GATA reports that commodity exchanges can dump gold debts on ETFs.
(emphasis mine) [my comment]
Commodity exchanges can dump gold debts on ETFs
Submitted by cpowell on Sat, 2009-07-11 17:11
1p ET Saturday, July 11, 2009
Dear Friend of GATA and Gold:
GATA board member Adrian Douglas discloses in the report below, titled "The Alchemists," that the New York and Tokyo commodity exchanges have been permitting their gold futures contracts to be settled not in real metal but in shares of gold exchange-traded funds (ETFs). This essentially allows the gold shorts (and the exchanges themselves, which guarantee futures contracts) to transfer their obligations to third parties that may not have the metal they claim to have and that, in any case, are operated by the investment banks running major short positions in gold.
Thus it is likely that the paper claims to the world's supply of gold are greater than even GATA has suspected -- that the gold supply is even more oversubscribed and that "paper gold" is being created at an ever more frantic rate to suppress gold's price.
The ability to offload futures contract gold obligations to the ETFs could become the principal mechanism of the gold price suppression scheme. GATA asks its supporters to call Douglas' report to the attention of financial journalists, market regulators, and elected officials everywhere.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
* * *
By Adrian Douglas
Saturday, July 11, 2009
In the Middle Ages alchemists toiled in vain to transmute lead into gold. One wonders why they used such an expensive starting material, such as lead, when modern alchemists in the gold world have succeeded in transmuting paper into gold. This article reveals the anatomy of a scam that has been perpetrated on investors and goes a long way to explain and tie together developments in the precious metals markets in recent years.
As many readers may know, I have recently been reporting on how delivery notices at the COMEX cannot be reconciled with movements of metals from and into the warehouse. Clearly these are not going to match on a daily basis, just as orders into a factory will not match shipments out on any given day, as there is a time lag. But when averaged over a month, the "flow" of metal inventory should be comparable to the delivery notices issued. This is just basic accounting. But I have observed that reconciliation is almost impossible with the COMEX data. The only explanation I could think of is that settlement of contracts must be bypassing the warehouse. But how could this be possible, as I thought all contracts had to be delivered via a COMEX registered warehouse?
The COMEX states:
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Gold delivered against the futures contract must bear a serial number and identifying stamp of a refiner approved and listed by the Exchange. Delivery must be made from a depository licensed by the Exchange."
This seems unequivocal until you find this exception:
Exchange of Futures for Physicals (EFP)
The buyer or seller may exchange a futures position for a physical position of equal quantity. EFPs may be used to either initiate or liquidate a futures position.
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The COMEX trading rulebook clarifies further:
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104.36 Exchange of Futures for, or in Connection with, Product (Physical)
(A) An exchange of futures for, or in connection with, product (EFP) consists of two discrete, but related, transactions; a cash transaction and a futures transaction. At the time such transaction is effected, the buyer and seller of the futures must be the seller and the buyer of a quantity of the physical product covered by this Section. The quantity of physical product must be approximately equivalent to the quantity covered by the futures contract.
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So what this means is that contracts can essentially be settled without going through the COMEX warehouse. Futures contracts and a physical commodity equivalent can be exchanged outside of the exchange and an EFP form can be filed to the clearing department at the COMEX. What's more, the physical commodity doesn't have to meet the specification of the COMEX Gold Contract of being a 100 troy ounce bar or three 1Kg bars of .995 fineness.
So what can be delivered as the physical gold commodity?
This is where it gets very interesting. On February 18, 2005, the NYMEX, parent of the COMEX, issued this announcement:
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Exchange Rule 104.36, which governs exchange of futures for physicals ('EFP') transactions on the COMEX Division, refers to a 'physical commodity' as one of the required components of an EFP transaction but also indicates that the physical commodity need only be substantially the economic equivalent of the futures contract being exchanged.
The purpose of this Notice is to confirm that the Exchange would accept gold-backed exchange-traded funds ('ETF') shares as the physical commodity component for an EFP transaction involving COMEX gold futures contracts, provided that all elements of a bona fide EFP pursuant to Exchange Rule 104.36 are satisfied.
Thus, acceptable gold-backed and exchange-traded ETF funds include, but are not limited to, the iSharesCOMEX Gold Trust (ticker: IAU), which began trading on the American Stock Exchange on January 28, 2005.
The trust is an exchange-traded fund that provides a means of obtaining a level of participation in the gold market through the securities market. The trust shares are intended to constitute a means of making an investment similar to an investment in gold. Each trust share represents a fractional undivided beneficial interest in the trust's net assets which consist primarily of gold held by a custodian on behalf of the trust. The shares of that trust are expected to reflect the price of gold less the trust's expenses and liabilities.
