The Gross Mispricing in the Gold Market Risks the Global Financial System - A Fraud Too Far

With a physical commodity like gold, as several others have pointed out, 'supply' is not how much there may be, since most of the gold that has ever been mined is closely held in treasuries and private vaults, and is not on offer, available for purchase.

It is a monetary metal, a store of wealth, with some industrical applications.

The amount that has ever been mined would likely fit in a modern four bedroom house. In other words, there is not a lot of it, and the supply is increasing at a fairly slow rate over time.

Physical Supply On Offer

So 'physical supply' is that which is thought to be for sale at the current prices.

At the Comex, this bullion is designated as 'registered' or deliverable to someone who chooses to exercise a contract for it at the current price.

Demand

And also at the Comex, 'demand' is synonymous with open interest, that is, a contract created when someone goes long, or buys a contract that had not previously been owned by another. 

Yes, there are significantly larger physical markets for gold bullion, almost all of which exist outside the US.  But let us put those aside for now.

Rising open interest with rising prices and a steady or rising supply is easy enough to understand. More people are seeking to go long or buy a claim on some gold bullion, and the price rises to entice more who have their gold in storage to meet that demand.

What is also easy to understand, if you have a mind to open your eyes, is when demand is steady and historically high, but the price and the physical supply for delivery is falling. The explanation is naked shorting, the creation and selling of contracts based on increasing leverage.  

That is, speculators, of whatever size and for whatever reasons, are nakedly meeting demand with an artificial inflated supply that ordinarily could not possibly be met in an efficient physical market.

This is why I have come to think that the Comex precious metals market is like The Bucket Shop, although technically it does not meet the statutory definition since 'a transaction on a exchange' has been made.

The bullion banks and the Exchange are playing 'The Bank' in a situation in which an actual physical transaction is unlikely to occur.  And, given a reasonable probability of execution, impossible to demand at anything like the prices being quoted.

Leveraged Speculation

So why does it happen, and why does it matter?

It happens because gold is in this case is now being treated purely as a paper instrument, a derivative, although it is representing and price setting for a vast global industry and physical market from which it has become increasingly decoupled.

This is not surprising because rampant speculation in derivatives and paper assets has become de rigueur in these financially captured markets, and radically so since 1999. 

And the same forces that blew up the collateralized debt obligations and their mispricing of risk derivatives in 2007 seem as though they are going to blow up the global commodities markets, starting with the precious metals. 

The exchanges in this case may try to force settle everything in cash and for pennies on the dollar.  And so they dismiss the risks, and since the 'right people' are making money, no one will say a word.

Consequences

While the sources of new supply dry up with the decline of the mining industry, the urge to grab the available physical supply while it lasts continues to intensify.

But like the financial derivatives collapse in 2007 quickly metastasized to the global financial system, this relatively small precious metals market will also shaken the global financial system, and threaten to bring down the Too Big To Fail institutions once again.

I am not speaking of a 'default' on the exchange.  A paper exchange cannot default when cash settlement in paper can be enforced.  Rather, I am talking about a 'break in confidence' that finally persuades the rest of the world that the Anglo-American financial markets are a long con.   Let's call it 'a fraud too far.'  

We certainly have seen some mind-boggling systemic frauds and market rigging exposed in everything from derivatives pricing to LIBOR in recent memory.  We keep sloughing these events off in our walking amnesia.  But such things have long term and highly corrosive effects.

But just like the last time, while the money is flowing and the music is playing, the players will keep dancing, and the regulators and politicians will be keeping their eyes and ears closed.

'Nobody saw' the last crisis coming, except a few.   That is because they who should have known knew, but went along to get along.

Consider the consequences of repeatedly ignoring the risks of excessive speculation.  I do not think that we can afford it.

This chart is from Nick Laird at sharelynx.com.

President Carter: US Is Now 'Just an Oligarchy With Unlimited Political Bribery"

You might not have heard about this interview on the mainstream media.  It occurred several days ago.  Apparently Jimmy is not gleefully participating in the triumphant Clinton-Bush winners road tour and congenial yukfest. 

 

Some, nearing the latter part of their days, tend to feel the weight of their conscience.  But certainly not all, especially not those who believe in nothing greater than themselves.

