Tag Archives: paper gold

Bill Murphy: The Fundamentals Will Push Gold & Silver To Spectacular Levels

“Some sort of Black Swan event will come out of nowhere and cause an explosive move in gold and silver” – Bill Murphy on Shadow of Truth

In the absence of intervention, gold and silver would be trading at a level that is a few multiples higher from they “trade” now. At some point, some entity will want to take possession of a big “chunk” of gold or silver and will stand for delivery of the physical with the intent to remove that gold or silver from Comex vaults.

For now the big accumulators of physical gold (China, Russia, India) are content with the current rigged market price of gold as long as the west can continue to make deliveries into these countries. But at some point the west’s “cupboard” will be bare and big buyers will see what the Comex really has in its vaults. It’s at that point when the precious metals market will become interesting.

There is always the threat that the Shanghai Gold Exchange begins arbitraging out the price difference between the physical market (eastern hemisphere) and paper market (Comex, LBMA). Currentlysilver trades in China’s physical settlement market (Shanghai Futures Exchange) at a significant premium to the price on the COMEX paper market. The week of October 17, 2016 the average difference was well above $0.80 per ounce. This represents approximately a 45% difference. How large must the difference become before the physical market naturally overwhelms the paper market? The difference in the physical gold market is not quiet as dramatic as the physical silver market, but it seems a natural progression will occur in the not too distant future. The physical market is filled with people that are not interested in paper contracts. These people are in real markets located in the eastern hemisphere – China, India and other countries. In these countries gold is either part of the culture or there is an understanding of gold’s role as a currency.

In today’s episode with GATA/LeMetropolecafe.com’s Bill “Midas” Murphy about the extreme intervention in the precious metals market and the catalysts that will eventually override the Central Bank intervention.

Paper Gold Is Legalized Fraud

A lot of questions were raised when it was reported that Deutsche Borse failed to deliver physical gold in exchange for its Xetra-Gold Notes.  But the only real answer to those questions is simple:  the only way you ever own physical gold is if you buy actual physical gold and take possession.

The allegations that Xetra-Gold or Deutsche Bank or Deutsche Borse committed fraud or failed to deliver gold are strictly false.  One thorough reading of the Xetra-Gold prospectus dispels those allegations.  The prospectus little more than a blanket legal disclaimer.   The language is clear.  It says right in the prospectus that the an investment in the Notes “does not constitute a purchase or other acquisition of Gold.”  There is not case for fraud because none of the participants in Deutsche Borse, and Deutsche Borse itself, did not commit any breach of contract per the terms of the prospectus.

The term “economic” in the prospectus is defined (pg 12) to mean that the “bears the market risk associated therewith. If the gold price decreases, provided that all other conditions remain unchanged, such decrease may result in a partial or complete depreciation of the invested capital. If the gold price increases, provided that all other conditions remain unchanged, such increase may result in an increase in the invested capital.

In this latest episode of the Shadow of Truth we discuss why buying paper forms of gold like GLD or Xetra-Gold is nothing more than an investment in a paper claim to the rate of return on gold during the period in which you own the security.  If you don’t hold your gold in your own possession, you don’t own it:

There Is No Default Or Fraud Committed On The Xetra-Gold Securities

Anyone who purchases paper gold with the belief that it is an investment in gold is an imbecile.

Last week Zerohedge broke a story about an investor who tried to redeem shares in Xetra-Gold “notes” in exchange for the designated amount of gold represented by those notes. The story gained legs on the internet as a “refused delivery” and a “delivery default.”  I received several inquiries about this and my only response was that someone needs to go through the prospectus in order to determine what type of event has occurred.

I went through the prospectus and so far, everything published on the internet, including any claims made by Zerohedge, are reckless, useless and incorrect.   Here’s a link to the prospectus:  Xetra-Gold Notes.   Ultimately, there has not been a legal default. Furthermore, here has not been any fraud committed because there has not been any breach of contract.

