Articles & Blogs - Gold Commentary

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In Part I, readers were reminded yet again of the totally unsustainable parameters in the gold and silver markets. To be specific, manipulating gold and silver prices lower (for several decades) is resulting in the collapse of inventories – with the only possible long-term outcome being the collapse of the bankers’ fraudulent paper-bullion markets.

As with any other item, the collapse in inventories (and the increasing scarcity that implies) means that gold and silver prices must concurrently soar as the banksters’ paper-bullion scams collapse. Putting these two factors together, readers will soon see that the final rupturing of the paper-bullion markets does not necessarily have to result from any sort of formal default event.

Indeed, with the Banking Oligarchs in total control of both our crooked markets and our even more crooked market ‘regulators’, it seems highly unlikely that a formal default would be allowed to occur. Much more likely, as bullion inventories (most likely in the silver market) reach zero the servant-regulators will simply declare an indefinite suspension of trading in the paper markets.

If plummeting inventories are leading toward a default-event, yet formal default would not/will not be allowed to occur; what other mechanism could produce the inevitable rupture of these inventory-depleted markets? I hinted at the answer at the end of Part I: decoupling.

Certainly most readers could deduce for themselves what I was implying: a decoupling of prices between the (legitimate) “physical” bullion market and the corrupt, paper-bullion markets controlled by the bullion banks. However, while the bottom-line may be quite obvious, the path taking us to that final endpoint is likely not nearly as apparent.

In part, this is due to the fact that such a decoupling could be caused by a multitude of factors, including parameters which have nothing to do with the bullion market (directly) at all. For example, as the Crash of ’08 intensified and insurance behemoth AIG teetered on bankruptcy; the bullion funds for which it was guarantor briefly plunged in value. Obviously, had AIG not received its $180 billion in emergency hand-outs from the U.S. government and had been allowed to go bankrupt (like Lehman Brothers); then those bullion funds could have collapsed.

This may not seem like an especially dire event, especially if the funds involved were smaller, and thus had a lower profile than some of the mega-bullion funds in the marketplace. However, consider the inevitable human reaction whenever something bad happens to an investment very similar to one of our own.

All holders of bullion funds (and bullion-ETF’s) would immediately take a much harder look at their own holdings; to see if their own investments faced similar (or different) vulnerabilities. Here is where some seemingly insignificant collapse of a minor bullion fund/ETF could quickly mushroom into a market-ending event.

Regular readers are familiar with my frequent criticisms of the two largest bullion funds in the world: the bullion-ETF’s known (by their U.S. trading symbols) as GLD and SLV. My suspicions here are obvious: any close scrutiny of either of these two funds reveals a totally preposterous business model – fraught with massive counterparty risk for anyone foolish enough to hold units in either fund.

While readers looking for a more detailed critique can refer to previous commentaries (such as “The Seven Sins of GLD”), for the sake of brevity I will focus on just one glaring anomaly: the blatant, gigantic conflict of interest involving the custodian of each of these funds.

In the case of GLD (or the “SPDR Gold Trust”), the custodian for virtually all its gold is UK banking behemoth HSBC: the largest gold-short in the history of the world. As already noted; it’s nothing short of preposterous that the world’s largest gold-short is also the legal custodian for the world’s largest long bullion fund. It is the epitome of the cliché “the fox guarding the henhouse.”

More than that, it’s a patently obvious conflict of interest. GLD markets itself to unit-holders as “the cheapest way” for investors to (supposedly) “hold bullion”. Unit-holders buy more or less at the spot price, and (as custodian) HSBC subsidizes these unit-holders by absorbing most of the costs of storage.

Obviously subsidizing the entry of small, long investors into the gold market directly undermines HSBC’s multi-billion dollar short position. We are left with only two possible conclusions. Either HSBC is engaged in one endless act of gross negligence through undermining its own short position by subsidizing these long investors; or, the true nature of the fund is not as it is portrayed to the investing public.

I have previously offered an explanation which would rationalize this (apparent) conflict of interest: GLD is nothing but a leveraged sham – used to fund/back HSBC’s massive shorting operations. My reasoning here is very straightforward. HSBC has two massive positions/obligations in the gold market: it’s in-house short position, and its role as (long) custodian for GLD. However, only one of these two positions is ever audited. It would be a classic “shell game” except instead of using three shells, HSBC only needs two.

Immediately the conflict of interest disappears. Instead of sabotaging its own multi-billion dollar short position and subsidizing small investors; it would be using those small investors as chumps – to fund the massive shorting operations which undermine their own (long) investments. Which model is more plausible to readers: HSBC acting as a gold philanthropist, and subsidizing small investors against its own (massive) financial interests; or HSBC acting as a gold-predator, using the money of small investors against themselves?

In eerie/disturbing symmetry; the scenario is identical in the silver market – with JP Morgan penciled-in, in place of HSBC – except for one significant difference: global silver inventories/stockpiles have collapsed. With no (known) large, national stockpiles of silver; we have JP Morgan claiming to have possession of both of the world’s two, largest holdings of silver.

