While proof reading this piece I realized that I should preface it with an explanation. This very well may be the most important piece that I’ve ever written and one that could explain why and how the price of gold has dropped for 2 years in the face of all time record demand. We have wondered and scratched our heads as to how demand could dwarf supply yet the price drops. What is happening in China right now may very well explain it mechanically. The “mechanics” however now seem to be moving into the reverse because of fraud. What was previously “sold” that did not exist, now must be bought…yet still does not exist and is even a smaller relative pool. We are potentially facing a margin call in reverse in the gold (and silver) markets. The day that “none available” becomes the reality could happen very rapidly and without notice. I think we now have an answer!
Another day, another scandal. No I’m not talking about The White House where it seems that another scandal promptly comes along to distract your attention from the current scandal. No, I am talking about an investigation into China’s port of Qingdao base metal’s warehouse. I have written about this topic before, one avenue of credit creation is the “shadow banking system” that uses warehouse receipts as collateral for credit. It appears that some metal is missing or unaccounted for, and this after rumors has alleged that much of the metal has been re hypothecated as many as 10 times over.
OK, so here is the story as told by Zero Hedge a couple of months ago and now the story of missing metals today. Copper is reacting to this story by dropping in price rather than rising, this scenario was forecast by Goldman Sachs and agreed upon by Tyler Durden(s). Please understand that no matter what happens to the prices of copper, lead, beans, zinc or even gold, the bottom line is that this is a very fast growing seed that will grow into a credit contraction/implosion that will leap from China’s shores and engulf the entire credit based world.
I must confess that I am a little bit confused with this but let’s think this through and see what we come up with. At first glance, my thought was that if the metals are not there for whatever reason (never there, hypothecated many times over or even sold while other letters of credit exist with multiple owners), once this fact was understood the prices would rise. Common sense says that if there is less supply than previously thought then the clearing price should be higher. Goldman and Zero Hedge argue that once the scam is uncovered, a rush to sell the contracts will overwhelm the demand to secure the physical product. This very well may be true as owners of “receipts” will sell to receive whatever they can …while they can. The selling should only be over the short term in my opinion and a rise later in price as tight physical supply adjusts the clearing price later. I think the best way to explain their theory is that commodities (paper contracts) face a gigantic margin call that only can be satisfied by selling to cover. In essence, the asset has already been borrowed against several times over and the money does not exist to actually purchase the metal because it’s already been “bought” and the money spent elsewhere. Again, this is a little bit counterintuitive but I will come back to “counterintuitive” shortly.
Gold is where Goldman and Zero Hedge disagree. Goldman believes that gold will also go down just as other commodities while Durden disagrees. Zero Hedge believes that gold may actually rise and erase the losses of the last two years, in their words…
And yet in the case of gold, it just may be that even if China were to dump its physical to some willing 3rd party buyer, its inevitable cover of futures “hedges”, i.e. buying gold in the paper market, may not only offset the physical selling, but send the price of gold back to levels seen at the end of 2012 when gold CCFDs really took off in earnest.
In other words, from a purely mechanistical standpoint, the unwind of China’s shadow banking system, while negative for all non-precious metals-based commodities, may be just the gift that all those patient gold (and silver) investors have been waiting for.
–Zero Hedge, June 4, 2014
This of course, excludes the impact of what the bursting of the Chinese credit bubble would do to faith in the globalized, debt-driven status quo. Add that into the picture, and into the future demand for gold, and suddenly things get really exciting.”
OK, let me break this down a little, first I do not think that “China” under ANY circumstances will be selling ANY physical gold. I believe that the “transfer” from West to East of gold bullion over the last few years was a national decision that China made at the very top levels, it is a national program that will not be altered or reversed. That said we know that gold has dropped over the last two years while physical demand has dwarfed known physical supply. This was and is “counterintuitive” as I mentioned above. In a purely “cash market” this could never have happened but it did. “It did” and we have speculated as to why or how all along, now I think we have a better idea. The “hedging” that has been done was multiple in size of the overall market so in fact there was more selling than buying which pushed the price down (with paper). This allowed “China” to purchase and secure the real deal and as I’ve said regarding their infrastructure, it is built and if the paper markets implode or evaporate …then…”oh well, at least we have the real deal.” I might add they in retrospect will have secured “the real deal” for what will be looked back upon as for FREE!
