HowWealthWorks.com

[Dave]

Don't look now, but the US stock market is in the grips of an enormous bear.

In 2008, the Dow Jones Industrial average is set to lose 35% and the S&P 500 is set to lose 40%. World stock market indices by and large had even bigger losses in 2008. The big winners were US Treasuries and gold.

Major secular bear markets in the US typically end with a bout of inflation, and our expectation is that this bear is no different. Gold should continue to outperform the stock market for years to com.

Bloomberg: Gold Heads for Record Eighth Annual Gain on Dollar, Recession

Gold headed for a record eighth annual gain in London on expectations that the dollar and global economies will weaken, bolstering demand for the metal as a hedge against further declines in the currency and as a haven.

Gold rose 3.8 percent this year, preserving investors’ money as $30 trillion was wiped off equities and the Reuters/Jefferies CRB Index of 19 raw materials headed for its worst year in a half-century. The dollar index, measuring the currency against six counterparts, fell this month after the Federal Reserve cut its benchmark interest rate to a range of zero to 0.25 percent.

Gold rose 3.8 percent this year, preserving investors’ money as $30 trillion was wiped off equities and the Reuters/Jefferies CRB Index of 19 raw materials headed for its worst year in a half-century. The dollar index, measuring the currency against six counterparts, fell this month after the Federal Reserve cut its benchmark interest rate to a range of zero to 0.25 percent.
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Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom

[Dave]

When adjusted for the change in the value of the dollar, gold has been hitting real new all-time highs at the end of 2008.

The Optimist: Highest Gold Value Ever

Everybody knows, of course, that the price of gold rose to its highest level in history in March. Many people think that gold then dropped a lot and that it is still way down. Although it is true that the U.S. dollar price of gold did drop significantly from its March high, some people will be surprised to discover that the value of gold actually rose to new all time highs on the final trading day of 2008.

The value of gold is independent of the currency fluctuations of the U.S. dollar or any other currency. Since charts of gold priced in a single currency impose the currency variations onto the price of gold, we cannot see the value of gold by simply looking at a price chart. To show value, it is necessary to filter out the underlying currency variations. That can be done by multiplying the price (in a currency such as the U.S. dollar) times the composite currency exchange rate to plot the value independent of the currency. The MoreAu Index is an approximation of that process in which the U.S. dollar price of gold is multiplied by the USDX trade weighted dollar index. Plotting that product over time results in a chart that tracks the true value of gold independent of currency exchange rate changes. A copy of the chart updated through 12/31/2008 is presented below. Readers are also invited to view the updated chart (each weekend) at the link to the MoreAu Index chart page.

http://sitekreator.com/Optimist/auxusd_w.html

This is not your Grandpa’s deflation

To the surprise of absolutely no one, the MoreAu Index shows that the value of gold reached an all time high early in 2008 as the price of gold approached the $1,000 mark. Since then, the U.S. dollar price of gold has completed a substantial correction, and it closed the year below $900 per ounce. Some investors became discouraged during that pullback in price, and more than a few voices proclaimed that a deflationary environment killed the golden bull. My optimistic viewpoint is just the opposite. Instead of a deflationary environment, I see a severe (but relatively short term) credit squeeze that impacted the price of gold as it drove the U.S. dollar exchange rate sharply higher. As that credit squeeze is alleviated, the additional flow of funds that have already been pumped into the money supply will provide the after burners for a high intensity resumption of the precious metals bull. Indeed, using the MoreAu Index to filter out the effects of currency exchange rates, the chart above shows that the real value of gold ended 2008 at its highest value ever. An all time record high value shows that the gold bull is very much alive and kicking.
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Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom

[Suresh]

Reuters: S.Africa gold output falls 17.6 pct yr/yr in December

South African gold output fell 17.6 percent in volume terms and total mineral production dropped 10.7 percent in December last year compared with the same month in the previous year, official data showed on Thursday.
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South African gold output has fallen since state-owned power utility Eskom suffered a near collapse in the electricity grid last January.