Here we have multiple layers of (apparent) illegitimacy. Along with the same conflict of interest with SLV (the iShares Silver Trust) which HSBC faces in the gold market; we have the sheer, grossly excessive size of these holdings. In a world starved for silver, JP Morgan claims to be holding a long and short position both of which are more than twice as large as the Hunt Brothers’ position in the silver market – when they were charged and convicted with attempting to ‘corner the market’.

The major difference between JP Morgan’s massive concentration(s) in the silver market today and that of the Hunt Brothers is that back at the end of the 1970’s when the Hunt Brothers made their effort at cornering the market, global silver inventories were more than ten times larger. This makes it much less plausible that a single entity could be in possession of both of the world’s two largest stockpiles of silver.

Again we are confronted with two possibilities. Is JP Morgan a silver philanthropist (and self-saboteur)? Or is JP Morgan a silver predator?

In summation, a decoupling event where paper-bullion prices go toward zero while the price for real/physical bullion soars could result from multiple causes or scenarios. It could come from direct fears or suspicions of the legitimacy of one of the major bullion funds; or it could start with the collapse of a much smaller, less-significant fund. Alternately, the triggering of this decoupling could be caused by some external event which threatens the solvency of the banks acting as guarantors/custodians for these funds.

We could also have a hybrid event. Fears of the solvency/legitimacy of one or more bullion funds could result in an exodus of unit-holders out of the paper-bullion market, and into the physical bullion market. What began as a “decoupling” could end up as a default event. Ultimately all that investors need to know is that sooner or later, most/all holders of paper-bullion products will be threatened with catastrophic losses.

[Disclosure: I hold no position in GLD or SLV; but do hold “physical” gold and silver bullion]

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written by Jeff Nielson, October 28, 2012

Would you plz. point to some (free) articles on (the depletion of) silver stocks on your site, from yourself or Mr. Butler or whoever has looked into this topic.

I have never researched Ted Butlers basic assumptions for myself, but I'm increasingly have my doubts about his/your premise. If the remaining stocks are so small why has there never been a real shortage ? Gold might be a complete different story though (stocks to flow). Thank you very much! Rudy

Thanks for your support Rudy!

"Navigation" is not my OWN strong suit either (lol), so there's no shame in my eyes in needing a little help getting around the site. In fact, we created a section on our site where we collected a lot of the more education-oriented writing.

We call it our "Education Vault".
http://www.bullionbullscanada.com/index.php?option=com_content&view=section&id=12&Itemid=147

For future reference, it's located in the flashing box in the center of our home page, slightly to the left. Perhaps my partner Chad made the flashing display a little too fancy, as I suspect that many users think (at first glance) that it's some sort of advertisement?

Also, for readers wanting information on specific companies, my third partner Brian Boutilier has compiled our Mining Company Database, covering silver miners, gold miners, and general metals miners:

http://www.bullionbullscanada.com/mining-company-database

It can be accessed from the toolbar at the top of our homepage. For more general reading, all my commentaries are archived into categories, which can be accessed from the toolbar at the top, and also at the bottom of our home page.

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written by RudyVienna, October 28, 2012

Jeff, first of all THANKS a lot for your astute commentaries - I learned an aweful lot from you during the last years - although there are some areas where I choose to have a different opinion .

I for my part am not astute enough to handle the search engine on your site, it seems. Would you plz. point to some (free) articles on (the depletion of) silver stocks on your site, from yourself or Mr. Butler or whoever has looked into this topic.

I have never researched Ted Butlers basic assumptions for myself, but I'm increasingly have my doubts about his/your premise. If the remaining stocks are so small why has there never been a real shortage ? Gold might be a complete different story though (stocks to flow). Thank you very much! Rudy

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written by Jeff Nielson, October 26, 2012

This may be a bit off topic but I wondered if you could shed some light on it. Where is the gold?

There is supposed to have been 165,000 tons mined to date. Central banks etc. hold about 35,000 tons, ETFs etc. hold about 2,000 tons and Indian citizens the largest jewellery gold holders by far have about 18,000 tons. This leaves over 100,000 tons to be accounted for. The rest in jewellery etc.? Doesn't seem reasonable to me.

Jimha, I'm afraid that's more a question for historians and anthropologists to answer. As I noted in my commentary, VAST amounts of gold have been consumed in religious/cultural artifacts, and even the actual architecture. How many tons of gold are contained in the Taj Mahal (alone)?

People INSIDE these markets are unlikely to be able to provide any reliable data on how much of our gold has been devoted to these PERMANENT uses.

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written by jimha, October 25, 2012

This may be a bit off topic but I wondered if you could shed some light on it. Where is the gold?

There is supposed to have been 165,000 tons mined to date. Central banks etc. hold about 35,000 tons, ETFs etc. hold about 2,000 tons and Indian citizens the largest jewellery gold holders by far have about 18,000 tons. This leaves over 100,000 tons to be accounted for. The rest in jewellery etc.? Doesn't seem reasonable to me.

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