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In
the Middle Ages alchemists toiled in vain to transmute lead into gold. One
wonders why they used such an expensive starting material, such as lead, when
modern alchemists in the gold world have succeeded in transmuting paper into
gold. This article reveals the anatomy of a scam that has been perpetrated on
investors and goes a long way to explain and tie together developments in the
precious metals markets in recent years.
As
many readers may know, I have recently been reporting on how delivery notices
at the COMEX cannot be reconciled with movements of metals from and into the
warehouse. Clearly these are not going to match on a daily basis, just as
orders into a factory will not match shipments out on any given day, as there
is a time lag. But when averaged over a month, the "flow" of metal
inventory should be comparable to the delivery notices issued. This is just
basic accounting. But I have observed that reconciliation is almost
impossible with the COMEX data. The only explanation I could think of is that
settlement of contracts must be bypassing the warehouse. But how could this
be possible, as I thought all contracts had to be delivered via a COMEX
registered warehouse?
The
COMEX states:
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Delivery:
Gold
delivered against the futures contract must bear a serial number and
identifying stamp of a refiner approved and listed by the Exchange. Delivery
must be made from a depository licensed by the Exchange."
This
seems unequivocal until you find this exception:
Exchange
of Futures for Physicals (EFP)
The
buyer or seller may exchange a futures position for a physical position of
equal quantity. EFPs may be used to either initiate or liquidate a futures
position.
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The
COMEX trading rulebook clarifies further:
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104.36
Exchange of Futures for, or in Connection with, Product (Physical)
(A)
An exchange of futures for, or in connection with, product (EFP) consists of
two discrete, but related, transactions; a cash transaction and a futures
transaction. At the time such transaction is effected, the buyer and seller
of the futures must be the seller and the buyer of a quantity of the physical
product covered by this Section. The quantity of physical product must be
approximately equivalent to the quantity covered by the futures contract.
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So
what this means is that contracts can essentially be settled without going
through the COMEX warehouse. Futures contracts and a physical commodity
equivalent can be exchanged outside of the exchange and an EFP form can be
filed to the clearing department at the COMEX. What's more, the physical
commodity doesn't have to meet the specification of the COMEX Gold Contract
of being a 100 troy ounce bar or three 1Kg bars of .995
fineness.
So
what can be delivered as the physical gold commodity?
This
is where it gets very interesting. On February 18, 2005, the NYMEX, parent of
the COMEX, issued this announcement:
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http://www.cftc.gov/files/submissions/rules/selfcertifications/2005/rul0...
Exchange
Rule 104.36, which governs exchange of futures for physicals ('EFP')
transactions on the COMEX Division, refers to a 'physical commodity' as one
of the required components of an EFP transaction but also indicates that the
physical commodity need only be substantially the economic equivalent of the
futures contract being exchanged.
The
purpose of this Notice is to confirm that the Exchange would accept gold-backed
exchange-traded funds ('ETF') shares as the physical commodity component for
an EFP transaction involving COMEX gold futures contracts, provided that all
elements of a bona fide EFP pursuant to Exchange Rule 104.36 are satisfied.
Thus,
acceptable gold-backed and exchange-traded ETF funds include, but are not
limited to, the iSharesCOMEX Gold Trust (ticker: IAU), which began trading on
the American Stock Exchange on January 28, 2005.
The
trust is an exchange-traded fund that provides a means of obtaining a level
of participation in the gold market through the securities market. The trust
shares are intended to constitute a means of making an investment similar to
an investment in gold. Each trust share represents a fractional undivided
beneficial interest in the trust's net assets which consist primarily of gold
held by a custodian on behalf of the trust. The shares of that trust are
expected to reflect the price of gold less the trust's expenses and
liabilities.
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So
the gold ETF with the symbol IAU started trading on January 28, 2005, and
three short weeks later the shares of IAU became equivalent to real physical
gold in the eyes of the COMEX for delivery against futures contracts in an
EFP transaction! I
If
that doesn't blow your socks off, I don't know what will.
Also
note that the ETF mentioned is a COMEX product! How convenient!
Where
are the regulators? This ETF is not equivalent to gold. Note the description:
"Each trust share represents a fractional undivided beneficial interest
in the trust's net assets which consist primarily of gold."
All
that is being guaranteed is that each share is a fraction of the ETF assets.