Eskom has since limited supply to around 90 to 95 percent power to mines in the country, the world's biggest source of platinum and the second-ranked gold producer.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Dave]

In September 2008, we called the beginning of phase 2 of the gold bull market.

At that time, we wrote:

[Suresh]

Some of you may recall that we worried about a gold delivery default coming perhaps as early as January 2009. Well, we apparently dodged that bullet. But, it would seem that the issue of gold delivery default is not closed. Comex says that if you decide to take delivery on a gold futures contract, then it can pay you in equivalent GLD shares. But, the problem as Dave has explained is that GLD shares don't have to be backed by physical gold. Each share need only be a gold price derivative. That is, each share held does not necessarily take gold supply off the market and thus can't directly affect the gold price. Bluntly, GLD is a means of counterfeiting gold. That is, everyone can buy GLD shares and not affect the price of gold.

Prospectively, it would not be surprising to see the price of gold futures trading on the COMEX to fall and to see the price of gold futures trading on other commodity exchanges that actually deliver physical bullion.

This move by COMEX effectively prevents accumulation of physical gold in large quantities by U.S. citizens. (Buying hundreds or thousands of gold rounds at your local bullion dealer just isn't practical). So, there won't be any need for the federal government to confiscate gold from U.S. citizens; they won't have any. The practical ramification is that it has gotten more difficult for people to protect themselves during a currency devaluation.
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Jesse's Cafe Americain: Paper, Scissors, Gold

As you may have heard recently, the Comex has asserted their right under their rules to deliver the equivalent paper interest in Exchange Traded Funds such as GLD in lieu of the delivery of physical bullion for those standing for delivery under the rules of the commodity exchange.

Is GLD really the same as physical bullion?

"...it appears that a lot of investors believe and trust that investing in GLD is the same thing as buying physical gold bullion. A close reading and analysis of the GLD Prospectus, however, reveals that investing in GLD is drastically different from owning gold. This analysis will show why GLD is nothing more than another form of a derivative security which is loaded with counter-party default risk."
Owning GLD Can Be Hazardous to Your Wealth
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We have often said that when the real crisis of liquidity comes, and the final flight to safety from the credit bubble collapse begins in earnest, the exchanges will alter the rules to allow for cash and paper settlement of claims for bullion, which they cannot or will not be able to deliver at the agreed upon prices.
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BP 2009Q3
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Dave]

Bloomberg.com: U.K. Royal Mint Doubles Gold Output as Demand Swells

The U.K.’s Royal Mint, established in the 13th century, doubled production of gold coins in the second quarter as demand surged for bullion to diversify investments.

Output climbed to 16,910 ounces from 8,030 ounces a year earlier, according to data obtained by Bloomberg News under a Freedom of Information Act request. First-half production jumped 86 percent to 45,406 ounces, the figures show.

Demand for physical gold as a store of value and hedge against inflation has increased as governments spend trillions of dollars to combat the worst recession since World War II. Bullion holdings in gold-backed exchange-traded products rose to records in the second quarter. Gold is trading about 7 percent lower than the record $1,032.70 an ounce reached in March 2008.

“There’s still interest in gold as a safe-haven asset,” said Stephen Briggs, an analyst at RBS Global Banking and Markets in London. “This whole sector will capture people who don’t have access to the futures market.”

First-quarter demand for official coins more than doubled from a year earlier, according to the World Gold Council’s latest figures. Rand Refinery Ltd., the world’s largest gold refiner, boosted coin output to the highest in about 23 years in January, while Austrian mint Muenze Oesterreich AG sold a record 1.5 million ounces of gold in 2008. Coin fabrication reached a 21-year high last year, according to researcher GFMS Ltd.
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Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom

[Dave]

We've been following and touting the bull market in gold for years now. What I find most interesting is how market participants and events work to accommodate the gold bull. To my mind, phase 2 is well underway and the institutional investors are piling into precious metals in ever greater numbers.