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So the gold ETF with the symbol IAU started trading on January 28, 2005, and three short weeks later the shares of IAU became equivalent to real physical gold in the eyes of the COMEX for delivery against futures contracts in an EFP transaction!
If that doesn't blow your socks off, I don't know what will.
Also note that the ETF mentioned is a COMEX product! How convenient!
Where are the regulators? This ETF is not equivalent to gold. Note the description: "Each trust share represents a fractional undivided beneficial interest in the trust's net assets which consist primarily of gold."
All that is being guaranteed is that each share is a fraction of the ETF assets. The net assets could be 1 oz of gold while the face value of the total shares sold could be 100 million ounces!
The notice does not restrict which gold ETFs are eligible, so clearly the infamous GLD is also eligible to be considered as good as physical gold in an EFP transaction.
Right from the inception of the gold ETFs GLD and SLV, the Gold Anti-Trust Action Committee has deduced from studies of the ETF prospectuses that these funds very likely do not hold gold and silver to fully back the issued shares because the prospectuses don't categorically require it. (See footnotes 1 and 2.) In fact, the ETFs may have no gold or silver at all.
What seemed bizarre to GATA at the time was that the two mega-short anti-gold investment banks, JPMorgan and HSBC, would be involved in the launch and operation of precious metal investments that, on the face of it, would create huge investor demand for the very metals in which the banks hold massive and clearly manipulative concentrated short positions.
Now all becomes clear. The system is the ultimate alchemy. If ETF shares are NOT backed by gold but are accepted by the COMEX as equivalent to physical gold .... presto! You have turned paper into gold -- and paper is a lot cheaper than lead.
A futures market is supposed to provide price discovery for a commodity. In the gold market this notion has been hijacked because settlement can be made with a derivative instrument, such as an unbacked or partially backed ETF share. If that derivative instrument is not backed by gold on a 1:1 basis the scheme allows an artificial apparent increase in the supply of gold and so distorting price discovery toward lower prices.
Such a scam would be in grave danger of becoming exposed if anyone knew the true inventory condition of the vaults of the ETFs. That problem is easily solved by having HSBC be the custodian of GLD and JPMorgan be the custodian of SLV.
I have not found anywhere that COMEX accepts ETFs as an equivalent to physical silver for an EFP transaction, which probably explains why silver warehouse movements are much larger than those of gold, and perhaps may indicate that physical silver is the cartel's Achilles heel.
We have all wondered how GLD could have amassed a stunning 1,100 tons of gold in less than five years without the gold price exploding. This represents buying 10 percent of all global gold output each year. What's more, in the last nine months the ETF holdings almost doubled, adding approximately 500 tonnes or 23 percent of annual global production. And this when the signatories to the second Washington Agreement on Gold have reduced their gold sales to a trickle, from 500 tonnes per year. If the GLD shares are unbacked or only partially backed by gold, the alleged 1,100-tonnes gold holding would be easy to achieve with just the use of a printing press for the share certificates.
In looking at COMEX reports the EFP transactions are reported under "Other Volume." This category is huge compared to delivery notices. For example, on July 8, 2009, the gold price fell by $20. Looking at the relevant COMEX report --
-- on Page 4 "Other Volume" is 9,540 contracts or 954,000 ounces, while the much more visible delivery notices were only 17 contracts or 1,700 ounces! Judging from many reports the "Other Volume" category is orders of magnitude larger than the delivery notices.
What I don't know is how many of these trades are settled with the COMEX-approved gold equivalent ETFs or even if any are. I have sent an email to the COMEX to ask them. I won't hold my breath for a reply. My guess is that a lot of EFPs are settled this way, which would account in part for the meteoric issue of GLD shares. But the COMEX should be transparent; it should be required to publish exactly what is being traded as "Other Volume." In fact if the COMEX wants to be above suspicion it should insist in its rules that EFPs must be settled with gold that meets exactly the COMEX gold contract specification. The EFP then would facilitate delivery instead of facilitating a change in delivery obligations.
Why was it necessary to introduce a mechanism to exchange ETF shares in lieu of physical gold? Where there is smoke there is fire.
Adding credence to this supposition is that GLD has gained wide acceptance with mutual funds, pension funds, and university endowment funds. Many sophisticated investors believe ETFs to be equivalent to investing in bullion. This makes this fiat paper bullion scam easy to perpetrate.
It would appear that the COMEX gold warehouse is merely a window dressing displaying an almost static 2.5 million ounces of dealer-owned gold inventory. But it would appear the vast majority of settlement occurs out of the average investor's view AND, therefore, out of the view of the regulators.
This means that the COMEX is not what it seems. Delivery for an EFP only needs to be "substantially the economic equivalent" of the deliverable commodity! A default could occur at any time if this sorcery of swapping paper for paper suffered a serious setback.