Let’s start with some facts directly from the prospectus.   1)  The Issuer is Deutsche Borse Commodities GmbH;  2) The Custodian is Clearstream Banking AG;  3)  The Debtor of the Gold Delivery Claims is Umicore AG.   That latter aspect is interesting.  Unicore is a Swiss metals refiner and trader.   Any claims of failure to deliver  should be directed at Unicore. The securities in question are unsecured Notes of the Issuer and the only “asset” of the Issuer is a “claim for delivery of one gram of Gold in accordance with the Terms and Conditions.”  That’s it, there are not any other assets in Deutsche Borse Commodities GmbH.

Deutsche  Bank is one of the redemption agents.  But Zerohedge labelled Deutsche Bank as a “Designated Sponsor” as if it meant that DB had obligations beyond what was defined by the prospectus.  In fact, DB is a “designated sponsor in the electronic trading system” of the notes.  In other words, DB is the primary market maker in the trading of the securities.   Nowhere in the prospectus does it specify that DB is obligated to fulfill delivery of gold in exchange for redeemed Xetra-Gold Notes.  Note:  This is not a defense of DB – I regard DB as one of the most vile and corrupt banks on earth;  but legal facts are facts that need to understood and regarded.

Here’s the other relevant facts:   1)   The purchasers of the Notes will only acquire the rights securitised by the Notes. The purchasers of the Notes will not acquire any title to, or security interests or beneficial ownership in, the physical Gold held in custody on behalf of the Issuer. An investment in the Notes does not constitute a purchase or other acquisition of Gold.   This means that the notes are unsecured and the only right is to submit a claim against Unicore, the Debtor of the Gold Delivery Claims.  Good luck with that.

2) The gold price is determined based on demand for and supply of gold. The value of the Notes is a function of the demand for and supply of the Notes as such. This distinguishes an investment in the Notes from a direct investment in gold. The purchasers of the Notes will only acquire the rights  securitised by the Notes. The purchasers of the Notes will not acquire any title to, or security interests or beneficial ownership in, the physical Gold held in custody on behalf of the Issuer. An investment in the Notes does not constitute a purchase or other acquisition of Gold. This means that you are investing in paper plus the right to make a delivery claim.

3)  Deutsche Bank AG is not, in any way, obliged to protect the interests of the investors.  That’s self-explanatory and it is legal refutation of all of the accusations made against DB by reckless blog posts.

4) Umicore AG & Co. KG as the responsible agent for all physical delivery processes in connection with the Notes and in its capacity as the Debtor of the Gold Delivery Claims will be actively trading in gold. This activity may also lead to various potential and actual conflicts of interests. Umicore AG & Co. KG is not obliged to decide any such conflict of interests in favour of the investors, but will in connection with the trading in gold take such decisions and measures at its sole discretion as it may deem
necessary or expedient to protect its own interests and will act in this context as if the Notes did not exist.   That basically says that if you expect to be guaranteed delivery of gold when you send your notes to Deutsche Bank, who is a redemption agent, then pay your lawyer to file a claim in German and Swiss courts.

The prospectus makes it very clear that the purpose of the notes is to make profits for the entities who are the shareholders in Deutsche  Borse.   In that regard, the prospectus states that:  The only business activity of Deutsche Börse Commodities GmbH is the ongoing issuance of the Notes which are the subject matter of this Prospectus and transactions associated with such issuance. All activities resulting from the issue of the Notes, e.g., the safekeeping of Gold and the fulfilment of claims for delivery of holders, have been outsourced by the Issuer to third parties.  Those third  parties are generally the shareholders of Deutsche Borse.

The bottom line on the failed delivery incident reported by Zerohedge and strangulated by several other blogs is that Deutsche Bank has no obligation with respect to delivering gold to any note-holder who submits the paperwork required to redeem notes for gold other than to pass on the request to Umicore, which is specified as “the responsible agent for all physical delivery processes in connection with the Notes.”  In fact, the prospectus reiterates that “Deutsche Bank AG is not, in any way, obligated to protect the interests of investors.”

It goes on to state that Unicore, in its capacity as Debtor of the Gold Delivery Claims, will be actively trading in gold and that “this activity may also lead to various potential and actual conflicts of interests. Unicore AG & Co. KG is not obliged to decide any such conflict of interests in favour of the investors, but will in connection with the trading in gold take such decisions and measures at its sole discretion as it may deem necessary or expedient to protect its own interests and will act in this context as if the Notes did not exist.”

