The View: A Classic Bank Run

What I offer here on this blog is a view, backed up by premises and interpretations, sculpted into a framework of understanding, challenged and tested through repetitive application. After my last post I had a couple of brief conversations. One was public, with Bron Suchecki, Senior Analyst for the Perth Mint in Western Australia. The other was by email with a "gold bug" who is also a professional in the gold mining and exploration industry.

Out of these conversations emerged a dichotomy of views on which I think I can shed some light. Mine is not "expert knowledge" like these two gentlemen. Instead, it is a simple understanding that I have gained from ANOTHER. If this sounds trivial next to the opinion of two "experts," then I invite you to judge for yourself after I make my case. As I implied, these two experts do not agree.

The difference in viewpoints that I encountered is nothing new, and from my perspective it extends far and wide in gold market analyses. It is a fundamental difference of opinion born of misunderstandings (on both sides in my opinion) about what is really underlying the events we can all see. It is difficult to explain, especially since most of you are firmly embedded in one side or the other, so please bear with me here.

As I have written on many occasions, I do not consider myself a "gold bug." So where necessary, I am going to broadly refer to three fundamental views as "the gold bug view," "the mainstream view," and "the FOFOA view." But unfortunately I cannot just lay these views out as simply as you would like. I need to lead you to my understanding. So here we go.

During our conversation, Bron wrote that the Bullion Banks are not, as he called it, "naked short" gold. He further explained his meaning, calling it "financially short" versus "physically short." They are not "financially short," in that they are not exposed to exchange rate risk, aka, any movement in the price of gold. Here Bron explains:

To clarify the distinction for our readers, let us consider a bullion bank with a physical ounce asset backing an unallocated ounce liability to its clients. If that bullion bank then lends that physical to a jewellery company who use it in their operations, then the bullion bank now has an ounce claim asset backing its unallocated ounce liability. From your point they are short “physical” but I would also note that the bullion bank is not short “financially”, that is they are not exposed to any movement in the price of gold.

Yes they are exposed to the risk the jeweller does not return the physical at the end of the lease. Probably more importantly, they are exposed to liquidity risk. I think this is the sense that you use “short” and is reflecting the issue of “maturity transformation” (see http://unqualified-reservations.blogspot.com/2008/09/maturity-transformation-considered.html for an excellent explanation of why this is a big problem).

My use of the word “short” is for situations where the bullion bank exchanges (or sells) the physical backing its unallocated ounce liabilities for cash. This creates a financial risk as there is a mismatch between the denominations of the liability (ounces) and the asset (dollars).

In other words, the bullion banks lend (rather than sell) "gold units" (be they real or paper) and as a result they now hold the claim or contract for repayment denominated in "gold units" (be they real or paper). I think Bron is trying to say two things at once here – that 1) "technically" they are not naked short, and 2) they have no "exchange rate risk," both satisfied by the stipulation that the gold units (real or paper credits) that they had lent are now being carried on the books as an asset (i.e., claim on repayment) for the same "gold units."

Bron rightly elaborates that this condition exposes the banks to the standard counterparty risk of default, as well as "liquidity risk" from the maturity issue with lending short-term demand deposits (such as checking accounts and unallocated gold accounts) in exchange for longer-term assets (repayment over time like mortgages and mining finance). However, what he fails to acknowledge is this – there is no clearly defined lender of last resort to cover the risks. So the banks are IN FACT exposed to "exchange rate risk" as their ultimate recourse for filling the resulting permanent (default) or temporary (liquidity) hole in their books is to go into the open market to buy the replacement gold with cash.

If you think hard about a bank that finds itself in this position, you'll eventually agree it's just a matter of degree whether one is completely naked or just "semi-nude" – depending on the extent to which the market price is running away from him. And in this case, because they are chasing gold with cash, they in fact have "exchange rate risk" too, even though the denomination of their books imply that they do not. More in a moment.

Bron again:

The second part of FOFOA’s comment is that any delivery to GLD by a bullion bank of physical gold that was supporting/backing the bullion bank’s fractional unallocated liabilities is a “synthetic supply” that effectively suppresses price by “divert[ing] growing investment demand away from the tightening physical market.”

