And this flurry of schemes coming out of India to do more domestic mining, and monetize the gold held by private individuals and their temples, to stem the demand for bullion imports.
IF the Banks were short of physical bullion in London around July when Jim gave this interview, then by his estimates we would tend to see the strains on the free holdings of physical bullion about-- now.
I do not know what has caused Jim to say that "people are taking their gold out of banks and putting it into new vaults because they’re losing confidence in the banking system. These new vaults are private storage vaults owned by private companies, not by banks." I do not have his level of contacts. But it does seem that there is a slow but steady bleed of bullion out of the Comex warehouses. And 'deliverable' gold is at record low levels.
One would hope that the Banks were wise, and would not pyramid their web of wagers in size and term, hoping that the shortages of physical gold do not become deeper and more stubbornly set. This could turn into a feedback loop of shortage and demand that would have Sir Eddy George back staring into the abyss once again.
But alas, this time the central banks are net buyers, not sellers. And the gold manipulators must contend with the great engines of physical demand in the East. Surely by now the Banks must have learned their lessons about recklessly gambling with other people's money and assets.
What have we learned, at long last, about bailing these fellows out?
What makes this a more potentially serious problem is that the willful battering of the miners may make a resilient source of non-central bank supply more difficult to ramp up A typical gold project takes many years to get into meaningful production.
Perhaps the central banks will use the people's sovereign wealth, this time in the form of gold as well as paper, to bail out their banking buddies from their reckless wagering once again.
So here is something to add to your knowledge.
Let's see what comes of it.
Related: Bullion Bank Apologist and Physical Versus Paper
How Many Good Delivery Bars Are Left in the London Vaults - Ronan Manly
Here is the excerpt from the Jim Rickards interview.
When I was in Switzerland for Physical Gold Fund, we actually saw the gold that belongs to the investors in Physical Gold Fund. We had auditors, they had bar numbers and manifests, and we went item by item. Those bars actually belonged to the fund.
That’s not true with these LBMA agreements. You don’t have any allocated gold. That means a bank can have, say, one ton of gold and they can sell 20 tons of gold. They use the one ton to back all 20 of those contracts. In effect, they’re short 19 tons. They own one ton physical and sell 20 tons to a bunch of institutional investors or high-net-worth individuals who want to own gold, so they’re short.
They depend on their customers not asking for the gold. As long as this is all on paper, it works fine. Where it breaks down is if the customer comes in and says, “You know that unallocated gold? I would like to make it allocated and actually have the physical gold. In fact, not only do I want it allocated, but I would like you deliver it from your vault to a private vault run by Brinks or Loomis or one of the big secure logistics providers.”
That is what’s going on. People are taking their gold out of banks and putting it into new vaults because they’re losing confidence in the banking system. These new vaults are private storage vaults owned by private companies, not by banks.
Going back to my original scenario, the bank has one ton of gold and they sell 20. If even five customers show up and say, “I’d like my gold,” one ton each, you’re now short four tons. You have one ton of physical, but you have five tons of requests from five different customers. You’re short four tons, so you have to go out into the market and buy four tons of market. Guess what? That’s a big order. Good luck finding it. You can find it eventually, but you might not be able to find it quickly. So you have price exposure. You’re suddenly short the gold because your customers are demanding it.
What would you do? You’d go out and buy the futures. Now you’re hedged. You’re short to the customer who sent you the notice, you’re long on the futures, but you’re price exposure is hedged. Now you can take 30 or 60 days or however long it takes to source the physical and make delivery to the customer. The customer may think the gold is sitting in the vault and can be delivered tomorrow, but trust me, they can’t. They’ll be lucky to get it in 30 days and could even take a few months.
When I see a massively long futures position, it suggests to me – again, to be clear, I cannot prove this – that banks are turning up short in some other part of the operation, probably on these unallocated gold forwards. Customers are taking their gold out of the bank, the bank has to deliver to those customers, they’re short, they’re getting long futures to hedge, and they’re going to spend the next couple months going out and buying gold.