Our primary wholesaler, and they have been in business for decades and are one of the biggest in the industry, just informed us that Goldman Sachs, Morgan Stanley and JPMorgan are no longer hedging gold in the US market. They are all getting out of the US market. According to our source, “liquidity has dried up.” All of the hedging is coming from the London Bullion Exchange banks. Comex is not a player anymore. The companies that issued the hedges and “covered the risk,” referenced above, are running for the hills. This has been a very lucrative business for them so it begs the question, “What are they afraid of?” Part of it may be due to Dodd Frank, but I fear there is more to it than that.
According to our source, and this is not hearsay or some rumor floating around, they can only hedge their (wholesale) orders when Europe is open for business and this is an especially big problem for silver. The essence of this is (no doubt over-simplified, but in a fashion that we can all understand) that everyone is laying the risk off to someone else who is laying it off to someone else, who is laying it off to someone else and the chain is only as strong as the weakest link. This is all in an “over the counter” unregulated and non-transparent market so the bullion banks don’t really know with certainty how safe their “insurance” is.
This is exactly what happened in 2008. The big Wall Street banks and hedge funds packaged risky over-valued mortgages into a new product called MBSs and laid them off, “hedged” the risk, with other firms like AIG. The firms that offered to cover the losses never expected to pay up and thought they could pocket the premiums with no risk. They were wrong!
Then everything unraveled, and AIG (and many other banks) went bust. AIG owed Goldman Sachs. I think the number was around $10 billion, and Goldman Sachs was not going to be paid. That is until Hank Paulson, former GS CEO ramrodded legislation (TARP) through Congress and bailed out, among other favorite sons, AIG. Of course, AIG paid Goldman Sachs $10 billion. Geese Louis, as a friend of mine often says. What fools most Americans are. They have no idea what is going on or how the game is played. We don’t count. Wall Street and the too big to fail banks win and everyone else is irrelevant! And you thought nepotism was bad? Everywhere you turn you see Goldman Sachs alum in key banking and government positions. Not only in the U.S., but around the world!
If you want to read more about this article, please follow the link, How Goldman Sachs Made Tens Of Billions Of Dollars From The Economic Collapse Of America In Four Easy Steps by Michael Snyder, on December 30th, 2009
So the point I am trying to make is that hedging commodities, and in this case gold and silver, is just another form of derivative, and the risk is every bit as real as in 2008. Perhaps the big banks have for once learned their lesson. They know that this time Congress will not lay it off again on the taxpayer to bail them out. (Maybe the Fed will just print it and give it to them – they are sort of doing that right now, to the tune of $45 billion a month in QE).
Isn’t that exactly what Jim Sinclair has been saying? He refers to it as a continuation of the 2008 derivative implosion, which is still out there, and was never eliminated. (One quadrillion dollars worth) In fact, as I understand it, the banks are back at it again, ADDING to their derivatives, not reducing them. Makes you wonder, didn’t they learn anything? Well, it will work until it doesn’t and we are just one black swan even away from Hell.
And remember, “hedging” is just another form of a derivative.
I say, run, don’t walk to the phone and order your gold and silver now. Without the ability to hedge in the US, it is only a matter of time before the entire PM industry will no longer be able to lock in a price until your funds have cleared. And the pricing mechanism will cease to work. Are you paying attention? This, to me, is a game changer.
The real issue is NOT that people won’t be able to BUY gold and silver. The issue is, without the ability to hedge, they won’t be able to lock in a price until the wholesaler takes delivery from their source (Mints) and I rather doubt the Mint will be able to guaranty a price way out in advance with the price violently moving up. The pricing mechanism will be broken. Sinclair has warned you about this too – he says Comex will no longer exist and without hedging, margin will go to 100% (as happened in 1980 to silver). In other words, the real physical metal that can be delivered will set the price, not a paper derivative or contract. We’re on the way there.
Also, the customer’s funds will have to be in the possession of the wholesaler in advance. We know that the delays can stretch out to months, not weeks or days, especially in silver. Even if there aren’t actual shortages of the metal, there will be shortages due to fabrication bottlenecks. Firms can only work three eight-hour shifts, and that’s all they can product. Mints can only supply a fixed amount of produce. When orders exceed that capacity, the result is delays. When the price is going straight up, most likely due to panic short covering, buyers will be locked out. What buyer in his (or her) right mind would place an order knowing they could pay multiples of the current quoted price, with no ceiling or guaranty? A quote would be meaningless! Also, the wholesaler will NOT stock gold and silver, unhedged, since the risk, the liability is too great. Even in a rapidly rising market, the price will swing up and down within the trend. Wholesalers make their profit on the bid-ask spread, not by gambling on price moves. Therefore the retail buyers (I mean you, our readers and clients) will be screwed – locked out, not because there is no metal but because there is no way to know how many ounces your check will buy. The pricing mechanism will have seized up.
Maybe it’s a good thing that the big banks will no longer hedge in the U.S. That may put an end to their ability to manipulate the price or certainly make it more difficult. Good by and good riddance! Especially to JPMorgan and Goldman Sachs.