I would note that for this statement to be true the bullion bank(s) in question must be naked short. Not all Authorised Participants for GLD would have access to the physical to do this, nor would they all be willing to take on such a financial exposure

What Bron is describing here is classic, straight forward short selling – borrowing an item and then selling it, knowing that you will have to buy it back in order to return it to the lender. And he concludes that the only way GLD should be considered a "synthetic supply" is to the extent that the Bullion Banks outright shorted gold, borrowed it from their unallocated creditors and sold it into the market via GLD shares.

Now we're getting close to the point where I think a slightly different view of the gold inside the bullion banking system will reveal a different reality. I will get to this view in a moment, but I want to throw out one situation where the Bullion Banks may be acting following Bron's rules and still creating a "synthetic supply."

Suppose the BB/APs created a few GLD baskets with some of their physical reserves but didn't sell those shares. Instead, they held the shares as part of their physical reserves. And because the carry trade and mine finance uses for their gold were trailing off, they found a new way to lend gold for an income. They simply lent out the GLD shares (rather than selling them) to hedge funds and anyone else that wanted to short GLD. The BB/APs now have no exchange rate risk, they still own the shares representing their gold, they are earning an interest rate on the lent shares, the short hedge funds are creating a "synthetic supply" that will not only divert demand, but also put downward pressure on price, and the BB/APs can call in their shares and physical gold if and when they have the need.

I think Bron's "mainstream view" suffers a little from the same thing that all mainstream views suffer from – the 40-year commoditization of gold. This view holds that gold is more or less just like any other commodity rather than the systemically vital FX (foreign exchange) wealth reserve asset that it actually is. Last year Bron quoted Jeffrey Christian in a post written in defense of Christian's "100:1" comment. I think this quote that Bron used from Christian's CPM website really reveals the prevalence of this view of gold as just another commodity:

"This article may help to clarify the complex world of commodity banking, in which gold, silver, and other commodities are treated as assets, collateralized and traded against. When we explain these processes to clients, we often refer to the same mechanics as they are applied to deposits, loans, and assets by commercial banks in U.S. dollars and other currencies. Banks treat their metal deposits in much the same way as they do deposits denominated in money, as the reserve asset against which they lend additional money to borrowers."

So no big deal, because we're just talking about commodities here, not money, right? And thanks to this view, gold still trades precariously (without a safety net) inside a banking system similar to other FX currencies – dollar, yen, euro – with one notable exception. It is the only one without a backstop, a lender of last resort, a Central Bank. This would not be a problem without the expansionary force of fractional reserve lending, even at a conservative ratio. More in a moment.

Okay, now on to my gold bug friend. He writes:

Hi FOFOA,

Imagine that you were a bullion bank (or group of bb’s) who had sold short 5,000 to 15,000 tonnes of gold.

Now you have been in trouble for the last 10 years as the tide has turned.

But what if you created a diversionary device such as an ETF that holds only a portion of the gold it says it does. You could use the ETF (GLD) to divert money from physical and then systematically skim off 10 to 50 tonnes at a time to refill your coffers as physical gold was picked-up. You would still be “making money” with leveraged tools on the paper market with the money you held from the prior sale of the gold so you would not be hurt as much as everyone thinks while you patiently picked away at the available physical gold.

This GLD tool would give you the ability to start to repay your gold while using that device also as a price-capping mechanism.

Perhaps that is what GLD is for.

Sincerely,
XXXX

I responded that I thought his view was a bit conspiratorial. In other words, too many (obviously) competing interests would have to be in on the conspiracy to make it work. I responded that the Trust is not in the business of "picking up" gold. And that I thought my view fit the evidence better. That all the gold bars claimed on the list are actually there. But that they were (mostly) never a market flow off-take, but rather a simple reduction in reserves. He came back with this:

Hi FOFOA,

So if I understand correctly, large clients of the APs would buy gold, give it to the ETF for shares and then sell the shares – is that where the retail investor share liquidity comes from? Or is it simply a shorting vehicle where people buy gold, sell it to the ETF for shares then sell the shares before every drop in the price of gold while retail investors buy?

Under my model, I propose that there are a handful of big bullion banks (BBs) who played the gold carry trade and they would indeed have had to have a “look everyone, behave or we’re screwed” agreement to play this game.

If the ETF was vacuuming up whatever physical gold was available for “retail ETF investors” from unknowing AP clients it would be a “visible” vehicle to hide in plain sight while it was ultimately the handful of the BB APs trying to acquire gold to cover their own gold shorts. The AP clients could short gold while the BB’s could skim it off to cover their own shorts.