Zero Hedge speculates that purchases of “hedges” to close in the paper market will overwhelm sales in the cash market (I do not agree that physical sales of any big size will ensue). These “hedges” include forward sales and leases from the mining industry, “leases” both official and “unofficial” (as in stolen) and multiple sales of the same physical ounce in the paper markets. As you know, there has been some very good work done and evidence put together that there are 100 paper ounces sold for every 1 real and deliverable ounce on the planet. It is this situation that I believe Zero Hedge speaks of as “unwinding.”
So the question now is how much, how big and how quickly does this scandal in China become uncovered. Make no mistake, there will be executions in China over this unlike the “the Corzinization of America” because they actually still do have a rule of law. Even though “we” (Americans) have become almost completely numb with scandal after scandal, this one has the potential to shake the entire globe so that we cannot ignore it. This is all about the credit structure coming down. “Collateral” has been lent against many times over and in some cases never existed or has been stolen. This is about “trust” and will quickly become about liquidity and the lack of. This is initially a highly deflationary event and as most everything is run on credit…everything will feel the shockwaves.
Even without the paper contracts that must be unwound on the buy side for gold, the fact that confidence will have been totally broken will in my opinion push gold to much higher levels on its own. I also want to mention that as “history rhymes” we may be seeing this again soon. The deflationary events of the 1930’s gave way to a revaluation higher of gold; this will be done again in my opinion only this time by China as they are now the biggest owner. They will have the ability to do this and also the need to. We will find out truly “who has the gold and who doesn’t.” Those who do not will need to spend much much more of their fiat currency to secure gold and or live in hyperinflation. This is the “perfect storm” for America and the greatest setup of all time for a revaluation of gold. The dollar will be sold like a hot potato at the same time revelations of leased, lost and otherwise stolen gold come out in public. Picking a higher number for gold correctly will be a crapshoot and could even become an infinite number under the worst circumstances.
Bill I think you are overreacting again. I mean what could go wrong, we have Dodd-Frank helping the average Joe with that neat ‘unsecured lender to the bank’ language. Uhh that no right to habeas corpus for USSSA citizens (NDAA) if deemed by a higher authority, whatever that means.
Hey the west is getting it right now btw, I just saw where Italy is including prostitution in their GDP, and why not, it makes everybody involved happy. I mean what could go wrong? Maybe in my senior years my mind is turing to silly putty due to too much boxing & football impacts in my earlier years, but I am now convinced my friends and family are right…..I am just overreacting…!!!
They love to tell me “you been saying that stuff for several years & see nothing has happened? We will just what until a triggering event happens & then make adjustments.” You and I are wrong buddy.
Shit the trigger was pulled by the “Paper Boys” at Jekyll Isl in 1910 (with the 1913 creation of the FOMC & the IRS) & the fps of the triggered projectile is picking up speed now it just hasn’t taken any flesh. The good news is they are firing paper bullets & the bad news is the new sheriff in town from the east is shooting real three dimensional bullets. The problem is everyone is in the middle. All you can do is protect yourself with the insurance of had assets.
But, as I said maybe I am overreacting. After all one side only has paper bullets.
SG
ps. great article as always btw
yes, we are over reacting as usual.
Boom!!
Bill,
I’ve stopped reading articles from every so called expert out there EXCEPT yours. I’m no trader, broker, nor savvy investor. Just a regular joe, but your articles are so easy to understand even a guy like me gets it. If it’s any consultation, I’m still here and haven’t given up. Reading this article today gave me goosebumps and really unnerved me. You the MAN!!
ValleyForge
thanks VF, hang in there as our logic is rock solid.
I also see negative interest rates now in Europe, which should also lead to massive, massive demand for physical gold.
