I know that you’re probably wondering about the title “…And It’s Gone.” I wanted to write further about the “missing metals” in China and how quickly we could see the machine go into reverse because of the leverage, size and amount of players involved. After writing the title and thinking about how to start off I realized that it could and does apply to so many different facets in the world today, and not just the financial world. To refresh your memory and give you a 90 second chuckle, here is the South Park video that made the phrase “…And it’s gone” so famous.
In the non-financial category you must include common sense, integrity, work ethic and the rule of law amongst others. They are all gone. Maybe not completely because there are still some smart, hardworking and honest people out there but when you look at the “top,” yeah, it’s pretty much all gone. When I say the “top,” I am talking about the places that wield the power and make the decisions.
I could have used this title for the recent revelation by Christine LaGarde that the IMF may someday move from Washington to Beijing. The title fits Crimea, it fits the depositors in Cyprus, and it fits the proposed use (or lack of) of dollars that Gazprom will be using for settlement. I could have certainly used it for the coming “bail ins” all over the world. And it also fits the Chinese businessman who opened his 1 ton crate of gold from Ghana only to find worthless steel.
OK, yes, apparently “it” is gone, “it” being the collateral. All along I have said that the entire system which is “credit based” is a daisy chain and that no link, anywhere could “break” …or the whole system would break. The situation in China’s Qingdao port looks to be the link that is breaking. If there are 80,000 tons of aluminum and 20,000 tons of copper missing here, what about other ports? Then of course the thought process leads your mind to the banks and the lenders themselves. These institutions are not just Chinese banks. If you recall, JP Morgan offloaded their commodities arm to Mercuria back in March. Swiss based Mercuria was a big lender to this market; good timing by Morgan and Mercuria now holds part of the bag? Citigroup was also another big lender in this market, can they or do they have the strength to eat loans that were made in retrospect with “less” or even no collateral?
Please understand that this situation is going to bring trust into the equation and just as any receding tide does, all of the bad deals and frauds will be exposed. I could have titled this piece “show me the money” because this is where all of this will lead. “Receipts” everywhere will be questioned and not just for aluminum and copper. There will be questions raised between banks, between sovereigns and of exchanges themselves. “Trust me” will not cut it anymore and we will soon find out who really has what.
Does GLD really have the 800 tons of gold that they say? What about the LBMA and COMEX? Oh heck, what about Ft. Knox, West Point and of course the Federal Reserve Board of NY? Do you see the danger here? We have shown you so many bits and pieces of anecdotal evidence where common sense told you that there was no way that the amounts of physical gold “claimed” could never be true, how could all of these pieces be pure coincidence?
This is where I believe we are headed, “show me the money” so to speak. I think that we are at a very big crossroads where “trust” will be supplanted by “fact,” as in you either have it or you don’t. Please understand that when you couple in the recent revelations that the U.S. has spied on everyone, everywhere, the U.S. “trust meter” is running very low with foreigners. Dollars are being shunned and supplanted with each new deal and even here in the U.S. there is growth in “non” dollar settlement. I will be shocked if we do not see other countries asking to repatriate more gold reserves held in NY and I also believe that the world collectively will demand that the U.S. show an authentic audit of the gold reserves that we claim to have. It will be put up or shut up time.
Yes, the “problem” is in China currently and looks to be a fraud of their making, not ours. But …fraud is fraud and everyone will question everyone else no matter who they are, where they are or what reputation they are riding on. I cannot tell you how important it is to understand that this situation could blow up in such a short period of time and change the entire world of finance literally overnight. I can say this because of the leverage involved in not just in commodities, gold, stocks, bonds or real estate. There is leverage (debt, credit) everywhere; it is the basis of “wealth.” (Can you imagine telling your great grandfather that “debt is wealth,” yeah that would go over well).
Global trade must have credit to settle, internal trade must have credit to settle and so does distribution. You absolutely must understand that in a world where “just in time inventory” rules, the “shelves” are not very deep because they don’t have to be. However, without credit nothing will work. You see, this event no matter how else you view it is a credit “tightening” onto an economy that is already weak and a financial system that is walking a tightrope. This is how all “credit contractions” of pyramid schemes or Ponzi schemes happen. First you see or smell a teeny tiny fraud (the current situation is not so small) that grows and infects other players in other countries and in other markets. It keeps on growing until everything is infected. The situation today is that almost everyone is over leveraged, there is no “free” collateral that is left to borrow against and we have computers. I use the word “computers” because they are fast, REALLY FAST. If you are a student of history and have read about the Credit Anstalt collapse in 1931, then you know just how fast a credit contraction can turn into an all-out collapse without computers. In today’s world where instant news and instant trading is the norm, markets may not be able to stay open for even one full day.
Before finishing, I do want to mention that this revelation of missing collateral could possibly even be a ploy by the Chinese. As I have said many times, I don’t think that they worry about the paper markets or their collapse. They have already built out their infrastructure and inked supply deals for decades to come (PAYING with dollars of course). I believe that it is quite possible that China is pricking the credit balloon here. Remember, they do have well over $1 trillion worth of treasury bonds that they can “use” to sell in the middle of a panic to buy hard assets with. They could kill two birds with one stone by dumping their paper treasuries and scooping up some more assets at fire sale prices. This is the way it has always been done, just ask the Rothschilds.
I am not trying to be alarmist here; I am just trying to alert you to the likelihoods that can arise from “missing collateral” in a world where credit is “everything.” No matter your own situation, whether you are debt free or not this will affect your life. I also want to point out that gold is “money” that has no credit or anyone’s liability attached to it unless you “own” it in non-physical form. What is coming will affect every financial asset everywhere and the phrase “…and it’s gone” can come into play before you can even say it. Gold in physical form on the other hand is not only “immune” to this coming infection, it will benefit from it when all is said and done.