This could allow the AP BBs to systematically take steady delivery of smaller amounts without raising eyebrows while also creating a GLD ETF “fractional reserve” vehicle which may only have 10% of the gold it advertises to divert cash from the physical market. Whatever gold it is able to secure from unknowing AP’s is skimmed away by the BB APs who are in the know. And the tonnage could grow to the sky while only 50 to 100 tonnes is ever really there – and even having multiple claims on the total amount as you point out!

When redemptions are made, the ETF / public would only see that one of the APs had taken delivery never really knowing where the gold is going after the AP has taken delivery (back to the Central Banks or held in an allocated account for the CB’s).

Does this make any sense?

It will be interesting to see where this goes – although it may just end in a big smoking hole and we never find out.

Sincerely,
XXXX

I think there is a tendency in the gold bug community to be overly focused on "bankers and central banks" as the main culprit against gold when in fact it was mostly the mining operations and private moneyed hedge funds that were doing the majority of the short selling (albeit through the services of the BBs) and engaging in the gold carry trade. My gold bug friend's view stems (I believe) from a misunderstanding of the processes that were exposed, among many other places, in Blanchard's 2002 suit against Barrick and JP Morgan and described in this Motion to Dismiss. I am referencing this document only as one example that also contains a good description of the gold lending and short selling process, filed by the defendant, Barrick Gold Corp., nonetheless.

Also, I am not passing moral judgment on past gold lending and short selling activities as I believe that in this case "morality" is not quite as obvious as most gold bugs think. I believe that it was "the system" that systematically held gold prisoner in the past. That gold would ultimately break free and cause massive systemic turmoil was never in question. Only the timing and the amount of turmoil was. As Another wrote in his first post, "Westerners should not be too upset with the CBs actions, they are buying you time!"

Anyway, the rough view is that physical gold was lent by the CBs to the BBs and sold short for the specific purpose of suppressing the price of gold on behalf of the CB's supposed genetic disposition against gold. This would have left the BBs short tonnes of physical gold owed back to the CBs in a rising price environment which can be deadly to the shorts. The more detailed view is that the gold lent by the CBs to the BBs was then lent to the miners like Barrick, who sold it (through the BBs) into the market for financing purposes. While the BBs borrowed gold from the CBs and affected the sale of the gold, the exchange rate (or price) exposure would have been on the miners, not the BBs in this case.

My view is that this was an all-paper deal, all around. That the BBs lent their own "gold liabilities on paper," claims against their fractional physical reserves, to the miners… on paper! In reality they gave the miners dollar cash from the sale of these "paper claims" to the Western gold bug marketplace, and booked as an asset the miners' obligation to repay the loan back in physical gold units.

So the BB was short paper gold to the market and long future physical gold payments from the miners. Of course this has the same effect on the market price of gold as the gold bug view above, but it does shift the causal relationships around slightly. Let me explain.

All that BB paper gold that was sold into the marketplace to fund mining operations (to hopefully spur growth in the physical stockpile) was redeemable on demand from the BB "gold window." And the most common way you take delivery at "the window" is you pay a little more to have your gold put in allocated storage.

Another wrote that the Western gold bugs were willing and excited to not only hold paper (unallocated) gold rather than the real thing, but to also trade in their physical, that had been sitting around collecting dust as a dead asset from 1981 through 2001, for this new paper gold. In other words, they gave up their physical to the BB pool of unallocated reserves in exchange for tradable paper BB liabilities. This was a kind of "reverse gold window" in the 1990s, taking in physical gold.

So, imagine two "gold windows" at the Bullion Bank. One is marked "incoming" and the other is marked "outgoing." At the "incoming window" you have "the West" lined up to turn in their physical gold for exchange-tradable paper liabilities. And right around the corner you have "oil" lined up taking delivery or allocation. It is this flow that allowed the oil for gold deal to go on as long as it did. But then something happened.

The thing was, the incoming flow from the mines was not exploding as hoped and expected. And the overall flow from the mines combined with the Western gold bugs puking up their private stashes was nothing compared to the sheer volume of the "oil" wealth in line around the corner. At the current price there was literally unlimited demand at the "outgoing" window and a limited supply coming in. This is what Another meant when he wrote that the oil states had already (almost inadvertently) cornered the gold market by 1997.

ANOTHER: "People wondered how the physical gold market could be "cornered" when its currency price wasn't rising and no shortages were showing up? The CBs were becoming the primary suppliers by replacing openly held gold with CB certificates. This action has helped keep gold flowing during a time that trading would have locked up."

