If one were to describe, in a word, the singular quality of gold that
gives it value both as money and a wealth preservation asset, that quality is
integrity. Physical gold cannot be printed, it cannot be conjured by a
central bank or government official, it cannot be credited into existence by
a bank. And over a period of four thousand years, the markets have selected
gold and silver as money. The replacement of gold and silver sound money with
unstable debt-based fiat paper currency by banking interests and their
government partners over the past century has been a mere blip in humanity's
monetary history.
Real wealth ultimately flees from markets that give corrupted price
signals and this now presents an apparent existential threat to the world's
pre-eminent gold and silver market, the London Bullion Market Association
(LBMA), where daily is set the gold and silver reference price (or 'fix') for
miners, investors, and, crucially, for Western financial markets.
Trading of unallocated gold contracts on the LBMA began in the late 1980s
and, according to the LBMA, is now the vast majority of all daily gold
trading volume in London. The introduction of unallocated contracts was not a
pedestrian matter with Evelyn Rothschild himself allegedly directly lobbying
Margaret Thatcher for this change in the gold market. The Rothschilds ran the
daily Gold Fix at their bank setting the price at the LBMA from 1919 until
2004 and have been synonymous with gold over the last 150 years.
The LBMA states that these unallocated gold contracts have the holder as
merely an unsecured creditor for gold and not an owner of gold. That is an
important difference. While ownership of real gold can be created only by
first securing and transferring the ownership of metal, which is limited,
unsecured claims for gold can be created without limit - and we see
this in the London gold market unallocated spot contracts that are traded.
The daily gross turnover of gold trading on the LBMA spot market is 200
million oz. - twice the world's annual gold mine production and, according to
the LBMA, it is 10x higher than the net settled trade volume totals posted by
the LBMA . However, as touched on above, there is an important distinction to
make. The vast majority of this daily trading is not gold trading. Instead,
the trading is primarily of these unallocated gold contracts representing
trading of gold promises and not of gold itself. In effect, the trading of
unallocated gold contracts at the LBMA has corrupted gold in this market from
exchange of a limited real gold asset to exchange of an unlimited virtual or
digital asset.
Where are the 10,000+ Tonnes of Gold?
Using the typical commodity trading multiplier of 2x to 3x of daily
trading volume to calculate the open interest, or total claims, in the
market, the daily trading volume in London implies a total open interest of
gold claims on the LBMA of 400M to 600M oz of gold in the spot market -
claims equivalent to 13,000 to 19,000 tonnes of gold. The LBMA is located in
the small 'square mile' City of London (a form of quasi-independent
city-state operating under its own rules and governance within greater
London) and the LBMA does not publish an open interest figure as most raw
material or commodity exchanges do.
The pension funds, corporate interests, sovereign wealth funds, private
interests, etc. that hold unallocated spot gold contracts on the LBMA instead
of physical gold are holding a gold substitute with these unallocated spot
contracts. This supply of unallocated gold contracts creates 'gold' where
there is none and the massive volume of gold trading each day can move the
price of gold to almost any level as the only limit is the requirement to
supply the few who historically have taken delivery of spot physical gold.
Leasing-out of sovereign physical gold by central banks and the officers of
the gold mining companies of the world who sell their production ultimately
through the LBMA via bullion banks also provides fuel to supply this gold
pricing mechanism. This has enabled the suppression of the market price of
gold against the best interests of mining corporations, society as a whole,
and destroying shareholder value in the process.
The manipulation of the gold price is not merely negatively impacting
shareholders of the miners to the benefit of jewellery or bullion buyers in
Asia - the manipulation of gold also contributes to the destabilization of
the financial system, as we shall see .
