Submitted by Bill Holter:
I would not normally write something like this but it seems I had to. Last week, Bob Moriarty of 321 Gold wrote a story with the exact same title and came to the conclusion “…is zero”.
He began his article by saying “So anyone telling you Comex is about to default either doesn’t have a clue as to how commodity markets work or they are deliberately lying to you.”
He then goes on to say “But the chance of a ‘Gold Derivatives Time Bomb,’ is also zero. There is no such thing. And there is no such thing as a ‘Commercial Signal Failure’ or a 400 ounce gold bar made of tungsten.”
Is he serious? When well over 100 pieces of paper “call” on the one underlying real ounce …there is no chance of failure? Is he trying to say the commercials can NEVER ever be wrong and forced to cover because they cannot deliver “promised” but non existent gold? Is he trying to say 400 ounce tungsten bars have not already turned up?
I do want to point out, this is the same man who said a derivatives blowup can never happen.
I think those at Bear Stearns and Lehman Brothers would beg to differ with him! We already know for a fact, we were only hours away from a total financial meltdown in 2008 were it not for the Fed magically creating $16 trillion.
It is clear to me, since the amount of global derivatives far exceed the underlying assets they represent, true “settlement” or “performance” is a foregone impossibility as the “pie” only gets bigger. The only question now is “how big is TOO big”?
Let’s look at the numbers and use a little common sense to see “who doesn’t have a clue or is deliberately lying to you”! Currently in the COMEX gold and silver vaults we see there are roughly 17 tons of gold and 32 million ounces of silver “registered” (available for delivery). This amounts to about $680 million worth of gold and $540 million of silver. A whopping total of $1.2 billion or less than 1/2 day’s interest on the U.S. federal debt. In today’s world of “trillions and quadrillions”, this amounts to pocket change!
I put these registered inventories forth so we can have something to use as a base for comparison. Looking at silver, there are now 1 billion ounces represented by 200,000 COMEX contracts of various months. For May alone (which goes first notice day in five days) there are 280 million ounces represented by these paper contracts. By comparison, the world (excluding Chinese and Russian production) produces 700 million per year. So, we have a market with a claimed 32 million ounces that “prices” (for now) a market which produces 700 million ounces per year.
This 32 million ounce inventory is the “guarantee” being used or promised to “deliver” on contracts (280 million ounces worth for May and 1 billion ounces in total) whose owners can decide they want delivery. If you look at other “commodity” markets, there are none as egregious as silver. Currently open interest represents 140+% of global production. In other words, the paper market is far larger than the real physical market. Not so in other commodities where the paper markets are typically 10-15% the size of global production.
Going one step further with this 32 million ounce inventory, we saw a 10 minute span on Thursday morning where 37.5 million ounces of silver were dumped all at once. The effect of course was nearly a $1 drop in price. This was done as silver looked to be breaking out pricewise to the upside, the massive dump was used to contain price. We saw this again on Friday when over 100 million ounces were dumped in just one hour. In perspective, Thursday’s dump equated to 19 days of total global production…sold in 10 minutes. Taking Thursday and Friday’s “70 minutes” together saw the equivalent of 2 1/2 months of global silver production sold.
Again, who actually has this amount of silver and who in their right mind would ever sell it in this fashion to get the absolute worst price possible? …unless they WANTED the worst price possible? Taking a brief look at how inept the registered gold inventory is, Shanghai has been importing 30-40 tons per WEEK for several years now. How many “days” worth of Shanghai imports will COMEX’ 17 tons cover?
The above speaks to the woefully small registered inventories claimed by COMEX. From a mathematical standpoint, both silver and gold stocks could be wiped out in just one trade. Bob Moriarty says this does not matter and no default can ever happen because COMEX can settle in paper.
I agree with his statement “COMEX can settle in paper” because it appears they have been doing this for years rather than delivering real metal to all of those standing. I do no have smoking gun proof of this but just ask yourself the question, WHO would fully fund their account in order to take delivery, wait until the very last days of the delivery period and then just “go away”? This happens time and time again, I believe it can only be explained by “cash premiums” being offered and paid. If you have another plausible explanation, I would love to hear it but by “plausible” I mean to say it must include real logic a true economic man would follow.
Now, is “cash settlement” because there is no gold or silver available to deliver … considered a default?
According to Bob Moriarty the answer is “no”. I would simply ask you this, if COMEX can only settle in cash, then what is it exactly that you are trading? Of what value is a contract which cannot perform and deliver the product you are “supposedly” trading? It is for this reason I have said for many years we will end up seeing a two tiered market where there is one price for the paper derivatives of gold and silver …and another (higher) price for the real thing. In fact, we are already seeing the early stages of this with backwardation particularly in London.
To finish, until recently we were told that ALL markets were rigged EXCEPT for gold and silver.
We were just nutjob conspiracy theorists to think gold and silver markets were rigged. But now we find out we weren’t nuts after Deutsche Bank admitted guilt and paid a fine for rigging the London fixes. The fine by the way was not small potatoes, it was $5 BILLION …(or roughly five times the dollar value of what COMEX claims to be able to deliver)!
I assure you Deutsche Bank did not hand over $5 billion out of the goodness of their hearts, nor did they take lightly “pleading guilty” as they will now be sued by the mining industry to the moon and back. Even more curious was their decision to turn state’s evidence?
I certainly do not have the particulars but I can observe and connect the dots. The metals markets are acting very differently and the commercials (if COT numbers are to be believed) are extremely short while registered inventories are extremely low. Financial stresses in Western credit markets are again showing quite similar to 2008. Central banks have already fired interest rate/money supply bazookas …while sovereign treasuries far and wide have destroyed their balance sheets.
Would it be crazy to believe fear capital will flood into the ONLY MONIES ON THE PLANET that have neither counterparty risk nor are anyone else’s liability? Actually, from a mathematical standpoint, all of this global debt can ONLY be paid back if currencies are debased …which guarantees a flood into gold and silver.
Would it be considered a “default” if the U.S. had to print so many dollars that it took 1 million of them to purchase a cup of coffee? In the situation where COMEX inventories get cleaned out, isn’t this the same thing as a bank in the old days “running out of gold”? That was considered default then but Moriarty wants you to believe it is “business as usual” today?
Sorry, I don’t think so!
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