ABG

Enlightening the Gold Bugs

One more thing. I don't know if this author is intentional inventing fake history, or whether he simply doesn't know what he is talking about.

Gold was NEVER $17 per ounce in 1932. Prior to the gold confiscation in 1934 by the Roosevelt administration, the dollar was "good as gold." You could sell your gold to the government, and they would buy as much gold as you offered them, for $20.67 per troy ounce.

From 1929 - 1932, it is a well known historical fact that Americans were contemptuous of the dollar, and stricken with gold fever. They were feverishly turning in dollars for gold, at the rate of $20.67 per troy ounce, and putting the gold into their basements and safe deposit boxes.

The basic problem by 1933 was that the government had printed far more dollars in the 1920s than it had gold. So, the government had lied to the people. The dollar was never "good as gold". There wasn't enough gold in the federal treasury to meet the conversion demands. So, the first thing the government did was declare a moratorium on conversions to gold.

By 1932, the Treasury was begging to buy gold, but no one was selling to them. Everyone, including foreigners, were simply demanding gold for their dollars. To balance the loss of gold against the number of dollars outstanding, the Federal Reserve tried to reduce the dollar money supply from 1929 to 1933 by 1/3rd. That, according to Fed Chairman Ben Bernanke, was what launched a severe recession into a Great Depression.

By 1933, the U.S. Treasury was severely depleted of gold, and by 1934, the government forcibly confiscated the yellow metal from its citizens. People DID NOT voluntarily sell their gold back to the government. In short, there wouldn't have been a run on the U.S. gold reserves, in the early 1930s, if people were happy with the dollar. Yet, deflation was in full swing, and people were still contemptuous, because they no longer trusted the government, or the banks, just like today. They turned to gold, just like now.

There was tremendous demand for gold in 1932, and had the government not fixed the price at $20.67, it probably would have doubled or tripled or more from 1929 to 1934, in spite of the general condition of deflation in all other things. But, one thing is for sure, the revisionist history that is described in this author's commentary, NEVER HAPPENED. Gold never sold for $17.00 per ounce.

Enlightening the Gold Bugs

The problem this author has is that he is looking in the rear view mirror. There are many reasons for the current dollar pop, not the least of which is the U.S. Treasury's need to sell bonds to finance all the bailouts. Let us consider some points:

1) a nuclear armed Iran on is the way,
2) we already have a nuclear armed Pakistan and an angry nuclear India,
3) gold mine production falling in spite of higher prices,
4) gold bullion demand exploding all over the world and smelting operations unable to keep up with demand,
5) the Fed and all other world central banks promising to use all "tools" meaning it will print whatever cash is needed to restart the credit cycle,

In short, either the unprecedented cash printing works, and we get incredible levels of inflation, or it doesn't work, and we get an economy that is falling apart, where so many dollars, euros and pounds have already been printed that they still won't buy much in a depression-era economy. In either scenario, gold will be the best investment.

The author can keep his money in cash. Better that way. It will help keep the price of gold and silver down for now, so that wiser folks can buy for reasonable prices. By the time folks like this author turn away from the rear view mirror, to see what is happening in front of him, he is likely to crash. But, that is his choice, and, apparently, he is very determined to get that result.

Gold: Not an Effective Hedge Against Inflation

The author arbitrarily uses 1980, at the top of the 1980s market cycle, to support the idea that gold is a bad hedge against inflation. But, we are near the bottom of the gold cycle right now, not the top. The last 8 years of gold's appreciation happened in a time of deep calm and steady economic growth. It was not the result of fear and panic, as in the 1970s. The first year of panic was the second half of 2007 to 2008. So, the gold cycle is now just beginning, not ending.

Arbitrary choice of 1970, at the bottom of the 1970s gold cycle, as a date upon which to base an analysis will give a completely different picture, compared to the choice of 1980. The price for gold on the Swiss market was $42 per ounce. If you had bought gold in 1970, keeping it stored in Switzerland (because Americans were not allowed to own bullion until 1974), you would have had incredible gains to date, exceeding the official measures of inflation.

Of course, there would have been yearly storage charges, but, if you owned the S&P 500 index, you would have needed to pay taxes on the dividends, and on all the sales that you are constantly forced to make when various stocks are removed from the indexes. If you owned a passive mutual fund, you would have been more seriously impacted by taxes.

