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Seeking Alpha
asks did the ECB save COMEX from gold default?
(emphasis mine) [my
comment]
Did
the ECB Save COMEX from Gold Default?
by: Avery Goodman April 02, 2009
On Tuesday morning, gold derivatives dealers, who had sold short in the
face of a fast rising gold price [evidence of
either unbelievable stupidity or gold market manipulation],
faced a serious predicament. Some 27,000 + contracts, representing about 15%
of the April COMEX gold futures contracts remained open. Technically,
short sellers are required to give “notice” of delivery to long
buyers. However, in reality, buyers are the ones who control the amount of
gold to be delivered. They “demand” delivery of physical gold by
holding futures contracts past the expiration date. This time, long buyers
were demanding in droves.
In normal times, very few people do this. Only about 1% or less of gold
contracts must be delivered. The lack of delivery demand allows the
casino-like world of paper gold futures contracts to operate. Very few short
sellers actually expect or intend to deliver real gold. They are, mostly,
merely playing with paper. It was amazing, therefore, when March 30, 2009
came and passed, and so many people stood for delivery, refusing to part with
their long gold futures positions.
On Tuesday, March 31st, Deutsche Bank (DB) amazed everyone even
more, by delivering a massive 850,000 ounces, or 850 contracts worth of the
yellow metal. By the close of business, even after this massive delivery,
about 15,050 April contracts, or 1.5 million ounces, still remained to be
delivered. Most of these, of course, are unlikely to be the obligations of
Deutsche Bank. But, the fact that this particular bank turned out to be one
of the biggest short sellers of gold, is a surprise [if I
was a German citizen, I would be furious. Deutsche Bank short selling of gold
has helped the dollar at the expense of EU gold. For a nation that
experienced hyperinflation eighty years ago, this should be ABSOLUTELY
UNFORGIVABLE.]. Most people
presumed that the big COMEX gold short sellers are HSBC (HBC) and/or JP
Morgan Chase (JPM). That may be true [I expect the
remaining positions are overwhelmingly US/UK banks (ie: JP Morgan Chase)].
However, it is abundantly clear that they are not the only game in town.
Closely connected institutions, it seems, do not have to worry about
acting irresponsibly, in taking on more obligations than they can fulfill [evidence
of this always irritates me]. Mysteriously, on the very same
day that gold was due to be delivered to COMEX long buyers, at almost the
very same moment that Deutsche Bank was giving notice of its deliveries, the
ECB happened to have “sold” 35.5 tons, or a total of 1,141,351
ounces of gold, on March 31, 2009. Convenient, isn’t it? [yes,
it is.]
Deutsche Bank had to deliver 850,000 ounces of physical gold on that day,
and miraculously, the gold appeared out of nowhere.
The announcement of the ECB sale was made, as usual, dryly, without further
comment. There was little more than a notation of a sale, as if it were a
meaningless blip in the daily activity of the central bank. But, it was
anything but meaningless. It may have saved a major clearing member of the
COMEX futures exchange from defaulting on a huge derivatives position. We
don’t know who the buyer(s) was, but we don’t leave our common
sense at home. The ECB simply states that 35.5 tons were sold, and
doesn’t name any names. Common sense, logic and reason tells us
that the buyer was Deutsche Bank, and that the European Central Bank probably
saved the bank and COMEX from a huge problem [Agreed]. What
about the balance, above 850,000 ounces? What will happen to that? I am
willing to bet that Deutsche Bank will use it, in June, to close out
remaining short positions [Agreed], or
that it will be sold into the market, at an opportune time, if it
hasn’t already been sold on Tuesday, to try to control the inevitable
rise of the price of gold.
Circumstantial evidence has always been a powerful force in the law. It
allows police, investigators, lawyers and judges to ferret out the truth. Circumstantial
evidence is admissible in any court of law to prove a fact. It is used all
the time, both when we initiate investigations, and once we seek indictments
and convictions. We do this because we deal in a corrupt world, filled with
suspicious actions and lies, and the circumstances are often suspicious
enough to give rise to a strong inference that something is amiss. Most of
the time, when the direct evidence is insufficient to prove a case beyond a
reasonable doubt, or even by a preponderance of direct evidence, circumstantial
evidence fills the void, and gives us the conviction. We even admit
evidence of the circumstances to prove murder cases. In light of that, it
certainly seems appropriate to use circumstantial evidence in evaluating
possible regulatory violations. The size and timing of the delivery of
Deutsche Bank’s COMEX obligation is suspicious, to say the least, when
taken in conjunction with the size and timing of the ECB’s gold sale.
