A Thought Experiment

As we prepare for what will certainly be another wild and volatile week, I thought I would propose to you the thought experiment I have been considering all weekend.

First, let's summarize what we know:

  • Rehypothecation at MFing Global causes $1.2B in customer assets to vaporize into the ether.
  • JPM, HSBC (the EE) et al claim seniority on ownership of these client assets.
  • The assets in question include not only cash but paper and physical metal.
  • An MFing Global client (named Jason Fane) has sued HSBC demanding his gold and silver be returned to him by HSBC.
  • HSBC claims the gold and silver is theirs, not Fane's, even though Fane had bought and paid for it.

So, here's the deal. Going forward, why on earth would anyone purchase gold and/or silver on the Comex with the intent to take delivery? You'd have to be either crazy, ignorant or some combination of the two.

Therefore, if you are holding a Feb12 or April12 contract with the intent to take delivery, why would you keep it? Now that you know that your trading firm will rehypothecate your account and now that you know that there will likely be multiple claims on your metal, why would you even consider fiddling around with the criminals in London and New York?

Additionally, if you are an investor, trader or financial advisor, why in the world would you continue to hold GLD? The only possible reason I can see would be stupidity and/or ignorance.

And with that, here's the thought experiment:

Are we now going to witness the final disconnect between the actual physical price and the paper metal price as determined by the Comex and the LBMA? Investors who wish to own actual physical metal that is allocated to them personally and they can hold in their own two hands will, in all likelihood, eschew the Comex and LBMA entirely. Then, here's what I think happens next:

  • Physical demand soars and, with it, physical price. Sources tell me this is already happening as bulk physical gold is currently being sold and delivered at $1950/ounce.
  • Paper demand dwindles and paper price declines. As buyers exit the Comex, the tenuous balance between buyers and sellers is disturbed. More sellers than buyers means a declining price.
  • Paper price is also pressured by the liquidation of GLD and other etf shares.
  • The Cartel, unwilling to establish additional shorts, will be buying and closing contracts almost as quickly as the specs are selling and closing contracts.
  • We will know this physical/paper breakdown is finally upon us if we continue to see widening spreads of physical vs paper all the while the total Comex open interest continues to collapse, through 400,000 contracts and down toward 300,000.

This process could rapidly accelerate and the Comex might finally meet its demise.

Could I be wrong? Of course, which is why I'm looking for your feedback on this idea. Regardless though of the timing, the Comex/LBMA fractional bullion banking system is dying. The exposed criminality of the MFing Global affair is the mortal wound to which it will eventually succumb.

What can you do to prepare? Do not, under any circumstances, purchase Comex or LBMA contracts with the intent to deliver. Only buy metal from reputable dealers and then store it outside of the current bullion bank system. If etfs and closed-end funds are your only option for protection, you should look closely at some of the physical metal funds that are based in Canada. GLD and other paper metal etfs should not be considered safe for anything other than day-trading.

Always remember what has been stated here ad nauseam: The only metal which you can be 100% confident that you truly own is the metal that you hold in your own two hands. Period.

TF

232 Comments

Turd Ferguson's picture

A short video

MODERATOR

This video is everywhere today. It might as well be here, too.

!

AC_Doctor's picture

1st in

SHIT FIRE!  The lawyers will be busy for years trying to track down the multitudes of ownership and claims on silver bullion bars and gold bullion bars while the paper markets collapse, COMEX and LBMA default and physical metals skyrocket to unfathomable prices.  This will obviously implicated the equities markets as faith in the system is finally pushed over the limits and the hedgies and big investement firms all scramble for the last remaining pieces of phys on the Planet Earth.  Oh yeah, the mine stock owners will benefit immensely and the shorts will be methodically burnt to ashes.  Get you AU and AG while it's cheap and don't forget the 3-6 months of food, water, supplies and some kind of protection for you and your family.

sweet cheeses's picture

this is the sugarplum dancing in my head

Love to have one of these in my xmas stocking for the zombie apocalypse...just in case :)

Brotha Bob's picture

Looks at silver cot report

This weeks silver cot reports shows the market shrinking. Negatives across the board. Appears that everyone is leaving the market.

silverkid420's picture

Silver price

You guys think we see a price drop as people leave the market in "FAKE" silver?  Mite this be the week of high $20's?

What do you all think?

WineGuy's picture

Hey BBB

You've been a member 8 minutes and you are already promoting your own site? Good luck with that here 

LaMachinna's picture

Oops, always close but not quite right! Here's my post from

end of the last thread. 

just not exactly sure WHERE! Help, turdites.

With all the hypothecation and rehypothecation and well, all those big screwed up things all the big screwed up financial institutions always do in a big screwed up kinda way....If PAPER metals crash, which sure wouldn't surprise me, then the LOGICAL thing would be for a instant significant focus on the PHYS and demand/shortage thereof.....right? Does LaMachinna have it half right even?