With the above as legal context, I’m not surprised that Deutsche Bank did not offer any remedy when it was asked to respond to the allegations of a failed delivery of gold.  In fact, the prospectus does not contain any specific remedies in this case.   The only possible conclusion is that there has been a “breach of morals and ethics.”   Boo hoo.

Ironically, the Xetra-Gold notes have more loopholes and lack of investor protections than GLD.  Anyone who buys GLD thinking they are investing in gold is an idiot.  What does that make anyone investing in Xetra-Gold with the belief that it’s an investment in gold?

The easy conclusion in this situation is that the entities that are involved in Xetra-Gold do not have the gold that is supposed to be delivered.  That’s probably the most likely explanation but unfortunately the prospectus does not specify any legal remedies.  I guess a gold-delivery-note-holder could file a lawsuit against the Issuer and Unicore.  Until someone with deep pockets who is interested in truth discovery takes that initiative, we are left with no definitive explanations.

They’re Making It Easier To Buy Gold Cheap

To begin with, this statement by the Bank of Japan’s Kuroda validates my blog post yesterday about Japan’s monetary pivot to gold and to the east:  “no need and no possibility for helicopter money.”

My best guess is that the only productive activity for Bernanke on his last trip to Japan was eating blowfish sushi and hitting the teenage stripper establishments.

The manipulators are making it easier for us to accumulate gold at a cheap price.  I moved money from my fiat checking account into Bitgold every day this week and twice yesterday. I managed to catch what looks like the low of this latest manipulated pullback.  Every time they hit gold I buy.

I exchanged emails with Dr. Paul Craig Roberts yesterday about the  sell-off of the price of gold this week caused by the obvious “invisible” hand of the Fed.  Note this was a week in which Japan was supposedly going to drop $100 billion in helicopter money at Ben Bernanke’s behest – an announcement which should have sent gold soaring:

Me:   I agree this was a manipulated take-down of the price but,  you know as well anyone, markets never go straight up except the Dow/S&P 500 when the Fed wants to make those indices go straight up – like now.    Gold was overdue for a trading correction. I agree there’s some idiots out there who think the Fed is powerless now over gold – that’s ignorance or sensationalism.

Dr. Roberts:   Is there such a thing as a trading correction when the price is controlled and manipulated? Is it a trading correction when the bullion banks dump, as we have shown numerous times, massive paper shorts in the futures market?

Me:  I agree with your point there – but to be honest, I like to see any market pullback after it has the type of run that gold has had since early February. Should it be pulling back from a much higher price platform? Yes.  But gold was on the verge of going parabolic, which is never healthy in any market. The Fed is doing us a favor. I have been moving a lot of money from my checking account into my Bitgold account this week every morning. If gold was not being pushed down, I might not have added any.

The other interesting aspect of your point there is the amount of paper the Fed is needing to throw at gold to keep the price down. The open interest has been more or less at an all-time high on the Comex for a few weeks now. The last time the open interest was this high was when gold was pushing $1900.

In other words, it is requiring a much bigger relative effort for the Fed to prevent the price of gold from spinning out of its control now than it did when gold was about to launch over $2000.

They have not lost complete control yet, but they are much closer to that event now than they were in 2011.

On another note, the fact that the SPX spiked higher on the original Japan helicopter money announcement but has not sold off on the withdrawal of that threat underscores that fact that the Fed is pulling out all stops to push the market higher

But this is just the “marquee” indices – the Dow, SPX and Naz – as plenty of stocks have been and are heading lower because the core economy in the U.S. is falling apart.


The Audit The Fed Movement In Congress Is A Joke

CNBC announced yesterday that “The ‘audit the Fed’ movement is taking a big step in Congress this week.”  Only here’s the problem:

The bill seeks not a financial exam of the U.S. central bank but rather a peek behind the curtain of how monetary decision-making happens.   LINK

The first time I read that, it me left somewhat stunned.  “A peek behind the curtain” of how monetary decisions happen?  Seriously?  I think we get to see this in action every day between FOMC meetings, when the various Federal Reserve retards step up to the podium to drool all over themselves as they as mumble incoherently about raising interest rates at the next meeting.  In fact, just today some chode from the Atlanta Fed named Lockhart stated that:

June certainly could be a meeting at which action could be taken. I think it is a little early at second-quarter data to draw a conclusion, so I am at this stage inconclusive about how I am going to be thinking about June, but I wouldn’t take it off the table.