If the index creators just left all stocks on the index that started on the index, and never got rid of the dogs, your gains in stock investing would be non-existent. So, companies are always added, and removed, and funds that follow the indexes, or you, need to buy/sell in sympathy with these moves to keep your portfolio consistent with the index. This creates taxable events, and taxes reduce return. In comparison, gold is not taxable until it is sold. Most people never sell it, so the capital gain is never taxed.

At any rate, after taxes, you would have had a much bigger gain from a static gold investment, dated from 1970, than from investing the same amount of money in the S&P 500 in 1970.

That is not to say investing in the stock market is a bad idea. It is simply a bad idea at this moment in time. There will come a time for stock investing, but not is not that time. Right now, smart people will opt for gold. Even though the stock market will go up a lot in the next few years, from current depressed prices, all of these gains will be for show only. They will likely be merely nominal gains, even though I do think we will be seeing DOW 30,000 by 2011.

Because of the circumstances that surround us, over the next 5-10 years, stocks will arise primarily out of inflationary pressure created by the Fed in its quantitative easing program. In other words, after adjustment for the reduced buying power of the dollar, stock gains will be non-existent, at least for many years. Gold, in contrast, will probably go up in real terms, because of the increased levels of world instability, a continuing decrease in mine production in spite of higher prices, and simply that almost everyone wants at least a little bit of it (whether in bullion or jewelry) and the world population is growing much faster than the world's stockpile of gold.

Will COMEX Default on Gold and Silver?

Oh, yes, Donnatella, one more thing. You are technically correct that the exchange is always the legal "counter party". However, when we speak about "counter-party risk", we must talk about all the real counter parties to the transaction. The counter party to you is your own broker and its clearing house. The counter party to your clearing house is the exchange. The counter party to the exchange is the short seller clearing broker. The counter party to the buyer is his broker's clearing house. The propensity and ability of all these parties must be considered when discussing "counter party risk", not just the exchange.

Will COMEX Default on Gold and Silver?

Yes. I agree. I cannot agree with Donatella that the clearing members of the exchange are above reproach, nor that the allegations made against some of them by conspiracy theorists should be dismissed out of hand. Some of the conspiracy theorists, like James Sinclair, for example, are persons of high intelligence and business acumen. What they are saying cannot be dismissed without a thorough investigation, which has never been done.

However, it will be extraordinarily difficult for private actors, like clearing members of COMEX or NYSE-Liffe, all of whom are guaranteeing trades on the futures exchanges, to default, as compared to the U.S. government's gold default back in the 1930s. The government can hide behind eminent domain and related legal theories. The private actors cannot. They face potential criminal liability, and a huge increase in civil liability, upon any default, so, absent a "end of the world" scenario, they aren't going to do it.

Don't ignore the opportunity to buy gold and silver at incredibly cheap prices, without the 20-30% premiums in the real market. The main point is that, even if the conspiracy theorists are correct, and they may be, people should still buy precious metals on the futures markets, as long as they don't get caught by the siren song of speculation, and have the cash to pay, and do pay, for their purchases up front.


On Dec 23 01:40 PM Long John Silver wrote:

> The whole system is based on "TRUST" and "honesty" which are in short supply these days. Even the federal government reneged on the gold
> certificates issued before 1934. Read the Supreme Court "gold cases"
> to see how the highest Court simply sidestepped the "ironclad" promise
> to redeem the certificates in gold coin. As a lawyer, I can tell
> you there's no rule that can't be bent or circumvented once the lawyers
> get into the act. It's a joke. Take physical delivery now so you
> don't have to trust anybody.

As Good as Gold?

The author of this article is using a selective time period, from 1980 to now. Suppose we used the increase in the NASDAQ stock market from January 2000 to now? We would see a whoppingly big negative return from stock investing! Why not start the gold analysis in 1970, ten years before 1980, when the inter-governmental price was fixed at $35 per ounce, but gold was selling in the free market in Switzerland (Americans were still prohibited from owning bullion) for about $42.00 per troy ounce? That would be a far more accurate time period of 38 years and would provide a better analysis of the investment allure of the yellow metal.

1980 was an exceptional period of time of fear and high inflation. Gold and silver (the latter helped along by long oriented market manipulation) ran up very high on the fear factor. But, the period from 2000 to 2007 was not filled with economic fear. In fact, it was a period of slow dollar declines, relative calm (except for 9/11), low inflation and steady growth in the general economy and in the financial markets. Yet, gold soared from $270 per ounce to $670 or so, during that period of time.