It is circumstantial evidence that the gold used by Deutsche Bank to
deliver and fulfill its COMEX obligations, came directly or indirectly, from
the ECB.
I’d sure like to know what the ECB’s “alibi” is.
If I were an investigator for the Commodities Futures Trading Commission
(CFTC), assigned to determine whether or not gold short sellers are knowingly
violating the 90% cover rule, I’d be questioning the hell out of the
ECB staffers, as well as employees in the futures trading division of
Deutsche Bank. There is certainly enough evidence to raise
“reasonable suspicion”. Reasonable suspicion is all that one
needs to start a criminal investigation. It should be more than sufficient to
prompt the CFTC, as well as European market regulators, to start a commercial
investigation of the potential violation of regulatory rules by both the ECB
and one of the world’s major banking institutions. That is, of
course, if and only if, the CFTC staff really wants to regulate, rather than
simply position themselves for more lucrative jobs inside the industry they
are supposed to be regulating, after they leave government service. [our
regulatory system is filled with conflict of interests…]
It is quite important to determine whether or not Deutsche Bank was bailed
out by the ECB because that will answer a lot of questions about allegations
of naked short selling on the COMEX. If the ECB knew that its gold
would be used as post ipso facto “cover” for uncovered shorting,
staffers at the central bank might be co-conspirators. At any rate,
the German bank did sell short on futures contracts without having enough
vaulted gold it sold a naked short. It also means that the ECB has
facilitated a major rule violation in a jurisdiction (the USA) with which
Europe is supposed to have extensive joint regulatory agreements, any number
of which may have been violated by this action of the ECB. At the very
least, naked short selling is a blatant violation of CFTC regulations, which
require 90% cover of all deliverable metals contracts. If the delivered gold
came directly, or indirectly, from the ECB, it means that Deutsche
Bank’s gold short contracts were “naked” at the time they
were entered into [Unless the ECB, like the US, is in the
business of selling call options on gold].
The 90% cover rule is very old rule, designed to prevent fraud on the
futures markets. Its origin dates back into the 19th century.
Farmers, in that simpler age, were complaining that big bank speculators were
downwardly manipulating grain prices on the futures exchanges. Nowadays, the
CFTC has a predilection toward categorizing banks as so-called
“commercials” or “hedgers”, rather than as the
speculators that they really are. Traditionally, only miners and gold
dealers whose business involves a majority of PHYSICAL trade in gold should qualify
as commercials. However, the CFTC has ignored this for a long time, and
qualified numerous banks and other financial institutions, whose main gold
business is derivatives, as “commercial” entities, immunizing
them from position limits and other constraints. As a result, just like
the farmers of the 19th century, today’s gold
“cartel” conspiracy theorists revolve their theory around an
allegation of downward manipulation, and heavy short selling concentration.
Manipulation can only take place when there is a disconnect between
supply, demand, and trading activity on the futures exchanges. The 90%
cover rule attempts to force a direct tie between the futures market and the
availability of particular commodities, so that supply and demand become
primary even on paper based futures markets, just as it is in trading the
real commodity. Unfortunately, the modern CFTC has ignored or
misinterpreted the purpose of the 90% cover rule for a very long time. This
regulatory failure has allowed the current free-for-all
“casino-like” atmosphere that now prevails at futures exchanges.
It would be helpful if some of my colleagues, within the public prosecutor
and securities regulatory offices, in Europe, as well as the CFTC in America,
filed complaints for discovery, to ferret out the truth. In the interest of
transparent markets, the ECB should be forced to disclose who purchased the
gold they sold in the morning of March 31, 2008 and why the sale was timed in
a way that corresponded to the exact moment in time that Deutsche Bank had a
desperate need for gold bullion.
Was it yet another bank bailout? Has another bank sucked up precious
resources belonging, in this case, to the people of Europe? Gold is
needed to bring confidence to the Euro currency, as often noted by
Germany’s Bundesbank, which seems to be less kind to German banks than
the ECB. Why should the ECB be permitted to sell gold to closely
connected derivatives dealers, if the primary purpose is to save those
dealers from the bad decisions they have made, and the end result is to
reinforce moral hazard? Should banks like Deutsche Bank be allowed to take on
more derivative risk than they can afford without involving publicly owned
assets? Did Deutsche Bank issue naked short positions? Have innocent
European citizens now had their currency placed at more risk, and some of
their gold stolen from them, simply to enrich private hands? All of these
questions are begging for answers. [If I was living
in the EU zone, I would be complaining very loudly about this ECB gold sale.]