The net assets could be 1 oz of gold while the face value of the total shares
sold could be 100 million ounces!
The
notice does not restrict which gold ETFs are eligible, so clearly the
infamous GLD is also eligible to be considered as good as physical gold in an
EFP transaction.
Right
from the inception of the gold ETFs GLD and SLV, the Gold Anti-Trust Action
Committee has deduced from studies of the ETF prospectuses that these funds
very likely do not hold gold and silver to fully back the issued shares
because the prospectuses don't categorically require it. (See footnotes 1 and
2.) In fact, the ETFs may have no gold or silver at all.
What
seemed bizarre to GATA at the time was that the two mega-short anti-gold
investment banks, JPMorgan and HSBC, would be involved in the launch and
operation of precious metal investments that, on the face of it, would create
huge investor demand for the very metals in which the banks hold massive and
clearly manipulative concentrated short positions.
Now
all becomes clear. The system is the ultimate alchemy. If ETF shares are NOT backed
by gold but are accepted by the COMEX as equivalent to physical gold ...
presto! You have turned paper into gold -- and paper is a lot cheaper than
lead.
A
futures market is supposed to provide price discovery for a commodity. In the
gold market this notion has been hijacked because settlement can be made with
a derivative instrument, such as an unbacked or partially backed ETF share.
If that derivative instrument is not backed by gold on a 1:1 basis the scheme
allows an artificial apparent increase in the supply of gold and so
distorting price discovery toward lower prices.
Such
a scam would be in grave danger of becoming exposed if anyone knew the true
inventory condition of the vaults of the ETFs. That problem is easily solved
by having HSBC be the custodian of GLD and JPMorgan be the custodian of SLV.
I
have not found anywhere that COMEX accepts ETFs as an
equivalent to physical silver for an EFP transaction, which probably
explains why silver warehouse movements are much larger than those of gold,
and perhaps may indicate that physical silver is the cartel's Achilles heel.
We
have all wondered how GLD could have amassed a stunning 1,100 tons of gold in
less than five years without the gold price exploding. This represents buying
10 percent of all global gold output each year. What's more, in the last nine
months the ETF holdings almost doubled, adding approximately 500 tonnes or 23
percent of annual global production. And this when the signatories to the
second Washington Agreement on Gold have reduced their gold sales to a
trickle, from 500 tonnes per year. If the GLD shares are unbacked or only
partially backed by gold, the alleged 1,100-tonnes gold holding would be easy
to achieve with just the use of a printing press for the share certificates.
In
looking at COMEX reports the EFP transactions are reported under "Other
Volume." This category is huge compared to delivery notices. For
example, on July 8, 2009, the gold price fell by $20. Looking at the relevant
COMEX report --
http://www.cmegroup.com/trading/energy-metals/files/cmxopint070809.pdf
-- on
Page 4 "Other Volume" is 9,540 contracts or 954,000 ounces, while
the much more visible delivery notices were only 17 contracts or 1,700
ounces! Judging from many reports the "Other Volume" category is
orders of magnitude larger than the delivery notices.
What
I don't know is how many of these trades are settled with the COMEX-approved
gold equivalent ETFs or even if any are. I have sent an email to the COMEX to
ask them. I won't hold my breath for a reply. My guess is that a lot of EFPs
are settled this way, which would account in part for the meteoric issue of
GLD shares. But the COMEX should be transparent; it should be required to
publish exactly what is being traded as "Other Volume." In fact if
the COMEX wants to be above suspicion it should insist in its rules that EFPs
must be settled with gold that meets exactly the COMEX gold contract
specification. The EFP then would facilitate delivery instead of facilitating
a change in delivery obligations.
Why
was it necessary to introduce a mechanism to exchange ETF shares in lieu of
physical gold? Where there is smoke there is fire.
Adding
credence to this supposition is that GLD has gained wide acceptance with
mutual funds, pension funds, and university endowment funds. Many
sophisticated investors believe ETFs to be equivalent to investing in
bullion. This makes this fiat paper bullion scam easy to perpetrate.
It
would appear that the COMEX gold warehouse is merely a window dressing
displaying an almost static 2.5 million ounces of dealer-owned gold
inventory. But it would appear the vast majority of settlement occurs out of
the average investor's view AND, therefore, out of the view of the
regulators.