The members of the Gold Cartel must be very proud of themselves for succeeding where the ancient alchemists failed. In fact, they are so proud they decided they didn't need to limit the scam to the COMEX. They have implemented it on the Tokyo Commodity Exchange too.
On October 29, 2008, the TOCOM made the following announcement:
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Based on the Memorandum of Understanding signed in January this year, The Tokyo Commodity Exchange (TOCOM) and Tokyo Stock Exchange (TSE) have launched 'Inter-market Cooperation Workshop' in efforts to improve convenience for participants of both markets, and studied to reinforce cooperation between the commodity market and the stock market.
In light of the study at the workshop, TOCOM has added a 'physi cally backed commodity ETF' as a possible physical for EFP (Exchange of Futures for Physicals) transactions at the exchange, which allows seller and the buyer, who holds agreement for physical transactions, to conclude the contracts in the commodity futures market without continuous trading of physicals.
Therefore, the SPDR Gold Shares [GLD], physically backed commodity ETF listed on the TSE, which has a correlation with the gold spot price, can now be used as a physical for EFP transaction on TOCOM's gold market.
Thanks to this new arrangement, it is expected that the link between TSE's SPDR Gold Shares market and the TOCOM gold market will be strengthened and that the price reliability, as well as the liquidity of both markets, will be enhanced.
For inquiries about this news release, please contact:
Planning Department, The Tokyo Commodity Exchange
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Notice the comment that the "liquidity of both markets will be enhanced." There can be little doubt about that! They can print as many ETF shares as they want and they can then settle as many EFPs as they want ... and guess what happens to the price of gold with such an apparent increase in liquidity. Yes, it will be suppressed. As they said in the release, "the price reliability will be enhanced."
Now that reminds me of Alan Greenspan, who said, "Central Banks stand ready to lease gold in increasing quantities should the price rise." But why get the central banks to lease the real stuff when an ETF can print up an IOU that the unsuspecting investor will accept to be as good as gold?
Does this mean that the alchemists of the Gold Cartel have discovered the Elixir of Life for their gold suppression scheme so that it will go on forever?
No, absolutely not. Faith in anything paper is going out of fashion. California is shortly going to discover that people don't like IOUs. Central banks outside of the G7 countries are buying gold, and I am sure they know about this alchemy. I doubt that the Chinese will accept GLD shares for settlement of futures contracts.
If you want an investment in bullion, then make sure you have an investment in bullion. In my opinion what I have presented here, and what other analysts have written, indicate that GLD and SLV are not investments in bullion. They are mere IOUs in bullion. Take physical delivery of gold and silver from the COMEX. They have only 2.5 million ounces of the real stuff in the gold inventory [open interest on gold futures equals 36,810,300 ounces (368,103 contracts)]. That is a paltry $2.3 billion at today's price.
The Gold Cartel is desperate to suppress gold and keep the dream of a "strong dollar" alive along with maintaining low interest rates by using a mechanism described by Professors Summers and Barsky in their research paper "Gibson's Paradox and the Gold Standard." [While I 100% believe gold suppression is taking place, I think it is out of desperation rather then a grand master plan] The London Gold Pool used real gold to try to suppress the gold market, and it failed. The paper IOU is going to be even less successful. Imagine what will happen to the gold price when the holders of the paper IOUs go looking for physical gold instead. The Gold Cartel has built a dam on the river of physical gold demand, thinking that it is clever enough to defy the laws of supply and demand. Wait until the dam bursts to experience gold fever such has never been seen before.
Buy real gold and silver before the dam bursts!
The Canadian Wheat Board explains exchange for physicals.
Exchange for physicals (EFP)
What is it?
An EFP is an exchange of grain for the equivalent quantity of futures. The EFP option offered by the CWB lets producers take a short futures position through their broker and exchange this position with the CWB to lock in the futures component of a Basis Price Contract (BPC). When the EFP is executed with the CWB, the producer receives a long futures position to unwind their short at the previous day's settlement price posted on the CWB pricing schedule. The CWB takes on the short position at the same price to lock in the futures portion of the BPC. EFP transactions occur outside of the futures pit.
[Translation: Exchange for physicals (EFP) is when a client gives an IOU for a physical commodity to a broker and that broker opens a short position in that commodity on the futures exchange.
Normally, Exchange for physicals is the legitimate process used by producers to sell futures against future production. For example, after famer promises to deliver wheat at harvest, the farmer's broker sell wheat futures to lock in price. As long as the IOU portion of the EFP is from a commodity producer and involves current year production, EFPs are completely legitimate practices (in fact, futures exchanges were created to allow this to happen).