Here’s SF Fed Head John Williams – this is just priceless:   “I think the incoming data have actually been quite good and reassuring in terms of policy decisions, so, in my view, June is a live meeting.”

Really John, June is going to a “live” meeting?  Does that mean that the rest of them have been fake?   From where are you getting your data- the toy chest at your dentist’s office?

I hope that guy didn’t actually  have to pay for his education because it was a colossal waste of money if he did.  Do we really need Congress wasting time passing legislation to mandate a “peek” at that?

I just don’t understand how these Fed officials can threaten to raise rates predicated on the economic “data” that’s being released.   It’s childish. Everyone knows the Fed can’t raise rates without collapsing the house of cards it has created.  The sharp sell-off in the Untitledstock market today was attributed to the turret’s syndrome outbursts by these two idiots. But nothing could be further from the truth.  The market sold off today in a reversal of the manipulated spike higher yesterday.  The momentum-chasing computer algos began dumping the historically overvalued shares they gobbled up yesterday.

One of the big banks issued a study a couple weeks ago which showed that the only entities buying stocks right now are pension funds.  “Smart” money is dumping shares at an unprecedented rate and really smart money is getting extremely net short and/or loading up on gold (it was revealed yesterday in an SEC filing that Soros Funds made gold its largest holding).

I said 12 years ago that the last asset remaining  after housing for the elitists to loot would be the retirement assets.   It’s starting:  severely underfunded pension funds loading up on the overvalued stocks being dumped by insiders and “smart” money.  “Underfunded” is a socially polite way to say “the pension fund has a big debt obligation to future beneficiaries.”  An underfunded pension fund buying stocks on margin is no different than someone buying stocks in a IRA on margin, only the latter is not allowed by law.

An audit of the Fed will NEVER happen.  This country will collapse before any kind of reform or change is ever possible.  I knew the possibility of an audit of any substance died the very first time Ron Paul tried to pull a proposal through the House Financial Services Committee.  Chairman Barney Frank sat on it before deciding to use it as toilet paper.

What do we need an audit for anyway?  Everyone knows the Fed does not have the gold that it claims to be “safekeeping” on behalf of the U.S. Treasury.   The Fed knows everyone knows.   But as long as no one forces the Fed to open up its “deep storage” vaults, everyone can keep pretending that the gold is there.

A reader asked this question today:  “if naked shorts are allowed to be dumped on the Gold and Silver exchanges without any regard for reality, how can the companies that are shorting be stopped from shorting? It seems to me they control the deck and the rules on the Comex and CFTC have been tailored to allow them to manipulate the market and if that is the case what can stop them?”

My answer is that the physical market will eventually cause a massive default by the naked shorts.  But my view for the last 15 years has been that the U.S. will start a world war before it is forced by the physical market  to reveal the truth.  I stand by that call.   A non-audit of the Fed is likely deferring the inevitable…

Guest Post: Precious Metals Bull Snorts, Resumes Move

The character of the precious metals market has changed.  The manipulation efforts using paper derivatives masquerading as gold and silver futures contracts is losing traction.  I believe that the supply/demand dynamic in the physical gold and silver market is beginning to drive the price.  Control over the price of the metals is likely shifting from NY/London to Moscow and Shanghai.  I’ll have more to say about soon.

The  News Doctor’s Eric Dubin posted commentary and analysis of the blatant paper attack on the price of gold and silver that took place about 40 minutes into the floor trading session on the Comex on Thursday morning (April 21).  The initial price attack occurred in the space of about seven minutes in which $2 billion of paper gold and 1,218 tonnes of paper silver were  dumped on the Comex.   Over the last five years,  an attack like this was usually the start of bigger systematic price-takedown of the precious metals over a period of several days.  However, in the last couple of months, the market seems to shrug off these paper attacks and head higher.

