Did the Comex Just Create More ‘Paper Gold’ For Price Suppression?

A mysterious “pledged gold” entry has just showed up on the Comex gold warehouse report. The definition of this new warehouse stock classification for gold is provided in Chapter 7 of the New York Mercantile Exchange rulebook.

In brief, “eligible” gold is a gold bar stored in a Comex vault that meets Comex specifications (quality, size, purity, and brand).

A “registered” gold bar is one that has been designated for delivery and for which a warrant has been issued. This warrant is evidence of and specifies ownership title to the bar. Warrants facilitate the transfer of delivery under a Comex contract.

“Pledged gold” is a bar for which a warrant has been issued but for which the warrant has been placed on deposit at the CME Clearing House as part of a required performance bond.

The Chicago Mercantile Exchange (CME) has its own clearing division through which all trades are confirmed, matched (counterparties being verified), and settled (money changes hands). Each contract has a long and short counterparty.

A clearing member of the exchange is typically a bank, hedge fund, or commercial entity that has been admitted as a clearing member. The clearing mechanism is the “lubricant” that enables any securities exchange to function.

Part of a clearing member’s responsibility is to assume “full financial and performance responsibility for all transactions executed through them and cleared by the CME.” If you execute a trade on the Comex and fail to pay, the firm that took the other side of your trade is on the hook if you don’t pay for the trade. Or if you have elected to take delivery of a gold bar but can’t pay for it, the Comex member that has the other side of your contract is on the hook for the money.

Each clearing member is required to post a performance bond, a specified minimum amount of funds or collateral value that functions as a reserve to reinforce a clearing member’s obligation to guarantee the trades the clearing member executes. Think of this as a margin requirement.

A warrant that has been issued, which signifies titled interest in a gold bar, can now be used as collateral for the performance bond requirement. A warrant used this way is the “pledged gold” in the warehouse report. The gold bars connected to a warrant being used as collateral cannot be used to satisfy contract delivery requirements of the entity using the warrant as collateral. But the gold connected to warrants is still counted as part of the Comex gold stock.

Additionally, Comex clearing members can use what is called “London gold” as performance bond collateral. The CME rulebook does not define “London gold.” Presumably these are the standard 400-ounce London Bullion Market Association bars stored in a London vault.

But the term “London gold” remains unexplained and nebulous, and recently the CME tripled the amount of “London gold” that can be used by a clearing member as performance bond collateral, increasing it to $750 million from $250 million.

Why has the exchange tripled the amount of “London gold” that can be submitted as performance bond collateral and included Comex gold bar warrants as assets considered acceptable collateral?

As has been well documented, the open interest in Comex gold contracts has just reached a record high. The current open interest, more than 716,000 contracts, is 85 times greater than the “registered” gold stock on the exchange and almost nine times more than the total amount of gold in Comex vaults, including “pledged gold.”

As a technical matter “pledged gold” should not be considered part of warehouse stock because it cannot be delivered. The financial risk assumed by the Comex CME clearing members escalates with each new contract of open interest, especially to the extent that the open interest is “uncovered,” meaning the Comex lacks enough gold to bear the risk of a delivery default.

For this reason the size of the performance bond posted by each clearing member increases pro-ratably with the rising value of the gold contract open interest. (That is, clearing members that process an increased amount of contracts require higher margin deposits.)

This raises the question of the quality of “London gold” as collateral. The issue with “London gold” is whether the gold is verifiably sitting in a London vault or if the posting bank — for example, HSBC — even has legal title to the bar.

Hypothecation is when a bank borrows a gold bar held in its custody for a client, a bar owned by someone else, and uses that bar for another purpose like a delivery requirement or perhaps for posting it as collateral on the CME.

What process is in place to verify that the bank has the right to use that bar, or to verify that the bar even exists?

Even if the entity posting “London gold” as collateral may have some type of documentation showing rights to the bar in London, that bar may have been borrowed — that is, hypothecated by the London vault custodian and sent to Asia or India to satisfy a delivery requirement.

Keep in mind that the Bank for International Settlements now allows “gold receivables” to be counted as gold in custody. This hypothecated bar may exist only as a receivable entry on the books of the London vault operator.

Finally, there is the question of big bank liquidity. The “repo” and money printing recently undertaken by the Federal Reserve Bank of New York reflect a liquidity squeeze in the banking system. I would prefer to receive cash as collateral against a performance bond if I were in the business of extending credit for trading activities. Anyone with a brokerage account is required to use cash as margin equity. Try using a piece of paper that says you have titled interest in a gold bar.