What I have discussed is a “worst case” scenario, but real, non-the-less. I believe it will unfold, as I suggest, but maybe not tomorrow. But it is coming.
I asked Bill Holter to comment on this, so check out his section below, and read his article titled, “Tick Tock…They Pulled the Pin.”
Jim Sinclair wrote the following:
My Dear Friends,
Wall Street wants Yellen as Chairperson of the Federal Reserve. President Obama wants Stockman as Chairman of the Federal Reserve.
Here are the questions, the answers to which you must know:
1. Which candidate would be more positive, fundamentally, to gold?
2. Which candidate, if either, would be bearish for bonds?
3. Will the present Chairman service until term end?
–jsmineset.com, July 30, 2013
I asked Andy Hoffman for his views. He said:
LOL, good questions.
I find it hard to believe Stockman would ever be considered. They are “all in” with the fiat money printing Ponzi scheme at this point, and there’s no turning back. No room for “Volcker-types”; although even Volcker would be toothless in today’s world.
I believe Yellen’s a shoo-in, as she is more of a money-printing dove puppet than BB. If Stockman came into the picture – and I haven’t even seen it there; the market would likely crash. And I don’t believe for a second that Obama wants him.
As for question #3, who knows?
Here’s the latest WSJ article:
When we last checked the online betting side Paddy Power gave 1 to 5 odds (meaning you have to bet $5 to make a $1 profit) on Janet Yellen, the current vice chairman. She’s still the favorite, but her odds have drifted slightly lower to 1-to-4 on Friday, on the web-betting site Paddy Power.
Lawrence Summers’ odds of snagging the post, meanwhile, moved slightly higher to 11-to-2 (meaning a $1 bet gets you $5.50 if he gets the job), up from 8-to-1 (a $1 bet yields $8 profit)
The new money was particularly keen on Roger Ferguson, a former Fed vice chairman and now the chief executive of TIAA CREF. On Friday, Paddy Power was giving 50-to-1 odds he’d get the nod. Now, they’re offering 16-to-1.
The changes came after a “flurry of bets,” according to a tweet sent by Paddy Power, which is based in the Isle of Man. The betting also changed the mix of potential candidates. Gone are some long shots such as Harvard’s Niall Ferguson and Princeton’s Paul Krugman. Now included is Stanley Fischer, Israel’s former chief central banker, offered at 40-to-1 odds.
–Wall Street Journal, July 13, 2013
I believe the answer to #1 is that Larry Summers would be bad for gold. In 1988, Summers and Robert Barsky published a paper titled Gibson’s Paradox and the Gold Standard. One of the conclusions of their theory was that in order to foster a strong dollar and low interest rates, you can’t let the price of gold rise. Gold performs inversely to “real” (adjusted to inflation) interest rates. Bill Murphy (LeMetropole Café) wrote a lot about this, when he first started publishing, around the turn of the century. Therefore, I would expect Summers would be bullish for bonds, since his previous views favor holding down interest rates. Rising interest rates means falling bonds and falling interest rates means rising bond prices. That would require a continuation of Quantitative Easing, or an extension of the Fed’s current policies. Summers, I believe, would keep the bond market from falling, although it is hard to see it rise very much since interest rates are already so low. Still, the Fed may end up as the buyer of last resort and Summers in the man to carry that policy off.
Honestly, I would have to agree with Jim Sinclair that the Fed has no choice but to stick with QE to infinity, so on that level, it doesn’t make much difference who they put into the office.
Summers is bad for gold – short-term, but even with his policies in place in the early 2000s. And thousands of tonnes of central bank gold was leased into the market place to assist the gold suppression, gold’s bull market came to life in spite of the policy. I believe, in the end it won’t matter a lick who replaces Bernanke. The bull market was born under Greenspan’s leadership, marched ahead under Bernanke’s leadership and will continue with a vengeance under the next Fed Head’s leadership. Nothing substantial will change. No matter who heads up the Fed, they won’t want to tank the stock market, the bond market, the real estate market and the economy. There can’t be any change in policy because they are painted into a corner and have run out of options. All of the markets are living on low interest rates, cheap money and Fed-based liquidity.
Regarding #3, like Hoffman says, “Who knows,” but my guess is yes, he will stay in office until the end of his term. Leaving early would cause some market uncertainty and the government, like most businesses, like to see the “year end” figures favorable. Change tends to upset markets. I say he stays till the end of his term, on Jan 31, 2014. Perfect timing, it’s a Friday.
I also say, as you can see by the “locked down” dollar and gold prices, that nothing much will change until after Bernanke leaves at the end of January. Black Swan events are a game changer, but we can’t predict those in advance.
Just like I wrote yesterday, it’s running fast and going no-where. Look at the swing from $1,336 to $1,306 and then gold finished comfortably back in the “trading range.” The range may move around a bit, but as long as gold stays above $1,300 it’s fine. Ha, ha, ha. What a joke.