Saturday, July 21, 2012

Are the Gold Vaults Empty?

No, this isn't a post about conspiracy theories that Fort Knox has no gold. Its about a very real possibility that banks don't have the gold in their vaults they claim. Gold that they are charging customers to store but may have lent out or sold. This is not a conspiracy. In fact, its already happened before at Morgan Stanley in 2005.

Of course, what would seem like a tin foil hat conspiracy before 2008 sadly just seems par for the course following the shenanigans of the last several years. Just to remind you of the surrealism of the past several years we've experienced:

  • Berni Madoff's billion dollar Ponzi scheme exposed.
  • Mortgage fraud by most all major banks including document forgery.
  • MF Global bankruptcy where over $1 Billion of client "segregated" accounts were stolen without a single arrest.
  • PFG Best goes bankrupt after $200 million of client "segregated funds" go missing while regulators were clueless.
  • Libor scandal that required the tacit collusion and fraud of several of the world's biggest banks.
In light of all of this, as well as the mismanagement and irresponsible leverage that bankrupted Lehman and forced the Fed to have Merrill Lynch and Bear Sterns acquired by marginally better managed banks, would it be surprising at all if the banks didn't have the gold they say they have?

Before we go any farther, let's just review some terms and concepts so that you fully understand what you are about to read so that you can understand the magnitude of what is taking place.

First, you may recall how I described traditional banking versus shadow banking in a previous post. Just as traditional banking utilizes a fractional reserve system where $1 is leveraged ten times in loans, gold banking operates on the same principle. Banks can leverage and lend many times their gold deposits. In addition, they write derivative contracts on gold which is estimated to be 100 times the actual physical gold holdings!

Secondly, remember how I described how segregated accounts are supposed to be just that...segregated and not mixed with the bank's assets. Clearly in the case of MF Global and PF Best this was not done according to law, a fraud that resulted in massive losses on client funds. In a very similar way, when a bank takes on gold deposits from clients, the gold is either allocated or unallocated. Allocated means you deposit your numbered bars with the bank. The bank charges you storage fees and when you want your gold back you notify them and get your same gold returned. If its the same gold it can easily be verified by matching the serial numbers on the bar. Unallocated gold may be lent by the bank and when you get it back it may be any gold that is considered "good delivery". In this case, the serial numbers will not match but you get bank a similar amount just like when you deposit dollars at a bank and withdraw different dollars from the ATM. You don't care about the serial numbers as long as its the same value you deposited.

Lastly, LBMA stands for London Bullion Market Association. This market in the UK along with the COMEX in the US, largely determine the paper price of gold each trading day.

With that in mind, click the link below to discover just how deep the rot is in the global banking system.

First, there's this from ZeroHedge:

In 2007, Morgan Stanley paid out $4.4 million to settle a class-action lawsuit by its clients after Morgan Stanley charged them to buy and "store" precious metals for them,  but neither bought or stored the metals.
(Similarly, a 2011 class-action lawsuit filed in federal court in New York accused UBS Financial Services of misleading silver investors and harging them storage fees for metal that was never actually purchased,  segregated, and stored for them.)
Avery Goodman points out that Morgan Stanley has once again just launched a similar scam, offering "allocated" metals, but gaming the definition so that the holdings are not really allocated.
On May 21st, Matterhorn Asset Management's Egon von Greyerz alleged that Swiss banks are trading physical gold bullion which is being held in special "allocated" accounts for its customers:
We are stressing to investors to take their gold out of the banking system, not only because there are runs on banks that will continue, but the risk of being in the banking system is major. So you should take the additional step of not just owning physical gold, but also owning it outside of the banking system.

We (just) had an example of a client moving a substantial amount (of gold) from a Swiss bank to our vaults, and we found out the bank didn’t have the gold. This was supposed to be allocated gold, but the bank didn’t have it. We didn’t understand why there was a delay (in our vaults receiving the gold), but eventually we found out why there was a delay (the bank didn’t have the gold). It’s absolutely amazing, but not surprising.