Larry Summers Discovers Gold's Relationship to Real Interest Rates
Larry Summers, who served in the 1990s during both Clinton administrations
and ultimately as Treasury Secretary, notes in his paper Gibson's Paradox
And The Gold Standard (Summers and Barsky, August 1985, NBER Working
Paper No. 1680 http://www.nber.org/papers/w1680.pdf),
that real gold prices (prices in constant dollars, adjusted for inflation)
have historically moved inversely with real interest rates - i.e. as
real interest rates decline, the price of gold increases reflecting a
movement into gold and out of bonds. Summers writes that, for the period from
1973 until the date of the paper, "... we show that the real gold
price... ....displays marked negative correlation with the real interest
rate..." [pg. 24] and that "...The negative correlation between
real interest rates and the real price of gold that forms the basis for our
theory is a dominant feature of actual gold price fluctuations...." [pg.
4].
As seen in the 1970s and early 80s, in a free market, increasingly
negative real interest rates are signalled by rapidly rising gold prices
necessitating higher real interest rates to draw money back into bonds from
gold.
Summers paper focuses on the relationship between real interest rates
(nominal interest rates minus the inflation rate) and real gold prices
(measured in constant, inflation adjusted dollars). So let's take a look at
real interest rates and the real price of gold since the late 1970s. Referencing
the important work of Reginald Howe (http://www.goldensextant.com/commentary34.html#anchor38381),
we can see below how the inverse of the real price of gold (adjusted to
constant dollars using the US BLS Consumer Price Index (CPI) ) diverged
suddenly from tracking real interest rates in 1987 with the real price of
gold. The real price of gold declined thereafter through the year 2000 even
as real interest rates became increasingly negative. In August 1987 Alan
Greenspan, who had served for 10 years as a Director of JP Morgan, becames
Chairman of the Federal Reserve. The late 1980s introduction of unallocated
spot gold instruments on the LBMA artificially reducing demand for real gold
as well as surreptitious central bank leasing of sovereign gold stocks into
the market, already well documented by the Gold Anti-Trust Action Committee
(GATA) and numerous other sources, aligns with this divergence of the gold
price inflation indicator with real interest rates.
The method of calculating the CPI has been changed several times by the
Bureau of Labor Statistics over the years. Holding constant the 1980 method
of calculating the CPI (provided by John Williams' www.shadowstats.com) to give a uniform
constant dollar measure gives an even more stark view of the 1987 break-point
of the constant dollar price of gold and real interest rates. It can be seen
that the price of gold actually declined even as real interest rates
themselves became acutely negative - the inverse of the natural relationship
- and we are all too aware of the financial bubbles blown during this period
with the loose central bank monetary policies globally.
In summary, by suppressing the price of gold by creating artificial supply
with 'paper' gold as a physical gold substitute in London, this key warning
indicator of negative interest rates and an obstacle to inflationary monetary
policy by central banks has been disabled and loose monetary policy has been
entrenched globally over the past several decades. The markets and global
economy have become secularly distorted by excessively low real interest
rates by central banks with the consequent loose-money policies blowing
destabilizing, debt-fuelled financial and economic bubbles.
According to the Wall Street Journal, debt levels globally now exceed $200
trillion globally representing 300% of global GDP compared to 150% of GDP
that was an historically sustainable level in the West (http://blogs.wsj.com/economics/2013/05/11/num...-at-313-of-gdp/)
.
A further indicator of the distortion of the LBMA daily spot gold price is
provided by the following graph tracking the lease rate of gold as a proxy
for the availability of physical gold in London. The LBMA spot market price
of gold started to drop sharply on November 2, 2015 but the over the next two
months the lease rate of gold reacted strangely both surging and, notably,
the various duration lease rates invert completely from the norm with the 1
week rate surging above the 6 month lease rate reflecting metal shortage in
the spot gold market.
Note: during the fall of 2015, posting of GOFO data online was
disrupted from late October through late December.)
Normal markets don't work that way. In a typical spot market for limited
goods, shortages of an asset cause prices to rise, not to fall. The LBMA is
an exchange where gold spot prices are driven down leading to increased
demand for physical gold that drives gold shortages in the gold lease market.