This is important! Important enough that it was in Another's very first post. And this blogger (at least) believes Another was most probably a European CB insider, so as to give his words significant weight.

What he's saying here is that when the CBs lent gold to the BBs, it was in a banking backstop or lender of last resort capacity, not unlike when the Fed created trillions to backstop the frozen interbank lending market in 2008 or when it swapped billions with the ECB in 2009 as a Eurodollar backstop. All the BBs ever got from the CBs was paper, "CB certificates." Think of it in commercial banking terms. These "CB certificates" would have been analogous to "reserves held at the Fed." Reserves held at the Fed fill a void of cash in the vault for the banks, just like these high powered certificates acted like physical reserves to the BBs.

ANOTHER: "This whole game was not lost on some very large buyers WHO WANTED GOLD BUT DIDN'T WANT ITS MOVEMENT TO BE SEEN! Why not move a little closer to the action by offering cash directly to the broker/bank ( to be lent out ) in return for a future gold note that was indirectly backed by the CBs. That "paper gold" was just like gold in the bank. The CBs liked it because no one had to move gold and it took BIG buying power off the market that would have gunned the price!"

But then, like I said, something happened:

ANOTHER: "The Asians are the problem, by buying up bullion worldwide and thru South Africa they created a default situation on all the paper, for the oil / gold trade! …Asia put an end to a sweet deal for the West! From the early 90s it was working very well. But now: The problem with gold physical supply is very real indeed! … The oil "understanding" was broken by the Asians. More gold has been sold than can ever be covered! This market is not the same as the past. … The great mistake by the BIS was in underestimating the Asians.

"Some big traders said they would buy it all below $365+/- and they did. That's what forced LBMA to go on a spree of paper selling! Now, it's a mess. … Instead, the BIS set up a plan where gold would be slowly brought down to production price. To do this required some oil states to take the long side of much leased/forward gold deals even as they "bid for physical under a falling market". Using a small amount of in ground oil as backing they could hold huge positions without being visible. For a long time they were the only ones holding much of this paper. Then, the Asians began to compete on the physical side." (See this post for more detail on the oil for gold trade.)

Now the real picture is starting to emerge. "Oil," lined up at the "outgoing" gold window, had the physical flow already cornered because of oil's indispensable value to the West. Then the Asians showed up at the window. Well, not completely. They were also taking supply right out of South Africa so it never made it into the Western paper liability system, the BB reserves. This caused the BB reserves (think cash on hand in a bank) to shrink.

The CBs stepped in to backstop this run on the BB's reserves with their "CB certificates." (A backstop prevents price from running away, the same way Bernanke's 2009 currency swap calmed the rising dollar.) Additionally, they convinced "oil" to take "repayment contracts" removed from the asset side of the BBs' balance sheets in lieu of actual physical reserves. These contractual assets were (now) as good as gold in the hand because they were backed by the BB's reserves which were (now) backstopped by CB gold, still sitting in the CB vaults.

Are you starting to see the view yet? Okay, let me back up a little bit for the slow. We really need to start thinking of the Bullion Banks as the banks that they are! In fact, it is largely unnecessary for us to insist upon calling these "bullion banks" – along the same premise that we don't find it necessary to specify when commercial banks are acting as "dollar banks" or "euro banks" or "yen banks." A bullion bank is simply a bank that carries a set of books denominated in "gold units" as opposed to dollars, yen or euro.

But to be fair, the act of operating a banking book in units of gold is specialized enough that it does tend to warrant the extra adjective when referring specifically to those banks that run in bullion circles. So who are the Bullion Banks? They are the banks that engage in banking and clearing operations with units of gold ounces. They include, but are not limited to, all the big banks that have committed themselves to offering market-making quotes to the LBMA network. These LBMA Market Making Members are:

The Bank of Nova Scotia - ScotiaMocatta
Barclays Bank Plc
Credit Suisse
Deutsche Bank AG
Goldman Sachs International
HSBC Bank USA NA
JP Morgan Chase Bank
Merrill Lynch International Bank Limited
Mitsui & Co Precious Metals Inc
Société Générale
UBS AG

Other non-market making BBs can be found on the LBMA Full Members list, although not everyone on this list is a BB. For example, Brinks is not a bullion bank.

