The Governor of the Bank of England Mark Carney has a problem and it is a
severe problem. For decades, the Bank of England has acted as a coordinating market-maker
for bullion banks in the City of London that trade 'unallocated' or unsecured
gold and silver contracts through the London Bullion Market Association
(LBMA). The market is uncovering that the Bank of England (BoE) has in effect
been facilitating what amounts to a kiting operation in maintaining the
structure of the London metals market where the vast majority of spot claims
for gold and silver can never be settled with actual metal delivery. The
irony is not lost when one considers that the BoE operates the Prudential
Regulation Authority that regulates 1,700 UK banks to ensure their
"safety and soundness".
By facilitating unsecured,
or unbacked, paper gold and silver spot ownership contracts that are held
by a host of private, corporate, financial, and sovereign wealth fund
interests, paper claims for ownership of an estimated 400 million to 600
million oz. of gold and 4 to 6 billion oz. of silver have been created
through the LBMA. These spot metal contract holders, deflected into holding
paper promises for metal instead of metal itself, hide true metal demand with
the result that real price discovery is thwarted and precious metal prices
are held at artificially low levels.
Former US Treasury Secretary Larry Summers wrote that a phenomenon called
Gibson's Paradox identified that rising gold prices have historically forced
interest rates higher. These rising rates thwart prolonged inflationary money
and debt creation by central banks. The scheme of suppressing global gold and
silver prices for decades has allowed loose monetary policy globally by
central banks over this period and has created a secular global bond bubble
with worldwide bond holdings now exceeding $220 trillion and 340% of GDP -
twice the historically sustainable level of 150% of GDP.
Estimated leverage at the LBMA for spot metals claims vs the amount of metal
available for delivery range from 100:1 and higher for gold and are much
higher for silver. If we consider gold and a 100:1 leverage ratio, the result
is that 1% of spot claimants for gold in the London spot market can receive
metal or 100% of claimants can receive 1% of the metal that they believe they
own - or somewhere in between.
With all of the world's refined silver stockpiles estimated at
approximately 1 billion oz. (including holdings by investor Exchange Traded
Funds or ETFs), the situation created in the silver market is extraordinarily
unstable. Each of the 1 billion oz. of refined physical silver in global
stockpiles is held by claimants and is not available for sale unless the
holder decides to dispose of the asset. And with annual mine supply of the
order of .850 billion oz. already being consumed by industry and investors
taking delivery of the metal, the silver spot market claimants in London face
a disturbing realisation. The spiking silver price that we see today warns us
of impending exceedingly large price spikes and market disruption as the
metals market deleverages.
To date, the LBMA, bullion banks and the BoE have created the appearance
of a liquid market using leased gold from sovereign metal holders and central
banks and also using the metal flows from the global gold and silver miners
who themselves are enabling this price suppression by selling their physical
metals through the LBMA to the detriment of shareholders and society at
large.
A number of data points now indicate increasing crisis in the global
metals market:
·
1) In 2013 virtually all of the available gold outside the Bank
of England holdings and ETF holdings was withdrawn from the City of London
vaults leading the LBMA in 2015 to revise
refinery statistics that showed this metal withdrawal and reprocessing in
2013;
·
2) Deutsche
Bank admits gold and silver price manipulation with other bullion banks;
·
3)
Draw-downs of New York COMEX metal exchange registered silver holdings
have dropped to historical lows reflecting silver metal stress in the North
American market; and
·
4) Mark O'Byrne of GoldCore
has reported unprecidented "panic" in the inter-bank gold market
due to bar shortages due to factors other than Brexit.
The leverage created by the Bank of England along with its partner bullion
banks can prolong suppression of gold and silver prices for a long time but,
when the tide turns and metal is pulled from the LBMA, the scheme unravels in
a small fraction of the time that it was in place due to the outsized impact
of the reversal of the leverage. Leverage works in both directions. The end
result is spiking metals prices, interest rates, and consumer goods prices
(inflation), as wealth flees from market artifice into goods of innate value
coupled with market and social upheaval as discontinuous interest rate
movements disrupt the $100s of trillions in the interest rate derivatives
market and collapse the global banks that hold them.
Governor Carney, the BoE and Brexit
Which brings us now back to Governor Carney. As the LBMA metals scheme is
now rapidly unwinding in London, Governor Carney has engaged himself both
during and after the Brexit campaign warning that a financial crisis will
ensue if Britain leaves the European Union. Carney well knows that a
financial crisis is mounting right now due to the failure of the LBMA's
levered structure enabled to a large extent by his own institution.
But the BoE's tack is creating a different narrative. Tory MP Jacob
Rees-Mogg recently challenged Governor Carney in Committee on his behaviour
of hyping Brexit consequences during the recent Brexit campaign - behaviour
which directly contradicts BoE policy of remaining apolitical during
elections. Carney's response to Rees-Mogg's direct questions was evasive,
styling his argument by using distinctions without a difference. After a
thorough Mogging, Governor Carney was left sitting threadless in his loafers.
Governor Carney followed-up his Brexit campaign performance with a June 30
2016 speech titled "Uncertainty,
the economy and policy" . In the speech, Carney argues that the
markets suffer from "economic post traumatic stress disorder"
(PTSD) from prolonged uncertainty using ten dollar terms such as "affect
heuristics" to explain the developing crisis - a crisis that has been
developing for some time as the London metals rig unwind accelerates with
metal being withdrawn through the LBMA. The FT and other financial press
jumped on the PTSD
catch phrase trumpeting it in their headlines.
Carney further states on pg. 12 of the prepared text of his speech that
"The Bank conducts policy consistently, transparently, and
accountably." and on pg. 16 that the BoE has a plan and that "Part
of that plan is ruthless truth telling." (Governor Carney deviated from
the prepared text by saying "Part of that plan will continue to be
ruthless truth telling."). The metals market doesn't see it that way.
In all of the above, Carney does not address the pending LBMA and global
financial market disruption from the LBMA market rig unwind that will impact
the global bond and derivatives market. Instead, Governor Carney and the BoE
hype Brexit and PTSD thereby structuring a different narrative for the coming
financial and monetary system disruption.
It is not PTSD or affect heuristics that are driving this developing
crisis. It is time for ruthless truth telling and stabilising monetary system
change, Governor Carney.
Until that time, the BoE remains threadless on Threadneedle Street.