Now, in spite of the fact that we are clearly on the precipice of heavy dollar devaluation (the Fed, for all intents and purposes, admitted last Tuesday that it intends to inflate America out of its debt problems), gold hasn't yet made much of a move. Given the environment, where the dollar is relatively certain to drop like a stone thanks to the Fed's "quantitative easing" program, a 5% per year reduction in mine production in spite of what should be the stimulus of huge price increases, and with demand increasing exponentially all over the world (except at the futures exchanges!), it seems to me that gold, at least at the price for which it can be purchased on the futures markets, is now very low priced and a screaming "BUY" even for those with a shorter-term investment goal of maybe 1-2 year horizon.

I would note that silver has collapsed even lower, and this collapse is completely irrational. Most rational folks among us were jumping on the $9.00 per ounce silver price last month, for example. They aren't making any more of it, and mine production has come to a standstill now. It is bound to have a price explosion soon.

In short, I think the author is very wrong about value of gold in the current economic environment. In all likelihood, given the circumstances of dollar depreciation, as well as shortages of mining supply as well as the end of central bank willingness to lend out large quantities of gold, and China's desire to purchase 3,600 tons of it as soon as possible, the yellow metal is bound to rise in a fast but sustained way.

Gold prices may eventually exceed the rational price, but it is currently no where near that. Logic and reason tells me that the top is probably several years and thousands of dollars per ounce above where the metal is now selling. So, frankly, I will be continuing to buy, at least until the price is several thousand dollars per ounce higher than now.

Will COMEX Default on Gold and Silver?

Oh, yes, and, also, the clearing house of the counter party short seller will also be guaranteeing the trade.

Will COMEX Default on Gold and Silver?

One more point on counter-party risk. When you buy gold or silver or anything else, on futures exchanges, your trade is guaranteed by 1) the counter party short seller which will often be a huge bank; 2) the clearing house who executes the trades of your broker; 3) the exchange itself. There is every reason to believe that a minor delay in delivery, coupled with a huge price increase in the metals, will be the only result of a so-called "default" by short sellers. You, the delivery demanding buyer, will almost assuredly get your gold at the price you paid, and not a penny more.

Will COMEX Default on Gold and Silver?

I would also note that you are not making an effort to understand the allegations of the conspiracy theorists. That is a mistake no prosecutor should make, when a victim, however confused, comes for help. Conspiracy theorists are saying that a few of the clearing members, themselves, are engaged in the alleged fraud. Allegedly, they take positions for their own account, to manipulate the market - not merely on behalf of clients.

The accused short-sellers, and their short position, are in the commercial category, NOT the speculative. Therefore, whether or not clearing members have controls on the type of speculators they accept in their prime brokerages, for example, is irrelevant.

I take a practical view. I think that conspiracy theory should certainly be properly investigated, which it has never been. However, conspiracy theories should prevent people from gaining the practical benefit of buying their gold and silver at wholesale on COMEX and NYSE-Liffe. That being said, contrary to what you are implying, CFTC certainly has the responsibility to enforce its own rules.

Other cheap no-premium markets, like the London Bullion Exchange, are closed to small investors. They make it very difficult for people to buy from them, because of incredibly high minimum purchase requirements, and a dearth of consumer-oriented information.

The futures markets, in contrast, corrupt or not, have become excellent places to buy cheap and force delivery upon the short sellers. They are completely open to middle class investors. Right now, there is no better place to buy precious metal, so long as the buyer does not succumb to the siren song of speculation fever.

As a side effect, if the conspiracy theorists are correct, mass demands for physical delivery will end alleged gold and silver pricing fraud more quickly than any CFTC investigation.


On Dec 22 04:39 PM Donatella wrote:

> Having lived through every imaginable commodity scenario in my 30+
> years in the commodity business, I can say that the information listed
> above is confused. Sorry to say. It suggests that the onus of
> preventing defaults on physical deliveries on the commodity exchanges
> is in the hands of the CFTC. It is not. It is controlled by the
> exchanges themselves...

Will COMEX Default on Gold and Silver?

GTU is not a wise investment because it sells at an extraordinary 21.7% premium to its net asset value of gold in storage. In other words, you will pay a whopping 22% premium, which is higher than even most physical gold dealers are charging.

There may be certain long term capital gains advantages because, but this is memory only, that they do not allow withdrawals of gold, and, therefore, it is not taxed as a collectible. But, emergency withdrawal and use is one of the essential reasons people own gold. On top of that, under Obama, I believe the lower rung of the capital gains tax will be eliminated. So if this advantage does now exists, it will not exist for long.