It is important to start thinking of these gold operators as the banks that they are, because then you can start to see the significance of the CBs publicly announcing, through the twice-renewed CBGA, that they are no longer going to be the lender of last resort to this system. Quote: "The signatories to this agreement have agreed not to expand their gold leasings…" You cannot be a backstop without expanding!

Furthermore, you will be able to see how the very act of commercial banking (which is lending) automatically creates a ginormous synthetic supply of whatever the system's reserves are. Think credit money versus cash, or even M3 versus M0 once you throw in a few derivatives. The LBMA today clears 18,000,000 ounces, or 560 tonnes of paper gold liabilities every single day. That's down from its peak of 1,359 tonnes in December, 1997 when Another started writing. That's each and every day! It's all right here.

And that's just the part the LBMA clears. A Friend writes:

A bank can be "populated" with unallocated gold accounts in two primary ways. It can either be done as a physical deposit by a silly person or by another corporate entity, or else it can occur completely in the non-physical realm as a cashflow event whereby a customer with a surplus account of forex calls up and requests to exchange some or all of it for gold units, whereupon the bank acts as a broker/dealer to cover the deal – occurring and residing on the books as an accounting event among counterparties rather than as any sort of physical purchase. No bread, no breadcrumbs, only a paper trail and metal of the mind. This is how the LBMA can report its mere subset of clearing volumes averaging in the neighborhood of 18 million ounces PER DAY. Just a whole lot of "unallocated gold" digital activity as an ongoing counterparty-squaring exercise.

Here is an analogy that my Friend wrote me in an email:

It is here that I offer the eurodollar market as a very good parallel to the bullion sector of banking. While not a perfect parallel (for all the most obvious reasons) it provides a remarkably good bridge to help anyone who has a good footing on modern commercial banking to successfully cross over to that seemingly unfamiliar territory of "bullion banking". In fact, they need do little more to successfully cross over than to simply think of bullion banking ops as though they were eurodollar banking ops – the difference being that whereas eurodollar banking makes extra-sovereign use of the U.S. dollar as its accounting basis in international banking activities (thus outflanking New York's purview and restrictions), bullion banking engages in similar "extra-sovereign" use of gold ounces within its operational/accounting basis (thus outflanking and overrunning Mother Earth's domain and tangible restrictions).

And just to be sure we're on the same page, the eurodollar is not to be in any way confused with the euro, but rather stands to mean the artificial supply of "U.S. dollars" that "exist" as accounting units in off-shore banks, having originally been authentic deposits of New York's finest export, but which were then subsequently lent on – fractionalized and derivatized into a vast amorphous mass as only a network of cooperating banks can do best.

Okay, now that you hopefully have a new view of the valley below, for now we can call it "the FOFOA view," let's take a look back at the two other views with which I started this post. The mainstream view is blind to how gold is different than all other commodities in that its lack of a real lender of last resort in a fractional reserve system, should the interbank lending market freeze up, could bring down the entire global monetary and financial system.

And then there is the gold bug view that suspects the Bullion Banks, at the behest and under the guidance of the CBs, must be gaming the system in order to skim physical gold that they eventually need to ship back to the CBs. But then the FOFOA view is that the system itself is, and always has been, the culprit. And that the bullion banking system must and will revert to a non-fractional, non-lending, 100% reserve banking system. Not the fiat banks. Just the Bullion Banks. The CBs demand this, as Another told us a long time ago, because physical gold is cornered by real wealth at these prices, and they (the CBs) will not give up any more of theirs.

I'm sure there are still "tonnes" of those "CB certificates" in the reserve accounts of the Bullion Banks, as all their paper gold liabilities must be backed by either assets or reserves on their balance sheets. But those certificates will never be cashed, except by a very few "important clients" of the type you do not default on because they have something you need.

ANOTHER: "Banks do lend gold with a reason to control price. If gold rises above its commodity price it loses value in discount trade. They admit now to lending much where they would admit nothing before! They do this now because of the trouble ahead. Does a CB [receive] collateral to lend its gold? Understand, they only lend their good name on paper, not the gold itself. The gold that is put on the market in these deals belongs to someone else! The question is not "Are the CBs worried for the return of gold?" but, "Has our paper been lent to the wrong people?" The BIS will not allow the distribution of all gold to settle claims."

Now let's see, how can I apply this view to my last post in order to address Bron's contention that GLD does not constitute a "synthetic supply" while also addressing my gold bug's allegation that the BBs are scamming the system rather than merely trying to manage a run on the banks that is already well underway? Well, a lot of you seem to have no problem imagining a cashless currency system, so let's try another analogy.