But, as LaMachinna's intuition continues to also flash bright red is that tptb (lowercase intentional) KNOW THIS TOO (and, am sure have known for way longer than I can even understand..). This is thus far the brick wall for little LaMachinna's mind.....like as you would say, Turd, beyond there are the dragons?

I just can't see (finally, now) tptb would allow for this to stand. Or, is it the less painful for them? And, that my fellow turdites is amazing.

<scratching head.....>

Brotha Bob's picture

After MFing Global

After MFing Global, Turd, I think you are correct. Or at least prudence would dictate, that your money is not safe at a brokerage.

Alas, some people are not always smart. They will refuse to believe the markets are crooked, even with the evidence right in fron of them. They can scuff at a one off event. "Oh, that won't happen to me."

What you are watching is a slow-motion train wreck. MFG, while horrendous, only stresses the system. What your gaming will take another clearing house collapse. Then it will be "Kate, bar the door!" one event is easy to ignore. Two, impossible!

With the stress on the system, another MFG is going to happen. How can it not? Did the banks learn from AIG? MFG? No. The next event, and there will be a next event, will be due to the rehypothion allowed in London, or the counter-party risks associated with CDS. Or, a combination. Let's not forget the time bomb that's is CDSs.

Once investors loose confidence in the markets, that their money is not safe, watch the exits. Yes, this applies to the PMs. But I doubt it will be isolated to the PMs. It will be all markets, and all fiat paper.

Why the CB raid on gold this week? Gold was not near an all time high. Why knock it down, again? The see what's to come. I think they are trying to keep things together for Christmas.

Vagabond's picture

Silver Sale Refused

I went into a store in Springfield MA yesterday to buy a roll of silver and the guy said he didn't  want to sell any.  A friend said he was asking for $40 last week.  In Boston I found one place that would sell me 10 ounce bars for $4 over spot, but nothing else for under $39.  I went into 4 or 5 shops.  Apmex and Gainesville have been my go to place, they are still offering prices close to paper spot, but out on the street the disconnect seems to be growing.

TheGoodDoctor's picture

So, should you buy some puts

So, should you buy some puts on the GLD? So, that is an option right?

silverkid420's picture

I can get silver very easily

I can get silver very easily here in CA.  I was thinking of selling a 100 oz bar to a friend for 1.5 over spot and rebuying in a week when the paper price crumbles....  Do you all see huge price hits in next week or two?  How will the REAL price become avaliable if this occurs?

Fortinbras's picture

@DPH..

You are thinking of Polonium poisoning.

I'll PM you some authors/titles while im on this trip. If you dont mind, please PM me so ill have a reminder.

punchbowl's picture

BBB's

Sorcha Faal defines disinformation.

beinki's picture

(No subject)

Fortinbras's picture

Everyone should go back and read what CaLaw wrote...

... Regarding interpleaders before they get too crazy about the HSBC lawsuit.

We forced ML to file one a few years ago when we suspected fraud in an account. We also suspected that ML shouldvhave known and we asked that the Federal court involved take posession of the funds while it was worked out, but ML had to file the interpleader as they claimed they were merely "stuck in the middle" and HSBC might be doing the same... But might not. ;)

Battle Beagle's picture

Honey Pot

JPM and the gang will bait silver specs back into the market as many times as they can. This is why I expect a strong silver rally in the next 3-4 months to occur, they/JPM need to give the appearance that the market is working again to keep the system functioning as long as possible.  I expect JPM will "sweeten the pot" for those who play at the comex casino for a short time, only to take the honey away when the specs get overconfident again. 

TheGoodDoctor's picture

@beinki Quite sobering dude.

@beinki Quite sobering dude. Thanks for your video.

silvermedusa's picture

Physical ONLY!!!!

Turd, think you are right.  Paper PMs will go down in price, the markets are broken beyond repair, nobody trusts anyone anymore.  But before stackers get too excited, the physical will not be sold at that price.  Either premiums will jump, big time, or LCS will close up shop and go on vacation.  That is what I saw last time we had the big drop.  I don't even trust buying online and "waiting for delivery".  If TSHTF, I don't expect delivery services to be able to protect goods.  

Don't know how many of you are old enough to remember when truck jackings were common in the 70s.  When things get bad  enough, the truck jackings will start again.  Like in banana republics,  high value things will start to be paid for at the time of delivery and not a second sooner.  Civilization is a very fragile thing.  One can't take for granted that systems will work the way they have before.  Yikes!  What a week this should be!

¤'s picture

Thanks

Thanks big yellow hatted one. 

BTW...I received a second hat in the mail this week and would've returned it except for the Anytown, USA thing.  Oh well. 

