Gold is the Nancy Kerrigan to the dollar’s Tonya Harding.

Posted by freedomforall 1 year, 9 months ago to Business
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"Well, let’s look closer, and you may start to see the reasoning for a flash crash.

Making Derivatives Simple?
Given gold’s fixed supply, its $835B slice of the mega-trillion-dollar derivatives pie seemed like a needle in a haystack.

In fact, at first glance, it would appear that the big boys, including the BIS, were not even concerned about little ol’ gold and its cozy corner of the derivatives trade.

But bankers are clever little foxes guarding their own henhouse, and came up with two intentionally complex ways to classify (and hence distort) the gold derivative trade, which in turn is broken down by two types of complex trading instruments, namely futures contracts and forward contracts.

Thankfully, I will not take you too deeply into those weeds, but suffice it to say that such deliberate complexity makes it nearly impossible for the average guy or gal on the street (or 20-something “financial journalist”) to unpack and hence discredit the sketchy games played on the rink of derivative-distorted gold pricing.

The first level of intentional complexity has to do with futures contracts vs. forward contracts.

Bear with me. It’s not as boring or “smart” as they want you to think it is.

Futures contracts are traded on registered exchanges for which institutional investors and just about anyone else have unfettered access.

Forward contracts, on the other hand, are traded in that shady little OTC market, for which normal investors have far less (if no) permitted access.

Instead, the only athletes allowed on that slippery rink for forward contracts are what are known as “principals” of “unregulated institutions,” which basically just means the big boys—i.e., commercial banks, major family offices, privately-held mega companies, sovereign wealth funds and other financial choir boys like central banks.

These lucky, big-boy “foxes” are allowed to trade forward contracts and do most of their ice-skating in and among other members of the London Bullion Market Association (LBMA), who settle their trades in either London or Zurich.

According to the foxes at the BIS, there were about $530B worth of forward contracts in this members-only rink last year.

Thanks to Basel 3, those banks/players are required to treat their contracts as “unallocated (paper) gold” (i.e., “bad stuff’), which are booked as liabilities on their balance sheets.

But as Basel 3 reminds, those same banks also need to show equal amounts of “good stuff” (i.e., real, physical gold) assets to match their “bad stuff” (paper gold) liabilities.

This means those $530B worth of derivatives (forward contracts) need to either: 1) be slowly removed from their books or 2) converted into “good stuff”—namely,” allocated (physical) gold.”

In sum, the banks need more physical gold to meet Basil 3, and by year end, gold demand (and pricing) among these foxes should be rising, right?

But here’s the embarrassing rub: there’s a very real possibility that those LBMA members don’t actually have enough physical gold assets (8,667 tons) to meet their balance sheet ($530B) paper liabilities. Are you seeing the potential motivations for a flash crash yet?"

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