“We’re setting up for an epic battle, and if silver keeps motoring forward, we may very well have an $18 handle on silver smack in the middle of the expiring contracts window.  Buckle-up!  There’s going to be fireworks, one way or another” – Eric Dubin, The News Doctors  You can read the rest of Eric’s commentary here:   The Precious Metals Bull 


Hugo Price Salinas: The Crumbling World Order And Gold

The massive “disintermediation” of physical gold from western Central Banks plus bank and ETF custodial vaults to the east, especially China, India and Russia will eventually be one of the biggest stories/events of this millennium.   This acceleration in the migration of physical gold this year has been triggered by the relentless manipulation of gold by the Fed/ECB/BoE and its agent bullion banks using fraudulent paper gold contracts.  Recently, the drawdown in the amount of gold reported to be in the vaults on the Comex and in HSBC’s GLD vault is nothing short of stunning.

Hugo Salinas Price has written a must-read essay on the collapse of the west and measures China will implement assume the lead role in a restructured global world order:

The Chinese evidently have some plans which they are not divulging, for we see that China is purchasing huge amounts of gold. In the meantime, the US insists on trashing the price of gold, as if to say that the Dollar is and will remain the world’s supreme currency till the end of time.

China is quietly accumulating gold and saying nothing. But we can try to guess what China is thinking: “The US is mired in an insoluble problem. Do nothing to provoke the US. The US will destroy itself in a huge collapse.”

You can read his entire analysis here:   The Crumbling World Order and Who Will Pick Up the Crumbs?

The middle class in the United States has no idea that a heavy 2×4 is being at the back of their heads.  By the time many of them realize what is happening, it will be too late to duck.


The Credibility Of Andrew Maguire

Andrew Maguire has been a controversial figure in the gold/silver world ever since he blew the whistle on JP Morgan’s silver manipulation.  The information provided by Maguire to GATA was presented by GATA’s Bill Murphy at a hearing held by the CFTC on the precious metals market manipulation in March 2010.  Maguire had originally sent an email to someone in the CFTC enforcement which detailed how the precious metals would be attacked two days later when the non-farm payroll report was released.  Maguire wrote to the CFTC after the attack:

It is common knowledge here in London among the metals traders that it is JPM’s intent to flush out and cover as many shorts as possible prior to any discussion in March about position limits. I feel sorry for all those not in this loop. A serious amount of money was made and lost today and in my opinion as a result of the CFTC’s allowing by your own definition an illegal concentrated and manipulative position to continue.

GATA has detailed the entire event in this article:  LINK.

After Bill Murphy’s testimony at the CFTC’s hearing, Jeffrey Christian – a known shill for the bullion banks – publicly slashed and burned Maguire’s reputation with highly slanderous assertions about Maguire’s background and experience.  Christian’s remarks were intentionally deceitful, but the damage was done. The fraudulent attack on Maguire opened the door of doubt in the minds of many about the credibility of market intel delivered by Maguire to the public via venues like Eric King’s King World News.

I bring this up because a friend and colleague of mine – someone who has been around the precious metals sector longer than me, sent email to a myself and one other person asking for our thoughts on Maguire’s latest interview in King World News:  A Historic Event Is About To Shock The Gold Market

The interview is worth a listen and I believe there’s a high probability that Maguire’s insight and assertions are accurate.  Having said that, I wanted to share my response to the email, because it explains why I think Maguire’s intel is good.  The first part of my response references some comments made to my colleague from someone who expressed concern about the potential for Russia and China to unload gold like Venezuela did in order to avoid financial trouble:

Goldman has been working on getting Venezuela separated from its gold for over a year. Recall about a year ago that Goldman sent VZ a proposal for a leasing transaction. VZ was an easy prey. In my opinion, the way that VZ has been squeezed out of its gold tells us just how desperate the bullion banks are to source real physical gold. This move was analogous to taking Halloween candy from a little kid. But China/Russia are a different matter.