Imagine a banking system that is running out of cash (pretend the Ben Bernank doesn't exist and there is no printing press). Most of you are perfectly okay with this because you use your credit cards and your debit cards, your newfangled online and smart-phone banking and your old fashioned checking accounts. You rarely, if ever, touch that nasty cash with its blood and cocaine residue and horrible germs. In fact, you hardly even notice that the banks are running out of cash.

But where did all that cash go? Well it turns out that there are some people that still believe only in cash, and they have paid the banks to put their cash into little metal safety deposit boxes. We'll call this "allocation" of the cash. Silly, these people are, because your paper gold, umm, I mean electronic money is still worth as much as their nasty cash shoved in cubby holes, and yours is a lot more liquid to boot! On top of that, you don't even have to pay storage fees for your electronic money! In some cases the bank pays you!

But at one point, say between 1999 and 2004, these banks had actually increased their cash reserves as some of their lending operations wound down. Think: people (mines) paying off their loans and the gold carry trade unwinding. With the loss of this revenue and a brief spike in reserves, these banks piled a bunch of cash into a vault and created a hybrid currency for some that believed in cash but still preferred the liquidity of electronic money. These "special accounts" paid a reduced storage fee on their money, less than the deposit box customers, but more than the regular customers. But for this fee they were guaranteed that their electronic money was not fractionally reserved like everyone else's. In fact, they were told, it was fully reserved.

The only catch was that, unless these special customers had $13 million, they would never be able to touch their cash. In fact, it would never trade at a different value from plain old electronic money. And once they realized this, it would be too late to do anything about it. Their only option would be to exchange back into electronic money and try to find someone who would sell them actual cash, which of course would be impossible at that time.

So you see, these "special full reserve accounts" created a synthetic supply that diverted people from the action they knew they needed to take, delaying that final, inevitable outcome, a bank run. That cash was always going to go to a few "giant" clients in the end. A few that could afford it. The few that got lucky in the end. Because the banks knew all along that it will ultimately be a "giant" that sounds the alarm. The overriding goal has always been to delay the inevitable, not to avoid it, for the last decade at least in my opinion.

And that is how the banks are using this "vaulted cash" to delay the revelation that a bank run is already fully underway. They are slowly buying back those "special accounts" in order to move that cash, a little at a time, into safety deposit boxes for the big customers that are actually "running on the bank." As long as no one runs out of the bank's front door yelling "the bank is out of cash," then the run hasn't reached the panic stage yet. But that doesn't mean it isn't happening.

Here's an interesting item that I struggled to interpret until I really thought it through. Do you remember the stories about HSBC clearing out space in their vaults, or JP Morgan building new vaults? What could be the explanation for this if the aggregate gold stock is so stable? Then it occurred to me that unallocated storage is much more space-efficient because the gold sits stacked on pallets. Allocated gold often gets put into cubby holes to assist in recordkeeping. That takes up much more space. So the process of allocation after many decades of non-allocation requires an expansion of vault space. This is how I now interpret these stories.

We cannot know the actual state of the BBs' books from what is visible for analysis. So how fast could all of the physical gold reserves be spoken for? As frightening as it sounds, worst case, they may already be. When I think about Jim Rickards' second-hand account combined with the fact that someone is draining GLD, it seems like we could be in the final stage of "extend and pretend that there is not a run on the bullion bank reserves."

We shrimps should have gold available for purchase until some small or medium-sized Giant is denied allocated bullion. Several people asked after my last post, "What if all the APs won't play ball and redeem your basket?" My answer was, "Well, then it is game over for Bullion Banking!" Gold is going into hiding. When a small Giant runs out of one of the Bullion Bank's front door announcing "the bank is out of gold," as Fekete puts it, all offers to sell gold against irredeemable paper currency will be abruptly and simultaneously withdrawn.

So buyers large and small, get in line to get your gold. Because we have no way of knowing who will be the last in line to get cashed out. What we have here is an explosion in the bullion banks' physical leverage factor, not through an increase in lending this time (the lending is actually declining), but through customer withdrawal of reserves, with no physical backstop. Even a bank with a conservative leverage factor can experience a bank-busting, system-crashing run. Public confidence is the only thing that stands in the way. This is how a classic bank run runs.

Sincerely,

FOFOA

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