Selling Gold That Grows on Trees

(There’s a good reason why bullion traders and investors have nicknamed the COMEX the CRIMEX. Read Robert Moore’s essay below to see why.  Moore, a frequent contributor to the Rick’s Picks forum, says bullion bankers have leveraged the commodity exchange’s liberal rules to perpetrate a fraud that would land you or me in jail. RA)

In 2004, two young men named Robert “Buddha” Gomez and James Nichols fleeced thousands of people to the tune of $21 million by selling them “paper” automobiles.  Here’s a link to more on this fascinating story by Car and Driver’s John Philips. These two hucksters swindled thousands of people into paying real money for nonexistent cars that were part of the fabricated estate of a fictitious, deceased eccentric millionaire, who declared in his will that these cars were only to be sold to “decent, churchgoing people” at unheard of bargain-basement prices as low as $1,000.

If Gomez and Nichols had known what was good for them, they would have studied the COMEX gold and silver futures market a little more closely before embarking on their little adventure into the exciting world of fraud. We all know that a futures contract is merely a paper promise to deliver a quantity of bullion (or some other commodity) for a pre-determined price at some future date. This is analogous to the paper promise to deliver “miracle cars” at some future estate settlement date; and as long as the promise to deliver can be sold to a willing buyer, then the scam can continue in perpetuity.

Concentration of Traders in the CFTC COTs

Gomez and Nichols’ scheme collapsed and they were both hung out to dry when the need to deliver real cars to settle these purchase agreements came due. In the gold and silver markets, by contrast, the scam is aided and abetted by a regulatory environment whereby the threat of default is curtailed simply by raising the number of allowable paper promises (aka position limits) that can be issued by willing sellers. The COMEX allowable position limits in Gold and Silver are already completely out of whack, and when you add the “special limit exemptions” that have been extended to the “Big 8” bullion banks, the true scale of the fraud committed in the interest of preserving faith in paper money becomes clear. As these position limit exemptions have increased ever higher toward infinity, the legal ability to sell “Gold that grows on trees” has influenced bullion-bank traders to be more bold and more deeply entrenched in the fraud.

Where’s the Demand?

Just look at this comparison graph (above) showing the extent of forward selling (days of production) by the largest traders in various commodity markets to get a feel for the level of forward selling that gold and silver are subjected to by the big commercials, compared to other commodities. Why would world markets need so much forward sold silver and gold? Doesn’t everyone know that gold has very limited industrial use (especially compared to platinum or copper), and since photographic storage has moved from cellulose to silicon, industry’s chief consumption points for silver have also diminished drastically. And, if this much gold and silver really is changing hands out there, then why are eligible COMEX inventories sitting at 20 year lows? If the Big Commercial traders are laying on these enormous short positions as part of a legitimate hedging strategy, then why wouldn’t the same strategy work with crude oil? Or Wheat? And, most notably — why wouldn’t this same hedging strategy work with copper? Is it purely coincidence that there is so much concentration by a few mega-banks on the short side of the open interest in precisely the two elements that have served as the most viable forms of money for longer than any other medium in human history?

Okay, I’m drifting dangerously close to the “tin foil hat” event horizon. Let’s get back to Gomez and Nichols. These two chumps were eventually brought down by people who became impatient due to their expectation of physical delivery of the cars that they “purchased.” So too might the expectant recipients of physical bullion eventually reach the same level of impatience with those who are selling them paper promises to deliver real bullion (that is, unless they really, actually prefer owning even more potentially worthless paper contracts over physical metal).

Madoff’s Lesson

Bernie Madoff declared that he knew his empire was a Ponzi scheme for years before he got taken down, and he stated that once you realize it is fraud, your only choices left are to let it collapse immediately, or run the fraud as high (and as long) as you can. You become consumed by it. Is this what is happening today in the big silver and gold exchanges?

If you can logically conclude that there is no fraud in the COMEX gold and silver markets, then you can also conclude using the same logic that what Robert Gomez and James Nichols went to prison for was selling “futures contracts” against automobiles that they did not own, and had no intention of ever delivering. Is this any different from the forward-sold (i.e., short) positions in COMEX gold and silver? If Gomez and Nichols had successfully attempted to persuade the judge to allow them to simply increase the number of automobile delivery promises that they are entitled to issue, they might have been able to buy some cars in the “current month Craig’s List spot market” and made good on their earlier promises.. They would both still be free men, right?