Like GLD and IAU, which erect high barriers to withdrawal, an interest in GTU does not function as an emergency store of ready wealth in the event of disaster. In short, because of the disadvantages, especially the high premiums, GTU is not a viable alternative. CEF has many of the same shortfalls, and invests in both gold and silver, so it is not a pure gold play.


On Dec 22 05:58 PM Jason Hamlin wrote:

> Central Gold Trust (GTU) and Central Fund of Canada (CEF) hold physical
> gold and silver in allocated vaults. Unlike GLD and SLV, it is audited
> and they do not lease it out to be shorted. Furthermore, these funds
> outperform GLD and SLV, so I don't understand why anyone would hold
> them (unless they are unaware of GTU/CEF).

Will COMEX Default on Gold and Silver?

I do not believe that COMEX will default. That is why I recommend that people buy gold and silver, for physical delivery there. I merely intend to explain why it will not happen even if, as appears obvious, the exchanges and CFTC have allowed the 90% cover rules to be violated. If you bother to read the article, you will learn that. In a worst case scenario, the exchange itself will be the counterparty.


On Dec 22 04:39 PM Donatella wrote:

> Having lived through every imaginable commodity scenario in my 30+
> years in the commodity business, I can say that the information listed
> above is confused. Sorry to say. It suggests that the onus of
> preventing defaults on physical deliveries on the commodity exchanges
> is in the hands of the CFTC. It is not. It is controlled by the
> exchanges themselves. It is incumbent upon the exchanges to use
> a series of measures to limit spot month positions when deliverable
> supplies are not available. I would suggest that you read the Delivery
> rules in the Exchange rulebook, posted on the CME website under COMEX.
> The rules are as follows. Sellers must have deliverable stocks in
> exchange liscensed warehouses the day prior to the delivery. If
> these are not available, the seller will be forced by the clearing
> member (financial institution which is a member of a clearing house).
> The exchanges responsibility is to prevent spot month futures positions
> from becoming so large in relation to the physical supply available
> for delivery that they will adjust the margin on positions as they
> get closer to delivery. In the past, the exchange (for platinum)
> has charged significantly over 100% of the value of the physical
> metal on futures positions in the spot month to prevent disruptive
> market conditions from taking place. Also, the clearing members
> (financial institutions which comprise the clearing house) are responsible
> for accepting clients and have stringent requirements for doing business
> with "speculators&q... and trade houses and are the ones which
> will be responsible for any defaults. It would be useful for you
> to read the rules on defaults and how the clearing house structure
> handles potential defaults. What clearing members do NOT want are
> clients which could potentially default on deliveries and will not
> deal with them having positions in the spot month if they do not
> have the material at hand. In the history of COMEX there was one
> default -- in the early 80s, Volume Investors, and the loss was made
> up by the clearing members, leaving all players on the exchange and
> every position whole. The exchange endured the Hunt mess, the 9/11
> attack (which left millions of ounces in the basement of the exchange
> in the Mocotta Metals warehouse facility ultimately intact.) Believe
> me, if you are looking for CDS or Subprime type cloak and dagger
> scenarios at the COMEX, believe me they have lived through everything
> and the checks and balances and transparency in this process is so
> clear that there is no way the precious metals Aramgeddon you describe
> would happen. They would charge 150-200% margin to eliminate large
> spot months positions first if the clearing members were reckless
> enough to take such business in the first place.

Will COMEX Default on Gold and Silver?

GLD is not permitted to lease gold to the best of my knowledge. However, if short sellers hold shares of the COMEX gold trust (IAU), they are allowed to pledge those shares to meet the "cover" requirement. IAU and GLD allow withdrawals by shareholders, provided that the shareholder owns a "basket" worth of bullion. A basket consists of several million dollars worth of gold. To get the exact numbers, you need to get the prospectus for IAU. At any rate, assuming that some of the banks millions of dollars worth of IAU shares, or buy them in anticipation of a delivery problem, they can cash the shares into bullion, and deliver that bullion. Hence, the amount of gold available to short sellers at COMEX is probably larger than appears on the surface, though probably not nearly enough to meet all delivery obligations if, let's say, 20% of the holders of the February contract demanded delivery.

> Do you know if the SPDR Gold Shares ETF (GLD) is permitted to lease
> gold holdings to the bullion banks who then us it as margin for shorting
> or is it all being held long and unencumbered in a depository?

>
>
> Jack
>
>

Will COMEX Default on Gold and Silver?

