The Doc and Eric Dubin Clarify JP Morgan’s Decision to Exit Physical Commodity Business

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In this week’s SD Weekly Metals & Markets The Doc & Eric Dubin discuss:

  • This week’s rally in gold & silver- metals close strong ahead of next week’s FOMC statement
  • GOFO negative 15 days & counting
  • India gold smuggling & unprecedented Chinese gold demand
  • JP Morgan’s announcement Friday evening of the sale of its physical commodities business is JP Morgan really closing down their gold vaults?

SD Weekly Metals & Markets is below:

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By Eric Dubin:

JPMorgan selling physical commodities business: Is JP Morgan closing it’s metals vaults?

The physical market in question here are the supplemental operations JPM and Goldman Sachs and others have gotten into aggressively within the last decade, roughly. We’re talking about warehouse operations to store base metals, food stuffs, etc. We’re talking about leasing of oil tankers to attempt to have greater control (and extra profit) from oil trading (above and beyond futures market activity). We’re talking about pricing of electricity at the point of movement on the physical grid. Get it? NOT options and futures exchanges and the derivatives market overall that has been their cash cow for decades….

But there is indeed an INDIRECT link to what’s going on with their massive decline in COMEX gold inventory. The COMEX and LBMA bullion futures and forwards markets are under extreme stress on account of plummeting confidence in the ability of those institutions to actually deliver physical against contracts. That’s also a big part of the reason why GOFO has been negative for a record setting stretch of time, and why there is short-term backwardation. Confidence in the system is on the decline and people want gold and silver in hand more so than being willing to take what should be an easy trade of simultaneously selling physical today and buying the same amount to be delivered via a futures contract one month forward (you don’t want to do that if you think the system is at risk of failing to deliver one month forward, so gold in hand today is worth more as expressed in terms of the prices the fractional reserve gold system generates). All that said as background, as we see the natural outgrowth of all this declining confidence — JPM’s crashing gold inventories at the COMEX — the regulators are starting to come out of their coma and are starting to look around. It’s not that they want to look around. Believe me. They’re probably just as happy to keep surfing internet porn and sticking Bart Chilton out in the media to say, “we’re looking into it.” But 2014 is an election year and over at the marble nuthouse known as the US Congress, some politicians are starting to feel pressure to “do something” about banking sector corruption.

 

If you were Jamie Dimon, what would you do? Well, how about shifting focus of general criticism. Give up this ancillary physical market operation. It’s about the same level of pain as the occasional slap on the wrist fines that investment banking firms sustain when they’re busted for manipulation of energy, LIBOR and other markets. Exiting the physical infrastructure add-on business gives the bankers the ability to say to politicians, “Yes, we’re sorry, our actions did add to the cost of overall commodities products but we’re out of that business now so please, leave us alone.” Meanwhile, their core derivatives market operation in gold, silver, interest rate swaps, oil and on and on continues.

Tune into the radio show this weekend for more by clicking the play button below or downloading the podcast!

 

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