Et tu, COMEX?

(If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box.)

  • Robert September 25, 2010, 7:46 pm

    HAHAH!

    Looks like my crack about the “tin foil hat” event horizon was prescient… This commentary hit the GATA radar screen:

    http://www.gata.org/node/9056

    Actually, I think my tin foil hat was issued when I purchased my first Krugerrand back in 2006… To be acknowledged by Chris Powell, Ed Steer, and others on the GATA board is a sincerely flattering for me…. Thanks.

    • keith September 26, 2010, 3:53 am

      I got you beat! I started buying gold and silver back in the late 90’s and have been waiting for the crash ever since. I long since traded in the tin foil hat. Nobody has been waiting for cats to start sleeping with dogs longer than I have. What I learned is while meltdown is almost imminent, it can go much, much longer then you think. Sorry but I’m not holding my breath. Just remember my name -keith- and give me credit when 5 years from now comex gold is still standing. It simply cannot be busted outside of a complete bond market collapse. Period- end of discussion.

  • cosmo September 25, 2010, 6:01 am

    I really enjoy the debate about the reasons and effects of PM price manipulation and have been edified by the writings of Mr Antal Fekete and Rob Kirby(Whose name I have not crossed on this forum) here is a link to his writings:
    http://www.financialsensearchive.com/Market/kirby/main.html

    For me , I have read enough to see that the manipulation is blatant and the BB are agents of the US Govt. I will hold my gold and silver until their fraud is exposed, and meanwhile, know that my wealth is being preserved by a rising PM price. It is the only investment I’ve made that I can honestly say I lose no sleep over.

    And that is worth more than all the paper in the world.
    Rest well all, you are going to need it.
    Peace

  • cwd September 25, 2010, 3:34 am

    That comment was not made in jest. That is exactly what happened. No new contracts could be opened, thus the only buying was to close short positions, and the futures were limit down for eighteen days if I remember correctly.

  • Edwardo September 25, 2010, 1:30 am

    “Not ‘having’ gold to cover contracts vs. not ‘willing’ to trade gold for dollars is totally different.”

    Agreed, but interestingly, the basis for both of these issues is rooted in a lack of trust.

  • Edwardo September 24, 2010, 11:43 pm

    They don’t care about the gold that is selling at lower prices because the amounts in question are relatively small. As for basis distortion, well, some believe that is going on presently. I recommend reading FOFOA’s blog and the writings of Antal Fekete for more insight into this issue.

    • keith September 25, 2010, 1:03 am

      Fekete has some great write-ups where he expounds on the idea that silver shorts aren’t naked. It can’t be proven but I agree with the idea.

      Fekete also believes that comex gold will one day close. But the reason he lays out is different from what we are discussing. It’s not a shortage of gold or silver that will cause it but instead a lack of confidence that those that give up their gold can get it back on the same terms. Not ‘having’ gold to cover contracts vs. not ‘willing’ to trade gold for dollars is totally different.

  • Edwardo September 24, 2010, 8:22 pm

    “Can anyone explain why the IMF refused to sell Eric Sprott the balance of the 400 tonnes after India had taken 200 tonnes and someone else 10 or 20 tonnes? I suspect they were not about to sell it for 1/50 what they can get with their fractional gold sells…yes, I’ve spent much time at the FOFOA site as well as many other sites that delve into the fractional gold issue.”

    I can’t explain it, per se, except that one of my earlier posts alludes to why they would not sell to a “civilian” like Sprott. It is because they would have sold it to him at a price vastly higher than the spot market, and they don’t want to let that cat out of the bag just yet.

    Keith wrote:

    Now, I do agree that IF the ‘let’s get physical’ crowd were to empty out all their other investment obligations and took delivery that Comex might default but we are nowhere near that. Not even by a long shot. ”

    The ‘let’s get physical’ crowd doesn’t need to liquidate their other holdings, and they have, at least from some of the reports I have read, begun to empty out vaults in London. The move is well underway to take the physical supply elsewhere and starve the beast as it were.

    • Benjamin September 24, 2010, 8:54 pm

      Hi Ed,

      That would be a heck of a surprise, your explanation for the Sprott incident. I never did consider that.