It’s quite possible that the ongoing squeeze in big bank liquidity has forced the CME to triple the amount of “London gold” said to be available to the exchange and to include Comex gold warrants as acceptable collateral in lieu of requiring cash or Treasury bonds. This is the only way the CME could present the appearance of financial integrity and security with respect to the soaring gold contract open interest — open interest that is created by bullion banks and hedge funds and that bears almost no relation to the underlying stock of physical gold — to help contain the gold price.

The timing of the expansion of the collateral package is curiously correlated directly with the rapid escalation in gold contract open interest and the recent liquidity squeeze in the banking system.

The tripling of the use of “London gold” and the inclusion of warrants as collateral suggest that the CME and its Comex are preparing to allow an even greater expansion in Comex gold open interest to increase the ability of Comex banks to engage in gold price manipulation. Why else would the CME allow the open interest in gold contracts to dwarf the actual physical gold in Comex vaults?

Ultimately, the use of “London gold” and Comex warehouse warrants expands the fractional-reserve gold banking system and further weaponizes “paper gold” in support of the longstanding bullion bank and central bank campaign to suppress the gold price.

10 thoughts on “Did the Comex Just Create More ‘Paper Gold’ For Price Suppression?

  1. Dave,
    I always enjoy and appreciate your work. In the case of this article about the new Comex “Pledged Gold” category, don’t you think that you should have acknowledged the work of Ronan Manly at Bullionstar who first drew attention to this issue and wrote an article about a week ago which covered exactly the same ground as your peice?

      1. He is right, Ronan Manly produced his article well before yours, how can he reads your article first ? He is not “chastising”.

  2. Dang Dave

    I’m sure glad we got smart people like you figgurin’ out how the CME is running their newest game of Three Card Monte.

    I sees them cards got new names
    Registered, Eligible and Pledged

    Any fool that gits hisself into that game and don’t know who’s the fish, his name be Mack

    I see it a little different. After someone’s jumped and Pledged into the gang; after the gold heist’s done, a Warrant’s issued for the gang’s arrest. Then they’s Registered as sex offenders, git sent to Pelican Bay Super Max , and after 10 years they’se Eligible for parole.

    Not ‘zackly sure where ‘counter party’ and ‘lubricant’ fit into this scheme but that’s why prisons got Segregated Housing Unit; SHU for that sort of inmate.
    What happens in prison stays in prison. Mostly.

    But I’m talking about the lowest form of criminal scum, not the honorable and esteemed members of the CME and COMEX

    When it comes to HSBC my mind wanders to words like
    Felony Arrest and Execute

    Yur friend F Gump

  3. Mr. Kranzler,
    As always your analysis is most appreciated. Have to admit watching the AU. Crimex hit 700-800K a day in trading volume is astounding as is the Repo and other machinations we are seeing in spades every day. Trying to relate this massive cluster**** to most anyone is most depressing as it takes just a few seconds to see the eyes start to glaze over. It seems the hole gets exponentially bigger and the obfuscation is leveraging the whole shatshow to the outer limits of my imagination on a daily basis. The unbounded limits of what they pull out of the rectal cavities is astounding. The limits seem to expand at rates beyond reality. The sheriff of limits has continued to be abrogated. Any idea when the bell rings and the bell tolls? Not that it hasn’t just seems they just find a new way to perpetuate the scam. The chasm seems to always produce a causeway to escape for yet another day. Does this lunacy have no bounds?

  4. “… meaning the Comex lacks enough gold to bear the risk of a delivery default.”

    While there are often justifiable gripes about the Federal Reserve/Fiat scheme, the gold & metal markets are governored by similar scams.

    The concept of “wealth” is just a system of massive manipulation.

    Plus, the greater the continued concentration of wealth (including ALL asset classes), the more ANYTHING of “value” can be manipulated.

    It’s interesting to look at the 50+ year chart of gold prices, and realize that between the late 1970’s to early 2k’s, a lot of people lost a lot of money on gold & other “precious” metals.
    Then to look at the possible bubble/pricing spike of recent (since ~2008) and compare it to the bubble/spike of the late 70’s.

    I’m fascinatedcinated, and perplexed by the human addiction to perceived “wealth”.

    People seemingly have nothing else of intrinsic, natural personal value in their lives (like morals, ethics, talents, knowledge, etc.) to cherish.

    We are all mere slaves to the highly controlled system.
    And yet we most all think we maintain “free will”.

    1. They have already convinced even a lot of highly educated people like those with PhD’s in economics of total BS.

      When otherwise intelligent/educated people think shares of a gold ETF are as good or better than physical ownership…brain damage alert.

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