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Over the weekend, I received an e-mail with some commentary written by Bix Weir.  Within the commentary was a paragraph and a link to an article that he penned 5 years ago.  There was also a link to a statement that was made by the Chinese back then that “they reserved the right to default on derivatives.”  The paragraph and links follow:

Silver Derivatives and China

“In August of 2009 China stated publicly that they “reserve the right” to default on any derivative contracts…

“China’s SOE regulator, the State-owned Assets Supervision and Administration Commission (SASAC), had told the financial institutions that SOEs reserved the right to default on contracts”

I had completely forgotten all about this, I’m sorry to say, but glad to have again come across it because it’s a piece to the puzzle that is needed.  China’s SOE’s (state owned enterprises) reserve the right to default on derivatives.  Do you understand what this means?  It means that China is playing the “game” and will play the game only for as long as it benefits them to do so.  They are also playing the game with the knowledge that they hold all of the cards and can press the default button when, how, and with whom they want to.

Let’s expand on this a bit.  We know that China has been a huge buyer of physical gold for several years and that they have now accumulated a minimum of 5,000 tons.  This would make China the 2nd largest holder of gold in the world if the U.S. were to still have their 8,000+ tons.  As I’ve written many times before, logic tells us that the U.S. cannot have this gold because too much physical has been purchased in relation to production; it had to come from “somewhere.”  If you recall, Zero Hedge has hypothesized that gold futures were used to depress price over the last two years even as physical demand argued for higher prices.  If this is true (which I believe it is) then what exactly have the Chinese done?

I believe they have accumulated the metal which is now safely onshore and vaulted while they are short derivative contracts.  Do you see how the old saying “possession is 9/10ths of law” applies here?  Does it even matter “how short” they are if they reserve the right to default?  I’d like to add that in my opinion, if this has been done and the short sales truly exist (again, I firmly believe that they do), it was not to depress the price.  I don’t think the Chinese care one way or the other whether they were paying $1,000 per ounce or $10,000 per ounce as long as they got delivery of it.  The suppression of price acted to scare buyers away and shake some loose change out of the pockets of nervous or scared owners.  The price suppression was meant to create less competition and even a little bit of added supply, “dollar price” was unimportant.

In my opinion, the Chinese found out and knew for sure back in 2009 that “they had been had” by the West.  I believe that they knew for sure that they were the object of a Ponzi scheme and would ultimately be defaulted on with their dollar assets.  They announced their gold holdings, said that they reserved the right to default on derivatives and spent the following years building infrastructure, stockpiling raw materials (and gold) and went on a buying spree where they promised to “pay in dollars.”  Do you understand the last sentence and what it really means?  It means that “the joke” is not on China because they figured out the punch line before it was given!

Before finishing this I would like add just a little bit more opinion.  We know that the COMEX silver open interest has recently soared to near record amounts.  I have speculated that this might well be Chinese proxies.  The open interest for July could close to half of dealer held metal, the September contract could completely clean out and default the COMEX silver vaults if current open interest stood for delivery.  Is it possible that the Chinese would create a default in the West and then make good on their word and default on their derivatives positions?  Could they say “we would not have defaulted if we were not defaulted upon first?”

What would the end result be if this theory is correct?  Let’s see, the Chinese have the infrastructure built, they have raw materials and contracts for more using dollars to pay, they have been building political bridges all over the world and most importantly they have the gold!  I also must wonder if this “right to default” is what the Chinese used as leverage to get official gold to move from West to East.  Could they have threatened default unless they really got paid …in gold?  For what reason would the West (the Fed) deliver gold and empty the vaults?  To buy a little bit of time?  If they did not make the deliveries then what would the world look like today?  Possession isn’t 9/10ths of the law; I think we will find out that it is the law!