European regulators are quick to condemn the Federal Reserve for its
incestuous relationship to client “primary dealer” banks, special
treatment of favored institutions at the expense of other non-favored institutions,
propensity toward injecting dollars to artificially stimulate the stock
market, seemingly endless bailouts of closely connected banks, and, now, the
seemingly unlimited printing of new dollars. I’ll not attempt to
excuse the Fed for its failures. Indeed, I believe that it is in the best
interest of the American people to close down that malevolent institution,
permanently. However, if any of the questions I have posed are answered in
the positive, people might begin to understand that special favors, nepotism,
corruption, and a failure to properly regulate are not confined to America.
The real estate bubble, for example, was allowed to become much bigger in the
U.K., Ireland, Spain, and eastern Europe, than it ever was in the USA. The
collapse of real estate, in those countries, is going to be more severe, even
though it is more recent in origin than the pullback in the USA. America
happened to be the first nation affected, but it did not cause the world
economic collapse. That was caused by the joint irresponsible policies in
almost every major nation in the world.
Those who rely on the good faith of Angela Merkel, to keep the Euro
inviolate, certainly have a right to get answers from the ECB and from
Deutsche Bank. The answers will tell us a lot about the real proclivities of
the ECB. As the U.S. dollar is progressively debased, in coming years, will
the Euro be any better? [good questions] Is
the ECB merely a European copy of the Federal Reserve “slush
fund”, utilized by well connected European banks, for the purpose of
private financial gain, much as the Federal Reserve’s assets are
utilized by its primary dealers? If the ECB is willing to bail out a major
trading institution from the mismanagement of its derivatives operations, who
could honestly claim that it would hesitate to competitively debase the Euro
against the dollar? Having the answers to the questions I
have posed would give everyone the knowledge needed to make important
decisions. That is exactly the reason that, in all likelihood, we will never
get these answers. Maybe, Europeans and others ought to be dumping Euros
just as fast as they are now dumping dollars, and buy gold and silver,
instead. [While I still believe the euro will hold up better
than the dollar, gold will do much, MUCH better.]
Aside from the regulatory issues, if we did discover that Deutsche Bank
got its gold from the ECB, one glaringly strong inference arises. When
a major derivatives dealer goes begging for gold, to the ECB, it is very
strong circumstantial evidence that not enough physical gold is available for
purchase on the OTC wholesale market. Up until now, bearish gold commentators
have steadfastly denied that wholesale gold shortages exist. Instead, they
have insisted that all shortages are confined to retail forms of gold. Now,
when combined with the circumstantial evidence, however, common sense tells
us that they are wrong.
Decision: There is sufficient evidence for this case to go to a full scale
investigation. The CFTC and similar securities regulators in Europe need to
properly investigate the gold conspiracy allegations. That has never been
done to date. They must determine who is buying central bank gold and whether
or not it is simply being sold into the open market, or channeled into the
hands of favored financial institutions who then use it to cover naked short
selling. The investigation must include detailed vault audits and explore all
paper trails.
Disclosure: Long
on gold. [me too]
My reaction: First
NYSE runs out of 1 kg gold bars, now
this.
1) Gold derivatives dealers have sold short in the face of a fast rising gold
price, which is not normal market behavior.
2) On Tuesday morning, March 31st, some
27,000+ contracts, representing about 15% of the April COMEX gold futures
contracts remained open.
3) In normal times, very few people do this, and so it is amazing that March
30, 2009 came and passed with so many investors refusing to part with their
long gold futures positions.
4) On March 31st, Deutsche Bank delivered 850,000 ounces of
gold to COMEX contract holders.
On Tuesday, March 31st, Deutsche Bank (DB) amazed everyone even more, by
delivering a massive 850,000 ounces, or 850 contracts worth of the yellow
metal.
5) Even after Deutsche Bank’s deliveries, about 15,050 April contracts,
or 1.5 million ounces, still remained to be delivered (a large portion of
this likely to be JPMorgan).
6) The fact that Deutsche Bank turned out to be one of the biggest short
sellers of gold, is a surprise (and should make German citizens very angry).
7) On March 31st, ECB announced it had "sold" 35.5 tons of gold
(1,141,351 ounces).
Mysteriously, on the very same day that gold was due to be delivered to COMEX
long buyers, at almost the very same moment that Deutsche Bank was giving
notice of its deliveries, the ECB happened to have "sold" 35.5
tons, or a total of 1,141,351 ounces of gold, on March 31, 2009.
8) Deutsche Bank will probably use the remaining balance of the ECB’s
sale to close out its short positions.