 

Carter's startling admission is at the root, the very heart of the lack of reform and recovery. 

 

But the pundits, even the so-called liberal media and the disgruntled conservative media, will not discuss it frankly and openly.   They traffic in shallow anger and distraction, and faithfully serve the special interests.

And there is as little serious discussion in the pampered corporatist media, whose mission is to obfuscate and distract the public from the key issues with 'bread, circuses, and sensationalism.'

This is the kind of thing that everyone in power, and almost all those who bask in that power, know but never talk about openly, feigning ignorance with dismissive ridicule.  

 

They are caught in a credibility trap of their own making.  And so they while away the days with private looting, waiting to see which way and when the winds of reaction may blow, while doing everything they can to maintain the status quo which they have created for their own benefit.

It is the dark heart of corruption, the quiet coup d'état that has overthrown the American republic.

 

The people are beginning to ask, 'After six years, why is there tremendous profits for those who caused the problems in the first place, but no recovery for the rest of us?'

And the elite look with bewilderment, fear, and anger at the fruits of their treachery and deceit.  

They think to themselves, 'We know that we are superior people, tasked with the burdens of leadership, so they must simply be ungrateful,  jealous of our success.'

 

A small but highly visible minority may look to the worst of the oligarchs as their leader and savior.  One might call it a kind of Stockholm Syndrome, but really it is just a perverse reaction, the impulse of the camp follower that identifies with their abusers, thinking that this elevates them from the rest.

 

And the media wisely warns them, slurring any candidates out of the mainstream control, the narcissist and the socialist, urging the people to stick with the familiar oligarchic brand names, Bush and Clinton, and in extremis that slickly formed alloy and extruded creation of the money masters, brand Obama.

Hubris begets nemesis.  If they were not so self-absorbed and morally stunted by their pride and selective experience they would understand that people will not stand by and allow themselves to be abused forever.

Transcript:

HARTMANN: Our Supreme Court has now said, “unlimited money in politics.” It seems like a violation of principles of democracy. … Your thoughts on that?

CARTER: It violates the essence of what made America a great country in its political system. Now it’s just an oligarchy, with unlimited political bribery being the essence of getting the nominations for president or to elect the president. And the same thing applies to governors and U.S. senators and congress members.

So now we’ve just seen a complete subversion of our political system as a payoff to major contributors, who want and expect and sometimes get favors for themselves after the election’s over. … The incumbents, Democrats and Republicans, look upon this unlimited money as a great benefit to themselves.

Hat tip for the above to Sam Sacks and especially to Jon Schwarz at The Intercept.

 

Gold Daily and Silver Weekly Charts - Non-Farm Payrolls Next Week - 116:1 and No Fear

"Greed is the inventor of injustice as well as the current enforcer."

Julian Casablancas

I will be interested to see how traders square up tomorrow ahead of the weekend.

Here is 'the lay of the land' as we head into the month of August next week.

The first chart shows just how silly the trading at The Bucket Shop has become.

The next shows the results of the attempts to knock down the open interest at Comex.  It has succeeded a bit, but these lower prices taken to shake out the bulls are not enticing many to put their actual bullion up for delivery. 

Deliverable stocks are at a low and therefore the 'leverage' of paper potential claims to available bullion is still rather high at 116:1.

Sentiment has gotten silly low with the momentum boys piling on, and activating their opinion bots to enhance their trade.

Have a pleasant evening.

SP 500 and NDX Futures Daily Charts - Triumph of the Swill

"Pride goes before a destruction, and arrogance before a fall."

Prov 16:18

This was a fairly lackluster day in US equities.

Sentiment is now back to somewhat complacent as the VIX has fallen back to a 12 handle.

I picked up a little VIX today.  I may buy more if we see some additional fluff to the upside.

This is probably not going to last, and is marking a top of sorts.  Whether this is a major top or just a passing intermediate term thing I cannot tell.

The forces of crony capitalism are ready to stick a fork in the rest of the world, and start carving off chunks for themselves.

When a people begin to consider themselves exceptional, above all others, you know that the downfall is just around the corned.  It may be considered the 'German disease' by some, but we are all susceptible to it.

Have a pleasant evening.

