I realized after assessing some comments posted on my Tuesday article about the fraud going on at the Comex that I did not articulate a key point about the credibility of bank financial reporting. It seems that there is still a contingency of people who are willing to believe that if a bank issues an accounting report, it must be valid.
Let me preface this clarification post by saying that given the long laundry list of charged and prosecuted high profile fraud cases against all of the big banks, I just assumed that everyone understood that banks can not be trusted at all. Here’s my Golden Rule: banks can not be trusted at all. Fool me once, shame on you; fool me twice, shame on me; fool me three times, I’m a moron. Got it?
This clarification is to explain exactly why bank-produced paper reports at the Comex are more than likely riddled with fraud and it clarifies the difference between owning physical gold in your own possession vs. owning a paper claim on gold sitting somewhere else and a claim which can be hypothecated such that you actually lose legal entitlement to that underlying asset.
With that in mind let me clarify how the Comex warehouse gold and silver stock reports are produced.
From Truth in Gold:
Each bank that operates a Comex vault is responsible for keeping and maintaining all accounting records in connection with operating their vault. This means that all of the reports and data that the CME uses to produce its warehouse stock reports come from the banks themselves. They are paper accounting records the bank produces and sends to the bean counters at the CME. There is no actual independent audit of the reports OR of the bars themselves that are reported to be held in each bank vault. Everything the CME publishes is based on what is reported from the banks. Do you still trust these reports? If you do, re-read my Golden Rule.
Please DO NOT CONFUSE the reliability of paper records and the reliability of any bank not acting fraudulently with regard to those paper claims with actual physical gold that is sitting in an allocated account and bars for which the rightful owner has legal entitlement. Paper is NOT to be trusted – in any form.
A large portion of the gold that is being reported by the Comex vault operators is likely not really there to be reported. Now, “not being there” could well mean that there is a lease-claim attached to it or some other form of hypothecation. Just because bars are sitting physically in “registered” or “eligible” accounts does not mean that the intended owner of that bar has a legal entitlement to that bar.
Review the laws connected with short-selling and hypothecation. When an asset is sold short or hypothecated, the original holder of that asset unknowingly loses legal title to it. The fact that the legal department at the CME now requires a disclaimer about the bank reports that are used to produce the Comex warehouse gold and silver stock should tell us all we need to know about the nature of those bank reports, especially when considered in the context of all of the other fraud that banks have been involved in over the last couple decades.
Now, I also believe – per the recent 35% drain of gold inventory from the Comex – that a lot of the bars have been physically removed upon demand by entitled owners. By “entitled,” I mean the party who possess the legal title to the bars. The disclaimer was added to the inventory report as an attempt to exonerate the CME from the legal liability of fraudulent reporting by the vault operators, who are responsible for the record-keeping and accounting and reporting of the bar inventory that is supposed to be in their vaults. Moreover, a high percentage of the gold that remains in the Comex vaults has likely been leased out or hypothecated. In other words, the financial reports from the banks do not legally present the actual amount of gold or silver in Comex vaults that can be immediately removed upon demand by the original intended owner. Think this is far-fetched? Explain why the Bundesbank demanded some of Germany’s gold to be shipped back to Germany it requires and it requires 7 years to ship back just 300 tonnes of Germany’s 1800 tonnes supposedly sitting in the Fed’s NY vault? (Please note that Venezuela was able to have 200 tonnes of its gold shipped back to Venezuela within about 4 months).
This is the same kind of situation with GLD. Same wine, different bottle.
Now as far as Comex bar quality standards, not only am I well aware of the criterion and rules, but we have taken delivery of both gold and silver bars FROM the Comex. I am experienced in the entire process from start to finish.
This is also why I DO NOT trust the Comex reports. Back in April 2010, we took delivery and were given notice by HSBC for several silver bars. BY THE RULES, HSBC was required to deliver the bars to our possession by April 30, the last delivery day. They are given 3 days of leeway. Not only did we NOT receive the bars within the legal time frame, it took 7 full weeks for HSBC to make good on the delivery. If our fund was a lot bigger and we could have reasonably afforded the litigation, we would have gone after HSBC for breach and damages.
Moreover, during 2010, HSBC changed its delivery policy for off-Comex deliveries, making it more cumbersome and more expensive to get bars delivered to your possession from their vault.
Need I remind you that HSBC has recently been charged in several fraudulent banking activities AND convicted on a couple. They are connected to the recent HKMex gold scandal in Honk Kong, as well.
This clarification is to explain exactly why bank-produced paper reports at the Comex are more than likely riddled with fraud and it clarifies the difference between owning physical gold in your own possession vs. owning a paper claim on gold sitting somewhere else and a claim which can be hypothecated such that you actually lose legal entitlement to that underlying asset. The Comex is just as fraudulent as Enron, Refco, Amaranth, AIG, etc. Capito?