And this is with spot gold buyers only at the margins taking delivery of
physical gold. The majority sit holding their unallocated spot gold
contracts.
Although the introduction of irredeemable debt-based fiat (paper) currency
is predicated on an ultimate currency collapse when the required exponential
debt growth to support expansion of the money supply becomes asymptotic,
short-circuiting the gold and silver markets over decades has shut down
cautionary warning signals in the global gold and debt markets that would
force monetary system reform.
The distortionary effect of LBMA unallocated gold contracts and
surreptitious central bank leasing of their physical sovereign gold holdings
into the market have increasingly shown signs of coming undone in recent
years and now months. While increasing daily volatility in the LBMA gold
market has previously registered merely as increased cooling fan rpm's in the
LBMA's bullion bank mainframes where their digital gold is created,
exchanged, and held, the real gold market is awakening. This awakening is, again,
only at the margins but has already had a material effect on the gold market
but not yet on the LBMA paper gold price.
London's Gold is Gone
According to data analyzed by BullionStar analysts Ronan Manley and Koos
Jansen, 2013 saw a run with gold swept out of London vaults leaving empty
vaults in London according to Bloomberg reporter Kenneth Hoffman target="_blank"(https://www.youtube.com/watch?v=yewuiAJyJco
).
Recently, the LBMA amended their gold refinery statistics indicating that
these London Good Delivery bars had been refined and reformatted in kilo gold
bars and shipped primarily to Asia by revising 2013 refining statistics in
August 2015reducing stated 2013 refinery activity by 2,000 tonnes and obscuring
this run on London gold target="_blank"(https://www.bullionstar.com/blogs/ronan-ma...ion-statistics/
and a target="_blank"lso https://www.bullionstar.com/blogs/ronan...a-and-the-lbma/).
The World Gold Council, financed by mining companies, and GFMS Reuters
similarly do not report this run that left an estimated 6 tonnes of gold in
London Vaults outside gold held by various ETFs and the Bank of En target="_blank"gland (http://www.safehaven.com/article/396...ets-in-collapse).
The LBMA thus has next to no visible London gold stocks backing the
estimated 11,000 to 19,000 tonnes of spot gold open interest. And bullion
banks are now attempting sell their once needed, now empty, London vaults.
Only one recent vault sale of note has occurred with a Chinese bank buying
the new 1,500 tonne vault that Deutsche Bank put on the market with its own
departure from the London Daily Gold Fix an target="_blank"d market (http://www.zerohedge.com/news/201...as-largest-bank).
( With major bullion banks abandoning the London market, the question
arises whether there has been a quid-pro-quo between the UK and China
that China, with its massive gold bullion holdings, would help to try manage
the gold crisis developing in London in return for the UK being the first
country to support the the China's AIIB Asian infrastructure bank in 2015
that triggered a rush of Western countries to do the same and also supporting
China's Yuan as a reser target="_blank"ve currency (http://www.safehaven.com/artic...oting-gold-yuan).
The Post LBMA-Era Price Reset
The LBMA appears now to be in an intractable and rapidly degenerating
position - with the vaulted gold available outside of the Bank of England and
ETF holdings largely gone from London, how do you manage the appearances of a
spot gold market with turnover of 200M oz per day and a massive open
interest? While gold flow from the miners provides some liquidity and enables
the LBMA paper gold market to provide some gold delivery and suppress gold
prices, it is obvious that a massive gold event has occurred and that this
paper market will not be the same given increased pressure for physical
delivery. The London market cannot sustain any material gold withdrawal as
occurred in 2013.
We now approach an event that may provide the catalyst for the inevitable
repricing of gold and expiry of the LBMA paper/digital gold scheme. That
event is the April 19, 2016 initiation of a daily spot domestic Gold Fix on
the Shanghai Gold Exchange (SGE) that will be followed at a later date for
the SGE international gold market. The SGE is very different from the LBMA
unallocated paper gold market in that for a standard kilo gold contract to be
issued, first a kilo of 99.99% pure gold delivered directly from an approved
refinery must be deposited with the SGE.