      But it would seem counter-intuitive. Why would they let us buy a cheaper spot if they’re not wanting any stray cats? On the other hand, if spot was kept cheaper, it could turn off potential investors. But that’s a serious risk of a backfire, and also raises the question of why not lower. They could, imv, far more easily and with less risk use basis distortion to curtail a rush.

      All the same, though, I’d like to know what your reasons are for thinking that. Any further explanation or links?

    • mikeck September 25, 2010, 2:59 am

      Thanks Ed,

      I was actually hoping one of the naysayers would make an attempt at the question…too direct and on point I guess. This ain’ t rocket science.

      Mike

  • mark j September 24, 2010, 7:37 pm

    No one has an excuse, not to realize the fraud at crimex exist.

    To do so, takes willful ignorance.

    • mikeck September 25, 2010, 3:06 am

      Hey Mark,

      That borders on name calling. 😉

  • fallingman September 24, 2010, 6:30 pm

    Thanks indeed.

    The Powerz, like Madoff did, continue the bamboozle and then act as if anyone who questions the con is crazy. “Nothing to see here folks.”

    I’m with redwilldanaher. What? Does Jamie Dimon have to confess on camera?

    I’ve seen more than enough.

  • martyn September 24, 2010, 6:02 pm

    just a couple of points..firstly don’t forget that that the largest pool of physical metal we know for sure exists (as opposed to Fort Knox gold) is the ETF stash…and this folks is under the custodianship of the same 2 bullion banks who would themselves are the Comex short parties…all nicely protected by dubious legal clauses hidden away in the ETF prospectus’s. Its a little like the 2 guys in the paper car scam also having another business involving warehousing and valetting Ford and GM’s new car inventory …conflict of interest?
    Also taking the paper car analagoy further.. these 2 guys would have been nicely let off the hook if the US government decided to make all car ownership illegal and all cars had to be returned to the civil pound….in precious metal parlance we call that “confiscation” …and yes it’s been done before and will be tried again.

    • Robert September 25, 2010, 6:14 pm

      Great points Martyn… thanks

  • mikeck September 24, 2010, 5:27 pm

    Thanks for posting Rick.

    Thanks for giving this ever important issue some ink Robert. Not that it would do any good, but you should send a copy to the commissioners. You have brought many of the naysayers, who have not studied this issue nearly as deeply as you have, out of the woodwork.

    I have spent many hours, nay years, studying the facts myself and will not be swayed by name calling…those who know of what they speak do not have to resort to name calling.

    Can anyone explain why the IMF refused to sell Eric Sprott the balance of the 400 tonnes after India had taken 200 tonnes and someone else 10 or 20 tonnes? I suspect they were not about to sell it for 1/50 what they can get with their fractional gold sells…yes, I’ve spent much time at the FOFOA site as well as many other sites that delve into the fractional gold issue.

    Mike

  • Edwardo September 24, 2010, 4:37 pm

    “Remember silver. It didn’t default, they just changed the rules to “sell only”.

    I hope that comment was made tongue in cheek, since a “soft default” is still a default.

    Someone asked:

    “What would a COMEX default do to ETFs like DGP, GLD, SLV and CEF?”

    Paper claims to gold are going to be exposed for what they are, fraudulent pieces of paper. Having said that, don’t lump CEF into the same category with GLD and SLV.

    • keith September 24, 2010, 5:40 pm

      Edwardo, I’m heavily invested in gold and silver I can only hope that you are right. However, I honestly don’t see paper gold as being fraudulent. It’s no different then any other futures market be it oil or soybeans.

      What is bought and sold is contracts with infinite supply in opposed to stocks, bonds and housing which has a finite supply. The upshot is, when it comes to commodity futures, the physical market always sets the price. Specs have little effect on the price (overall and long term) as both long and short are forced out of the market before delivery date. It is nothing more than a roulette wheel. The number of participants have nothing to do with the outcome and winnings. Futures are truly a zero sum game. Everything else is not.

      Now, I do agree that IF the ‘let’s get physical’ crowd were to empty out all their other investment obligations and took delivery that comex might default but we are nowhere near that. Not even by a long shot.