Rogoff (I believe) has said that we need a cashless society to tax nefarious activities AND ALSO to keep people from maintaining the NOMINAL value of their money when interest rates go below zero. Wow! Negative REAL rates are no longer good enough. Didn’t Draghi just the other day thumb his nose at the world for betting against Europe? Now they enact a policy that proves they are at Defcon 1 or 2 because the policy itself might crash their entire financial system. It amazes me how people don’t realize we entered into Bizarro World some time ago. Everybody expects that belated return to normal that will never come.
I have already written about this for tomorrow’s newsletter.
I need you all to see the history of the paper fraud in gold going back to the demonic Rothschild family in this video at apx 23:06. Here is the link http://www.youtube.com/watch?v=fqF-2C1JTyo.
The documented part of the video shows:
Title: PAPER AGAINST GOLD
OR
“The History and Mystery of the Bank of England, of the debts, of the stocks, of the sinking fund, and of all other tricks and contrivances, carried on by the means of paper money”.
This goes to show the onging fraud that was created back in the 1800′s by this demonic bloodline to swindle the people out of their wealth.Now we have gone from ZIRP to NIRP. How you can go from a free loan to a negative free loan gets me!
Thanks Bill!
Bill, if you get a chance you should listen to Greg hunters USA watchdog interview with Catherine Austin Fitts. She terms this economic collapse the “slow burn”. A systematic shutdown & extraction of wealth by TPTB. What’s interesting about her view point is that she believes USD $ can still maintain it’s hegemony as world reserve currency for sometime. She rationalizes this by the simple fact that no other country in the world has the infrastructure ie under sea cables, satellites, internet payments systems in place that could be launched to set up an alternative payment system outside USD$. I know the BRICS are working on this with Brazil laying their own internet cables under the sea, the Chinese setting yuan swap facilities around the world & the Russians doing their thing to step outside SWIFT. I guess my question is how much of a deciding factor is this? Lets say, china, tomorrow can no longer get metals from the west. Will this infrastructure or lack there of have any significance in them pulling the plug? Your thoughts. Great article by the way
thank you Gil. I disagree with K A Fitts on this one. I believe it will become a “lights out” event with nothing slow about it when it happens. Yes we have the infrastructure but in a lights out event I believe the world would be up and running close to smoothly within maybe 6 months with the US isolated outside of the system. “They” will make it work somehow without US help or much interference in my opinion. This fraud exposure in China is a very big BIG deal as it could set a gigantic credit contraction in motion.
Bill : excellent post. The key word is TRUST. Once that disappears, all hell will break. I can just imagine all the internal and external auditors spending all-nighters reviewing asset bases. This just may be the beginning of the end; you cannot spin this away. Lots of nervous bankers globally, I expect. More suicides?
“we” say and have said that THIS is exactly the case with gold. “They” said we were crazy, this could never happen. Well it has and now we will see about gold and silver won’t we?
I love reading all of you guys at Miles Franklin. Thank you.
Will silver follow with gold?
Once this thing heats up, it should lead gold higher.
Won’t the banks just trot of to their HQ and simply ask for cash to pay off their obligations. They used $23Trillion to bury it in ’08, what stops them from bending arms and rules this time round. Sure, they’ll snuff a couple of poor idiots to satisfy the MSM followers but that will soon be forgotten.
Now, where’d I put that conspiracy nut job’s lead on Flight 370? Ah, that’s yesterday’s news. Oh, here we go; Kim Kardashian has a new dress. Front page news for sure.
it will all become about delivery of the real deal.
Bill,
Another great article. I had taken the Chinese rehypothecation scandal as a shot across the [Western Central Bankers’] bow that, when they (China) control the gold market, rehypothecation will not be allowed. “Fair warning”, so to speak. Now this looks like the scandal might really be a triggering event. Excellent analysis.
Mike
thank you.
Bill
Your answer is the best I’ve read so far!! It makes a lot of sense.
GOT SILVER?
We will see, this could get out of control really fast when it does. Fraud is always uncovered when “the tide goes out”.
Just a simple exercise, to provoke thought.
What price will the Chinese and the rest of the BRICs set gold to, initially?
