A Thought Experiment

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Sun, Dec 11, 2011 - 5:09pm

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

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