    • Benjamin September 24, 2010, 6:09 pm

      keith,

      In regards to affecting outcome…

      Many naysayers (not saying you’re one, btw) see the likes of GATA and Ted Butler as complaining about the impact on the spot. And they are, but so long as spot isn’t greater than futures, a scam like this could supress the spot market, no? If investors on the whole are seeing contango, why would they rush their money into physical and/or demand delivery if long futures?

  • Benjamin September 24, 2010, 4:00 pm

    Nice article, Robert. And while I saw this coming, plain as day…

    “Doesn’t everyone know that gold has very limited industrial use (especially compared to platinum or copper)…”

    …I still had a good laugh over that. Even with appeal rising, there’s still so many that just don’t get it!

    Anyway, I had something else to post, until I read the comments. So I’m going to take an impromptu stab at what all this might mean. To begin, the amount of above-ground supply…

    It’s to my understanding that over half (and still growing for the time being) was mined in the latter half of the 20th century.

    http://www.gold.org/faq/start/25/

    Yes, yes, I know. It’s the WGC (I’ve read some less than reputable things about them). But I think it’s more true than it isn’t. Quite a bit of the gold (and silver) mined every year since has turned up from mining other things. For example, though I don’t recall the name, the world’s largest gold producer is/was in recent years an open pit copper mine in Indonesia.

    And what with all rising standard of living throughout the world, I’ve no choice but to accept that gold and silver are mined and sold. It would also make a great deal of sense. I very much value gold (and even silver) as money, but money is just money. Copper and other bases are much more useful than money doing nothing but hoarding. So I imagine incidental is sold to make the extraction of other things more viable, which would be like that trade-off between holding money vs having something else (and something has to explain why I can go to virtually any bullion retailer and buy both).

    But does it come out of the ground to the extent as suggested by COMEX numbers? Like so many others, I don’t think so either. However, the more it doesn’t come out, the more the spot rises. Squaring that with the likely possibility that both come out of the ground incidentally, I can see how this might maintain contango, for the time being. They can create/default on as many futures as needed, at any price, to keep the spot from exceeding the future price. Meanwhile, at least some monetary metals keep trickling in, to satisfy growing demand… for the time being.

    If this is anything close to reality, what’s going on far exceeds the criminality of merely selling “paper cars” to longs who refuse to press the issue (which makes me wonder who they are). If one follows Antal Fekete, then the contango/backwardation signal is quite an important one for currencies. What they would be doing, then, is accounting for all the ongoing theft wrought by fiat currencies in this round in human history to date!

    • mikeck September 24, 2010, 5:11 pm

      Benjamin wrote, “What they would be doing, then, is accounting for all the ongoing theft wrought by fiat currencies in this round in human history to date!”

      BINGO!!!!!

      Mike

    • Robert September 24, 2010, 6:01 pm

      Thanks Ben!

      I take interest in Fekete’s assertion that rising “premiums” in the bullion spot market is simply a form of backwardation, and that this backwardation is the indicator that reflects “the most real of the real interest rates”

      Regarding the stock to flow question in Silver and Gold as a justifier for the inverse of the chart I presented above, I’ve done some of my own research on this since I originally wrote this essay, and what I’ve found is that stocks to flows in Gold are indeed quite high, but in Silver, there are two dynamics. If you look at stock to flow in the consumer/producer categories, you see a ratio very similar to copper’s. But as soon as you add in the Bullin Banks and spec funds- the ratio goes to nearly 10 to 1.

      Indeed, the large banks are using the liquidity inherent in the trade of Gold as the smokescreen behind which they crank up their huge leverage ratios, but to be doing this in Silver as well is a risky game, IMHO.

      If Chinese inflation keeps driving up the cost of domestic metal production, then the Chinese might just start looking to the US market for good bullion delivery, especially since our congress is preventing them from purchasing our mineral bearing real estate .

      The simple fact is that Silver and Gold are not coming out of the ground any faster than they did during the 1980’s, despite Chinese production increasing at 8% per year. Basic supply demand principles suggest that this can only be bullish for prices.

    • Benjamin September 24, 2010, 7:06 pm

      Robert,

      “Indeed, the large banks are using the liquidity inherent in the trade of Gold as the smokescreen behind which they crank up their huge leverage ratios, but to be doing this in Silver as well is a risky game, IMHO.”