The counterparty is the exchange and short seller, not the broker. The broker is merely your agent, carrying out your trades.

There is always some temporary counterparty risk with the clearing broker, because they store your cash during the transaction. Notable is the fact that commodity brokers (and stock brokers who are acting as futures brokers) are not covered under the SIPC insurance scheme.

But no major futures clearing broker ever has gone bankrupt, to the best of my knowledge. It is a very profitable business.

There is no law on this, because the event has never happened, but, theoretically, best execution regulations would require the broker to buy the gold promptly, on the spot market for you, to carry through the trade to its natural conclusion of delivery. The exchange would be under an obligation to reimburse you (and, therefore, the broker) on all costs. The broker should have no problem in taking whatever short term loans it needs to carry through the transactions.

Keep in mind that your short selling counterparty is probably one of the biggest banks in the world, like JP Morgan, HSBC, Goldman Sachs, etc. They are obligated to carry through the transaction, so the likelihood that your broker will actually need to go to the London spot market to buy is VERY small. It will almost assuredly be done by the short sellers to save face.

Remember, these banks all have complete access to the federal trough, and feed at it regularly, so money won't be a problem for them. Contrary to the visions of some metals aficionados, gold is very available, provided that the price paid is high enough. In short, I think the counterparty risk is minimal, especially if you buy a contract for the next available expiration date, and take delivery that month.

Will COMEX Default on Gold and Silver?

Declaration of "liquidation only trading" does not prevent people from taking delivery. It only affects traders. Delivery is a contractual right that cannot be taken away from contract holders.

When CFTC declared "liquidation only", in the silver markets, back in 1980, it simply meant that traders were unable to buy new positions in silver. This allowed short sellers to buy back the contracts and liquidate their short positions. The declaration of "liquidation only" trading does not affect old positions, and if the Hunts wanted to, they could still have stood for delivery.

Taking delivery is a contractual right, and in the absence of a real force majeure, it is protected by the Commerce clause of the U.S. Constitution. The CFTC can regulate trading, but cannot make rules that retroactively impair the right of contract.

As unlikely as the CFTC is to make an attempt to blatantly support silver and/or gold fraud, if such an "emergency order" (to stop deliveries) were made, it would be quickly invalidated by the courts. The end result would be that defaulting short sellers would owe a larger sum of damages (because the price will have risen) and the CFTC would owe huge sums of money for the attorney's fees of the victims who act to invalidate the regulations.

CFTC is not actively enforcing its own regulations, right now, but that does not mean it is actively supporting the alleged fraudsters, except by failing to act affirmatively against them. In any event, the agency cannot alter the right of contract, nor would it dare to try. It is not very likely that CFTC would enact trading rules to support of fraudsters.

You must remember that the short sellers were the victims back in 1980.
The Hunts were attempting to "corner" the silver market on the long side. That is market manipulation of the opposite sort that short-selling banks are now being accused of. Collusion by longs, who wish to create a falsely higher price, by constricting normal supply is just as wrong as attempting to periodically crash the market using the weaknesses of leveraged longs.

On top of this, the gold market is far deeper than the silver market, and is traded all over the world. COMEX prices currently have a heavy influence on spot prices because they are assumed to be legitimate. The fact that the COMEX standard contracts are deliverable, leads people to use the futures markets for price discovery. But, the end of trading on COMEX will end the moral authority of the futures exchanges to influence the spot price, and will not collapse the price, in the current market. If, in fact, there is downward manipulation, and end to it will result in a huge increase in price. Back in 1980, the Hunts were engaged in upward manipulation, using the futures exchanges as a key part of their plans. An end to trading there, caused the end of the upward manipulation, and, therefore, a crash in the price.

In short, once again, a delay in fulfillment of COMEX delivery will not stop contract holders from getting their gold and silver. Instead, it will simply cause a huge price rise because, if there really is a conspiracy to reduce prices, it will be ended, then and there. The futures markets are a great place to buy physical gold and silver.

Dec 22 08:39 AM ComexCow wrote:

> The futures exchanges could declare an emergency action in the spot
> contract and force trading for liquidation only, not delivery...

Let the Detroit Automakers Fail

I might also note that, at the top of one company, Ford, is Alan Mullaly, who has been trying to restructure Ford in an almost impossible situation, where he suffers from constraints from both the UAW and the Ford family. He is from outside the industry, and is the only CEO who might be worth keeping, IF he agreed to work for $1 per year, until the company got back on its feet.