I think that Rickards is correct in his judgement, and joins many others
including Kyle Bass, who because of their backgrounds are much harder to
ridicule and dismiss by the creatures of the bullion banks. And in some
of their more recent remarks about this, one can almost feel the desperation.
And here and there, the rats seem to be leaving the ship.
When this pyramiding of bullion and price manipulation falls apart, which
history suggests that it must, there will be many angry investors demanding
explanations of officials and regulators and bankers who will be shuffling
from one foot to another, trying to excuse their lack of good fiduciary
judgement and responsibility.
I just wonder if they will try to wait for some 'big event' to disclose this,
in the hopes that fewer questions will be asked, and will be more easily
dismissed.
As Rickards notes, and again I think he is right, they will 'close the gold
trading window' and force settlements for cash at one price, and then reopen
the price for actual bullion at a price that will climb shockingly
higher, despite a determined PR campaign by their friends in the media.
Perhaps I am wrong about this, but to me it has seemed for some time to be
all too similar to the improbable sustainability of the Madoff scheme, and
other such arrangements that depend on large numbers of people accepting a
proposition that is dangerously misconstructed, misrepresented, and therefore
mispriced in terms of risks.
"If JP Morgan leases gold from the US Treasury it
does not mean that they back up a truck in Fort Knox and drive the gold away.
There is no need for that. It is just a paper transaction. The gold can sit
in Fort Knox. JP Morgan can take a hypothecatable title. Now once JP Morgan
has the gold what they do is they sell it at times 100 to gold investors who
think they have gold but what they really have is what is called unallocated
gold.
Unallocated gold is a euphemism for no gold. If I call up JP Morgan and I
say, 'You know I wanna buy a million dollars worth of gold,' they will say,
'Fine. Here is our contract. Send us the million dollars.' I sign the
contract. I send the million dollars. They send me a confirmation and it says
I own a million dollars worth of gold subject to the contract.
Well, read the fine print in the contract. What it says is your gold is
unallocated which means that they do not claim to have any specific bar with
a serial number or your name on it. In reality they have taken the same bar
of gold and sold it to a hundred different investors.
Now that is fine if we are happy with the paper contract, but if all 100 of
us show up at JP Morgan and they have only got one bar of gold, the first
person may get the gold. The other 99 people, they are going get their
contracts terminated. They are going to get a check for the value of gold at
the close of business yesterday, but they are not going to get today's price
movement or tomorrow's price movement when super spiking going up to $2,000,
$3,000, $4,000 an ounce. That is when you want your gold for the price
protection when everything else is falling apart. That is when you are going
to discover that you do not have gold."
Read the entire interview with Jim Rickards here.
Very unlikely you say? Do you remember what happend to those who were holding
their bullion in these warehouses through MF Global? And this was a
relatively isolated event. A more general break in the chain of cross
ownership and counterparty risks at 100 to 1 leverage would create a market
dislocation that would be quite memorable.
And as a reminder, here is what Kyle Bass had to say about unallocated and
hypothecated gold, even that held within a 'fractional reserve' exchange
structure.