In the meantime, I have two hats to wear maybe. 

silverkid420's picture

HONEY POT

I like where your heads at regarding JPM sweeting the pot.  I think I may just hold off selling that extra 100oz bar.  I was planning to see so I could gain 10-15 ounces on a price hit and a rebuy.  But I HOPE you are right!

Swift Boat Vet's picture

Clueless people?

I'm wondering just how many investors are into the PMs,  but haven't been reading any commentary and, for lack of a better word at the moment, are therefore clueless as to the possible implications to their financial health.  As a result,  I think there is actually better than a even chance that the wind down will be pretty tame to begin with.  Banks slowly covering (or blasting price down and covering) all they can while the slower market participants slowly gain a clue or two. 

TPTB have proved to have remarkable skills at market control in the past.   Let's see just how long that control can be maintained.   The trustee/Judge hold a very important key, even though it is a losing situation no matter what.

Swifty

cpnscarlet's picture

@all - Call me a crybaby, but

@all - Call me a crybaby, but I'm reading the thread and feel like some of my best lines from Saturday are being stolen angry

Call me a whambulance.

NW VIEW's picture

SWITCHING HORSES

One day, some day, those who control the markets will switch horses in the middle of the market stream!   When the paper dumping starts along with the stampede  to buy take home metals,  we will see a run like we had with the 49ers.   

cpnscarlet's picture

Okay, no more whining, but...

Do we all still think that at least Sprott's funds and CEF are safe to hold???

PS - C'mon Turd, just a little more info - Can't you give us a little hint on who's telling you that Au is trading phys at 1950????? Pretty please???

¤'s picture

beinki

yesyes   You're one cool and unique Turdite!

Thanks for that effort and sharing it here.

Bsong's picture

Question ???

Are brokerage firms required to withhold tax and early withdrawal penalties when a customer prematurity liquidates IRA?  In the light of all things learned here I've  to make some decisions.  Thanks!  

clueless one's picture

etf'd up...

Wow.  Monday is gonna be interesting.

If people were into GLD/SLV, thinking that they would some how get phyzz with their shares, then they are big holders.  Not little guys.  Right?  You can't hold like 100 shares and think you own Gold...right?  Anyone catch the video of the lawyer guy who read the fine print on GLD?  You ain't gettin anything but paper out of that sucker.

If big dollar players are involved...and folks who have given these big players their personal cash in hopes of redeeming tangible assets, start to ask questions, then all bets are off.  I give it a 75% chance that both ETF's sell off hard this week..but rebound, because let's face it, it's a financial tool...people play the ETF's all the time, and I doubt even a small percentage ever expected phyzz out of the deal.  That said tho, if volumes are crap as they've been lately, then you could see a pretty substantial price drop in both GLD/SLV before said rebound occurs.  It'll effect the phyzz market...but premiums will adjust so you won't get the "deal" you'd expect.  Not like the bullion guys aren't on the phone to one another when price moves happen.

Just my two cents...but I've got powder on stand by, just in case.

People are still in the market and trading accordingly, whether it be for gains in a portfolio or daytrading to by groceries...the fact remains that they'll still play the paper game and will continue to do so, no matter what dire news comes out.  Some can't get away from it...it's like Vegas, and there is money to be made on the short side. 

However...what happens when another Clearing House bites the dust?

Glad I'm not involved.  Good luck to y'all...

Thanks, TF.  Great post as always.

Vypuero's picture

seems to me

If what you say is true, I would actually (were I the EE/Comex/etc) try to RAISE prices, or at the very least, completely halt suppression for some time, in order to bring back confidence.  Why would I want my game to die?  If it does die, it means we are near the end game.  I would also look to settle the suits as quickly as possible since the costs to make the investor whole are small compared to the loss of the game.  

hawkeye's picture

GLD is not a stock............

I watched a webinar the other night with Robert Green, who is a CPA well known for trader tax issues. A question was brought up about investing in GLD........it is organized as a trust and is treated as a collectible for tax purposes. The capital gains on a collectible is 28% or more depending on your tax bracket, so just be aware of this fact if you have owned GLD and sold for a profit this year. (I would assume the SLV is also organized as a trust, but that was not mentionned).

Also, DO NOT CLICK ON THE LINK in that website above BulletsBeansandBullion.....the link to the story about the Arctic gulags takes you to a website that Norton blocked as it is known to be infected with a virus!! Norton may slow down my computer, but it just saved my ass.........cool

Jimux's picture

http://my.news.yahoo.com/gold

http://my.news.yahoo.com/gold-buyers-tempt-greeks-facing-hard-times-053147576.html

"The gold price has risen 300 percent in the last five years," it says on its website, arguing that now is the time to sell before it falls again.

So they believe the price is going to fall, but out of the goodness of their heart are buying it.

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