But keep in mind, it's not called a bull because it's easy to stay on. This bull market will try to scare you out and wear you out. Buckle up, it's going to be a bumpy ride!

FT.com: Gold approaches $1,000 an ounce

The gold price has risen to its highest level in six months, as stock markets waver and investors move to hedge their portfolios against inflation.

The metal hit $992 a troy ounce this week. Analysts at GoldCore, the bullion dealers, said they expected investors to take profits once the price hit the psychological mark of $1,000. However, Standard & Poor’s said many analysts believed it would rise above this level. The gold price last exceeded $1,000 in February.

Demand for gold soared last year as investors sought a safe haven from the stock market falls and global economic uncertainty.
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Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom

[Suresh]

FinancialSense.com: Central Banking: A Blight On Humanity
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Impeccably reliable sources have informed me that as recently as Sept. 30, 2009 – the last possible day of trade in the Sept. 09 gold futures – a number of well-heeled market participants “bought” substantial tonnage worth of gold futures on the London Bullion Market [LBMA] and immediately told their counterparties they wanted to take instantaneous delivery of the underlying physical bullion.

The unexpected immediate demand for substantial tonnage of gold bullion created utter panic in at least two banks who were counterparties to this trade – J.P. Morgan Chase and Deutsche Bank – because they simply did not posses the gold bullion which they had sold short [an illegal act which in trading parlance is referred to as a “naked short”].

Because these banks did not have the bullion to honor their contracted commitments, one or both of them approached the counterparties and asked if there was any way they could settle this embarrassing matter quietly on a “cash basis” to absolve the banks from fulfilling their physical bullion delivery obligations. The purchasers were not interested in a ‘cash settlement’ and demanded delivery of physical bullion giving these banks 5 business days to resolve the situation. A premium of as much as spot plus 25 % [that would be 1,250 – 1,300 per ounce of gold] was offered to settle this matter in fiat money instead of the embarrassment of a very public “failure to deliver” on the part of the London Bullion Market Association.

Earlier this week, no less than two Central Banks became involved in effecting the physical settlement of this situation. One of these Central Banks was British [that would be the Bank of England] – and reportedly, even they were only capable of providing less than pure, non-compliant gold bars that did not meet good delivery standards stipulated by the LBMA. Like it or not, this is a testament to lack of physical gold available, folks.

To summarize: Banks like J.P. Morgan Chase and Deutsche Bk. - who sold endless amounts of gold futures at prices of 950 – 1025 and then tried to make “side deals” with the folks they sold the futures to – offering them spot + 25 % [let’s say 1,275 per ounce] to settle in fiat – only after their counter parties demanded substantial tonnage of physical gold bullion.

Stunningly, if accurate [and there is absolutely no doubt in my mind that this is not accurate], this means that gold is already in SEVERE backwardation and this fact is being hidden from the public.
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Rob Kirby | Kirby Analytics | Toronto, Ontario, Canada | Email | Website
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Resource Investor: What does Aden's $5,800 gold projection suggest for juniors?
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The Aden sisters, Mary Anne and Pamela, have extrapolated the future price of gold using the same growth rate as in the ‘70s and applied it to the current bull market and reported their findings in their latest Aden Forecast. They determined that if one were to compare the bull market’s second rise from 1976 to 1980 to the current bull market we could see gold eventually reach $4,100 during the next run-up. They further reported that if one were to take the entire bull market gain in the 1970s at 2,300% and extrapolate it to today’s situation then $5,800 would be the equivalent upside target.

The Adens concluded that “with today’s bull market being far more global in scope compared to the 1970s, we could eventually see these much higher gold price targets realized. This is especially so factoring in that gold’s peak in 1980 at $850 is the equivalent of about $2,400 in current dollars. Gold has not even approached that level yet and the situation is far more serious now than it was then.”

