More Evidence Gold is Being Hoarded as Comex Fulfills Gold Contracts With Paper

My bet that by 2020 we will return to some form of gold standard is looking better. Something is up when gold is being hoarded to such an extent that the futures exchanges cannot fulfill with metal but have to try to stiff the contract holder with paper. Now, they have done this in the past, and gotten away with it, but according to this story, never so aggressively.

Prof. Antal Fekete has been on this story for several months, and has set forth in some detail how the gold basis is being manipulated, perhaps because of hoarding. (The basis is the delta between the cash price and the next futures price.) Yves has had several posts on Gold Panic, and it is consistent with the good Professor’s analysis.

Another aspect of this story is the collapse of Barrick’s hedging strategy. Barrick Gold (ABX) is the largest gold mining company and had been following a really dumb hedging strategy which had been to take naked short positions (shorting gold they did not possess). In a world of gold hoarding, they may not be able to cover, even at a loss. The strategy was so risky that a conspiracy theory had evolved that Barrick was front-running the US government to keep the gold price down. Lending support to this is the question: why would a gold production firm try to cap the gold price? An answer which does not require the conspiracy is that Barrick had less gold in the ground than it wanted to reveal, and so was engaged in a confidence game of the first order. The weak Dollar (driving gold up) and the hoarding has called their bluff.

Gold-backed currencies, unlike fiat currencies, have the irreducible endpoint of debts being paid in gold, which has retained value throughout history. Fiat currencies have no such endpoint. You can make the argument that fiat currencies are backed by the productive capacity of the issuer, and that they have some irreducible value based on taxing that production. History has tested that case, and found it wanting. You see, fiat currencies tempt countries to over-extend.

What happens when the debts of the issuer are vastly beyond their productive capacity? Well, the country defaults, and the fiat currency is forcibly exchanged for scratch. A 2008 paper by Harvard Professor Rogoff and Prof. Reinhart, both members of the NBER (which calls recessions and recoveries) entitled This Time Is Different demonstrates that instead of fiat regimes making good, they have defaulted over and over throughout eight centuries of financial crises:

We find that serial default [repeated sovereign default] is nearly a universal phenomenon as countries struggle to transform themselves from emerging markets to advanced economies.

Before we take comfort in the US being already an advanced economy, the imperial power of its day has typically defaulted after over-extending. Rich European countries have defaulted, including Austria, France, Portugal Spain and Germany. The reunified German defaulted in 1873, bringing the whole world into a long depression, including the United States. In the last century, Germany defaulted twice: 1932 and 1939. Russia three times, beginning in 1918. England in effect defaulted in 1931.

So now the gold hoarding makes sense: other sovereign powers are preparing for – or at least hedging against – the inevitable sovereign default of the US. The more Obama buries the US in ever more present deficits and future commitments, the closer this becomes.

Niall Ferguson’s piece in Newsweek, which I discussed yesterday, fits into this context. He was talking about Imperial powers getting over-extended, and the first thing that falls is to pullback on excessive defense spending and foolish Imperial wars. Even as Obama pitches tonight a three-year vague commitment in Afghanistan, the hand writing is on the wall. Sadly, the US is so over-extended the wars are but a small pullback in the vast future deficits from social commitments. This won’t end well.

About Duncan Davidson 228 Articles

Affiliation: NetService Ventures

Duncan is an advisor to NetService Ventures, where he focuses on digital media and the mobile Internet.

Previously he was at four start-ups: Xumii, a mobile social service based on a Social Addressbook; SkyPilot Networks, the performance leader of wireless mesh systems for last-mile access, where he was the founding CEO; Covad Communications (Amex: DVW, $9B market cap at the peak), the leading independent DSL access provider, where he was the founding Chairman; InterTrust Technologies ($9B market cap at the peak), the pioneer in digital rights management technologies, now owned by Sony and Philips, where he was SVP Business Development and the pitchman for the IPO.

Before these ventures, Duncan was a partner at Cambridge Venture Partners, an early-stage venture firm, and managing partner of Gemini McKenna, a joint venture between Regis McKenna's marketing firm and Gemini Consulting, the global management consulting arm of Cap Gemini.

He serves on the board or is an adviser to Aggregate Knowledge (content discovery), Livescribe (digital pen), AllVoices (citizen journalism), Xumii (mobile social addressbook), Verismo (Internet settop box), and Widevine (DRM for IPTV).

Visit: Duncan Davidson's Blogs

5 Comments on More Evidence Gold is Being Hoarded as Comex Fulfills Gold Contracts With Paper

  1. “England in effect defaulted in 1931” … by leaving the gold standard presumably. Let’s not forget that the USA defaulted similarly in 1971, when Nixon unilaterally renounced exchangeability of foreign-held dollars for gold. On the basis that default is an indicator of imperial decline, maybe it’s been happening in the USA for decades already?

    (The British Empire lasted well beyond 1931, too).

  2. Yup, also read that some of the shipped gold bars turned out to be fake (gold-plated tungsten), but I have seen precious (pun intended) little coverage of this. Also, naked short selling needs to be banned. How can you buy and sell something you don’t even own?

  3. It’s interesting to note that 100% of the December gold contracts requesting delivery of physical gold were settled with cash instead of bullion (first link in this article).

    Indeed, it appears as though obtaining physical gold through Comex has come to an end, at least for the immediate term. Just one more bullish factor for owning physical bullion.

    It’s my opinion that the gold/precious metals bull isn’t going to run out of steam anytime soon and more fuel keeps feeding the fire.

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