      Hmm. But if silver is generally more prevelant in the crust, wouldn’t it make it less risky?

      “especially since our congress is preventing [China]from purchasing our mineral bearing real estate .”

      Really? Not saying you’re wrong, but I would’ve bet on the opposite well before betting on them blocking such accquistions. It’s just the way our politicians are!

      Or maybe not. Have you ever heard of a Bix Weir? He’s got to be one of the most interesting/provacative commentators I’ve come across. I mean, Rick is savvy and witty, but what Bix Weir offers is so out of this world, so off-the-wall… Anyway, he contends that, among many other things, that our government isn’t really out to destroy the country. He even thinks it’s possible that some Fed chairmen were in on the protection, too. If you’re looking for a nice, entertaining, and perhaps (even Mr Weir says he doesn’t know) enlightening read…

      http://www.roadtoroota.com/public/department39.cfm

      For the recored, the St Louis Fed does indeed have a pdf on the “Wishes and Rainbows” comic. Very strange, that. They used to have the old version, too, but that seems to be missing, last I checked.

      http://search.stlouisfed.org/search?site=stlfed&client=stlfed&output=xml_no_dtd&proxystylesheet=stlfed&q=Roota

      Sorry if that strays off-topic, but I just finished reading Mr Weir’s latest, and it was on my mind! 🙂

  • Tom Paine September 24, 2010, 3:44 pm

    Not that I really want to make up excuses for Crimex and the banks, but could it be that there are just many times as many gold and silver derivative “structured products” there as ones where a counter party might need to be long or short paper soybeans or corn? I think so.

    Of course this begs the question as to the honesty of some of the products out there where people may think they are invested in gold, but could end up being a bag holder for a bankster or hedge fundster. When asked where the actual gold is they will then point to somewhere in the small print of the artfully incomprehensibly prospectus and say “caveat emptor”.

    Think the pm bull is over? I have a structured financial product I’d like to sell you.

  • Cameroni September 24, 2010, 3:16 pm

    Not on the Gold issue but still interesting,…..This is going back into the archives again and is a little off the topic of today. Does anyone else remember an analogy made here to boosting the economy based on a tourist who plunks down 100 dollars in a hotel. I am sure I read that story here first but can’t recall the articles name anymore.

    Anyway, this morning on Seeking Alpha I read a very similar analogy related to the Fed’s impact on the economy. It went like this….

    “There is no inter-bank risk, in that the Fed is empowering bad behavior in that all of the excess printing of notes to stimulate are being lent back to the Fed at higher rates.

    It is like the tourist who drives into a dusty Texas town, puts $100 deposit on top of the hotel lobby counter and asks to inspect a room before booking.

    The Manager takes the note and runs down to pay his bar tab.

    The barman takes the note and runs down to pay the butcher his unpaid meat bill. The Butcher runs down to pay the local lady of the night who has been doing tricks on credit. The lady of the night runs into the hotel to clear her room bill. The tourist comes down the stairs, picks up his $100 note and says he will not be staying.
    Without anything being spent the town cleared some unpaid bills and (everyone) thought that things were picking up economically”.

    The whole article is at:
    http://seekingalpha.com/article/226879-what-will-trigger-the-fed-s-last-bullets?source=dashboard_macro-view

    Maybe you were on to something there Rick.

  • Lucas September 24, 2010, 2:49 pm

    naked short-selling should be illegal. It is equal to counterfeiting

    • mikeck September 25, 2010, 3:34 pm

      I thought naked short selling was illegal. ETF’s should also be illegal. Both are based on fraud. I guess fraud is not a crime when committed by the Wall Street thugs.

      Both naked short selling and the stock ETFs create shares that dilute current shareholders, but the proceeds do not go to the businesses the shares back. http://www.cnbc.com/id/39309280

      Regarding the Gold and Silver ETFs, if we assume that they actually have real metal backing all the shares issued, yes, I’m alsoROTFLMAO, but humor me while I make a point…shorting those “fully backed” ETFs is fraud!!!

      How so? Well if I own, oh say, 1000 shares of GLD, there would be a 100 oz. bar of gold in storage backing th0se shares…now someone sells short 1000 shares and you buy those shares on the market, presto, both you and I have “a claim” on the same 100 oz. bar.