And silver? “Silver is more volatile than gold. It fell more than gold last year, and it has risen more than gold this year (See table below: silver +55% vs. gold +19% YTD). This makes sense because silver is both a precious and a base metal. To foresee silver’s potential compared to gold, look to copper as a guide. Copper is a good barometer because it rises during times of global economic growth. That is, when you see both gold and copper rising together (See table below: gold +19%; copper + 95% YTD), then silver will most likely be stronger than gold… If global growth remains on a positive track, we will continue to see silver outperform gold.”
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

FinancialSense.com: On Doing God’s Work
“Gold Finger - A New Take On Operation Grand Slam With A Tungsten Twist”

I’ve already reported on irregular physical gold settlements which occurred in London, England back in the first week of October, 2009. Specifically, these settlements involved the intermediation of at least one Central Bank [The Bank of England] to resolve allocated settlements on behalf of J.P. Morgan and Deutsche Bank – who DID NOT have the gold bullion that they had sold short and were contracted to deliver. At the same time I reported on two other unusual occurrences:

1] - irregularities in the publication of the gold ETF - GLD’s bar list from Sept. 25 – Oct.14 where the length of the bar list went from 1,381 pages to under 200 pages and then back up to 800 or so pages.

2] - reports of 400 oz. “good delivery” bricks of gold found gutted and filled with tungsten within the confines of LBMA approved vaults in Hong Kong.

Why Tungsten?

If anyone were contemplating creating “fake” gold bars, tungsten [at roughly $10 per pound] would be the metal of choice since it has the exact same density as gold making a fake bar salted with tungsten indistinguishable from a solid gold bar by simply weighing it.
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When the news of tungsten “salted” gold bars in Hong Kong first surfaced, many people

who I am acquainted with automatically assumed that these bars were manufactured in

China – because China is generally viewed as “the knock-off capital of the world”.

Here’s what I now understand really happened:

The amount of “salted tungsten” gold bars in question was allegedly between 5,600 and 5,700 – 400 oz – good delivery bars [roughly 60 metric tonnes].
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Within mere hours of this scam being identified – Chinese officials had many of the perpetrators in custody.

And here’s what the Chinese allegedly uncovered:

Roughly 15 years ago – during the Clinton Administration [think Robert Rubin, Sir Alan Greenspan and Lawrence Summers] – between 1.3 and 1.5 million 400 oz tungsten blanks were allegedly manufactured by a very high-end, sophisticated refiner in the USA [more than 16 Thousand metric tonnes]. Subsequently, 640,000 of these tungsten blanks received their gold plating and WERE shipped to Ft. Knox and remain there to this day. I know folks who have copies of the original shipping docs with dates and exact weights of “tungsten” bars shipped to Ft. Knox.
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The balance of this 1.3 million – 1.5 million 400 oz tungsten cache was also plated and then allegedly “sold” into the international market.

Apparently, the global market is literally “stuffed full of 400 oz salted bars”.
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These revelations should provide a “new filter” through which Rothschild exiting the gold market back in 2004 begins to make a little more sense:

“LONDON, April 14, 2004 (Reuters) - NM Rothschild & Sons Ltd., the London-based unit of investment bank Rothschild [ROT.UL], will withdraw from trading commodities, including gold, in London as it reviews its operations, it said on Wednesday.”

Interestingly, GATA’s Bill Murphy speculated about this back in 2004;

“Why is Rothschild leaving the gold business at this time my colleagues and I conjectured today? Just a guess on my part, but suspect:”

*SOMETHING IS AMISS. THEY KNOW A BIG GOLD SCANDAL IS COMING AND THEY WANT NO PART OF IT. …”

“ROTHSCHILD WANTS OUT BEFORE THE PROVERBIAL "S" HITS THE FAN.” BILL MURPHY, LEMETROPOLE, 4-18-2004

Coincidentally [or perhaps, not?], GLD Began Trading 11/12/2004

In light of what has occurred – regarding the Gold ETF, GLD – after reviewing their prospectus yet again, it becomes pretty clear that GLD was established to purposefully deflect investment dollars away from legitimate gold pursuits and to create a stealth, cesspool / catch-all, slush-fund and a likely destination for many of these “salted tungsten bars” where they would never see the light of day ...
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

As we mentioned back in December, A 15% drop from the $1,218/oz. high would take the price of gold down to $1,035/oz. A correction down to $1035/oz. wouldn't be a big deal because the price of gold would still be above $1000/oz. -- roughly the breakout price out of gold's cup and handle formation between March 2008 and September 2009.