9) circumstantial evidence and common sense tells us that the European
Central Bank sold its gold to Deutsche Bank and probably saved the bank and
COMEX from default.
10) If the CFTC staff really wants to regulate, they would “be
questioning the hell out of the ECB staffers, as well as employees in the
futures trading division of Deutsche Bank.”
11) If the delivered gold came directly/indirectly from the ECB, it means
that Deutsche Bank had a “naked” short position in COMEX gold
(unless the ECB, like the US, is in the business of selling call options on
gold).
12) Naked short selling is a blatant violation of CFTC regulations
13) The ECB has likely facilitated major rule violations through its gold
sale.
The ECB has facilitated a major rule violation in a jurisdiction (the USA)
with which Europe is supposed to have extensive joint regulatory agreements,
any number of which may have been violated by this action of the ECB.
14) For a long time, the CFTC has ignored the 90% cover designed to prevent
fraud on the futures markets, and has qualified numerous financial
institutions, whose main gold business is derivatives trading, as
"commercial" entities, immunizing them from position limits and
other constraints.
15) Market manipulation can only take place when there exists a disconnect
between supply, demand, and trading activity on the futures exchanges.
16) There is sufficient evidence for this case to merit a full scale
investigation.
It would be helpful if some of my colleagues, within the public prosecutor
and securities regulatory offices, in Europe, as well as the CFTC in America,
filed complaints for discovery, to ferret out the truth.
17) There are MANY questions begging for answers, and EU citizens have a
right to get those answers from the ECB and Deutsche Bank.
Why the sale was timed in a way that corresponded to the exact moment in time
that Deutsche Bank had a desperate need for gold bullion?
Was it yet another bank bailout?
Has another bank sucked up precious resources belonging, in this case, to the
people of Europe?
Why should the ECB be permitted to sell gold to closely connected
derivatives dealers, if the primary purpose is to save those dealers from the
bad decisions they have made, and the end result is to reinforce moral
hazard?
Should banks like Deutsche Bank be allowed to take on more derivative risk
than they can afford without involving publicly owned assets?
Did Deutsche Bank issue naked short positions?
Have innocent European citizens now had their currency placed at more
risk, and some of their gold stolen from them, simply to enrich private
hands?
As the U.S. dollar is progressively debased, in coming years, will the Euro
be any better?
Is the ECB merely a European copy of the Federal Reserve "slush
fund", utilized by well connected European banks, for the purpose of
private financial gain, much as the Federal Reserve's assets are utilized by
its primary dealers?
If the ECB is willing to bail out a major trading institution from the
mismanagement of its derivatives operations, who could honestly claim that it
would hesitate to competitively debase the Euro against the dollar?
18) Finally, the ECB sale to Deutsche Bank raises one last key point:
When a major derivatives dealer goes begging for gold, to the ECB, it is
very strong circumstantial evidence that not enough physical gold is
available for purchase on the OTC wholesale market.
Conclusion: The end of the COMEX is near, with default and collapse
being a step away. Paper gold markets are undeniably in the process of
breaking down, as I wrote last week in my entry, “something going haywire in gold markets”.
(emphasis mine) [my comment]
Currently,
the majority of gold demand is still absorbed by paper gold (futures,
unallocated gold, GLD, etc…). While theoretically unlimited, in reality
the supply of paper gold is constrained by the limits of credulity. In other
words, as short positions grow in gold derivatives relative to the underlying
supply of gold, their credibility shrinks. The biggest threat to those
manipulating gold is this loss of faith in their paper product.
Right now, those on the short side of gold are being overwhelmed by demand
and are being forced to intervene in blatant and obvious ways to cap prices
[The ECB’s gold sale and the shortage of 1kg bars on the COMEX are
evidence of this happening]. Examples of this desperation and loss of
control include the large increase in open interest in
COMEX gold after the fed’s announced its huge balance sheet expansion and the price action in gold today. They are evidence that paper
gold is in the process of breaking down.
The increasingly
abnormal action in paper gold will push more and more demand into the
physical market, which cannot be controlled and will drive up prices. The
timing of ECB’s gold sale to Deutsche Bank is the perfect example of
the desperate straits of gold shorts. If the paper gold markets were not on
the verge of collapse, the ECB sale would never have been announced on the
same day as Deutsche Bank’s delivery announcement. The ECB gold sale
must have been thrown together in a last minute panic, resulting in the
undesirable timing.
Buy physical gold. The next COMEX delivery month will probably be its last,
and the collapse of gold futures would bring down the entire gold derivative
market. The fed and other central banks will be powerless to stop it, as
there is no one who can print gold.
Eric de Carbonnel
Market Skeptics
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