This confirms what I’ve always thought. Not only should you not have gold in banks or even unallocated gold, but even allocated gold. It seems that some banks don’t even possess that. So the risk of having gold in the banking system is major.”
On May 23rd, John Embry - Chief Investment Strategist of Sprott Asset Management, with $10 billion under management - added:
When the customer finally got his gold, it was 2011 minted bars. This made no sense because he had been holding the allocated gold for years. That’s just another example that even the allocated gold in the banking system has probably been loaned out. Many of these customers will wake up one day and realize they entrusted their gold to the wrong people.”
Jim Willie claims that :
Swiss face hundreds of $million lawsuits, for refusal to deliver Allocated gold.
Similar reports have come from Canada and other countries.
Indeed, Jim Willie alleges today:
Allocated Gold accounts across the Western world have been confiscated, sold, and replaced with shabby paper gold certificates illegally.... The account raid practice has been widespread in Europe, London, and United States.
Given the numerous reports of supposedly "allocated" gold not being there, it should not be entirely surprising that wealthy investors are taking matters into their own hands ... literally.
Kirby Analytics notes:
We are hearing anecdotal accounts that beneficial owners of “allocated” gold bullion in London and other European centers have showing up at bullion banks and demanding their physical metal be a] viewed and assayed, and then b] withdrawn from the vaults of banks.
And as we pointed out in 2010:
Omnis’ Jim Rickards, GATA’s Adrian Douglas and others have demonstrated that the big bullion dealers and ETFs don’t have nearly as much as physical bullion as they claim.

Should a substantial portion of investors in these vehicles demand physical delivery at the same time, it could cause a panic in the gold market which would cause a huge run up in gold prices.
Does this mean you shouldn't own gold?
No ... It just means that you should only buy physical gold, and store it somewhere you can actually get your hands on it.

Once again, this should be no surprise to anyone who has seen the outright fraud in the banking system, especially in light of the fact that nobody has gone to jail for any fraudulent banking activity

And now this from King World News:

With many global investors still concerned about the recent price action in gold and silver, today King World News interviewed the “London Trader” to get his take on these markets.  The source told KWN that “... the LBMA’s price fixing scheme is coming to an end.”  The source also said that because of this, the eventual “move in gold and silver will literally frighten most people.”
Here is what the source had to say:  “It is now beginning to be discussed, openly, that the unallocated gold is not at the banks.  This is definitely the case with many of the allocated accounts as well.  The reason I’m pointing this out is you have a more ‘open’ disclosure that’s taking place with regards to this.”
The London Trader continues:
“This tells me there is something major that is happening behind the scenes.  It tells me that the LBMA’s price fixing scheme is coming to an end.  You have these naked short positions, that are incomprehensible to most people, in both gold and silver....
“As this scandal is brought to light, that the unallocated gold and silver are not there, and much of the allocated gold and silver is not at these banks either, and as you see these naked short positions unwound, the world will witness a massive price rise in in both gold and silver.  The move in gold and silver, at that point, will literally frighten most people.  They simply won’t understand what is happening.
When someone goes to a bank and deposits money, if you look at the small print, you don’t actually own that money, you’ve simply loaned it to the bank.  The banks will then turn right around and lend ten to one or whatever leverage they determine to use with your cash.  Well, when there is a run on the banks, as there has been in Europe, the money is printed by governments and given to the customers to calm things down.
The underlying problem here is that when the run on physical gold and silver begins, how will the banks print the gold and silver?  It’s not possible.  So something is brewing here.  There’s no smoke without a fire.  The reason this information is beginning to be discussed more openly is because of legal reasons.  They need to be able to say, ‘We disclosed to people that the gold and silver wasn’t there.’
Yes, this will include a scandal at the LBMA in those unallocated accounts.  The paper leverage in the LBMA system is off the charts.  Investors believe their gold and silver is sitting in those unallocated accounts, and they will be in shock when they find out it isn’t there.
We are talking here about a run on the bullion bank.  As this unfolds there will be a failure.  These people will only receive the fixed price before trading is halted.  This will not be called a default.  Then there will be a massive gap in the price of gold and silver.  But the bullion banks will not be allowed to go bankrupt during this process.  There is a ring of counter parties here.  If one of them fails, the whole system can fail.  So they will not be allowed to fail.”

