In early September, I took some profits on my long gold position a bit below 1000, my argument was that even if the 1000 barrier was to be broken, there would be fights around and several pull backs and that I would have time to catch it back if I feel the Bulls are about to win the battle. I was right about the fights but deadly wrong about the time to catch the jump… The gold jumped from below 1000 to more than 1050 in a couple of days while I was kept busy by my (day) job and (almost) screen off… I’ve been forwarded a “funny” tale about Gold after the action… It’s in French and if you’re able to eat frogs in a baguette, you can find it here, otherwise, let me try to summarize it for you below, taking out a lot of its original “conspiracy” rhetoric (“we’re manipulated, central banks are thieves, bankers are criminal etc etc”) not that I disagree all those but that’s just not the point here :
At the end of September, a major player of the London Metal Exchange (LME), some rumours say it is acting on behalf of China, decided at the last moment not to roll the massive numbers of future contracts it had on Gold, requiring the physical delivery of tons of gold (rumours say 20 tons…) from their counterparts (JPM, DB) that of course were naked and not able to deliver such an amount of gold … Despite negotiations that seemed to imply central banks (FED, BoE, ECB), it looks like the buyer, that seems to have the geopolitical importance to be able to require a settlement and to get it, stayed firm on the physical delivery and… finally got delivered. While it seems impossible to find such a quantity of the precious metal in such a short period, one can raise the question where this gold came from? A clue : every Friday at 4.30 pm EST, the GLD ETF publishes the gold stocks it owns in warehouses over the world… the 25st of September the lists accounted 1,381 pages, the 2nd of October, it accounted only 208 pages then 195 pages on the 9th… While a few blogs and forums noticed and discussed broadly the vanishing of the pages of the report, it suddenly showed back 855 pages on the 14th of October. It’s a kind of magics, no ?
This story, whether it's true or not, highlights :
- The danger of the derivative markets that allow to buy and sell much more commodities than it really exists: once again it’s a quadrillion exposure and this kind of situation shows why derivatives are weapons of financial destruction: we just trade assets and goods that don’t exist and a manifold of what will be produced on earth during the whole mankind and that’s a bubble that didn’t burst and the day it bursts the subprime crisis and what we experienced in 2008 will be a drop compared to. Here we can see in addition how ETF create the same “fake” assets (“fake” assets imply “fake” value) as for instance the gold stoked for the ETF is unallocated, which means that the same gold bar can be sold to an unlimited number of buyers.
- The game of China, the first gold producer that evoked on 31st of August a “stop loss” on this kind of derivatives and default on these OTC agreements : one can assume that China won’t deliver in the future the precious metal sold via OTC contracts, and will settle its debt with USD (they have plenty of them and we all know it’s doomed). That would be a way for China to turn its USD stocks into metals (Gold and silver) and into commodities in general.
Of course, the implications of the second point would be profound for the gold, for the commodities in general and for the USD and it would imply that gold could go its way up to the sky (I heard $2500 in early 2010), but as well for the derivatives participants (US banks mainly) and the whole West in general that widely supported this bubble, profited from it and brought the financial system to the brink of a collapse.
My thoughts : China would be sooooo right to play it that way
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