      Can anyone explain to me why fraud committed by the Wall Street thugs is not a crime?

      Mike

  • Jake September 24, 2010, 1:52 pm

    What would a COMEX default do to ETFs like DGP, GLD, SLV and CEF?

    • Benjamin September 24, 2010, 4:55 pm

      All depends. How many of those instrumental claims depend on the amount defaulted upon? Assuming a connection…

      If it’s unallocated ownership, more than likely you’d be screwed. And with at least some those that I recognize, they have both allocated and unallocated. Might be screwed there, too, even if it is the former, because you just don’t know if the firm will screw some in order to avoid a greater legal backlash. imo, that’s too much risk to assume, however one slices it.

      Aside from buying retail and keeping it on hand, the best way to own, is with places that have strictly allocated account, protected by international law (known as a bailment). Bullion Vault and GoldMoney too (iirc) offer both. The strict allocation is protection against any other claim. They simply aren’t there. You bought it, you own it. They offer no other claims.

      But a government determined and influential enough might trump bailment law if they want to, so it’s not a perfect shield. However, they (the company) can and will stall confiscation through legal action, which is an ahead of time warning. So you can have time to either transfer the country it’s vaulted in or take delivery, ahead of any greedy government action. It’s a risk worth taking to not pay the extra premiums, imo.

  • Edwardo September 24, 2010, 1:19 pm

    I neglected to add, in case it was not implicit, that the holders of the “centuries old” gold are not the shorts.

  • myanmarexpert September 24, 2010, 1:17 pm

    Hinde Capital and others analysis points to the potential for 100 paper oz’s of gold for every 1 physical ounce i.e. Leverage of 100:1 which is far beyond the leverage that causes the financial crisis.

    Gold is the antithesis of Fiat money and therefore the enemy of CB’s who through these massive short positions continue to try and keep prices down.

    So @PhotoRadarScam there will likely be a day of reckoning (delivery default) and Paper gold (ETF’s, futures) will go to zero and Physical gold will rise.

    Everyone needs to own physical gold (ideally in your own possession).

    Spend some time at FOFOA.

  • Edwardo September 24, 2010, 1:16 pm

    You are missing the point, Keith. That (centuries old) gold isn’t available to cover shorts, at least not at anything like the very low prices we are familiar with. It is held privately, not at central banks, and it doesn’t move.

    Absent a proper audit, I suspect a great deal of what many imagine is held at Fort Knox has, over the generations, moved to the Middle East as part of the long standing arrangement between, for example, The House of Saud, and the U.S. This was part of the destined to be tattered petrodollar regime. To make a long story less long, The Saudis have always been well aware that their black gold would one day run out, and the only way they could ensure the preservation of their vast wealth into perpetuity was through gold. It was once in their interest to have gold trade at low prices so that they could accumulate it, but, that too, has changed.

    • keith September 24, 2010, 1:27 pm

      I also believe that Fort Knox could be empty but some central bank or government has it and would lend it back to save comex. No different than how the Chinese come to our rescue time and time again and buy our debt. It’s in their best interest to keep the U.S. from crashing.

  • PhotoRadarScam September 24, 2010, 9:44 am

    So what exactly would this mean to those of use who trade futures contracts? What would happen to us if the whole thing were to collapse? If I had a GC contract at the time of collapse, would I be likely to lose the ~$6k that the contract costs? I would have to imagine the answer is yes.

    • keith September 24, 2010, 1:23 pm

      Remember silver. It didn’t default, they just changed the rules to “sell only”.

  • Bay of Pigs September 24, 2010, 5:16 am

    Thanks Rick for posting this. I’ve been a thorn in Mish’s side for a long time on this very topic. He says we’re all Tin Foil Conspiracy theorists. One thing is certain, when the COMEX manipulation/suppression/fraud (whatever term you choose) is finally broken, we will see a run on physical metal like never before.

    A good friend of mine lost $675K to the Madoff scam and his hedge fund manager told me years ago that people would be “throwing gold from the rooftops” before any pain would come to his type of investments (MBS’s and other assorted SIV bulls**t). He said gold was “risky and no good”. In other words, he was just another clown flapping his lips on something he didn’t understand.

    After ten years of a Golden Bull market, well over 95% of Americans still have ZERO exposure to the PM’s. Why is that?