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FT Alphaville: Gold backwardation fears revisited, uh oh!

The Business Insider blog brings to our attention that net gold-lease rates are back on the rise, and more importantly gold-forward rates are dropping fast.

And it’s true. The so-called GOFO rate set by the London Bullion Association dropped as low as 0.17167 on Wednesday — although it had perked up a bit by Thursday to 0.18500.

To compare, the rate held firmly above 0.3 for most of December, 2009.
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The reality was that with Libor sky high, and cash-calls coming at banks left, right, and centre — many banks, with bullion in their coffers, saw sense in lending out gold temporarily in return for much-needed cash. And with cash more sought after than gold in a sharply descending interest-rate environment, institutions were happy to pay counterparties to take their gold in return for cash.

Hey presto — GOFO rates went negative.
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The best way to understand it is to look at the formula for establishing the gold forward rate — the rate which gold dealers are willing to lend on a swap basis against dollars.

The formula is:

Forward rate = Dollar interest rate — metal lease rate
or
X=Y-Z

So, if the dollar interest rate was to fall swiftly from say 4 per cent to 1 per cent and the metal lease rate — the sum earned from leasing gold, selling it in the spot market and investing the proceeds in Libor — stayed constant at 3 per cent the gold forward rate would go from 1 per cent to -2 per cent. (Not that the lease rate would stay there for long because of the Libor influence.)

But the forward rate is also a function of the metal lease rate — itself part-derived from supply/demand fundamentals via the leasing process (or rather where people see supply/demand fundamentals in one, two, three or six months’ time etc). So if the dollar interest rate stood constant at 0.2 while the lease rate soared from -0.05 to 2.5 due to supply concerns, the forward rate would go from 0.25 to -2.3 and a negative gold forward rate would ensue.

In the first scenario the negative rate is a response to interest rates, while in the second scenario the negative rate is a response to a supply squeeze (the squeeze making it more costly to lease gold).

Gold prices to fall?

According to Brad Zigler at HardAssetsInvestor.com, however, a falling forward rate could also be indicative of one other thing. As he states:

[Suresh]

The Wall Street Journal yesterday ran article entitled PRECIOUS METALS: Gold Futures Plunge As Risk Appetite Dries Up. Risk appetite? For gold? Do journalists know why people hold gold? It's a safety trade . . . and has been so for thousands of years!

If people are selling gold, it's not because it represents risk. They are selling gold because there are other assets that are currently increasing more rapidly in value, such as U.S. dollars.

With that background, let's take a gander at Kitco's gold price chart 2000 - present.



Eyeballing the chart, we see support at roughly $1000/oz. If gold falls below $1000/oz., then there appears to be price support roughly every $50 down with strong support at $650/oz. It's hard to imagine the price of gold falling to $650/oz. But, if gold is in decade-plus long bullish Primary Trend, any pullback can profitably be bought. More specifically, in market correction, you can upgrade lower quality components of your portfolio to higher quality components, and/or you can buy more of the higher quality components that you already have.
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BusinessWeek: Hedge Fund Manager Sprott Sees Gold at $1,500 in 2010

Eric Sprott, whose Sprott Hedge Fund increased more than fivefold in nine years, said gold may rise to $1,500 an ounce this year and $2,000 within two years as the U.S. government takes measures to counter the credit crunch.
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“If you tell me how much quantitative easing there is, I’ll tell you where the gold price will go, but I have no trouble imagining we get to $1,500 this year and to $2,000 in two years.”