Gold Daily and Silver Weekly Charts - Gold Is the Statist's and the Con Man's Bête Noire

"I have one other issue I'd like to throw on the table. I hesitate to do it, but let me tell you some of the issues that are involved here. If we are dealing with psychology, then the thermometers one uses to measure it have an effect. I was raising the question on the side with Governor Mullins of what would happen if the Treasury sold a little gold in this market.

There's an interesting question here because if the gold price broke [lower] in that context, the thermometer would not be just a measuring tool. It would basically affect the underlying psychology.

Now, we don't have the legal right to sell gold but I'm just frankly curious about what people's views are on situations of this nature because something unusual is involved in policy here. We're not just going through the standard policy where the money supply is expanding, the economy is expanding, and the Fed tightens. This is a wholly different thing."

Alan Greenspan, Federal Reserve Minutes from May 18, 1993

If you take a look at the Fed minutes over the years you will see that Bernanke's response to the Congress that the FOMC does not think about gold is just prevaricating nonsense.

At this point I am getting curious why the Fed in particular would wish to see the price of gold kept down.  And I don't say this too lightly, but it would take a serious effort to ignore the blatant and heavy handed public relations campaign downplaying the value of gold, in the face of increasing physical demand around the world, and the undeniable fact that for the first time in several decades the central banks of the world have turned from being net sellers to net buyers.

As we see from the minutes above most clearly, the Fed was watching gold carefully for indications of monetary inflation.  And this was during the long bear market in gold in the 1990s when central banks were still routinely and openly selling gold to keep the price lower.

Why would the Fed, if indeed they are involved or more likely fully aware, like to see an indicator of inflation supine while they are laboring mightily to convince people that there is a recovery in the economy so that they can get off the zero bounds and raise rates?   Wouldn't a rising price of gold give them some credibility in such a move?

Or is this 'a wholly different things' as then chairman Greenspan said above?   Are we at that kind of moment that Eddie George, the governor of the Bank of England, talked about in late 1999, culminating in the infamous Brown's Bottom when England's financiers sold her gold on the cheap, presumably to bail out the Banking speculators.

"We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake.  Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The US Fed was very active in getting the gold price down. So was the U.K."

This current pool operation is indeed odd, unless one subscribes to the idea of a currency war pitting the US dollar status quo against the emerging economies who wish to find alternatives to what they feel is an abusive, almost neo-colonial form of monetary repression and at times a facility for plunder.

Although as I have mentioned before, I have a very open mind to the notion that some of the shenanigans from the last decade put some official sector and too big to fail jokers 'over their skis' in the precious metal markets, to the extent that Eddie George's abyss was starting to yawn like the Grand Canyon again. I never like to attribute to bad policy what can be just as easily attributed to purely stupid and short-sighted personal concerns and greed.

August looks to be a littler more interesting at The Bucket Shop. There were some more dribbles out of the warehouse, and the 'leverage' of claims is probably still well over 100:1. I'll have a look at it when mon ami Nick puts out his latest.

Fundamentally speaking, if we dare do such a thing in such dodgy markets, the demand for physical silver is increasing in 2015 while the supply is contracting, resulting in a projected deficit for the year.

Have a pleasant evening.

SP 500 and NDX Futures Daily Charts - Failure to Achieve Liftoff, GDP Tomorrow

 

 

There was intraday commentary about the FOMC statement here.

 

Even though The Recovery does not warrant it, I am still of the same mind I have been, that the Fed will raise 25 basis points in September unless the wheels are falling off the global financial system and/or the economy.  It is purely an inward-looking policy thing, and they are falling all over themselves to prepare the markets and to justify their actions. 

 

The Fed wants to get off the zero bound so they have room to maneuver when the next financial crisis comes, most likely from the bursting of their latest financial assets bubble.  The Fed is a servant to the Banking system.

 

The SP managed to gain some ground after an initial flip flop.  I was disappointed that a purchase of some powered up VIX did not get filled at the announcement when they smacked VIX lower to clear the stops and then ran it the other way.  You have to be pretty aggressive to get past the HFT spoofing and front running at times like these.  It never really did get back to a cheap buy. 

 

Let's see how the Advance GDP number for Q2 looks tomorrow.

 

This is an artificial market, so 'policy considerations' and private greed will most likely continue to trump any reasonable estimation of 'investment' and 'price discovery.'

 

Have a pleasant evening.