    • donniemac September 24, 2010, 12:57 pm

      I think you need to change exposure to possess. Very few have not been exposed to PM. The fact that so few Americans have made a conscience decision to won gold or gold backed investments is due to 2 things, IMHO. First is that the dollar has been on top for so long as the world’s currency, there is no historical impetus for protecting what of value Americans may personally own. The second reason is most people throughout the world are just not concerned or knowledgeable about how the whole money process operates. Like high tech, money, as a medium of exchange, is a type of black magic. Specially today when many use plastic for day to day purchases, EFTs for bill payments and thusly never even hold much in the way of “cold hard cash”.
      So that is why so few own PM. And as long as John Q Public believes in the black magic of money, fiat money will continue to reign.

    • Steve September 24, 2010, 2:43 pm

      How many people have any real savings with which to buy and hold PM? Most that do have gold and silver are looking at the PM as an exchange in which to make up for what was lost in the markets. The issue of ‘value’ as the reason to protect one’s self with PM is long lost to the ease of accepting political democracy. (a Republic has a hard cost to maintain by each individual) I’d guess, and it is only a guess, that in order for 90% of the population to buy gold they would have to put it on their credit card.

    • redwilldanaher September 24, 2010, 4:32 pm

      @BOP, I appreciate much of what Mish has put out over the years but I have to agree with you on this one. Glenn Beck of all people hit on this week regarding “tin foil hats” and “conspiracy theorists”. People think that they’ve bested you once they labeled you this way. I don’t know why, but it still astounds me that otherwise intelligent people can’t bring themselves to believe that other people commit crimes and plot against other people, even those they’ve never met. History anyone? How much more empirical evidence do these people need to see? The human nature of some, man’s inhumanity to man isn’t well enough established for them? The government has lied about nearly everything and yet “we’re” crazy when we try to piece enough together to call the sociopaths on it? I’m really tired of the dismissive types that take their news from, and loan out their thinking processes to, the MSM, the government statisticians, corrupt entities and other uninformed individuals. Insert quotes from Schopenhauer and Ibsen if you are unfamiliar with them. redwill

  • Edwardo September 24, 2010, 5:15 am

    In the previous post someone recommended http://fofoa.blogspot.com/ I’d like to second that recommendation. Whether one is persuaded by the perspectives of the proprietor or not, the discussions are very thought provoking, always informative and often profound.

    Now, with respect to silver, and the following assertion made in this evening’s post:

    “…and since photographic storage has moved from cellulose to silicon, industry’s chief consumption points for silver have also diminished drastically.”

    Data at The Silver Institute seems to suggest otherwise.

    While photography related use of silver did, indeed, fall precipitously from 218 million ounces in 2000 to 124.9 million ounces in 2007, industrial applications rose smartly from 374 million ounces to 456 million ounces in that same time period.

    Total fabrication, which includes the two categories listed above, along with a few others, fell from 891.7 in 2000 to 842.5 in 2007. I am not listing 2008-2009 for the simple reason that those years are encompassed by our ongoing global depression, which, I think, most would agree, is a phenomenon whose dampening effect on silver use has nothing to do with issues related to obsolescence.

    In the meantime, there’s nothing tinfoil hat about your observations of activity at the Comex, but many of the posters who have commented so far demonstrate an insufficient understanding of what I’ll call “the gold game.”

    To wit:

    “Buyers need to prove their bonafides by offering full money at the end of contract, forcing delivery.”

    You are obviously unfamiliar with the phenomenon of default at the Comex. It is not simply a matter of offering (fiat) money.

    “Not only that, even if the longs were to deliver, who’s to say the shorts couldn’t come up with the physical? Especially if it’s some sort of conspiracy between the government and the federal reserve then trust me; they’ll pull gold right from Ft. Knox before they’ll let that puppy default.”

    See the comment above regarding defaults at The Comex. As for the vaunted Fort Knox, it hasn’t been audited in over half a century. Given the amount of downright treachery engaged in by the U.S. Government, especially in the financial sphere, over the last few years, let alone the last sixty, one shouldn’t assume the presence of gold in size at Fort Knox.

    “Gold and silver are stored as money while other commodities are simply consumed.

    I happen to like silver’s potential, but is not stored as a money except in very small amounts by iconsequential players. Only gold is held by central banks across the planet.