Sprott said in a Dec. 18 interview that the Standard & Poor’s 500 Index will collapse below its March lows as an expected rebound in economic growth fails to materialize.
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Sprott’s C$1.39 billion ($1.3 billion) Sprott Canadian Equity Fund, which has gained about 18 percent in the past six months through yesterday, has 34 percent of its portfolio in mining stocks and another 39 percent in bullion as of Nov. 30.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Elliott Wave theorist Robert Prechter has predicted a severe downleg in gold, taking the price down to around $650/oz.

This year, equities will probably take a vicious tumble, perhaps, by as much 30-40%, after which a small rally will occur. (Thinking conspiratorially, it is necessary to move the sheep from the equity markets pen to the U.S. Treasuries markets pen. A dramatic fall in equities would get the sheep clamoring for the safety of U.S. Treasuries, lessening the workload on the Federal Reserve to keep yields low). During the early part of that vicious tumble, it is possible that gold will experience a sell-off. But, to $650/oz.? That is very hard for me to imagine. I still think that what's more likely is that the price of gold falls to a support level around $1000/oz. and stays there. Indeed, as the deflationary forces strengthen into 2011, the price of gold may yet increase.
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Clive Maund: Gold Market Update

The past week has seen the convergence of a variety of factors that together point to a powerful rally in gold soon. ...



As you may recall, we had interpreted the dramatic plunge of Thursday 4th February as bearish, especially as it crashed a support level, but in the light of subsequent developments it is looking increasingly like it was a final capitulation or flushout. Gold's strength this past week, which has seen it break back clear above the support/resistance line in the $1075 - $1080 area that it broke below the previous week, means that Thursday 4th can now be chalked in as a low, and is now viewed as probably marking the end of the corrective phase. This is very important, because it means that the downtrend from early December has taken the form of a strongly converging, and thus strongly bullish, Falling Wedge, and since the price is fast approaching the apex of this Wedge it means that upside breakout is drawing near. It would thus appear that our original interpretation of the corrective action from early December as a 3-wave reaction to complement the earlier 5-wave advance, is correct, with gold's positive action from the 4th February reversal hammer strongly suggesting that the 3rd wave, the C wave, is already behind us. Even if we only resort to plain old-fashioned common sense - you know, the sort totally absent in dealing rooms, the fact that gold has reacted back to a point just above a zone of strong support at the top of its earlier 20-month trading range, and to a point not far above its rising 200-day moving average greatly increases the chances of a powerful uptrend developing from here.
...


The latest COT chart shows that the Commercial short overhang, which has helped to force gold lower over many weeks, is now easing dramatically, opening the door to renewed advance....
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

At the outset, let's just state the obvious: it's only one bullion bar, and one data point does not make a trend.

Putting that aside, the fact that the tungsten salting was done on a 500-gram bar is a surprise to me. I would have thought that if salting were going to be done it would be more practical to do so at larger sizes.
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Zero Hedge: German ProSieben TV Channel Finds 500 Gram Tungsten Bar At W.C.Heraeus Gold Foundry With Bank Origin

German TV station ProSieben finds what appears to be some evocative proof of gold counterfeiting, in the form of tungsten gold substitutes coming to the W.C.Heraeus foundry, which is the world's largest privately-owned precious metals refiner and fabricator, located in Hanau, Germany. The foundry has isolated at least one 500-gram tungsten bar due for melting, originating from a (so far) unnamed bank, which as the head of the foundry stated made the unpleasant discovery that "not all the glitters is gold."

