The Global "Fractional" Paper Bullion Market Is Collapsing

I wrote last week that there was a scramble going on globally by entities seeking to take physical possession of the gold on which they have a legal claim, most of which is sitting either in alleged “allocated” big bank bullion vaults or in alleged “allocated” accounts in Comex custodial warehouse vaults. 

I also demonstrated mathematically, using the reported numbers on the CME website for precious metals futures open interest and warehouse gold/silver stocks, that the amount of gold represented by Comex futures open interest far exceeds the amount of deliverable gold on the Comex (the analysis is even more extreme for silver).  In fact, if less than just 10% of the buyers of June gold contracts demand delivery, the Comex won’t have enough gold to cover the legal claims.  For silver (July silver) it’s even more extreme.

This is a global problem and not just endemic to the Comex.  Globally, the legal claim of ownership on physical gold far exceeds the amount of gold represented by paper futures, LMBA forward contracts, leased gold and vault receipts.  The latter – vault receipts – is where the big banks in London have the most severe problem, as gold this is supposed to be sitting in “allocated” accounts under the name of the legal owner who bought and paid for those bars has been largely leased out.  I’ll get to that in a minute.

First, I received this comment from John Brimelow’s “Gold Jottings” report, which comes from Gerhard Schubert, head of Precious Metals at Emirates NBD, the largest banking group in the Middle East.  Keep in mind that Middle Eastern buyers demand physical delivery of their gold.  Here’s the quote from his latest weekly report:

I have not seen in my 35 years in precious metals such a determined and strong global physical demand for gold. The UAE physical markets have been cleared out by buyers from all walks of life. The premiums, which have been asked for and which have been paid have been the cornerstone of the gold price recovery. It is very rare that physical markets can have a serious impact on market prices, which are normally driven solely by derivatives and futures contracts…

I did speak during the week with several refineries in the world, of course including the UAE refineries, and the waiting period for 995 kilo bars is easily 2-3 weeks and goes into June in some cases. A large portion of the 995 kilo bars in the UAE goes normally into the Indian market, but a lot of the available 995 kilo bars are destined for Turkey, at this time. We heard that premiums paid in Turkey have reached anything between US $ 20 and US $ 35 per ounce.

The price hit of two weeks ago has triggered a serious scramble for physical gold and silver.  Reports like the above comment have been flooding from Europe, the Comex has had about 30% of its gold bars literally drained from the customer accounts of the Comex bank custodian vaults and the U.S. mint is running way behind on demand for silver eagles and some weights of gold eagles.  Ditto for the Canadian mint.

And then I get a call from a close friend in NYC last Friday.   His career has been in private wealth management in the private bank department of the Too Big To Fail banks.  He’s been looking for work and chats with old colleagues all the time.  He called my Friday and told me he just got off the phone with a very high level private banker from a big Euro-based TBTF bullion bank, but who was at JP Morgan until about six months ago.

This guy told my friend that there is a scramble by many very wealthy European families/entities to get their 400 oz bars out of the big bank vaults. He knows this personally, for a fact.  He said the private banker community is small over there and the big wealthy families all talk to each other and act on the same rumors/sentiment.  The Bundesbank/Fed and the ABN/Amro situations triggered this move.  He knows for a fact JPM tried to calm fears about 3 months ago by sending a letter to it’s very wealthy clients assuring them their bars were safe, in allocated accounts.  He said right now those same families are walking into the big banks like JPM and demanding delivery of their bars or threatening to take their $100’s of millions in investment portfolios to competitors.  His wording was “these people are putting a gun to the heads of private banks and demanding their gold.”

I know this information is good because I know my friend’s background and when he tells me his source is plugged in, the guy is plugged in. Not only that, my friend’s source said that there’s no doubt that someone like a John Paulson, not necessarily specifically him, but entities like him or it may include him, have held a gun to GLD and demanded delivery of physical in exchange for their shares.

Regarding the Bundesbank/Fed situation, recall that the Bundesbank asked to have some portion of its gold sitting – supposedly – in the NY Fed vault in NYC sent back Germany. The total amount is 1800 tonnes.  After behind the scenes negotiations, the Fed agreed to ship 300 tonnes back over seven years.  To this day, the time required for that shipment has never been explained.  Venezuela demanded the return of its 200 tonnes held in London, NYC and Switzerland and received it all within about four months.

And regarding the ABN/Amro situation.  ABN/Amro offered a gold investment account product that offered physical delivery of the gold in the investment account when the investor cashes out.  About a week before the gold price smash, ABN sent a letter to its clients informing that the physical delivery of the bullion was no longer available and that all accounts would be settled with cash at redemption. 

I believe it was these two events that triggered the big scramble for physical gold by wealthy families/entities who were suspicious of the integrity of their bank vault custodial arrangement anyway. 

In fact, what we are now seeing is the final stages of the paper gold/silver bullion market, which has grown at a parabolic rate over that last 13 years, and includes Comex futures, LMBA forward contracts, OTC derivatives – which is an even bigger paper market than the Comex – leased gold claims/contracts and warehouse receipts. 