This
means that the COMEX is not what it seems. Delivery for an EFP only needs to
be "substantially the economic equivalent" of the deliverable
commodity! A default could occur at any time if this sorcery of swapping
paper for paper suffered a serious setback.
The
members of the Gold Cartel must be very proud of themselves for succeeding
where the ancient alchemists failed. In fact, they are so proud they decided
they didn't need to limit the scam to the COMEX. They have implemented it on
the Tokyo Commodity Exchange too.
On
October 29, 2008, the TOCOM made the following announcement:
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Based
on the Memorandum of Understanding signed in January this year, The Tokyo
Commodity Exchange (TOCOM) and Tokyo Stock Exchange (TSE) have launched
'Inter-market Cooperation Workshop' in efforts to improve convenience for
participants of both markets, and studied to reinforce cooperation between
the commodity market and the stock market.
In
light of the study at the workshop, TOCOM has added a 'physically backed
commodity ETF' as a possible physical for EFP (Exchange of Futures for
Physicals) transactions at the exchange, which allows seller and the buyer, who
holds agreement for physical transactions, to conclude the contracts in the
commodity futures market without continuous trading of physicals.
Therefore,
the SPDR Gold Shares, physically backed commodity ETF listed on the TSE,
which has a correlation with the gold spot price, can now be used as a
physical for EFP transaction on TOCOM's gold market.
Thanks
to this new arrangement, it is expected that the link between TSE's SPDR Gold
Shares market and the TOCOM gold market will be strengthened and that the
price reliability, as well as the liquidity of both markets, will be
enhanced.
For
inquiries about this news release, please contact:
Planning
Department, The Tokyo Commodity Exchange
http://www.tocom.or.jp/news/2008/20081105-1.html
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Notice
the comment that the "liquidity of both markets will be enhanced."
There can be little doubt about that! They can print as many ETF shares as they
want and they can then settle as many EFPs as they want ... and guess what
happens to the price of gold with such an apparent increase in liquidity.
Yes, it will be suppressed. As they said in the release, "the price
reliability will be enhanced."
Now that
reminds me of Alan Greenspan, who said, "Central Banks stand ready to
lease gold in increasing quantities should the price rise." But why get
the central banks to lease the real stuff when an ETF can print up an IOU
that the unsuspecting investor will accept to be as good as gold?
Does
this mean that the alchemists of the Gold Cartel have discovered the Elixir
of Life for their gold suppression scheme so that it will go on forever?
No,
absolutely not. Faith in anything paper is going out of fashion. California
is shortly going to discover that people don't like IOUs. Central banks
outside of the G7 countries are buying gold, and I am sure they know about
this alchemy. I doubt that the Chinese will accept GLD shares for settlement
of futures contracts.
If
you want an investment in bullion, then make sure you have an investment in
bullion. In my opinion what I have presented here, and what other analysts
have written, indicate that GLD and SLV are not investments in bullion. They
are mere IOUs in bullion. Take physical delivery of gold and silver from the
COMEX. They have only 2.5 million ounces of the real stuff in the gold
inventory. That is a paltry $2.3 billion at today's price.
The
Gold Cartel is desperate to suppress gold and keep the dream of a
"strong dollar" alive along with maintaining low interest rates by
using a mechanism described by Professors Summers and Barsky in their
research paper "Gibson's Paradox and the Gold Standard." The London
Gold Pool used real gold to try to suppress the gold market, and it failed.
The paper IOU is going to be even less successful. Imagine what will happen
to the gold price when the holders of the paper IOUs go looking for physical
gold instead. The Gold Cartel has built a dam on the river of physical gold
demand, thinking that it is clever enough to defy the laws of supply and
demand. Wait until the dam bursts to experience gold fever such has never
been seen before.
Buy
real gold and silver before the dam bursts!
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References
[1]
"The Paper Game" by James Turk
http://www.financialsense.com/editorials/turk/2007/0305.html
[2]
"Unanswered Questions about the Silver ETF" by James Turk
http://goldismoney.info/forums/showthread.php?t=125607
Adrian Douglas
Marketforceanalys.com
Also
by Adrian Douglas
Adrian Douglas is editor of the Market
Force Analysis letter (www.marketforceanalysis.com),
which uses proprietary methods of determining market turning points.
Subscribers receive bi-weekly bulletins. He is also a member of GATA's Board
of Directors.
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