The open interest on the Comex for the December contract is approximately 293 thousand contracts (final number as of Friday is not posted until Monday morning). That represents approximately 29 million ounces of gold.
Yet, as of Friday (Oct 2), the Comex vault operators were reporting 161,642 ozs of gold in their “registered” vault accounts, which is the amount of gold that has been declared eligible for delivery.
This means that the ratio of December open interest to deliverable gold is approximately 180:1. This is a mind-blowing number. There’s 180 ounces of long/short positions for every ounce of deliverable gold sitting in Comex vaults. This ratio of paper gold to “allegedly” available real gold represents the most extreme exploitation of the paper liability fractional reserve banking system in the history of the known universe.
Of course, history tells us that every fractional banking system throughout the ages has collapsed under the weight of far too many liabilities piled on top of too few assets to back those liabilities. This one eventually will collapse as well.
In 1992, George Soros attacked the British pound sterling in what was billed at the time as “the trade of the century” (I was a junk bond trader at the time on Wall Street and worshiped Soros’ success (I despise the man now, for the record).
Prior to the implementation of the euro, an European “Exchange Rate Mechanism” was created in 1979 in which the exchange rate value of each European country currency was fixed against each other. Previously the currencies “floated” and price discovery was set by the market.
In 1990 Britain entered the European ERM and by 1992 the pound had become egregiously overvalued relative to the German mark. It was pretty obvious to everyone including the British Government, which was spending a fortune to prop up the pound vs. the mark.
Long story short, George Soros via his Quantum Fund had built a $10 billion short position in the the pound. To put this in proper context, a $10 billion bet in 1992 (using Government calculated inflation) would be a $17 billion bet today. That one bet against the pound and the British monetary system by George Soros was bigger than the size of most hedge funds in the world today.
On September 17, 1992, Soros’ gargantuan bet paid off. Soros and the market ultimately forced the British Government to “reset” its monetary system. The Quantum Fund is said to have made $7 billion on the trade, or a 47% rate of return unannualized in well under a year. It’s impossible to know the actual “cash on cash” return because we don’t know to what extent the short-pound bet was leveraged.
This brings us to the situation with paper gold vs. physical gold at the Comex. If shorting the pound was a quite conspicuous trade opportunity in 1992, then attacking the 180:1 paper:gold ratio on the Comex by going long Comex gold futures and standing for delivery is the most overtly obvious trade opportunity in anyone’s lifetime.
This particular predatory trade would exploit the most imbalanced market condition in the history of mankind. With only 161,646 ozs of gold declared to be available for delivery, attacking this highly artificial market condition would require only $182.6 million dollars worth of Comex contracts (assume $1130/oz for gold). This is less than 2% of the size of the bet that Soros made in 1992.
There are several hedge funds that are more than large enough to take on this trade, which is a “lay-up trade” in the purest sense of the definition. So how come no one will take it on?
The obvious answer is that hedge fund managers point to what happened to the Hunt brothers when they attacked a similar trade set up on the Comex in silver in 1979. Eventually the Comex changed the rules of the game and charges were levied against the Hunts by the CFTC for an attempt at cornering the market. It was the epitome of Government intervention in a market to protect the Comex bullion banks under the “veil” of market manipulation. A true tragedy in the history of the financial markets.
But where are the charges of market manipulation against the entities who are selling-short paper gold contracts into the market at a 180:1 paper to gold ratio in order to satisfy the demand of Comex futures buyers? And better yet, how come the long side of the gold open interest trade never stands for delivery. A mere $182 million bet that stands for delivery has the potential of a more than doubling or tripling (or more) in a very short period of time.
Concomitantly, if the rules of the game were changed to rules that reflected the true supply and demand of physical gold globally, it would force the mother of all short-covering trades. In all of the other products with futures markets in the U.S. the ratio of paper to physical is not even remotely close to the 180:1 ratio in gold. In fact, the CFTC cracks down if when the percentage of paper to deliverable exceeds much more the 20-40% in any other futures market.
It is a riskless bet that no one is willing to take on. This is because it’s loaded with 100% risk in one aspect. If someone were to attack the fraud on the Comex in order to make a lot of money on the obvious, the Government would step in and prevent the trade from occurring to completion even though the Government is unwilling to prevent the fraudulent market condition from developing in the first place.
This is a bigger injustice to our country and our financial system than was the Hunt brothers debacle. And the truth of the matter is that when the Comex finally does crumble under the weight of its own fraudulent, Ponzi scheme grotesque obesity, it will trigger or coincide with the collapse of the entire U.S. systemic Ponzi scheme.