The London Trader also stated: “I would also add that demand for gold from China is unceasing.  The Chinese not only want to diversify out of dollars, but now they also want to diversify out of the euro as well.  They are trying to do this in size.  They want out of those currencies, and what they are doing is exchanging them at the fixes in London for gold, and this will surprise some people, but we are beginning to see it in silver as well.
Gold is the primary focus, but very recently, and on every dip, we are seeing significant purchases of silver in size.  So yes, demand from China, it’s unceasing.  They want out of these debasing currencies.  I would add that they are buying anything that’s tangible, land, timber, mines, art, etc.
It is absolute nonsense when people speculate the Chinese may stop buying gold and silver.  When you see 315 tons of gold was purchased by China in the first five months of the year, that’s just the tip of the iceberg.  That 315 ton figure that was recently reported is patently false.  That’s just what they can’t hide.  The actual amount of gold China has accumulated is many times that 315 ton figure.
The buying is relentless.  It’s every single fix, every single day.  The Chinese are eventually planning to have gold back their new currency, which is going to replace the dollar as the reserve currency.”
The London Trader also added:  “It’s not just Chinese demand impacting the physical markets.  It’s the Middle-Eastern countries and Russia and so on.  Investment demand for silver is also picking up at these levels.  Demand is coming from the Middle-East, and India has also become a bigger buyer of silver.
I would also add that you see a great deal of negative press regarding gold.  Many are saying, ‘Look at 2008, they are going to sell gold along with everything else and it’s going to crash.’  What people don’t understand is gold is on its way back into the financial system.
We had the recent proposal to have gold categorized as a Tier-1 asset.  This moves the risk weighting from 50% to 0%.  Most people have not grasped the full significance of this proposal.  This will change the entire mechanics of the gold market when there is a time of stress, such as the one we witnessed in 2008.
This is one of the major reasons why those calling for a collapse in gold are going to be proven wrong.  Yes, in 2008/2009 we did see a significant correction in the price of gold, and that was a result of the liquidity drying up.  But in 2008, because gold was not considered a Tier-1 asset, it forced the banks to sell their only remaining liquid asset in order to raise cash.  This was done to meet margin requirements.
There was so much gold hitting the bid all at once that it was like a huge bottleneck.  This instigated a $200, waterfall-type decline, that amounted to a roughly 20% correction in gold in just 30 days.  This took place against tremendous fundamentals for gold.  In fact, the fundamentals for gold were so strong, that when gold bottomed in 2009, it only took just over 30 days for gold to break back above the level where the waterfall decline first began.
The difference this time around is that gold may be considered a Tier-1 asset, and what that means is that it will be equal to cash or Treasuries.  So there will be no need for banks to liquidate gold in order to meet margin requirements.  You may, instead, see fresh new money entering the gold market.  It’s going to provide a bid where there was no bid in 2008.”

The last paragraph makes reference to the Bank of International Settlements (BIS) possibly making gold a Tier 1 asset. You may recall me discussing this in a previous post. If you're a new reader or just forgot, I highly recommend you go back and reread the post. These are critically important developments that will affect gold markets.

Its becoming very clear that gold is once again becoming money as it has become the last international currency accepted between central banks without the fear of debasement and devaluation of fiat. Maybe Ben Bernanke refuses to accept that gold is money, but central banks around the world, and especially China, seem to think it is.

The London trader believes, as I do, that China i moving towards a gold backed currency. I as much said so in a post back in January. If you have not read it, please do.

One final thought; everything contained in this post could increase the price of gold & silver with or without another global financial crisis. Gold has gone from a high of $1,900 to its present price of $1,582. The Chinese are taking advantage of this subsidized paper price to hoard physical gold and laughing all the way....

Are you?

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