At some point there will be an even bigger “run on the bank” by those looking for delivery of the physical gold/silver that they have been “assured” is sitting in their “trusty” bank custodian vault.  I know for myself that I have seen enough from the JPM’s of the world to not trust anything they do or say.  I think a lot more people are finally coming to that same conclusion.  At some point there will be a complete collapse of trust in the paper monetary system and the price of gold/silver will really go parabolic, as the masses realize all at once – and far too late I might add – that everything that was rumored over the last 13 years about paper gold, gold leasing, etc is actually true.

26 thoughts on “The Global "Fractional" Paper Bullion Market Is Collapsing

  1. Great info, Dave.
    We can also help accelerate the Collapse by the taking following action:

    ON MAY 1ST, WE FIGHT BACK!!
    On May 1st, 2011, silver was massacred on the Sunday overnight Globex session.
    2 years later, we strike back!
    On Wednesday, May 1st, we have the opportunity to come together, and possibly break the Matrix!
    On May 1st, they will hear us loud and clear.
    Commit to buying silver on May 1st…but not just a normal purchase. We need to sacrifice. Sell something. Cancel a few restaurant meals. This is our freedom!
    DEMAND PHYSICAL SILVER ON MAY 1ST!!!

    ‪The Truth Rises – Coordinated Strikes Work Both Ways – May 1st 2013‬
    http://www.youtube.com/watch?feature=player_embedded&v=QGZ5f1G1Ep0

  2. Dave,
    I really enjoy your articles but … Hey dude lend me about 100K so that I can turn it into Shiny. I’ll gladly buy you a hamburger.

    Popeye

  3. One and the same. “Bullion banks” is the name given to the 5 or 6 – i forget – banks that are LBMA bullion custodial banks and have vaults in London. Most of those banks are the same ones that have Comex vaults. Brinks and a couple other non-banks also have Comex vaults. You can find that list on the CME website. You can use google to get the names of the London bullion banks.

  4. Are you hearing anything specifically about problems with Perth Mint on their unallocated accounts? I have friends in that situation and I warned them about a year ago to at least go to allocated or move it to physical, but so far no action by them. Any smoke signals that Perth is short the shiny stuff?

    1. The Perth mint is run by honest people. Their obligations to clients are guaranteed by the government of Western Australia under an act of their Parliament.I have had gold in their unallocated pool account.To test them I asked them to mint 50ounces as one oz coins and send them to me.The coins came by Fedex within 10 days to my New Zealand address.My good friend runs a goldmine just out of Westport on New Zealands south island .He sells them his raw gold.He and I have great cofidence in the Perth Mint based on our dealings with them.

  5. @ DayQuil

    This may answer your query about the Perth Mint:

    http://www.bloomberg.com/news/2013-04-30/perth-mint-works-through-weekend-as-gold-demand-surges-on-price.html

    Their unallocated accounts are backed by their working inventory of metal, which they seem to have enough of to keep their machinery working over the weekend.

    They are on record as saying that they will have to cease production of fabricated metal products (coins and bars) if their inventories are in danger of becoming inadequate to back unallocated accounts.

    I am told that they are still shipping six metric tons of one kilo gold bars to Hong Kong every week.

    1. It’s only prudent to stock-up on required medical supplies as well as food, water source(s) and shelter. Every family is different. PM’s to me is wealth preservation once we come-out on the other side. We can debate what the Event Horizon will be but we can all agree that something is afoot within the monetary system. I’m ready for any eventuality. Bring it on! I’m locked and loaded as well. Sheep get slaughtered. Don’t be a sheep. I want nothing and expect nothing from my government. I’ll take care of myself and family without anybody’s help! “How To” books and a garden are highly recommended…..GOOD LUCK to All

  6. Terrific article Dave. I believe the world is in the process of returning to the old law of supply & demand,
    which is eventually going to replace the phoney, make believe, unaccountable system now in place
    that has made bankster scumbags very rich while making the majority of the population much less so.

  7. If don’t hold it, you will be screwed as all paper assets burn, no savings, retirements are safe in the western world of CB’s & the likes of GS & JPM & the US Gov!

  8. Thank you for one of the best and revealing articles.
    I don’t need to go far. Gold and silver are the elites’s money. So pick some up if you can. It will be your food, and necessities in the not so near future. This is Anonymous #2

  9. Everything I have heard or read about Perth Mint is that it is safe, guaranteed by the government of Western Australia. The fly in the ointment is what will happen when there is a bank holiday in Australia. Perth Mint will surely close. And then what?!

    1. It’s not really a matter of how many $ you turn gold or silver coins into if the currency collapses. It is a matter of how you expect to fund your retirement or buy a house with bank account savings, treasury bills, or bank controlled mutual funds when the purchasing power of those things evaporates. If US currency does collapse, a couple of gold coins could probably still buy a small car, which you won’t be able to buy during a hyper-inflation event with paper money.
      The government of Yugoslavia printed $1 million dollar bills and it is now worth nothing, except as a curiosity. As a more likely and slightly less dramatic example, take a look at what happened to the Rouble after the USSR collapsed as a result of an unsustainable economic model. That could easily happen in the US or UK within the next few years.
      The value of paper currency is entirely based on the confidence that people have that others will accept its value. That is based on a reflection of the confidence in the government’s ability to manage money.

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