Russia running into financial trouble? Please show me any evidence of that OUTSIDE of western propaganda reports.  Russia continues to add a lot of gold to its Central Bank position every month. It that the behavior of an entity worried about liquidity? Have you looked at Russia’s debt/GDP ratio? As of 2014, the latest data available, Russia’s debt/GDP is 13%.  Russia is not in financial trouble. The western media wants us to believe that Russia is in financial trouble.

China? C’mon. China has $3.4 trillion in diversified FX reserves that needs to be netted against is sovereign debt position. China’s outright sovereign debt/GDP is 41% as of 2014. The number does not net out FX reserves.

As of July China’s household/corporate debt was 280% of GDP. The U.S. total debt (Govt + private sector) is 340% of GDP. The highest of any country in the world. US FX reserves are about $35 billion – i.e. nothing. Does the U.S. even have title to any gold that we use to add to its FX reserves? Doubtful. If any country is in danger of going insolvent, it’s the U.S if the rest of the world refuses to take any more paper dollars.

What if China were to include its true gold holdings at market in its FX reserves number?

As for Andrew, I had a long phone conversation with Eric King this past summer about Andrew. Eric is adamant that everything Andrew says is based in fact.  [note:  I came away from my conversation convinced that Maguire’s intel was bona fide.  As Eric and I discussed, the cartel has the backing of the U.S./British/EU Governments, which makes it impossible to predict the timing on actual occurrence of the events that we know ultimately will occur]

It’s hard to know for sure because Andrew references a lot of information that we have no way of verifying independently. For instance, he asserts that liquidity is leaving the Loco London market. Is there a way to verify this other than to have faith in Andrew’s assertions? If there is I’d love to see it.

Having said that, everything Andrew is talking about is exactly what Frank Veneroso said would eventually happen back in the late 1990’s. Frank never laid out “who and how” but he said eventually the western banks/CBs would be unable to contain the physical market with paper because the demand for physical would blow up the paper suppression schemes.

Here’s the other key assertion that we have no way of verifying: “the aggressive and predatory bullion banks that largely infest the swap dealer category of the COT report recognize the gold market has changed and are about to split ranks and reposition more bullishly, a position they would already have if they had not accrued such large underwater proprietary positions”

If you guys have any way of verifying that assertion, then we would know that Andrew is 100% bona fide.

At this stage, I have no reason to disbelieve Andrew based on my own observations and research into the precious metals market.  I really want to believe everything that he says is happening right now, but I’ve been taking a wait and see mind-set with regard to his assertions.

Is Japan “Inc.” Pulling Out Of The Comex And LBMA?

One of Japan’s largest global precious metals trading companies, Mitsui Precious Metals, is closing down its operations in New York and London by the end of 2015.  Note that it will maintain its operations in Tokyo and Hong Kong – interestingly:   Mitsui Pulls Out Of NY, London.

Mitsui is one of the largest business groups in Japan and one of the largest corporations in the world.  “When in doubt, pull out.”  In my view, this move reinforces the growing global fear of the massive paper to physical gold/silver leverage embedded in the NY/London banking system.

Remember, we are able to assess only what might be available to back visibly traded paper gold and silver derivatives (Comex futures, LBMA forwards).  And reported inventories are based on reports submitted by the bullion banks and Central Banks.  Do any of us really trust these bank reports as reported without visual confirmation and independent audits?

In fact, I will go as far to say that any analyst in this sector who presents any analysis and commentary based on bank-generated gold/silver inventory reports that does not stipulate up front that any and all information is based on reports that may or may not be accurate is thereby presenting invalid analysis.

missingbullionAnd, too be sure, all analysis that can be reasonably issued in entirely incomplete because it is impossible to assess the realistic exposure of OTC precious metals derivatives.   Even the banks who issue these opaque securities likely are in the dark.

I would suggest that Mitsui’s move pull out of the NY and London – thereby joining Deutsche Bank and Barclays – is symbolic of the world’s increasing perception that the New York and London financial markets are the biggest Ponzi schemes in history.  At the very least, it suggests that the world of growing weary of the fraudulent paper gold and silver markets on the Comex and the LBMA.


How Come No One Will Attack The Comex Gold Short?

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.   Thismissingbullion 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.