Let’s assume that the Chinese now have 10,000 tons of gold. They need this much to say, ‘We are the number one gold holder in the world,’ greater than the U.S.’ holdings (guffaw) of 8,134 tons.
The Chinese hold $1.3T in U.S. Treasuries. The Chinese think those will go to zero, post-reset.
So, to compensate them for their now worthless U.S. Treasuries, their 10,000 ton gold hoard will have to be worth at $1.3T. 10,000 tons x $4,000 per ounce = $1.3T.
So, I think the Chinese and BRICs will price gold at at least $4,000 per ounce at the reset.
What do you think?
Excellent thought process John! There is more to it than just Treasury holdings however, the pegged price will have to support much more than this. The number in my opinion will be much higher although the “initial bid” could be in this neighborhood. Speculation obviously on my part.
“…without a doubt the most important commentary of the year.”, according to Harvey Organ. Bill, you rock!
thank you Sally.
Great piece Bill!
One question here is : Why does China decide to unwind this “commodity loan scandal” at this particular point in time? This problem was widely known for a long time. It was sitting there, dormant. So did they choose to activate the switch now?
Just a few speculations from me: The BRICS development bank should be operational by July of this year; China sees the aggressive push from Obama’s administration and its TPP and Pivot to Asia as a direct threat in its own backyard; Ukraine’s Western supported violent coup shows that the Washington DC is relentlessly trying to undermine the emergence of a multi-polar world and attempting to destroy the emergence of the Eurasian trade zone; the soon coming end of the London Silver Price Fix and the current attempt by Western players to retain the price fixing power of Silver “within” the Western world; Gold and Silver future markets priced in Yuan soon to be opened. And we could add much more to this list.
My point is: Is China finally satisfied with the amount of physical gold it has and is ready to pull the plug on the Anglo-American Banks’ ability to price gold in the paper market? Do they also see that the Pivot to Asia, the TPP, TTIP the invasion of Ukraine, Syria, etc as dangerous enough to the world architecture for them to trigger the fraudulent paper commodity market nuclear bomb? Because the biggest looser here will be Anglo-American Banking cartel as they have sold/leased most of their physical reserves.
I’m just trying to understand why trigger this commodity leasing scandal now, when it’s been known for a long time. Whatever the reason is, I think that we are going see major changes in the not too distant future.
Thanks Eric. Could be and yes, I agree with most of your thought process here.
so sorry Farrell, he’s in my prayers.
Bill,
Another great article. I enjoy reading your articles and look forward to them each day as they help me relax (even though the content should lead me to drink!).
You don’t have to post this if you do not want to, but today has been a hard day for me and a worse day for my grandson who is 10 years old that my wife and I are raising.
My grandson, Bradley, was born just 1 and 1/2 pounds and is fortunate to be alive today. He was in the NICU for 8 months and then had to go to a children’s hospital where he was on a ventilator for 3 and 1/2 years. He is blind, can not talk and can not walk. He requires 24/7 nursing care and has had more operations in his first 5 years of life than most people will have in their entire lives. We brought him home to raise after he was in the children’s hospital for 5 years.
Today, Bradley has had a bad day when he usually does not.
All I’m asking is for any one that would like to pray for Bradley or put him on a prayer list to please do so.
Though I am in my 60’s and not as young of a spring chicken as I use to be, Bradley is a blessing to us!
Thank you.
I will certainly pray for Bradley. I hope others will as well.
I notice that many people here are thinking along the lines of east vs west mentality to the naked eye putin and obama are enemies but they both have the same boss
maybe so, but power and wealth is moving from West to East.
agreed
James Sinclair, at a recent seminar in Kississime FL, agreed that a strong possibility was that the Fed and the Rothschilds are consciously keeping the price of gold down, while aiding its movement to China, where the Rothschilds have build up massive connections since the time of Mao. This in payment of the losses China has suffered on their dollar holdings.
A more mature view holds that The Rothschilds are attempting to aid Maurice Strong in destruction of Western Hegemony in an attempt to bring about a one-world government.