Brad Zigler

Did the ECB Save COMEX from Gold Default?

As to why the number of banks engaged in CFTC-reported commercial metals operations is limited ...

It's for the same reason that the Federal Reserve deems a small coterie of banks to be "primary dealers" for auctions and open market operations. The're the bigger banks with the power to retail government paper to secondary banks.

Central banks deal metals, too, to the most creditworthy and well-connected financial insitutions, mostly in leasing transactions.

On Apr 02 11:34 PM Au long wrote:

> kohalakid,
>
> Thx for the comments. Food for thought.
> As you offered in the examples, it could be an explainable event
> that is necessary for certain transactions. It would be interesting
> to see a data set showing how the physical deliveries have changed
> over time compared to cash settled contracts. Perhaps that data exists
> but I have not come across it.
>
> By plotting cash settled vs physical delivery settlement, any recent
> spike in deliveries might be explainable, if correlated to ETFs for
> example. But unexplainable anomalies in the data could be revealing.
> Time will tell. If this sort of event, some short seller needing
> to find the gold to fulfill their contracts happens on a more frequent
> basis, then one might have to consider that something may have changed.
>
>
> The rather large net short positions that very few banks have in
> gold (and silver) according to CFTC reports and cited in Avery Goodman’s
> article, are a data set that attracts attention. From what I’ve read,
> (and plotted myself in Excel) the data suggests that the net shorts
> increase and decrease with some correlation to price, which leads
> to the idea that the shorting is done in order to affect the price.
> I have not read any plausible reasoning that explains the data, or
> that explains why very few banks engage in this activity. If it were
> a normal bank function, I would expect the large net short positions
> to be distributed among numerous banks. This leads to the question:
> what is unique about the few banks that are net short large positions,
> compared to banks engaged in similar business dealings?

Did the ECB Save COMEX from Gold Default?

Mr. Goodman -

You reference to 17 CFR 31.8 to explain the "90% cover rule." This section, it should be noted applied to LEVERAGE TRANSACTION MERCHANTS (LTMs), a now-defunct CFTC registration category.

The "rule" is not as ancient you assert. The LTM category was created in the 1980's. An LTM essentially sold off-exchange metals delivery contracts to retail customers. Modest down payments (typically 10%) were put up and the balance was financed, at interest, by the LTM.

Leverage contracts differed from futures in many important ways, not the least of which include: (1) investors were permitted to establish only long positions; there was no shorting by retail customers -- ergo the need for the cover rule cited; without an offsetting physical or forward/futures position, dealers would be necessarily short; (2) there was no centralized clearing; customers had no recourse in the event of default except to the dealer that granted the contract.

There are no LTMs currently registered by the CFTC and there haven't been for years. The category was riddled with fraud, misrepresentation and finally died through attrition and declining demand.

Banks and other entities now broking metals futures are registered as FUTURES COMMISSION MERCHANTS (FCMs) or INTRODUCING BROKERS (IBs) of FCMs and are subject to a wholly different rules of conduct.

There's no "90 percent rule" for FCMs or IBs because these entities act as agents, not principals, to customer trades.


On Apr 02 10:57 AM Avery Goodman wrote:

> Kohalakid,
>
> Obviously, you have no knowledge, whatsoever, of the rules that govern
> the markets in the United States, or anywhere else. Before we get
> more deeply into that, let me point out what 17 CFR 31.8 says, and
> leave it at that.
>
> "...(a)(1) Each leverage transaction merchant must at all times maintain
> cover of at least 90 percent of the amount of physical commodities
> subject to open long leverage contracts entered into with leverage
> customers, and must at all times also maintain cover of at least
> 90 percent of the amount of physical commodities subject to open
> short leverage contracts entered into with leverage customers..."
>
>
> Vault audits would tell us whether the alleged paper "cover" that
> is presented to the CFTC, and which is never questioned by them,
> to my knowledge, is actually valid. Most COMEX dealers are probably
> presenting OTC derivatives contracts to claim that they have the
> required "cover", and are not naked shorts.
>
> However, the veracity of those paper OTC contracts are in question,
> if big banks like Deutsche Bank, are forced to go "hat in hand" to
> a sovereign gold vault, like the ECB, to get enough gold (8500 contracts
> worth) to deliver on their obligations at COMEX.
>
> Vault audits are necessary, at this point, in order to determine
> the truth or falsity of the claim to possession of real metal. If
> OTC contracts are just supported by other OTC contracts, which, in
> turn, are supported by yet other paper contracts, and so on and so
> forth, ad infinitum, then the whole game is a fraud. In that event,
> the gold conspiracy theorists, from Ted Butler to Jim Sinclair, are
> telling us the truth. On the other hand, if the underlying metal
> really does exist, the conspiracy theorists are wrong, and everyone
> can feel much more comfortable in the quiet knowledge that our markets
> are honest and true.
>
> Keep in mind that it is not the individual investor who sells a "naked"
> short. It is his broker/dealer, and his broker/dealer's clearing
> broker, who end up doing that. Many of the broker/dealers and certainly
> the people on the bottom of the totem poll, like you, me, the line
> brokers and so on, are simply honestly relying upon paper promises.
> But, if the underlying metal doesn't exist, then, someone, probably
> the biggest players, at the highest levels, are committing fraud.
>
>
> The recent sale of such a suspicious amount of gold into the market,
> just at the moment of Deutsche Bank's need, justifies a full investigation
> of the gold market, either to help assure us that it is clean or
> to help start the cleansing process.