It's admitted to the CFTC: London gold market is a Ponzi scheme Submitted by cpowell on Sun, 2010-03-28 05:19. Section: Documentation By Adrian Douglas Sunday, March 28, 2010
The bombshell GATA dropped at the public hearing held by the U.S. Commodity Futures Trading Commission on futures trading in metals was stunning. Video of GATA Chairman Bill Murphy revealing a whistleblower source who warned the CFTC's Enforcement Division about market manipulation by JPMorganChase and witnessed JPM traders bragging of their exploits can be viewed here:
http://www.youtube.com/watch?v=9wIMpe9SjfQ
http://www.youtube.com/watch?v=e9bU0r6JP4s
Murphy explained that even though the Enforcement Division received detailed information about it in December 2009, the manipulation continues unabated, as can be seen by the way gold was taken down last week to rob holders of April gold call options in the strike range of $1,100-$1,150 as the hammering made the options expire worthless.
GATA believes that this new evidence will prove to be a "smoking gun," a watershed event in liberating the gold market from price suppression.
As dramatic as this revelation was at the CFTC hearing, there was another bombshell at the hearing. This was the testimony I was able to deliver at the hearing while assisting Harvey Organ with his testimony. I was able to show that the London Bullion Market Association (LBMA) over-the-counter gold market is nothing but a massive "paper gold" Ponzi scheme. What was then astonishing is that the bullion bank apologist, Jeffrey Christian of CPM Group, who has always been staunchly against GATA, endorsed my comments as being "exactly right" and went on to confirm that the LBMA trades more than 100 times the gold it has to back the trades.
There were lots of almost as equally explosive admissions at the hearing, so I have made a transcript of the relevant section of the webcast. I have posted the two short video clips here and here which are what have been transcribed.
http://www.youtube.com/watch?v=9wIMpe9SjfQ
http://www.youtube.com/watch?v=e9bU0r6JP4s
The transcript is given below with some notes added by me.
* * *
COMMISSIONER SCOTT O'MALIA: Both Mr. Organ and Mr. Epstein in the second panel raised the concerns that short positions exceed the physical supply. The second panel kind of argued that that wasn't a concern. Are you concerned that the shorts will not be able to deliver if called upon?
JEFFREY CHRISTIAN: No. I am not at all concerned. For one thing, it has been persistently that way for decades. Another thing is that there are any number of mechanisms allowing for cash settlements and problems, and a third thing is, as many people who are actually knowledgeable about the silver market and the gold market have testified today, that almost all of those short positions are in fact hedges -- the short futures positions are hedges, offsetting long positions in the OTC market. So I don't really see a concern there.
[NOTE: It is interesting that Christian is not concerned about the ability of the shorts to deliver because they can cash-settle. He clearly has no understanding that when someone wants to buy precious metals, giving him cash instead is a failure to deliver, a default. But Christian is not concerned. He says that the short position is actually hedged by a long position on the OTC, but we will see later in this testimony how he describes the "OTC physical market" and we will see that the long position is not bullion but is in fact an unbacked (or only partially backed) IOU for bullion.]
COMMISSIONER O'MALIA: Mr. Organ, would you like to respond?
HARVEY ORGAN: I do see a risk on this, and I think it is a risk that we have to be very, very careful of. As countries like China, South Korea, and Russia start demanding and taking physical delivery of their gold and moving it offshore to their shores and putting pressure on the Comex, we will probably come to a point in time where we will have a failure to deliver.
ADRIAN DOUGLAS: Mr. Chairman, could I make a comment?
CHAIRMAN GARY GENSLER: No. Who are you?
ADRIAN DOUGLAS: I would ...
CHAIRMAN GENSLER: No. I said no.
DOUGLAS: Oh, you said no?
CHAIRMAN GENSLER: I don't know, who is this?
DOUGLAS: I am Adrian Douglas. I am assisting Harvey.
CHAIRMAN GENSLER: All right, Sir. Yes.
DOUGLAS: I would just like to make a comment. We are talking about the futures market hedging the physical market. But if we look at the physical market, the LBMA, it trades 20 million ounces of gold per day on a net basis, which is $22 billion. That's $5.4 trillion per year. That is half the size of the U.S. economy. If you take the gross amount, it is about 1 1/2 times the U.S. economy. That is not trading 100-percent-backed metal; it's trading on a fractional-reserve basis. And you can tell that from the LBMA's Website, because they trade in "unallocated" accounts. And if you look at their definition of an "unallocated account," they say that you are an "unsecured creditor." Well, if it's "unallocated" and you buy 100 tonnes of gold even if you don't have the serial numbers, you should still have 100 tonnes of gold, so how can you be an unsecured creditor? Well, that's because it's fractional-reserve accounting, and you can't trade that much gold -- it doesn't exist in the world. So the people who are hedging these positions on the LBMA, it's essentially paper hedging paper. Bart Chilton uses the expression "stop the Ponzimonium" and this is a Ponzi scheme. Because gold is a unique commodity and people have mentioned this, it is left in the vaults and it is not consumed. So this means that most people trust the bullion banks to hold their gold and they trade it on a ledger entry. So one of the issues we have got to address here is the size of the LBMA and the OTC markets because of the positions which are supposedly backing these positions which are hedges, but it is essentially paper backing paper.
The rest of the article is at http://www.gata.org/node/8478
