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Starting on 25 March 2010 the CFTC has been conducting an investigation into the concentrated short positions in the gold and silver markets. There has been some very interesting testimony coming out of the Goldman Sachs (NYSE:GS) vampire squid’s mouth that the informed gold bugs already knew. The size and scope of this Ponzi scam is beginning to be comprehended. As the idea spreads, the demand for various types of ‘physical gold’ will increase and decrease.

STRAIGHT FROM THE VAMPIRE SQUID’S MOUTH

On 9 September 2008 I appeared on Adam Curry’s Daily Source Code in episode 788, which has hundreds of thousands of subscribers and has recently been reactivated. I casually remarked, “There are about 140 ounces of paper gold for every one ounce of physical gold.”

Jeffrey Christian, formerly of Goldman Sachs and currently of CPM Group, considers himself among the world’s foremost experts on gold. Before the CFTC Christian testified:

One of the things that the people who criticize the bullion banks and talk about this undue large position don’t understand what is the nature of the long positions of the physical market and we don’t help it; the CFTC when it did its most recent report on silver used the term that we use “the physical market”. We use that term as did the CFTC in that report to talk about the OTC market in other words forwards, OTC options, physical metal and everything else. People say, and you heard it today, there is not that much physical metal out there, and there isn’t. But in the “physical market” as the market uses that term, there is much more metal than that there is a hundred times what there is.

WHAT IS PHYSICAL GOLD?

Let’s untangle some of Christian’s weak verbal jiu-jitsu. In my book The Great Credit Contraction I start off the first paragraph of the first chapter with definitions because if there is no agreement on definitions then it is impossible to analyze and conclude properly. While I focus on the terms money, money substitutes, illusions and currency we may want to shift our focus and attention towards the bottom of the liquidity pyramid and the terms ‘gold’ and ’silver’.

Physical gold, AU 79 on the periodic table, has a density of 19.30 grams per cubic centimeter at room temperature and a liquid density at the melting point of 1,947.5°F of 17.31 grams per cubic centimeter. Physical silver has a similar definition.

Physical Fake Tungsten Gold has been demonstrated to exist and is differentiated from physical gold because of its tungsten composition.

GLD ETF gold differs from physical gold in many ways, which I have examined several times. On page 11 of the prospectus it states:

Neither the Trustee nor the Custodian independently confirms the fineness of the gold allocated to the Trust in connection wtih the creation of a Basket [issuances].

So for that reason and many others, in A Problem With GLD And SLV ETFs I concluded, “There is no assurance that the ‘gold’ held in the ETFs is actually the same gold as defined under the periodic table.”

I casted even more aspersions on these instruments in Another Problem With The GLD ETF where I showed from the 21st of November 10-K:

Gold held by the Custodian’s currently selected subcustodians and by subcustodians of sub-custodians may be held in vaults located in England or in other locations. In addition, the Trustee has no right to visit the premises of any subcustodian for the purposes of examining the Trust’s gold or any records maintained by the sub-custodian for the purposes of examining the Trust’s gold or any records maintained by the sub-custodian, and no sub-custodian is obligated to cooperate in any review the Trustee may wish to conduct of the facilities, procedures, records or creditworthiness of such sub-custodian.

Physical London LBMA OTC Forward gold is another interesting form of Christian’s physical gold. But I touched on the Massive Institutional Gold Market Change over six months ago.

CFTC TESTIMONY

Here are two key excerpts from the CFTC gold and silver hearings on 25-26 March 2010.

And the clip with Christian’s failed verbal jiu-jitsu is actually a blatant admission (at 3:48) of the Ponzi scam nature of the ‘physical gold market’.

So what has Christian attempted to do? Conflate the gold as defined in the periodic table with other forms of ‘gold’ such as GLD ETF gold, London LBMA OTC gold, Comex futures gold, etc. under the term ‘physical gold market’. Of course, such contorted logic is absurd. The ability of a piece of paper with the letters ‘G-O-L-D’ written on it, that can become worthless, is no more efficacious at providing protection of value than a piece of cardboard with ‘C-O-W’ written on it is efficacious at providing a gallon of milk.

CONCLUSION

The knowledge that there are at least a hundred pieces of paper masquerading as physical gold in the physical gold market for every ounce of gold as defined on the periodic table is old news. What is breaking news is that one of the vampire squids would testify before government officials that this is the case.

So, if possession is 9/10ths of the law and if there are 100+ claims on an ounce of gold for every actual physical ounce and if there is a demand by the market for those actual physical ounces, because The Great Credit Contraction continues and capital seeks safety and liquidity by moving down the liquidity pyramid, then what happens to the value of the gold ounce in one’s hand or trust third-party service? For comparison, there is about $7,000,000 of capital, real and fictional, for each ounce of physical gold.

Of course, Christian would probably argue it is illogical and irrational to contemplate such events unfolding. But they already have. David Einhorn moved billions from the GLD ETF into physical gold in his own warehouse.

Disclosure: Long physical gold, silver and platinum with no interest in the problematic SLV, Streettracks Gold ETF Trust Shares or the platinum ETFs.

Source: CFTC Gold and Silver Hearing Is Old News