    “Without doing the research; I’m willing to bet that if you actually took into account the stock to flow ratio of those commodities the chart would actually reverse itself.

    This is a very good point regarding stock to flow ratios, but I suggest that, after you do the research, you consider the fact that much of the above ground gold that exists in the world today is gold that has been around for centuries, and is simply not for sale at any price- i.e. it has zero flow- or at least at a price that remotely relates to the day to day spot price of the metal.

    • keith September 24, 2010, 5:59 am

      [much of the above ground gold that exists in the world today is gold that has been around for centuries, and is simply not for sale at any price- i.e. it has zero flow- or at least at a price that remotely relates to the day to day spot price of the metal.]

      Exactly the point. The shorts aren’t nearly naked as you think!

  • JohnJay September 24, 2010, 3:30 am

    Yep, no Gold and Silver to back futures contracts.
    No gold or silver to backstop the Federal Reserve Notes.
    (Does Ron Paul really need to peer in those vaults at Fort Knox to know that?)
    No houses at financed value to support all those trillions of dollars of shady mortgage paper being swapped around.
    No jobs to allow 800 billion dollars worth of student loans to be repaid.
    No savings past 10k for much of the boomers to retire on.
    More “Free Trade” Agreements in the pipe.
    (Oh, they are not really “Treaties” are they, so they only need a simple majority to pass, not 2/3’s of the Senate)
    All we have left is mountains of plutonium, tritium etc.
    Words fail me.

  • keith September 24, 2010, 3:24 am

    You’re missing one miniscule detail. The people put up the full price ($1000) with expectation of delivery.

    The longs have neither the means nor the intention to make good on their end of the bargain. They have to exit the market by expiration date just like the shorts do. All specs are forced out of the market and what’s left is producers and consumers. No different than oil or any other futures market. The number of specs participating in the market means nothing as there is an infinite number of possible contracts. You just need to find someone to take the other side and let the gamble begin.

    Keeping this short; you have some good points about hedging strategies and position limits (as to why) that I can’t answer. But what I do know is that the longs have absolutely zero claim on the gold. I’m not convinced they can even post the cash if they wanted to. Outside of a grass roots movement on physical gold we can expect the same horse on pony show with comex gold.

    Not only that, even if the longs were to deliver, who’s to say the shorts couldn’t come up with the physical? Especially if it’s some sort of conspiracy between the government and the federal reserve then trust me; they’ll pull gold right from Ft. Knox before they’ll let that puppy default.

    Without the event of an absolute collapse in bond and dollar markets a Comex gold default is nothing but a pipe dream for those that wear tin foil hats. Cheers.

    • keith September 24, 2010, 3:52 am

      Here’s another problem with the whole argument. Looking at the chart; it’s true that gold and silver have many more days of production to cover the short positions but those two commodities have infinitely slower rates of consumption. Gold and silver are stored as money while other commodities are simply consumed. Without doing the research; I’m willing to bet that if you actually took into account the stock to flow ratio of those commodities the chart would actually reverse itself.

    • ben September 24, 2010, 6:39 pm

      There’s a big difference between the longs and shorts. The longs are speculators, buying a few contracts, and ready and able to take the gain or loss if necessary. If the price goes against them too much they would either have to put up more money, or be sold out of the position. The shorts (big shorts) are intentionally attempting to manipulate the price downward, and should the price go against them too much, they could cause massive defaults with all the concommitant financial turmoil for everybody.

      Maybe the big shorts would try to take a page out of the Hunt Brothers era and ban long buying until the prices dropped 50%. But this isn’t 1980 any more, and if the American commodities exchanges tried this in today’s gloabalized economy, price would just continue to climb In Dubai, India, and Shanghai, while the American exchanges would be marginalized.

  • Daman Prakash September 24, 2010, 2:37 am

    In my opinion, buyers are equally resposible as they expect to buy 1 oz of Gold at just 5 to 6% margin money. Physical ownership mean they would buy only 1/16 th of ounce. Buyers need to prove their bonafides by offering full money at the end of contract, forcing delivery. Till buyers wish to reap profit ( or Loss) 16 times of what they can reasonably own by buying out physical, there shall always be a seller desiring to sell/ exploit with same intention.