YouTube clip in German with English subtitles
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Market Force Analysis: LBMA OTC Market – “Alchemists” Turn Paper into Gold
by Adrian Douglas
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I have written several articles recently that have discussed how much “paper gold” has been sold, principally through the unallocated accounts of the LBMA although there are other vehicles that achieve the same end such as pool accounts, unbacked ETF’s, futures, and derivatives etc, but the LBMA dwarfs them all.

http://www.gata.org/node/7911
http://www.gata.org/node/7908

I estimate that as much as 50,000 tonnes of gold has been sold that does not exist. That is equivalent to all the gold reserves in the world that are yet to be mined, or put another way, 25 years of gold production. That is the grand-daddy of all short positions! The fractional reserve operation of the LBMA is likely to be the next Madoff scandal, except multiplied by 100…a 5 trillion dollar fraud as opposed to a 50 billion dollar fraud.
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Because it is not consumed the buyer does not need to take possession of his gold but can be persuaded to trust the seller to store his gold on his behalf. This unique wrinkle allows bullion bankers to sell gold that does not exist. This allows them to make huge profits as they have very little cost as they don’t have the inconvenience of actually having to purchase the gold they sell! The consequence of this illegal activity is that it suppresses the price of gold because the “paper gold” supply has the same effect on prices as if real gold had actually been supplied to the market. This means that this racketeering is extremely beneficial to the central banks, who are hostile to gold because a free market gold price would blow the whistle on their perpetual inflationary actions. A suppressed gold price makes fiat currencies appear to have an artificially higher purchasing power. The central banks do not just turn a blind eye, but actively aid www.marketforceanalysis.com the bullion banks; they lease them central bank gold at a pittance of a lease rate to make sure there is always enough liquidity such that the scam is not exposed due to the bullion banks being unable to deliver real metal when requested to do so.
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The LBMA operates a fractional reserve system. They sell much more gold than they actually have. They keep on hand the amount of gold that they estimate, in the worst case scenario, they will be called upon to deliver. In a recent article I analyzed data from the LBMA’s own website that shows that a net of approximately 20 million ounces of gold are traded each and every day. http://www.gata.org/node/8248 This means that we are meant to believe that the equivalent of 25% of global annual gold production changes hands each day on the LBMA! On a gross trading basis it probably represents the entire global annual gold production traded each and every day! In dollar terms it represents 5.7 Trillion dollars of net trade annually. That is almost 60% of the entire US economy or 10% of the entire global economy being traded through a handful of gold bullion banks. It is simply mind boggling. You don’t have to be a rocket scientist or a market regulator to smell something fishy. To back that level of trading on a 100% reserve ratio the bullion banks would have to own almost 40% of all the gold ever mined in the world.
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Who exactly are the members of the LBMA? The clearing members are as follows:

HSBC Bank USA National Association
JP Morgan Chase Bank
The Bank of Nova Scotia
Barclays Bank
Deutsche Bank
UBS AG

HSBC and JPMorgan Chase are the biggest short sellers on the COMEX, they together own 95% of the OTC precious metals derivatives, they are custodians of the bullion supposedly held by GLD and SLV respectively and they are clearing agents for the LBMA.
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When more gold is demanded than the bullion banks can deliver they try to lease or buy gold from the Central Banks. If this can be done in a timely fashion the clients are none the wiser. If the Central Banks can not supply then the bullion banks are obliged to offer premiums over spot for clients to accept cash in lieu of the metal. We are hearing anecdotal stories that recently there have been cases of up to 25% premium being offered for clients to settle in cash. It would seem the bullion banks have pushed the game too far and are on a collision course with default. In addition the Central Banks have dishoarded a large proportion of their gold and are not in a position to come to the rescue of the bullion banks as they have been in the past. I recently made an analysis of the COMEX warehouse inventory of gold and silver in an article entitled “Alarming Trend in COMEX Gold and Silver Inventory Data.”

http://www.gata.org/node/8373

One of the conclusions is that in the last 6 months there has been a dramatic decline in the inventory held by the dealers on the COMEX (the registered category), while over the same period of time the Open Interest has increased. This essentially means that each open contract has less warehouse gold or silver backing today than it did 6 months ago. This is a classic reduction in reserve ratio.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.