On the other hand, if the IOU portion of the EFP is not from a commodity producer, then you have a problem. This is what is happening in gold and silver.
This story about ETFs being used as collateral for selling futures isn't news, at least not to me. I have already written about how GLD ishares are used to sell gold futures.
8) GLD is used to sell gold futures
To add insult to injury, GLD ishares are used to sell gold futures and drive down the price of gold. Investor Village explains about this practice:
bullion separately may be deposited and redeemed by "Authorized Participants" for Ishares that never even reached the Retail Market. There is no trust r equirement for an Authorized Participant (read specified Bullion Banks and most likely friends) to even sell the ishares (GLD) (received on deposit) into the Ishare market. The Prospectus specifically states that.
Significantly, the depositors ("Authorized Participants") have the alternative of using the Ishares (GLD) as collateral for setting up a spread at the COMEX, by selling Gold futures short against the Ishares they hold.
Such gives the bullion depositor ("Authorized Participant") the ability to make profit at a "Commodity" taxable rate rather than a higher "collectible" tax rate, which was adjudged to be applicable to GLD. The Prospectus specifically acknowledges that the Authorized Participants may be engaged in bullion trade and have trading desks.
As to the question of whether the gold will be there, the lingering doubt of the potential for "double counting" may exist.
In other words, "Authorized Participants" can deposit gold with GLD's custodian (where it is leased out) and then use GLD ishares to sell gold futures (at an attractive tax rate).
Ed Steer writes "And Then There's This".
So, regardless of what the dollar does, both gold and silver could explode to the moon tomorrow if the four bullion banks that are sitting on their respective prices would either start covering their grotesque short positions, or fold their arms and do nothing...i.e. don't go short against virtually every long that's being placed...which is what they've been doing now for the last 10+ years.
The changes in open interest for Wednesday's price action [as reported by the NYMEX] were a joke. Wednesday was a huge down day in both gold and silver and there was big liquidation...but the numbers, once again, did not show any sign of that. Gold o.i. actually rose 1,058 contracts to 374,043...on monstrous volume of 145,432 contracts. Silver o.i. was also reported as being up...515 contracts to 100,891...on 26,823 contracts traded. There are only two explanations for this dichotomy...the numbers were either not reported in a timely manner, or someone is lying big time. Ted Butler figured that there were about 15,000 gold contracts and maybe 3,500 silver contracts liquidated on Wednesday. So...where are they? Hopefully they will show up in today's report when it's released later this morning.
My reaction: There is no transparency or honesty in US/UK gold markets.
ETF as collateral in futures market
1) New York and Tokyo commodity exchanges have been permitting their gold futures contracts to be settled not in real metal but in shares of gold exchange-traded funds (ETFs).
2) The gold ETF with the symbol IAU started trading on January 28, 2005, and three short weeks later the shares of IAU became equivalent to real physical gold in the eyes of the COMEX for delivery against futures contracts in an EFP transaction.
3) This strange coincidence in timing suggest ETFs were created with that this purpose (collateral for futures market) in mind.
4) There is no legitimate reason for introducing a mechanism to exchange ETF shares in lieu of physical gold.
1) A futures market is supposed to provide price discovery for a commodity.
2) If that derivative instrument is not backed by gold on a 1:1 basis the scheme allows an artificial apparent increase in the supply of gold and so distorting price discovery toward lower prices.
COMEX gold warehouse are fictional
1) When averaged over a month, the "flow" of metal inventory should be comparable to the delivery notices issued.
2) Reconciliation is almost impossible with the COMEX data.
3) Settlement of contracts must be bypassing the warehouse, or/and warehouse numbers are fictional.
4) The COMEX gold warehouse appear to be merely a window dressing displaying an almost static 2.5 million ounces of dealer-owned gold inventory.
5) The COMEX should be transparent; it should be required to publish exactly what is being traded as "Other Volume."
Tokyo Commodity Exchange and GLD
1) TOCOM has added a 'physically backed commodity ETF' as a possible physical for EFP (Exchange of Futures for Physicals) transactions at the exchange.
2) the SPDR Gold Shares (GLD), physically backed commodity ETF listed on the TSE, which has a correlation with the gold spot price, can now be used as a physical for EFP transaction on TOCOM's gold market.
3) It is expected that the link between TSE's SPDR Gold Shares market and the TOCOM gold market will be strengthened (not a good thing).
Open interest numbers now fictional too
1) The changes in open interest for Wednesday's price action, as reported by the NYMEX, were a joke.
2) The numbers, once again, did not show any sign of big liquidation behind such a huge down day.
3) The numbers were either not reported in a timely manner, or someone is lying big time.
Conclusion: Don't buy any type of gold derivative in US/UK (no futures, no ETFs, no call options, etc...). They are not safe.