This creates a problem in that a daily spot SGE Gold Fix based on actual
gold trading in Shanghai is going to diverge at some point from the LBMA
daily Gold Fix trading unallocated paper gold contracts in London. A price
premium on physical gold in Shanghai cannot be extinguished with paper gold
from London.
To date, 10 Chinese banks have announced that they will participate in the
benchmark Fix at the SGE but no Western banks have indicated that they will
participate. In response to this reluctance, China has threatened that if
Western banks do not participate they will loose access to the Chinese target="_blank"gold
market (http://www.cnbc.com/2016/01...-benchmark.html).
This lack of Western bullion bank interest in the new SGE Gold Fix is
understandable as it would create a conundrum that a participating bank would
have to explain if there were two materially different spot gold prices
posted daily that could not be arbitraged away: one price for spot gold on
the SGE for physical gold and a second price for spot 'gold' in London based
upon trading paper. The market will then progressively degenerate into a much
higher global price for gold as the LBMA is pushed to the sidelines.
Sustained rapidly rising gold prices force up interest rates to draw capital
back into bonds. The knock-on effect will be on the global bond market and
financial asset prices as exploding gold prices and higher bond market
interest rates end the sophism of central bank manipulated interest rates and
their serial bubbles. With major banks holdings in interest rate sensitive
derivatives market totalling hundreds of trillions of dollars of notional
value and with western bank balance sheets that remain highly levered, there
will be bank turmoil.
In summary, central banks have been running a racket in conjunction with
the LBMA and the bullion banks - and the mark for this racket is 99.999% of
the population.
When Bill Dudley of the NY Fed refuses to answer questions regarding
whether there have been any gold swaps of sovereign US gold by the Federal
Reserve, then the observer may ask if these actions are illicit (listen to
Dudley starting at 50:00 minutes of this link distributed by Chris target="_blank" Powell of
GATA https://www.youtube.com/...h?v=2 target="_blank"unACzs9Gbo
and http://gata.org/node/16341).
And when we listen to the central bankers speak, we can also understand
why they cannot elucidate a rational plan for monetary policy. This group
have short-circuited the gold and global debt and financial markets to such
an extent that central bankers are now left merely saying that they are
"data dependent" and that we should prepare for negative interest
rates and a cashless society as their global credit bubble collapses on
itself.
The end of the LBMA paper spot gold market setting the global reference
price of gold is inevitable. As to the timing, keep an eye on the new
Shanghai Gold Fix and for further signs that the market realizes that paper
gold is faux gold and the LBMA is being abandoned.
In closing, a decade ago Christopher Ondaatje commented that he had one
more book that he wished to write and that was about the markets and
"this age of paper and its abuse that will end with horrific
consequences."
Watch out, people.
Post Script: 1) This story need not have a catastrophic
ending. Hundreds of millions of ounces of gold remain in the hands of
citizens and by opening-up mints for striking of citizen gold and silver into
sound money units along with an organized restructuring of the bond market,
this impending crisis can be averted. Unfortunately, the rule in politics is
to "never let a good crisis go to waste". Our politicians and the
financial interests who back them invariably use these crises to exert
greater control over citizens and the call at this time is for banishing
physical cash and expanding government control in society. Creating
decentralized sound money and taking away the franchise that government and
their banking interest sponsors have to create money from nothing is not
aligned with those currently at the nodes of power. It is however in the
interests of citizens.
2) When the gold market crisis breaks it will rapidly become apparent that
one of the few sources of real gold lies in the hands of miners. When this
realization occurs, it will create a hellacious run into gold mining equities
of miners that have real gold and silver resources. The question is whether
these gold and silver equities traded in financial markets that will be undergoing
paroxysms will provide any useful investment haven.
