Starting on 25 March
2010 the CFTC has been conducting an investigation into the concentrated
short positions in the gold and silver markets. There has been some very
interesting testimony coming out of the Goldman Sachs (GS) vampire
squid’s mouth that the informed gold bugs already knew. The size and scope of this Ponzi scam is
beginning to be comprehended. As the idea spreads, the demand for various
types of ‘physical gold’ will increase and decrease.
STRAIGHT FROM THE
VAMPIRE SQUID’S MOUTH
On 9 September 2008 I
appeared on Adam Curry’s
Daily Source Code in episode 788, which has hundreds
of thousands of subscribers and has recently been reactivated. I casually
remarked, “There are about 140 ounces of paper gold for every one ounce of physical gold.”
Jeffrey Christian, formerly of Goldman Sachs and currently of CPM
Group, considers himself among the world’s foremost experts on gold.
Before the CFTC Christian testified:
One of the things
that the people who criticize the bullion banks and talk about this undue
large position don’t understand what is the nature of the long
positions of the physical market and we don’t help it; the CFTC when it
did its most recent report on silver used the term that we use “the
physical market”. We use that term as did the CFTC in that report to
talk about the OTC market in other words forwards, OTC options, physical
metal and everything else. People say, and you heard it today, there is not
that much physical metal out there, and there isn’t. But in the
“physical market” as the market uses that term, there is much
more metal than that there is a hundred times what there is.
WHAT IS PHYSICAL
GOLD?
Let’s untangle
some of Christian’s weak verbal jiu-jitsu. In my book The
Great Credit Contraction I start off the first paragraph of the first
chapter with definitions because if there is no agreement on definitions then
it is impossible to analyze and conclude properly. While I focus on the terms
money, money substitutes, illusions and currency we may want to shift our
focus and attention towards the bottom of the liquidity pyramid and the terms
‘gold’ and ’silver’.
Physical gold, AU 79 on the
periodic table, has a density of 19.30 grams per cubic centimeter at room temperature and a liquid density at the melting point of 1,947.5°F of 17.31 grams per cubic centimeter. Physical silver has a similar definition.
Physical Fake
Tungsten Gold has been demonstrated to exist
and is differentiated from physical gold because of its tungsten composition.
GLD ETF gold differs from
physical gold in many ways, which I have examined several times. On page 11
of the prospectus it states:
Neither the Trustee
nor the Custodian independently confirms the fineness of the gold allocated
to the Trust in connection wtih the creation of a Basket [issuances].
So for that reason
and many others, in A Problem With GLD And SLV ETFs I concluded,
“There is no assurance that the ‘gold’ held in the ETFs is
actually the same gold as defined under the periodic table.”
I casted even more
aspersions on these instruments in Another Problem With The GLD ETF where I showed from
the 21st of November 10-K:
Gold held by the
Custodian’s currently selected subcustodians and by subcustodians of
sub-custodians may be held in vaults located in England or in other
locations. In addition, the Trustee has no right to visit the premises of any
subcustodian for the purposes of examining the Trust’s gold or any
records maintained by the sub-custodian for the purposes of examining the
Trust’s gold or any records maintained by the sub-custodian, and no
sub-custodian is obligated to cooperate in any review the Trustee may wish to
conduct of the facilities, procedures, records or creditworthiness of such
sub-custodian.
Physical London LBMA OTC Forward gold is another interesting form of Christian’s
physical gold. But I touched on the Massive Institutional Gold Market Change over six months ago.
CFTC TESTIMONY
Here are two key
excerpts from the CFTC gold and silver hearings on 25-26 March 2010.
And the clip with
Christian’s failed verbal jiu-jitsu is actually a blatant admission (at
3:48) of the Ponzi scam nature of the ‘physical gold market’.
So what has Christian
attempted to do? Conflate the gold as defined in the periodic table with
other forms of ‘gold’ such as GLD ETF gold, London LBMA OTC gold, Comex futures gold,
etc. under the term ‘physical gold market’. Of course, such
contorted logic is absurd. The ability of a piece of paper with the letters
‘G-O-L-D’ written on it, that can become worthless, is no more
efficacious at providing protection of value than a piece of cardboard with
‘C-O-W’ written on it is efficacious at providing a gallon of
milk.
CONCLUSION
The knowledge that
there are at least a hundred pieces of paper masquerading as physical gold in
the physical gold market
for every ounce of gold
as defined on the periodic table is old news. What is breaking news is that
one of the vampire squids would testify before government officials that this
is the case.
So, if possession is
9/10ths of the law and if there are 100+ claims on an ounce of gold for every
actual physical ounce and if there is a demand by the market for those actual
physical ounces, because The Great Credit Contraction continues and capital seeks
safety and liquidity by moving down the liquidity pyramid, then what happens
to the value of the gold ounce in one’s hand or trust
third-party service? For comparison, there is about $7,000,000 of capital,
real and fictional, for each ounce of physical gold.
Of course, Christian
would probably argue it is illogical and irrational to contemplate such
events unfolding. But they already have. David Einhorn moved billions from
the GLD ETF into physical gold in his own warehouse.
Disclosure: Long physical gold,
silver and platinum with no interest in the problematic SLV, Streettracks Gold ETF Trust Shares or the platinum ETFs.
Trace Mayer
RuntoGold.com
Trace Mayer, J.D., holds a
degree in Accounting from Brigham Young University, a law degree from California Western School of Law and studies the Austrian school of economics. He works as
an entrepreneur, investor, journalist and monetary scientist. He is a strong
advocate of the freedom of speech, a member of the Society of Professional
Journalists and the San Diego County Bar Association. He has appeared on ABC,
NBC, BNN, many radio shows and presented at many investment conferences
throughout the world.
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